After doubling in share price year-to-date, further upside is limited! Mizuho downgrades Phillips 66 (PSX.US) and other refiners to "Neutral"

Mizuho Securities downgraded three refinersPhillips 66 (PSX.US), Delek US (DK.US), and Par Pacific (PARR.US)from "Outperform" to "Neutral," with price targets set at $300, $83, and $91, respectively. The firm believes that after all three stocks more than doubled year-to-date, their further upside is now limited. Mizuho analyst Nitin Kumar said in a report that Phillips 66's refining business has achieved industry-leading operating performance, reflected in improved capacity utilization, enhanced ability to capture crack spread gains, and lower costs. However, he noted: "Nevertheless, we believe the current share price already reflects most of the operational improvements, as well as the short-term earnings growth from wider crack spreads." Delek US has made notable progress in executing its strategic objectives, including corporate optimization initiatives that have delivered measurable operational improvements. But Nitin Kumar said that after the sharp year-to-date share price gain, the stock's further upside is now relatively limited. In addition, as a key catalyst, the small refinery exemption policy"the relevant exemptions for 2025 have already been approved, and at the current share price level, this factor's contribution to valuation is no longer as significant." Meanwhile, stronger distillate crack spreads benefit Par Pacific's product yield structure. Distillate production accounts for about 39% of the company's total product yield, giving its business high exposure to distillate production. However, Nitin Kumar said the stock's current price already fully reflects expected earnings growth. Nitin Kumar said that overall, refining stocks have been driven by elevated crack spreads. The ongoing conflict in the Middle East and the Russia-Ukraine conflict have constrained refined product supply and delayed the return of refining margins to mid-cycle levels. These factors highlight U.S. refiners' structural cost advantages, but the further upside for the related stocks appears to be limited. Against the backdrop of years of domestic U.S. refinery closures and Middle East wars tightening global fuel supply, U.S. refiners are running at full capacity to meet market demand, helping make the second quarter one of the most profitable in history. For example, Phillips 66's second-quarter profit rose more than 300% year-over-year to $3.8 billion; Valero Energy Corporation (VLO.US) reported its strongest quarterly performance in history on a per-share earnings basis in the second quarter. And with fuel prices remaining elevated, the good times for refiners appear to be continuing. Shell (SHEL.US) said it expects a strong third-quarter performance from its oil trading business, as tightening global fuel supply drives refining margins to record highs.