US Independent Refiners

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1 Americas/United States Equity Research Independent Refiners Research Analysts Edward Westlake Johannes Van Der Tuin US Independent Refiners SECTOR REVIEW Product Markets Slowly Clean Up But Lowering TPs Bottom Line: For oil markets to improve BOTH crude and product markets need to clean up. OPEC is showing supply restraint which should help reduce excess crude stockpiles. So too, global refinery runs appear to be lagging oil throughput demand growth. Our global refiner cost curve suggests a modest bounce in margins is required to meet still rising global demand. Coming into 2017, gasoline inventories remain high which suggests a margin recovery could take some time to deliver. We do note NYMEX diesel cracks are performing $2.20/bbl better than last year. Widening domestic crude diffs are also likely a 2H17+ event. The refiners have outperformed the E&P's by ~12% ytd. Both crude and product markets are cleaning up but we prefer the E&P's at this point. Modeling: We have updated our mid-cycle margins, lowered the RIN burden and adjusted stock specific capture rates. This leads to ~1% lower mid-cycle EBITDA but not the collapse in EBITDA that bears argue for. Our aggregate 2020 EBITDA for the group (including delivery of growth plans) is -13% below the strong 2015 conditions but 73% above the weak Target Prices: We have lowered TP's by -10% in this review. Absent a recession, the equities should compound higher over, driven by self-help, logistics growth and a shrinking share count. Prefer catalyst rich MPC (TP $63/sh): While the dropdown acceleration is known, receiving cash at the parent, buying back stock and laying out the growth potential of MPLX does not look reflected in the MPC share price. Pairing back TSO to Neutral (TP $93/sh): We like the merger with WNR and management's track record of creating value. We are not as bullish on West Coast margins and see greater Grey Sky risks than some peers. We downgrade TSO and WNR to Neutral. Taking some profits on DK (TP $26/sh): There is still more self-help to deliver over and above the deal synergies alone. DK is the "hedge" on Permian diffs for E&P investors. However, we downgrade DK and ALJ to Neutral, signaling less upside to our base case after the latest rally. CVRR is our RIN exposed name (TP $15/sh): This variable rate refiner offers the most upside across the group as margins improve, differentials widen to transport costs and RINS reduce. Downgrade CLMT to Underweight Again ($3/sh): The debt burden should constrain equity performance absent a major rally in margins. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Figure 1: Changes to target prices and ratings Refiners in the Rebalance We felt that refining margins could rebound a little relative to last year (helped by a better diesel market, rising demand and throughput discipline), that domestic US crude spreads could widen a little in 2H and that pure play US refiners may get some RIN relief. These trends still feel intact. We felt that the economy entered 2017 with some momentum, notwithstanding generic recession risks that rise as unemployment falls below NAIRU, wage pressures increase, interest rates rise amidst a much larger burden of global indebtedness. Without a recession, the bear's fears on refiner EBITDA felt too harsh. Investing in refining at this relatively late stage of the business cycle, does require a higher hurdle. Refining performs badly in recessions relative to other S&P sectors. There should be some compelling catalyst or value-disconnect to own the shares. Absent a recession, most refiner equities should compound higher over time as investment plans bear fruit and share counts reduce. The sector is not expensive on mid-cycle earnings whereas the S&P is expensive on most measures. This puts us in a predicament. If an economic downturn is far enough into the future and margins do recover then there is headroom for the equities. However, we don't want to chase relative value too hard. So we continue to focus on MPC which offers value and visible catalysts. CVRR in the refiner MLP space also looks discounted, again, after selling off in recent days. Market Current New Current Target New Consensus % Diff. Stock Region Ticker Cap Recommendation Recommendation 22-Mar Price Target Target % change % Upside vs. Consensus TP US Refiners Marathon Petroleum Company North America MPC 26,167 OUTPERFORM OUTPERFORM % 27% 1% Phillips 66 North America PSX 40,819 NEUTRAL NEUTRAL % 5% -9% Tesoro Corp. North America TSO 9,592 OUTPERFORM NEUTRAL % 13% -13% Valero North America VLO 30,477 NEUTRAL NEUTRAL % -1% -9% Holly Frontier North America HFC 4,770 OUTPERFORM OUTPERFORM % 16% -4% Delek North America DK 1,583 OUTPERFORM NEUTRAL % 1% -7% PBF Energy North America PBF 2,307 NEUTRAL NEUTRAL % 9% -17% Western Refining North America WNR 3,847 OUTPERFORM NEUTRAL % 14% 4% Alon USA Energy Inc. North America ALJ 918 OUTPERFORM NEUTRAL % 2% 3% Average 120,480-8% 10% -6% Variable Rate MLP's CVR Refining North America CVRR 1,395 OUTPERFORM OUTPERFORM % 59% 29% Calumet North America CLMT 291 NEUTRAL UNDERPERFORM % -21% -36% Alon USA Partners LP North America ALDW 603 NEUTRAL NEUTRAL % 14% -4% Average 2,290-16% 17% -4% Source: Company data, Credit Suisse estimates, Bloomberg Reappraising margins: Quarter to date refining margins, high product inventories, but quickly falling days of product demand cover have caused us to tinker with our refining margins both near term and for 2H17. Generally, we've moderated 3Q17 margin expectations, but raised our 4Q17 assumptions (which we now feel were too bearish). Figure 2: Old US Gulf Coast ($/b) (LLS based) $30 5 yr range 5 yr avg 2016 $25 CS fcst 2017 $20 $15 $10 $5 $0 -$5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Figure 3: New US Gulf Coast ($/b) (LLS based) $30 5 yr range 5 yr avg 2016 CS fcst 2017 $25 $20 $15 $10 $5 $0 -$5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service US Independent Refiners 2

3 Figure 4: Old US Mid-Continent ($/b) (WTI based) $60 $50 $40 $30 $20 $10 5 yr range 5 yr avg 2016 CS fcst 2017 $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Figure 5: New US Mid-Continent ($/b) (WTI based) $60 $50 $40 $30 $20 $10 5 yr range 5 yr avg 2016 CS fcst 2017 $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service Figure 6: Old US Rockies ($/b) (WTI based) Figure 7: New US Rockies ($/b) (WTI based) $55 $45 5 yr range 5 yr avg 2016 CS fcst 2017 $55 $45 5 yr ra nge 5 yr avg 2016 CS fcst 2017 $35 $35 $25 $25 $15 $15 $5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec $5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service Figure 8: Old US East Coast ($/b) (Brent based) $25 $20 $15 $10 $5 5 yr range 5 yr avg 2016 CS fcst 2017 $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Figure 9: New US East Coast ($/b) (Brent based) $25 $20 $15 $10 $5 5 yr range 5 yr avg 2016 CS fcst 2017 $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service US Independent Refiners 3

4 Figure 10: Old US West Coast ($/b) (ANS based) Figure 11: New US West Coast ($/b) (ANS based) $60 $50 5 yr range 5 yr avg 2016 CS fcst 2017 $60 $50 5 yr ra nge 5 yr avg 2016 CS fcst 2017 $40 $40 $30 $30 $20 $20 $10 $10 $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service On a product by product basis, as you can see in the charts below, the NYMEX gasoline crack is still stuck in winter lows. Prices are flat yoy, but it is too early to call a repeat for the year as a whole; in 2016 much of the real weakness versus a normal year happened in June-September. Diesel margins are around $2.20/bbl better than the weak level of last year. Figure 12: US East Coast gasoline cracks ($/b) (Brent based) Figure 13: US East Coast diesel cracks ($/b) (Brent based) $ $ $25 $20 $15 $35 $30 $25 $20 $10 $5 $0 J F M A M J J A S O N D $15 $10 $5 $0 J F M A M J J A S O N D Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service, Platts, EIA Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service, Platts, EIA The key issue will continue to be the pace of product draws, whereas inventories are currently in line with last year's record high levels. Figure 14: US gasoline inventories (Mbs) Figure 15: US middle distillate inventories (Mbs) year average year average D J F M A M J J A S O N D 100 D J F M A M J J A S O N D Source: Credit Suisse Research, EIA Source: Credit Suisse Research, EIA That being said, from a days of demand perspective, which is key given that demand increases on a yoy basis, we are coming back into line with historic norms. Gasoline will be the product to watch, as we are still above normal demand cover, though the 'derived' weekly data from the EIA seems to point in the right direction. We'll need to see how the numbers bear out in the monthly data. US Independent Refiners 4

5 Figure 16: Gasoline demand cover (days) Figure 17: Diesel demand cover (days) year average 2016 gasoline year average 2016 distillate fuel oil 20 J F M A M J J A S O N D 20 J F M A M J J A S O N D Source: Credit Suisse Research, EIA Source: Credit Suisse Research, EIA Globally, inventories are still quite high, though here too rising demand yoy should help to moderate the impact of current inventory levels on global refining margins. Figure 18: OECD gasoline inventories (Mbs) 450 5yr avg Figure 19: OECD middle distillate inventories (Mbs) yr avg D J F M A M J J A S O N D 400 D J F M A M J J A S O N D Source: Credit Suisse Research, IEA Source: Credit Suisse Research, IEA Figure 20: Global refining cost curve, how it has shifted over the last 5 years. 20 East Coast EQuivalent Breakeven margin $/bbl Throughput Cost Curve 2017 Throughput Cost Curve ,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90, ,000 Cumulative Throughput Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service, EIA, OGJ US Independent Refiners 5

6 Taking into account recent refining builds we have put together a global refining cost curve, which seems to indicate that over time a modest bounce in margins is to be expected as demand rises. On a more short-term basis: Falling US crude runs, and forecast IEA runs, could help to soften product inventories and markets (particularly for gasoline) have been helped by a series of secondary unit outages. Outages that have helped boost product margins, all else equal, but units that could lead to renewed pressure on product inventories, should they come back online (and run full-out). Figure 21: US crude runs (Mb/d) 18 5 year average D J F M A M J J A S O N D Source: Credit Suisse Research, EIA Figure 22: Global crude runs according to the IEA (Mb/d) yr ave D J F M A M J J A S O N D Source: Credit Suisse Research, IEA Figure 23: Global reported FCC outages (Mb/d) Figure 24: Global reported reformer outages (Mb/d) J F M A M J J A S O N D 0.0 J F M A M J J A S O N D Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL service Figure 25: WTI LLS ($/b) $0 -$2 -$4 -$6 -$8 -$ J F M A M J J A S O N D Source: Company data, Credit Suisse estimates Figure 26: WTI (Cushing) WTI (Midland) ($/b) $5 $4 $3 $2 $1 $0 -$1 -$2 -$3 -$ J F M A M J J A S O N D Source: Company data, Credit Suisse estimates For some inland US refiners a bright spot could be crude differentials (WTI LLS and Midland LLS), which have been very tight recently. Pipeline capacity has outstripped US Independent Refiners 6

7 production, but it is the presence of too many take or pay contracts that some refining management teams think is really driving the sub-pipeline tariff differentials. Given Credit Suisse's current 2017 oil price forecast of $56.25 Brent and $55 WTI, our sense is that drilling in the Permian will outstrip take or pay capacity in 2H and should lead to a return to West Texas basis differentials more in line with tariffs. To be clear, at this point we are not calling for a blow-out in crude differentials. That being said, our Permian takeaway model does suggest that there is a chance of a pinch point, and wider spreads (even beyond tariff levels), at some point in 2018, depending on the pace of production growth relative to long haul pipe additions. However, infrastructure additions should be able to keep pace over the medium term. Reducing Tail Risks and Zeroing In On Corporate Valuations Our strategists have recently published a broad overview of the markets Equities: Climbing the wall of worry. The conundrum facing the markets can be illustrated in six charts (see charts and excerpts below). To start off with, there are some "big-picture positives" according to our strategists: "(i) US wage growth has been more muted than expected, making us believe the unemployment rate consistent with full employment is probably 4.2%, not 4.8%. This is critical because cycles peak when unemployment is bps below NAIRU; (ii) for the first time in 30 years the five-year risk-adjusted return of equities is better than that for bonds and realised equity volatility is now below that of bonds; this should encourage a bond for equity switch yet equity inflows are still below 2013 peak levels; (iii) earnings revisions remain positive (we raise our US EPS growth forecast to 8.7% from 6%); (iv) we think inflation expectations will rise closer to 3% (2.2% currently) and equities do not derate until inflation rises above 3%; (v) above all, equities remain the least expensive major asset class: the ERP is 5.4% vs warranted of 4.1%; and (vi) excess liquidity is consistent with re-rating." Though, there are two events that could make them turn negative: "(i) if the unemployment rate falls bps below NAIRU and wage growth rises above 3%. This increasingly looks like a 2018 event; and (ii) if the 10-year UST yield rises to %. We think we are in the late stages of the bull market, so ultimately most of the rise in the next year would reverse into the next bear market." Figure 27: The unemployment rate in the US is now below the NAIRU Figure 28: Global macro surprises are consistent with a further rise in PMI new orders Source: Thomson Reuters, Credit Suisse Equities Strategy research Source: Markit, Thomson Reuters, Credit Suisse Equities Strategy research US Independent Refiners 7

8 Figure 29: Equities are expensive in absolute terms Source: Robert J Shiller, Thomson Reuters, Credit Suisse Strategy research Risks on the horizon (end-2017/2018) An economic slowdown in China: "Post the 19th Party Congress, there is a clear risk that Chinese growth could slow down. To say the least, there has been little to no rebalancing: China has had the second-largest increase in credit to GDP over a 7-year period, with total debt 43pp above trend; China still has an extraordinarily high investment share of GDP at 42% higher than any other major economy; aspects of real estate also look worrisome to us, with the mortgage rate being well over double rental yields. It is hard to imagine the recent drivers of growth accelerating; over 40% of growth recently has come from infrastructure and c.10% of growth directly, and an equal amount indirectly, has come from real estate. Six of the seven indicators of policy that we follow are showing some tightening, which is inconsistent with both of these growth drivers accelerating further. As we move into 2018, China will be close to one of our warning signals, with a loan-to deposit rate in excess of 100% (which would make it harder for China to roll over its NPLs). Meanwhile, as with most credit bubbles, the key is to focus on real estate trends (when assets funded with debt go down in price, credit bubbles tend to unwind)." Significant monetary tightening across OECD: "We could start to see significant tapering. In its September or December meeting, the ECB is likely to face clear demand from the German bloc to taper given GDP growth of c.2% and core inflation rising to %. At some point the Fed will also unwind QE (our economists believe this will happen when the fed funds rate is between 1.25% and 1.5%). We think that the BoJ would allow the JGB yield to rise if the yen were to weaken beyond 120, with the practical problem that the BoJ already owns c.40% of the JGB market." Rising wage inflation: "By the end of H1 2018, US labour may have gained significant pricing power, resulting in a sharp pick-up in wage growth and pressure on margins and profitability (see above)." Italian elections: "In our opinion, the weak link in Europe is not France but Italy [ ], where 57% of the electorate supports Eurosceptic parties. We think the next Italian election will most likely be in spring 2018." US Independent Refiners 8

9 Figure 30: Summary of indicators that we would expect at a market peak Source: Company data, Credit Suisse estimates Impact on refiners: Our conundrum is that refiners don't look expensive relative to the market but they are highly cyclical. Positive macro surprises entering 2017 suggest that a recession does not look imminent but risks remain elevated on a two to three year time horizon. In a steady mid cycle environment the refiners' equity value could compound significantly higher over time (see later table) and pay out a decent dividend yield. However, when we adjust for time value of money and grey sky risks, the upside becomes less compelling, particularly against select E&P names that have sold off. Against the current macro backdrop, the P/E ratio of the large-cap refiners average ~12x. Using our forecast level of maintenance capex, both mid-cycle FCF yields as well as our SOTP math look supportive. It is not a compelling upside case, but there is some potential appreciation for select names, including MPC and CVRR (the most exposed to RINs). For further details see below: Figure 31: TP Upside/Downside for US Independent Refiners 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% CVRR MPC HFC WNR ALDW TSO PBF PSX ALJ DK VLO CLMT Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL service The table below summarizes some of the outputs from our valuation work. In general at our mid cycle assumptions, there is a compounding higher of equity value driven by investments to improve the refining system, growth in logistics and a reducing net debt per share as these companies generate free cash. In setting our target prices we consider: US Independent Refiners 9

10 Figure 32: Target prices and rolling SOTP valuations The average value of the business over 2018, 2019, 2020 discounted back to the end of We apply a grey sky scenario with a probability of 20%. This grey sky scenario is a recession in We model the recession impact across the different businesses e.g. refining, retail, the MLP etc. We apply a blue sky scenario of higher mid-cycle refining margins with a probability of 20%. On balance the application of grey sky/blue sky is a negative adjustment. Our strategists see a high chance of an economic downturn over the next two to three years but as we discuss above, but that appears to be increasingly less likely in This does set up the risk that our TP's end up being too conservative in the very shortterm, particularly if management teams bring forward value at a faster pace than our discount rate. Current Price Target Price Undisc Undisc Undisc Undisc Discounted Average Blue Sky Impact Grey Sky Impact MPC PSX TSO (*) VLO HFC DK (**) PBF WNR (***) NA NA NA NA NA NA NA ALJ (***) NA NA NA NA NA NA NA CVRR (****) 9 15 NA NA NA NA NA NA NA CLMT (****) 4 3 NA NA NA NA NA NA NA ALDW (****) NA NA NA NA NA NA NA Note: (*) TSO is being valuled as a stand alone entity (pre-wnr acquisition) Note: (**) DK Target Price includes ALJ acquisition uplift Note: (***) Target Prices set at acquisition exchange ratio Note: (****) MLPs valued on a DDM rather than SOTP Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL service Top picks, upgrades and downgrades: MPC Maintain Outperform with a TP of $63/sh. Although a lot of the near term conversation focuses on the accelerated drops of MPC assets into MPLX and the GP IDR swap, which raises over $4bn at the c-corp level and should help close the SOTP discount, we continue to believe that the longer-term value growth of MPLX and its impact on MPC is also underappreciated by the market. It is understandable given that MPLX merged with MWE into a commodity downturn and given the noise about financial restructuring that the investor conversation is not focused enough on the longer term potential to create value from MPC's logistics footprint. MPLX has 10M acres of dedicated upstream acreage as well as a large potential EBITDA uplift from repurposing existing assets like Capline, LOOP and Centennial. In refining, there is significant self-help to deliver at Galveston Bay and there is a store of growing value at Speedway. We reiterate our view that MPC has the potential to be an $80/sh stock down the road. Our TP reflects time value of money, an SOTP discount and the impact of a grey sky scenario. We remind folks that 1Q will be heavily impacted by maintenance, something to navigate. CVRR Still the most RIN exposed name under our coverage, with the largest potential upside. CVRR will need to navigate turnarounds at Wynnewood in 2H17 and 2H18, but still could resume distributions this summer. We lower 2017 and 2018 EBITDA by -5% US Independent Refiners 10

11 and -12% respectively, but roll forward our DDM, which does provide some off-set. Netnet, we lower our TP to $15/sh, but maintain our rating of Outperform. TSO/WNR We've incorporated a number of changes to the TSO target price as part of this sector review. We lower our target to $93/sh and take the recommendation to Neutral. Firstly, our longer term view of refining margins remains relatively muted. Yes, California's economy is growing and when there are unplanned outages, margins tend to spike. However, what works in California's favor today (i.e. the difficulty of importing into a geographically isolated market) could reverse as overall economic growth slows and auto efficiency/changing fleet mix impacts demand. We are in year 7 of the current business cycle expansion. Secondly, we believe the business has a more negative grey sky sensitivity than some peers given higher California operational costs and a greater share of R&M income, notwithstanding management's progress on diversification and retail integration. Our inclusion of grey sky scenarios does tend to leave our target prices below consensus across the group. We do like the integration of WNR which operates two of the highest cash margin refineries in the US and brings relationships in Permian logistics. At the moment, we include around $250m of synergy in our merger model which offsets the premium paid for WNR shares. If TSO is able to deliver the full synergy then this would add $4/sh of equity upside to our TP. The combination of WNR/TSO creates synergistic overlap in the South West product markets and around St Paul Park/Mandan plus opportunities to offer full service logistics to customers in the Permian and Bakken. Management have delivered more self-help in EBITDA than peers over the last 6 years or so and will likely continue to find ways to create value from their broader footprint. Our TSO standalone EBITDA of $2.9bn is lower than TSO's $3.5-4bn EBITDA target reflecting the absence of EBITDA contribution from the Vancouver Rail Project and retail M&A contribution plus narrower margin/crude diff assumptions. Our EBITDA multiples for TSO legacy refining are lower than peers reflecting the lower free cash flow. Our EBITDA multiples for TSO legacy marketing are lower, reflecting the mix of income streams say versus fully owned c-store EBITDA. For WNR, we have brought our TP to $40/sh, to reflect the acquisition offer exchange rate. DK/ALJ Share prices have increased ~110% off of last summer's lows and the current price is approaching fair value. DK has not sold off in the way that some other names have ytd and could appreciate further under the right circumstances (see below), but after a strong bull-run, we're taking a pause on DK/ALJ. Our DK TP is $26/sh. For ALJ, we have brought our TP to $13/sh to reflect the acquisition exchange ratio. Drivers that could send our DK target price higher: Retail improvements could add another $1/sh in uplift to a merged DK/ALJ; Every dollar the Midland crude differential widens, adds~15% to DK's EBITDA; As DK drops more assets into DKL and drillers get back to work in the Permian, the greater scale and growth outlook could tighten the yield on DKL and provide additional uplift to DK; Krotz Springs improves, potentially just being turned into a terminal; A greater ability to disintermediate their own crude supply, allowing them to source barrels at prices below the screen; and Last but certainly not least, ALJ has identified over 60 mil. of self-help at Big Spring, but has been unable to execute due to cash constraints. DK should be able to push their uplift higher by finishing the high return projects that ALJ didn't have the ability to start. US Independent Refiners 11

12 CLMT There continues to be just too much risk on this one for us. We've lowered our TP to $3/sh, ~21% below the market. Our chief concern is that even in a 'Blue Sky' scenario we can't find our way to a target price higher than $4 - $5/sh, but in a 'Grey Sky' recession scenario the company could very well be forced into bankruptcy. For the time being, management continues to make the correct moves, but the risk/reward from an equity perspective is too unfavorable. Steady as she goes, names that we've chosen to maintain: HFC Maintain Outperform, but lower our TP to $32/sh. After rallying nicely into the end of the year, HFC has sold off on margin worries and high product inventories. HFC should bounce back so long as operations stay on target and the margin environment improves seasonally in accordance to what we have discussed above. PBF We maintain our Neutral call, but lower out TP to $23/sh. PBF continues to be a show-me story, with massive potential upside in a 'Blue Sky' scenario, but real risk. Chief concerns continue to be (1) execution of improvements at the Chalmette and Torrance refineries and (2) a high level of sensitivity to the macro environment and refining margins. The recent sell-off in the stock, down ~26% ytd, makes for a solid upgrade argument. However, there is still a bit too much volatility for our tastes. In particular, we'd like to be a little more comfortable with their ability to hit pro-forma numbers for recent acquisitions on the Gulf and West Coasts. PSX Lowering our PSX TP to $83/sh, we maintain our Neutral call. PSX has been one of the more fully valued refiners for quite some time, but is getting closer to the time when the cash flow power of the company will expand to support its enterprise value. There are a number of hurdles to jump through first e.g. the startup costs and commissioning of the new cracker, a potentially weaker chemical market and higher ethane costs as the Gulf Coast crackers come on line over , near term refinery maintenance. Over time, our SOTP value rises north of $100/sh driven by the increase in value of CPChem, the LP and GP stake in PSXP, DCP and the self-help in refining (plus some margin/crude diff expansion), together with the more stable value in Marketing and Specialties. There will come a time, closer to this free cash expansion, when the shares could appreciate at a decent pace. VLO Maintain at Neutral with a TP of $67/sh. VLO is looking fully valued and has less capital appreciation upside than much of the group. That being said, the Gulf Coast refiner has the strongest balance sheet in the business, with ~$4.8 Bil. of cash on hand, and the capacity to return large amounts of cash to shareholders. Additionally, if the OPEC deal that has been pairing back production falls apart around their mid-summer meeting, VLO would be your best hedge as light/heavy differentials widen and investors flee E&P/Services for the downstream. ALDW Rolling the DDM increases our TP for ALDW to $11/sh, despite a weaker margin environment in 2017 as well as prospective future maintenance at the Big Spring refinery in Wider crude spreads should help profitability going into the end of 2017; our forecast is for $1/bbl Midland-Cushing crude spreads. If a pinch-point in Midland off-take capacity is reached at end 2018, it could provide some additional upside. Overall, we have cut TPs and earnings: After having tweaked multiples, captures and marking margins QTD, we've generally lowered our earnings for the group to the tune of ~4% in US Independent Refiners 12

13 Figure 33: Changes to earnings forecasts and a comparison to the consensus ($ mil.) OLD EBITDA E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E ALJ % -11% -24% -8% -12% ALDW (*) % -15% -27% -6% -12% CLMT (*) % -1% -4% -3% -6% CVRR (*) % -5% -12% -8% -12% DK % 0% 3% 3% 5% HFC 1, ,228 1,453 1, ,232 1,308 1,308 0% 0% 0% -10% -6% MPC 6,804 4,351 5,422 5,712 6,038 6,561 4,351 5,416 5,737 6,052 6,836 0% 0% 0% 0% 4% PBF ,083 1, ,083 0% -5% -6% -8% -3% PSX (**) 7,293 3,458 5,493 6,751 7,391 7,571 3,458 5,264 6,552 7,155 7,451 0% -4% -3% -3% -2% TSO 3,923 2,081 2,809 2,972 3,193 3,293 2,081 2,705 2,944 3,155 3,332 0% -4% -1% -1% 1% VLO 8,203 4,775 6,425 6,301 6,604 6,734 4,775 6,025 6,093 6,397 6,607 0% -6% -3% -3% -2% WNR 1, , ,004 0% -1% 1% 1% 0% Total % -4% -2% -3% -1% New EBITDA Consensus EBITDA % Change EBITDA % EBITDA vs Consensus E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E ALJ NA NA 12% 12% -20% NA NA ALDW (*) NA NA -4% -9% -25% NA NA CLMT (*) NA NA -22% -2% -10% NA NA CVRR (*) NA NA -1% 18% 4% NA NA DK NA NA -14% -13% NA NA NA HFC 1, ,232 1,308 1, ,067 1,258 NA NA -9% -7% -2% NA NA MPC 6,804 4,351 5,416 5,737 6,052 6,836 4,278 5,406 6,031 NA NA 2% 0% -5% NA NA PBF , NA NA 9% -7% -6% NA NA PSX (**) 7,293 3,458 5,264 6,552 7,155 7,451 4,092 5,334 6,467 NA NA -15% -1% 1% NA NA TSO 3,923 2,081 2,705 2,944 3,155 3,332 1,976 2,652 3,024 NA NA 5% 2% -3% NA NA VLO 8,857 4,775 6,025 6,093 6,397 6,607 4,821 5,715 6,383 NA NA -1% 5% -5% NA NA WNR 1, , NA NA -6% -1% 3% NA NA Total 33,003 16,647 22,924 25,495 27,291 28,868 17,258 22,728 26,329 NA NA -4% 1% -3% NA NA Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL service NEW EBITDA US Independent Refiners 13

14 Americas/United States Oil & Gas Refining & Marketing Rating (from OUTPERFORM) NEUTRAL [V] Price (23-Mar-17, US$) Target price (US$) (from 12.00) week price range (US$) Market cap (US$ m) Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Edward Westlake edward.westlake@credit-suisse.com Johannes Van Der Tuin johannes.vandertuin@credit-suisse.com Alon USA Energy, Inc. (ALJ) Fully Valued Exchange Ratio Bottom Line: ALJ has had a strong rally over the last 6 months, pulled up by DK's offer to acquire the remaining 52% of outstanding shares for an exchange rate of 50.4%. At this point, both DK and by extension ALJ look close to fully valued. We have brought our TP to $13/sh from $12/sh to reflect the acquisition exchange ratio, but also downgrade our rating to Neutral from Outperform and lower 2018 EPS by -53%. Valuation/Risks: We value ALJ on a sum of the parts basis, using a blended mid-cycle EV/EBITDA multiple of 5.3x. Earnings should increase over time as margins improve and drillers get back to work in West Texas, but there is downside risk if that isn't the case. Share price performance A p r Ju l O c t Ja n A LJ.N S& P IN D EX On 23-Mar-2017 the S&P 500 INDEX closed at Daily Mar24, Mar23, 2017, 03/24/16 = US$10.6 Quarterly EPS Q1 Q2 Q3 Q4 2016A E E Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Revenue (US$ m) 2, , , ,058.4 EBIDAX (US$ m) EPS (CS adj.) (US$) Prev. EPS (US$) - (0.16) (0.33) (0.37) ROGIC (%) P/E (x) P/E rel. (%) OCFPS (US$) P/OCF (x) Qtrly ent. val./ tot. EBIDAX Net debt (US$ m) Dividend (current, US$).6 Dividend yield (%) 5.1 Net debt (current, US$) Net debt/tot eq (Next Qtr., %) 63.3 BV/share (Next Qtr., US$) 7.6 GIC (12/17E, US$ m) EV qtr/gic (x) 1.4 Current WACC (%) - Free float (%) 44.5 Number of shares (m) Source: Company data, Thomson Reuters, Credit Suisse estimates US Independent Refiners 14

15 Alon USA Energy, Inc. (ALJ) Price (23 Mar 2017): US$12.64; Rating: (from OUTPERFORM) NEUTRAL [V]; Target Price: (from US$12.00) US$13.00; Analyst: Edward Westlake Income Statement 12/16A 12/17E 12/18E 12/19E EBITDAX (US$ m) EBITDA (US$ m) EBIT (m) (66) 29 (6) 27 Net interest income (exp) Net non operating inc (exp) (20) (30) (31) (30) Share of associates/jvs' equity Exceptionals (20) (30) (31) (30) Profit before tax (US$ m) (181) (79) (121) (91) Taxes (47) (6) (21) (11) Profit after tax (134) (73) (100) (80) Extraordinary gain/(loss) Non-controlling interest (minority) Preferred dividends EBIDAX (US$ m) Adjusted net income (US$ m) (65) (25) (50) (35) Cash Flow 12/16A 12/17E 12/18E 12/19E DD&A Change in working capital (33) 4 (0) 0 Other cash and non-cash items Cash flow from operations CAPEX (59) (70) (70) (70) Exploration expense Free cashflow to the firm Aquisitions Divestments Other investment/(outflows) Cashflow from investment (83) (90) (90) (90) Operating cash flow Depreciation & Amortization Balance Sheet 12/16A 12/17E 12/18E 12/19E Cash and cash equivalents Other current assets Total current assets Total fixed assets 1,367 1,312 1,258 1,203 Other assets Total assets 2,110 2,087 2,034 1,971 Total current liabilities Long-term debt Other Liabilities Total liabilities 1,528 1,560 1,588 1,590 Shareholders' equity Minority interest Total equity and liabilities 2,110 2,087 2,034 1,971 Per share 12/16A 12/17E 12/18E 12/19E Equiv. FPO (period Avg.) (mn) EPS (CS Adj.) (US$) (0.9) (0.3) (0.7) (0.5) DPS (US$) Operating CFPS (US$) Earnings 12/16A 12/17E 12/18E 12/19E EBITDAX margin (%) EBIT Margin (%) (3.1) 1.2 (0.2) 1.3 Net Income Margin (%) (3.1) (1.0) (2.1) (1.7) Tax Burden (%) Valuation 12/16A 12/17E 12/18E 12/19E Dividend yield (%) FCF yield (%) EV/EBITDAX (x) Returns 12/16A 12/17E 12/18E 12/19E ROE (%) (10.7) (4.9) (11.6) (10.4) ROGIC (avg.) (%) (5.0) 2.9 (0.6) 3.1 Gearing 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) Interest coverage ratio (X) (1.1) 0.5 (0.1) 0.4 Quarterly EPS 2016A Q Q Q Q E E Source: Company data, Thomson Reuters, Credit Suisse estimates Company Background Headquartered in Dallas, Texas, Alon USA Energy, Inc. is an independent refiner and marketer of petroleum products, operating primarily in the western and south-central regions of the United States. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) Our Blue Sky $16 per share price scenario assumes stronger than expected gasoline and diesel demand growth and a mismatch between product demand and refining capacity. The tightness in the market leads to a 10% bump to mid-cycle refining margins globally. Our Grey Sky Scenario (US$) 9.00 Our Grey Sky $9 per share price scenario assumes a cyclical downturn in the global economy within the next two years. Contracting economic growth and demand would result in a collapse of refining margins as well as drilling activity and a temporary 62% contraction in base-case EBITDA, before earnings recovers to only 91% of their forecast base-case level Share price performance 5 A p r Ju l O c t Ja n A LJ.N S& P IN D EX On 23-Mar-2017 the S&P 500 INDEX closed at Daily Mar24, Mar23, 2017, 03/24/16 = US$10.6 US Independent Refiners 15

16 Rating (from NEUTRAL) UNDERPERFORM [V] Price (23-Mar-17, US$) 3.80 Target price (US$) (from 5.00) week price range (US$) Market cap (US$ m) Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Edward Westlake edward.westlake@credit-suisse.com Johannes Van Der Tuin johannes.vandertuin@credit-suisse.com Americas/United States Master Limited Partnerships Calumet Specialty Products Partners, L.P. (CLMT) Little Upside, Dramatic Downside Bottom Line: There continues to be just too much risk on this one for us. We've lowered our TP to $3/sh from $5/sh, ~21% below the market. Our chief concern is that even in a 'Blue Sky' scenario we can't find our way to a target price higher than $4 - $5/sh, but in a 'Grey Sky' recession scenario the company could very well be forced into bankruptcy. For the time being, management continues to make the correct moves, but the risk/reward from an equity perspective is too unfavorable. We lower 2018 EPS by -$0.12 or - 12%. We lower our rating to Underperform from Neutral. Valuation/Risks: We value CLMT using a DDM model. However, as leverage at CLMT is too high, there is very little chance that it will distribute any cash in the near future. The primary risks to the name are its weak balance sheet, which would be hard pressed to survive a downturn in the larger economy. Share price performance A p r Ju l O c t Ja n C LM T.O Q S& P IN D EX On 23-Mar-2017 the S&P 500 INDEX closed at Daily Mar24, Mar23, 2017, 03/24/16 = US$11.33 Quarterly EPS Q1 Q2 Q3 Q4 2016A E E Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Revenue (US$ m) 3, , , ,653.1 EBIDAX (US$ m) EPS (CS adj.) (US$) Prev. EPS (US$) - (1.20) (1.00) (0.78) ROGIC (%) P/E (x) P/E rel. (%) OCFPS (US$) (1.61) P/OCF (x) Qtrly ent. val./ tot. EBIDAX Net debt (US$ m) 1,993 2,027 2,044 2,015 Dividend (current, US$).0 Dividend yield (%) 0.0 Net debt (current, US$) 2,007.4 Net debt/tot eq (Next Qtr., %) BV/share (Next Qtr., US$) 0.0 GIC (12/17E, US$ m) 2,174.1 EV qtr/gic (x) 1.0 Current WACC (%) - Free float (%) 78.7 Number of shares (m) Source: Company data, Thomson Reuters, Credit Suisse estimates US Independent Refiners 16

17 Calumet Specialty Products Partners, L.P. (CLMT) Price (23 Mar 2017): US$3.8; Rating: (from NEUTRAL) UNDERPERFORM [V]; Target Price: (from US$5.00) US$3.00; Analyst: Edward Westlake Income Statement 12/16A 12/17E 12/18E 12/19E EBITDAX (US$ m) EBITDA (US$ m) EBIT (m) (211) Net interest income (exp) (162) (143) (131) (118) Net non operating inc (exp) (326) (285) (262) (236) Share of associates/jvs' equity Exceptionals (326) (285) (262) (236) Profit before tax (US$ m) (375) (98) (87) (69) Taxes (8) (0) (0) (0) Profit after tax (368) (97) (87) (69) Extraordinary gain/(loss) Non-controlling interest (minority) Preferred dividends EBIDAX (US$ m) Adjusted net income (US$ m) (323) (97) (87) (68) Cash Flow 12/16A 12/17E 12/18E 12/19E DD&A Change in working capital 2 (10) (10) (10) Other cash and non-cash items Cash flow from operations (124) CAPEX (9) (70) (70) (55) Exploration expense Free cashflow to the firm (133) Aquisitions Divestments Other investment/(outflows) Cashflow from investment (185) (140) (140) (115) Operating cash flow (124.2) Depreciation & Amortization Balance Sheet 12/16A 12/17E 12/18E 12/19E Cash and cash equivalents Other current assets Total current assets Total fixed assets 1,678 1,640 1,598 1,529 Other assets Total assets 2,725 2,702 2,676 2,621 Total current liabilities Long-term debt 1,994 2,028 2,044 2,015 Other Liabilities Total liabilities 2,507 2,555 2,590 2,578 Shareholders' equity Minority interest Total equity and liabilities 2,725 2,702 2,676 2,621 Per share 12/16A 12/17E 12/18E 12/19E Equiv. FPO (period Avg.) (mn) EPS (CS Adj.) (US$) (3.1) (1.2) (1.1) (0.9) DPS (US$) Operating CFPS (US$) (1.6) Earnings 12/16A 12/17E 12/18E 12/19E EBITDAX margin (%) EBIT Margin (%) (5.9) Net Income Margin (%) (9.0) (2.7) (2.3) (1.9) Tax Burden (%) Valuation 12/16A 12/17E 12/18E 12/19E Dividend yield (%) FCF yield (%) (43.2) EV/EBITDAX (x) Returns 12/16A 12/17E 12/18E 12/19E ROE (%) (77.6) (85.2) () () ROGIC (avg.) (%) (9.2) Gearing 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) Interest coverage ratio (X) 1.3 (0.3) (0.3) (0.4) Quarterly EPS 2016A Q Q Q Q E E Source: Company data, Thomson Reuters, Credit Suisse estimates Company Background Calumet Specialty Products Partners, L.P. is a Delaware limited partnership engaged in the production and marketing of crude oilbased specialty products. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 4.00 Our Blue Sky $4 per share price scenario assumes stronger than expected gasoline and diesel demand growth and a mismatch between product demand and refining capacity. The tightness in the market leads to a 10% bump to mid-cycle refining margins globally. Our Grey Sky Scenario (US$) 0.10 Our Grey Sky $0 per share price scenario assumes a cyclical downturn in the global economy within the next two years. Contracting economic growth and demand would result in a collapse of refining margins as well as drilling activity and a temporary 50% contraction in base-case EBITDA making it hard for CLMT to cover its debt and probably forcing the company into bankruptcy or asset sales Share price performance 3 A p r Ju l O c t Ja n C LM T.O Q S& P IN D EX On 23-Mar-2017 the S&P 500 INDEX closed at Daily Mar24, Mar23, 2017, 03/24/16 = US$11.33 US Independent Refiners 17

18 Americas/United States Oil & Gas Refining & Marketing Rating (from OUTPERFORM) NEUTRAL [V] Price (23-Mar-17, US$) Target price (US$) (from 28.00) week price range (US$) Market cap (US$ m) 1, Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Edward Westlake edward.westlake@credit-suisse.com Johannes Van Der Tuin johannes.vandertuin@credit-suisse.com Delek US Holdings, Inc. (DK) Pausing After A Strong Run Bottom Line: Share prices have increased ~110% off of last summer's lows and the current price is approaching fair value. DK has not sold off in the way that some other names have ytd and could appreciate further under the right circumstances (see below), but after a strong bull-run, we're taking a pause on DK/ALJ. Our DK TP is $26 (from $28) per share and we've lowered our 2018 EPS forecast by $0.19 or -40%. We lower our rating to Neutral from Outperform. Valuation/Risks: We value DK on a sum of the parts basis, using a blended mid-cycle EV/EBITDA multiple and including $7.7 per share of uplift as a result of their pending acquisition of ALJ. On a standalone basis, earnings should increase over time as margins improve and drillers get back to work in West Texas and the name would be negatively impacted if, for some reason, the pending acquisition of ALJ were to fall apart. Share price performance A p r Ju l O c t Ja n D K.N S& P IN D EX On 23-Mar-2017 the S&P 500 INDEX closed at Daily Mar24, Mar23, 2017, 03/24/16 = US$15.18 Quarterly EPS Q1 Q2 Q3 Q4 2016A E E Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Revenue (US$ m) 3, , , ,318.1 EBIDAX (US$ m) EPS (CS adj.) (US$) Prev. EPS (US$) - (0.29) ROGIC (%) P/E (x) P/E rel. (%) OCFPS (US$) P/OCF (x) Qtrly ent. val./ tot. EBIDAX Net debt (US$ m) Dividend (current, US$).6 Dividend yield (%) 2.4 Net debt (current, US$) Net debt/tot eq (Next Qtr., %) -3.1 BV/share (Next Qtr., US$) 16.0 GIC (12/17E, US$ m) 1,056.0 EV qtr/gic (x) 1.4 Current WACC (%) - Free float (%) 82.0 Number of shares (m) Source: Company data, Thomson Reuters, Credit Suisse estimates US Independent Refiners 18

19 Delek US Holdings, Inc. (DK) Price (23 Mar 2017): US$25.25; Rating: (from OUTPERFORM) NEUTRAL [V]; Target Price: (from US$28.00) US$26.00; Analyst: Edward Westlake Income Statement 12/16A 12/17E 12/18E 12/19E EBITDAX (US$ m) EBITDA (US$ m) EBIT (m) (56) Net interest income (exp) Net non operating inc (exp) Share of associates/jvs' equity Exceptionals Profit before tax (US$ m) (104) Taxes (172) Profit after tax Extraordinary gain/(loss) Non-controlling interest (minority) (13) Preferred dividends EBIDAX (US$ m) Adjusted net income (US$ m) (178) (22) Cash Flow 12/16A 12/17E 12/18E 12/19E DD&A Change in working capital Other cash and non-cash items (48) Cash flow from operations CAPEX (46) (81) (48) (148) Exploration expense Free cashflow to the firm Aquisitions Divestments Other investment/(outflows) Cashflow from investment (108) (81) (48) (148) Operating cash flow Depreciation & Amortization Balance Sheet 12/16A 12/17E 12/18E 12/19E Cash and cash equivalents Other current assets Total current assets 1,402 1,423 1,526 1,547 Total fixed assets 1,103 1, ,023 Other assets Total assets 2,985 2,967 3,000 3,049 Total current liabilities Long-term debt Other Liabilities Total liabilities 1,803 1,844 1,895 1,950 Shareholders' equity 1, Minority interest Total equity and liabilities 2,985 2,967 3,000 3,049 Per share 12/16A 12/17E 12/18E 12/19E Equiv. FPO (period Avg.) (mn) EPS (CS Adj.) (US$) (2.9) (0.3) DPS (US$) Operating CFPS (US$) Earnings 12/16A 12/17E 12/18E 12/19E EBITDAX margin (%) EBIT Margin (%) (1.6) Net Income Margin (%) (5.1) (0.5) Tax Burden (%) Valuation 12/16A 12/17E 12/18E 12/19E Dividend yield (%) FCF yield (%) EV/EBITDAX (x) Returns 12/16A 12/17E 12/18E 12/19E ROE (%) (16.1) (2.2) ROGIC (avg.) (%) Gearing 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) (4.0) (6.0) (15.5) (17.4) Interest coverage ratio (X) (1.0) Quarterly EPS 2016A Q Q Q Q E E Source: Company data, Thomson Reuters, Credit Suisse estimates Company Background Delek US Holdings, Inc. (Delek) is a diversified energy business focused on petroleum refining, wholesale sales of refined products and retail marketing. The Company s business consists of three operating segments: refining, marketing and retail. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) Our Blue Sky $31 per share price scenario assumes stronger than expected gasoline and diesel demand growth and a mismatch between product demand and refining capacity. The tightness in the market leads to a 10% bump to mid-cycle refining margins globally. Our Grey Sky Scenario (US$) Our Grey Sky $18 per share price scenario assumes a cyclical downturn in the global economy within the next two years. Contracting economic growth and demand would result in a collapse of refining margins as well as drilling activity and a temporary 90% contraction in base-case EBITDA, before earnings recovers to only 85% of their forecast base-case level Share price performance 1 0 A p r Ju l O c t Ja n D K.N S& P IN D EX On 23-Mar-2017 the S&P 500 INDEX closed at Daily Mar24, Mar23, 2017, 03/24/16 = US$15.18 US Independent Refiners 19