Mercer Capital's Value Focus: Refining | 2Q16

BUSINESS VALUATION &
FINANCIAL ADVISORY SERVICES
VALUE FOCUS
Refining
www.mercercapital.com
Refining Overview
The refining industry is surrounded by uncertainty. Refiners’ inputs and products are both
commodities, which means that the price they pay for inputs and the prices they receive
for their products are generally determined by the market. Before the collapse of oil prices
in July of 2014, refiners had become accustomed to low input prices and wide margins.
The crude export ban allowed refiners to pay low prices for landlocked crude and sell their
refined products to the global market where prices reflected the global oil and gas market.
When the price of crude oil fell worldwide, the price of refined products followed a few
months after.
Although the price of refined products has increased slightly over the last few months, the
M&A market for downstream oil and gas is still at a standstill waiting to better understand
the long term effects of the lifting of the export ban.
Second Quarter 2016
Legislation 1
Oil Gas
Market Overview 2
Refining Marketing
Refined Product Prices 3
Refined Product Volumes 3
Crack Spread 4
Refiner Market Margin 5
Operating Idle Refineries 6
Market Valuations
Transaction Activity 8
Guideline Public Company
Valuation Multiples 10
Appendices
World Demand 11
World Supply 12
Domestic Supply 13
Commodity Prices 14
Stock Performance 15
About Mercer Capital 16

© 2016 Mercer Capital // www.mercercapital.com 1
Mercer Capital’s Value Focus: Refining Second Quarter 2016
In early 2016, the crude oil export ban, which had been in place since 1975, was lifted. Industry experts thought that
the lifting of the export ban would better align the production capabilities of U.S. refineries. Refiners, on the other
hand, feared that the exportation of crude oil would increase crude prices, as the pressure on price in an oversupplied
U.S. market gave way. Six months later, we do not know all the consequences, as the Brent-WTI spread is still insig-
nificant. Once the spread widens — and it is cheaper for other countries to buy WTI and pay transportation costs than
to buy Brent — the true effect will be understood. Until then, refiners should enjoy currently low input prices.
Adding to the uncertainty, the refining industry is heavily regulated. One of the newest rules, passed in December
2015, is the Petroleum Refinery Sector Risk and Technology Review (RTR) and the New Source Performance Stan-
dards (NSPS) rule. The RTR NSPS was passed in order to control air pollution from refineries and provide
the public with information about refineries’ air pollution. These regulations range from fence line and storage tank
monitoring to more complex requirements for key refinery processing units. The rule is expected to be fully imple-
mented in 2018. However additional time has already been proposed by the EPA. The EIA estimates the rule will
cost refineries a total of $40 million per year, while the American Petroleum Institute (API) argued that the annual
cost would exceed $100 million.
Legislation

Oil Gas
Market Overview
There are four main components to refined product prices: (1) crude oil prices, (2) wholesale margins, (3) retail distri-
bution costs, and (4) taxes. Generally, input prices and wholesale margins drive fluctuations in product prices as the
last two are relatively stable. Thus, in order to understand refined product prices, we consider the macroeconomic
trends in the global oil and gas market which drive input prices.
Global oil production outpaced global crude demand for almost a year. An oversupply of crude caused downward
pressure on the price of crude oil which for months benefited refiners as their product costs fell. A shortage of crude
storage forced producers to sell crude at increasingly low prices to refiners, who then would earn substantial profits.
But, as the market moved further into contango1
, crude oil producers were more willing to hold crude than sell it to
refiners at such low prices. As crude prices have risen over the last six months, refiners’ margins were originally
squeezed. However, as the economy has continued to recover, more people began traveling, increasing the demand
for and prices of gasoline.
1
Contango occurs when the future price of a commodity is higher than the spot price.

Refining Marketing
Refined Product Prices
The price of refined petroleum products has
increased slightly since February. However,
the price of gasoline still costs half as much
as it did two years ago. In general, refined
product prices fell at an annualized rate of
25% to 30% over the last two years.
Refined Product Volumes
Refined product volumes have remained
relatively stable over the last five years
excluding residual fuel, which decreased at
an annualized rate of 9.0%. However, over
the last twelve months, residual fuel pro-
duction increased by 10%.
Due to higher demand for gasoline, motor
gasoline production has increased by 13.6%
since the start of 2016.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
M
ay-2011
O
ct-2011
M
ar-2012
Aug-2012
Jan-2013
Jun-2013
Nov-2013
Apr-2014
Sep-2014
Feb-2015
Jul-2015
Dec-2015
M
ay-2016
DollarsperGallon
Gasoline Jet Fuel Propane
Kerosene Diesel Residual Fuel
Source: EIA
0
2,000
4,000
6,000
8,000
10,000
12,000
6/24/12 6/24/13 6/24/14 6/24/15 6/24/16
ThousandBarrelsperDay
Motor Gasoline Jet Fuel Distillate Fuel Residual Fuel Propane and Propylene
Source: EIA
Refined Product Prices
Refined Product Volumes
YOY Change
Gasoline -22.45%
Jet Fuel -32.18%
Propane 7.58%
Kerosene -31.21%
Diesel -27.32%
Residual -41.33%

Refining Marketing
Crack Spread
The crack spread is the price differential between crude oil and its refined oil products. The 3-2-1 crack spread
approximates refinery yield using the industry average for refinery production. For every three barrels of crude oil the
refinery processes, it makes two barrels of gasoline and one barrel of distillate fuel. Crack spreads have remained
relatively flat over the last 12 months.
Historically, the WTI Cushing 321 crack spread was higher than the Brent Crude 321 Crack Spread because U.S.
producers were not allowed to export crude with the exception of Canada and the price of WTI crude was depressed.
However, as the cost of crude fell around the world, crack spreads converged.
-5
0
5
10
15
20
25
30
35
40
45
6/30/11
9/30/11
12/31/11
3/31/12
6/30/12
9/30/12
12/31/12
3/31/13
6/30/13
9/30/13
12/31/13
3/31/14
6/30/14
9/30/14
12/31/14
3/31/15
6/30/15
9/30/15
12/31/15
3/31/16
6/30/16
Dollars
WTI Cushing 321 Crack Spread Brent Crude 321 Crack Spread
Crack Spread

Refining Marketing
Refiner Marker Margin
The refiner marker margin (RMM) is a general indicator, calculated quarterly by British Petroleum, that shows the
estimated profit refiners earn from refining one barrel of crude.
Refiners’ margins increased dramatically in the second and third quarters of 2015 as the price of crude fell and the
price of refined petroleum products had not caught up. Refiners in the U.S. northwest were making between $27 and
$28 per barrel of oil, while global profit margins barely reached $20 per barrel. However, in the fourth quarter of 2015,
refined product prices fell and refiners’ margins tightened. As the price of crude increased slightly in the first quarter
of 2016, refined product prices followed suit in the second quarter as margins increased.
0
5
10
15
20
25
30
3Q2014 4Q2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016
DollarperBarrel
U.S. North West U.S. Midwest GlobalSource: BP
Refiner Marker Margin

Refining Marketing
Operating Idle Refineries
As of June 30, 2016, the number of operating refineries totaled 139, which was up slightly from last year. Overall the
total number of refineries increased for the first time since 2008.
Two new refineries were built over the last 12 months and one was shut down. Petromax Refining Co. began oper-
ating a 25,000 b/cd refinery in Houston in the second quarter and Buckeye Partners LP began operating a 46,250
b/cd condensate processing facility in Corpus Christi, Texas in the fourth quarter of 2015.
Pelican Refining Company, LLC shut down their refinery at Lake Charles, LA. In 2011, Pelican Refining Company
was charged with violating felony counts of the Clean Air Act. Pelican paid the largest pollution fine in Louisiana
history — $12 million.
137
139
3
2
125
130
135
140
145
150
2011 2012 2013 2014 2015 2016
Idle OperatingSource: EIA
Total Number of Operating and Idle Refineries as of June 30, 2016

Refining Marketing
Operating Idle Refineries
(continued)
Refinery utilization rates have fallen as compared to one year ago. In May 2015, utilization rates totaled 92.5%. After
reaching a peak of 95.1% in July and falling to 86.6% in October, utilization rates equaled 89.9% in May 2016.
17.96
18.32
17.82
18.09
15.5
16
16.5
17
17.5
18
18.5
MMBD
Operating Capacity In OperationSource: EIA
Capacity of Operating and Idle Refineries

Market Valuations
Transaction Activity
Uncertainty in the industry has led to a standstill in MA activity.
While MA activity in the exploration and production sector has picked up since the beginning of 2016, MA in refining
and marketing has remained sluggish. Over the last nine months, the majority of the transactions in refining and mar-
keting were between chemical and lubricant refineries and renewable fuels refineries. Currently, investors are sticking
with what they know — demand for renewable fuels will increase and chemical lubricants are still in high demand.
The few transactions that occurred with petroleum transportation product refineries had very little public information.
Thus we look to the public market in order to understand valuation multiples.

Market Valuations
Transaction Activity
(continued)
Since the fall of crude prices in 2014, valuation multiples have been through multiple cycles of compression and
expansion. For refiners, low oil prices initially signal higher profit margins as refined oil product prices are not perfectly
correlated with input prices. This is especially true for non-transportation refined product prices (such as asphalt,
butane, coke, sulfur, and propane) whose prices are even less likely to respond to changes in the price of crude oil.
Thus, upon the initial fall of prices, earnings increased because the price of refined petroleum products did not fall as
quickly as the price of crude. Additionally, the low prices of crude oil and natural gas decreased refiners’ own oper-
ating expenses. Refining is itself an energy intensive process, and natural gas is used to power refineries. By the
fourth quarter of 2015, refiners’ margins began to compress as the price of refined petroleum transportation products
started falling. Refiners’ profits continued to fall through the first quarter of 2016, but have since recovered as the price
of refined products saw slight increases.
0
2
4
6
8
10
12
75th Percentile Median 25th PercentileSource: Bloomberg
Crude Prices
began falling
Refining EV/EBITDA Multiples

Guideline Public
Company Valuation
Multiples
Refining and marketing valuation multiples
are somewhat inflated in the current market
due to compressed profit margins. Holly
Frontier has the highest EV/ EBITDA multiple
in the guideline group (20.7x). However, the
company also has the lowest EBITDA margin
in the group (2.5%). This tells us that the
market views refiners’ decline in earnings
as temporary. Phillips 66 profitability is in
line with the group average, but has a higher
EV/ EBITDA multiple of 11.3x whereas the
average is 9.1x. Phillips 66 may have a higher
valuation because its operations are not
entirely concentrated in the refining industry.
Phillips also has well developed midstream
operations which they have expanded
recently. Midstream operations are not as
sensitive to changes in price and thus do not
face the same risk of margin compression.
LTM
EBITDA
Margin
Enterprise
Value @
6/30/2016
YOY
Change in
EV
EV/EBITDA
MultipleRefining Company Name Ticker Revenues EBITDA
Alon USA Energy ALJ 3,791.9 128.6 3.4% 869.7 -47.0% 6.8x
CVR Refining CVRR 4,306.4 159.0 3.7% 1,558.0 -45.3% 9.8x
Delek DK 5,189.9 143.4 2.8% 1,581.7 -45.5% 11.0x
Holly Frontier HFC 11,262.7 285.6 2.5% 5,902.2 -35.7% 20.7x
Marathon Oil Corp MPC 56,249.0 5,163.0 9.2% 36,855.5 8.8% 7.1x
PBF PBF 13,236.8 361.9 2.7% 3,622.4 7.0% 10.0x
Phillips 66 PSX 73,120.0 4,393.0 6.0% 49,553.6 2.5% 11.3x
Tesoro TSO 25,402.0 3,192.0 12.6% 15,032.6 -8.3% 4.7x
Valero VLO 76,654.0 6,777.0 8.8% 27,372.9 -19.4% 4.0x
Western Refining WNR 8,202.2 812.1 9.9% 4,171.6 -39.9% 5.1x
Average $27,741.5 $2,141.6 6.2% $14,652.0 -22.3% 9.1x
Median $12,249.8 $587.0 4.9% $5,036.9 -27.6% 8.5x
Median $9,787.0 $564.9 9.7% $5,862.5 10.0% 6.5x
Presented in $000,000s
Source: Bloomberg

APPENDIX A
World Demand
4.8%
20.6%
3.9%
12.4%
2.4%
55.8%
Former Soviet Union
U.S.
Japan
China
Germany
Other
Source: Bloomberg
MMBD
0
20
40
60
80
100
6/30/12 6/30/13 6/30/14 6/30/15 6/30/16
Japan Former Soviet Union U.S. China Other Germany
MMBD
Source: Bloomberg
MMBD
91.2 92.0 93.5 96.094.3
World Daily Consumption Of Crude Oil and Liquid Fuels: June 2016
As of June 30, 2016 total world daily consumption equaled 96.03 million barrels per day.
World Daily Consumption of Crude Oil and Liquid Fuels2
2
Germany’s consumption as of December 2015 will be available between August and December of 2016. Thus it was assumed to have remained constant.
96.03
mboe/d

APPENDIX B
World Supply
40.4%
14.5%
15.7%
4.9%
24.5% OPEC
Former Soviet Union
U.S.
China
Other
MMBPD
Source: Bloomberg
0
20
40
60
80
100
120
12/30/11 12/31/12 12/31/13 12/31/14 12/31/15
MMBD
Other China U.S. Former Soviet Union OPECSource: Bloomberg
90.1 95.695.391.790.8
World Daily Production of Crude Oil: December 2015
As of December 31, 2015, world daily production totaled 95.63 million barrels per day.3
World Daily Production of Crude Oil
3
World Supply is updated annually by Bloomberg
95.63
mboe/d

Domestic production of crude oil peaked in April 2015 at 9.63 MMBD. As of June 30, 2016, oil production fell by
10.6% to 8.70 MMBD. Domestic production of natural gas has remained relatively constant since December of 2014
but peaked in February of 2016 at 92.0 Bcf per day. Since then production has fallen by approximately 5% to 87.7 Bcf
per day in June.
APPENDIX C
Domestic Supply
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
6/29/12
10/29/12
2/28/13
6/28/13
10/28/13
2/28/14
6/28/14
10/28/14
2/28/15
6/28/15
10/28/15
2/28/16
6/28/16
NaturalGasMarketedProductionin
BillionCubicFeetperDay
CrudeOilProduction
inMillionBarrelsperDay
Crude Oil Natural GasSource: EIA
U.S. Crude Oil and Natural Gas Production

APPENDIX D
Commodity Prices
0
20
40
60
80
100
120
140
6/30/11
10/31/11
2/29/12
6/30/12
10/31/12
2/28/13
6/30/13
10/31/13
2/28/14
6/30/14
10/31/14
2/28/15
6/30/15
10/31/15
2/29/16
6/30/16
DollarsperBarrel
WTI BrentSource: Bloomberg
0
1
2
3
4
5
6
7
6/30/11
12/31/11
6/30/12
12/31/12
6/30/13
12/31/13
6/30/14
12/31/14
6/30/15
12/31/15
6/30/16
Dollarper
ThousandCubicFeet
Source: Bloomberg
Crude Oil Spot Prices
Henry Hub Natural Gas Spot Prices

APPENDIX E
Stock Performance
0
20
40
60
80
100
120
140
StockPriceinDollars
ALJ CVRR DK HFC MPC NTI
PBF PSX TSO VLO WNR
Crude
Prices
began
falling
Source: Bloomberg
Stock Performance of Refining Companies

Contact Us
Copyright © 2016 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged. Reporters
requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Industry Focus is published quarterly and does not constitute legal or financial consulting advice. It is offered as an information service to
our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary
publication, visit our web site at www.mercercapital.com.
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Contact a Mercer Capital professional to discuss your needs in confidence.
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ericksonb@mercercapital.com
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farrellg@mercercapital.com
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ericksond@mercercapital.com
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burgesst@mercercapital.com
MERCER CAPITAL
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Mercer Capital's Value Focus: Refining | 2Q16

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