The Zacks Oil and Gas - Refining & Marketing industry faces challenges from volatile crude prices, regulatory pressures and rising operational costs. Seasonal Q4 refining margin weakness and global supply additions could further impact profitability. Capital-intensive refinery upgrades and emissions compliance add financial strain, especially for firms reliant on fossil fuels. Despite these headwinds, the industry holds long-term growth potential. Strong refining utilization rates and steady demand for gasoline, diesel and jet fuel provide a solid base. Integrated refiners with geographic diversification can optimize margins through efficiency gains and strategic investments. Managing rising costs, including labor and store expansions, remains crucial. However, firms like Phillips 66 PSX, Marathon Petroleum MPC, Valero Energy VLO and Galp Energia GLPEY. Their focus on refinery optimization and sustainability initiatives offers resilience in an evolving energy landscape.

Industry Overview

The Zacks Oil and Gas - Refining & Marketing industry consists of companies involved in selling refined petroleum products (including heating oil, gasoline, jet fuel, residual oil, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum). Some companies also operate refined product terminals, storage facilities and transportation services. The primary activity of these firms involves buying crude/other feedstocks and processing them into a wide variety of refined products. Refining margins are extremely volatile and generally reflect the state of petroleum product inventories, demand for refined products, imports, regional differences and capacity utilization in the industry. Other major determinants of refining profitability are the light/heavy and sweet/sour spreads. Refiners are also prone to maintenance and unplanned outages.

3 Trends Defining the Oil and Gas - Refining & Marketing Industry's Future

Pressure on Margins: The refining and marketing industry faces significant challenges, including fluctuating crude prices and regulatory pressures. Refining margins saw seasonal weakness in Q4, and while demand remains steady, global supply additions could create headwinds. Additionally, geopolitical risks, environmental mandates and rising operational costs may impact profitability. The industry also faces capital-intensive requirements, such as refinery upgrades and emissions compliance, which could weigh on financial performance, particularly for companies heavily reliant on fossil fuel demand.

Poised for Sustained Growth: The industry remains well-positioned for long-term growth, driven by strong global demand for refined products. With refining utilization remaining strong and continued demand for gasoline, diesel, and jet fuel, the sector is set to benefit from tight supply conditions. Companies with integrated refining systems leverage geographic diversification and operational efficiencies to maximize margins. Moreover, strategic investments in refinery optimization and sustainability initiatives ensure competitive advantages, supporting profitability despite market fluctuations.

Escalating Costs: Increasing operational costs from store expansions and wage pressures weigh on the downstream operators’ financial performance. Competitive pricing in non-fuel categories and slower recovery in discretionary spending create headwinds. Together, these factors underscore the need for careful cost management and strategic planning to navigate short-term pressures in an evolving market environment.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Oil and Gas - Refining & Marketing is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #198, which places it in the bottom 20% of 246 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. As a matter of fact, while the industry’s earnings estimate for 2025 has gone down 22.2% in the past year, the same for 2026 has fallen 3.3% over the same timeframe.

Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Underperforms Sector & S&P 500

The Zacks Oil and Gas - Refining & Marketing industry has fared worse than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.

The industry has gone down 10.7% over this period compared with the broader sector’s increase of 3.3%. Meanwhile, the S&P 500 has gained 17.2%.

One-Year Price Performance

Industry's Current Valuation

Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 3.64X, significantly lower than the S&P 500’s 17.27X. It is also slightly below the sector’s trailing 12-month EV/EBITDA of 4.21X.

Over the past five years, the industry has traded as high as 6.96X and as low as 1.80X, with a median of 3.63X, as the chart below shows.

Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)

4 Stocks in Focus

Phillips 66: Based in Houston, TX, Phillips 66 is a diversified and integrated energy company established following the 2012 spin-off of ConocoPhillips' downstream operations. As one of the world's leading refiners, Phillips 66 operates 13 refineries, primarily in the United States, with a total refining capacity of 2.2 million barrels per day.

The Zacks Consensus Estimate for 2025 earnings of Phillips 66 indicates 7.8% growth. PSX has a four-quarter average earnings surprise of 13%. The Zacks Rank #3 (Hold) firm has a market capitalization of $51 billion.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: PSX

Marathon Petroleum: It is a leading independent refiner, transporter and marketer of petroleum products. Marathon Petroleum's access to lower-cost crude in the Permian, Bakken, and Canada helps it benefit from the differentials. The company’s exceptional cash flow generation and aggressive shareholder returns are the key drivers for stock price appreciation.

Findlay, OH-based Marathon Petroleum, has a market capitalization of $45.6 billion. MPC beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters. Shares of #3 Ranked MPC have lost 16.9% in a year.

Price and Consensus: MPC

Valero Energy: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. The company has a refining capacity of 3.2 million barrels per day across 15 refineries located throughout the United States, Canada and the United Kingdom.

Valero Energy beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other, the average being 101.2%. Shares of this Zacks Rank #3 company have lost 9% in a year.

Price and Consensus: VLO

Galp Energia: It is a Portuguese integrated energy firm with a significant presence in the downstream segment. The company’s Refining and Marketing unit is responsible for the supply and trade of oil and biofuels, and the operation of oil and gas refineries. It operates two refineries in Portugal.

GLPEY, based in Lisbon, has a four-quarter average earnings surprise of 51.2%. The firm has a market capitalization of $11.4 billion. This #3 Ranked company’s shares have increased 3.2% in a year.

Price and Consensus: GLPEY

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Phillips 66 (PSX) : Free Stock Analysis Report

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This article originally published on Zacks Investment Research (zacks.com).

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