Should You Buy This Energy Highflier?

It's no secret that the refining industry is hot right now. Increasing domestic oil production has flooded refiners with cheap crude, allowing them to make a killing on margins, as the price of gasoline -- based on the world's oil price -- remains high. Even refiners that are relatively new to the publicly traded world are posting incredible returns. Since its IPO last December, PBF Energy (NYSE: PBF  ) has returned an astounding 35.9%. Today we take a closer look at what's driving growth, and whether or not it's worth buying into now.

What is PBF
PBF Energy produces unbranded petroleum products, including heating oil, petrochemical feedstocks, and lubricants. It operates three refineries -- one each in Toledo, Ohio, Delaware City, Del., and Paulsboro, N.J. -- and combined capacity is about 540,000 barrels per day.

It is the fifth-largest independent refiner in the states, behind Valero (NYSE: VLO  ) , Phillips 66 (NYSE: PSX  ) , Marathon Petroleum (NYSE: MPC  ) and Tesoro (NYSE: TSO  ) . The group as a whole had a terrific 2012, and has performed very well so far in 2013. Take a look at how PBF compares to its peers statistically:

Company	Price	EPS	P/E	YTD Perform- ance	Refineries	Through- put Capacity (Mbpd)	Avg. Complex- ity
Valero	$45.70	$3.75	12.2	28.78%	16	2540	12.4
Phillips 66	$61.01	$6.48	9.4	10.42%	15	2231	11
Marathon Petroleum	$76.68	$9.89	7.8	19.75%	7	1644	11.7
Tesoro	$50.23	$4.19	12	10.66%	7	917	10.2
PBF Energy	$35.92	$3.85	9.3	22.32%	3	540	11.3

Source: Yahoo! Finance, PBF Energy

Obviously, PBF Energy is not the next Valero; it is a small fish in a big pond. However, there are a few things to like here. Despite only having three refineries, the average complexity of those refineries is quite high. That number, the Nelson Complexity Rating, indicates the cost and value of a refinery's capacity. A high number indicates a more costly refinery to upgrade and maintain, but one that is also able to produce higher-value refined products and process more difficult crudes, as compared to a refinery with a lower rating.

Higher and higher
Shares of PBF have soared on news events. It climbed when Hess�announced it was doing away with its refining business, it popped when Valero announced spectacular earnings, and it climbed again today, when management announced that its first rail delivery of Bakken crude was slated to arrive this week. PBF also announced it planned to increase the capacity of Canadian heavy crudes it can process at its Delaware City refinery, adding 40,000 barrels per day and bringing the total capacity up to 80,000 bpd by the end of the year.

That's a lot of good news. In fact, the stock is up more than 23% since I first wrote about it a mere two weeks ago. Make no mistake, with a P/E barely over nine, this is not the sort of wild ride investors take on overvalued technology stocks. PBF's quick ascent was matched by Valero and its industry peers, but that doesn't mean it's a risk-free stock either. Before we throw our hat in the ring, let's take a look at some potential setbacks.

Higher still?
There are some potential threats to the continued rise of PBF's share price. First, with only three refineries, PBF is at risk of a significant loss of capacity should something go wrong at any location. Its Toledo refinery recently experienced a fire in its fluid catalytic cracking complex. That section is shut down, and other units at the refinery are running at reduced rates. Only time will tell what sort of impact this will have on the bottom line, but it is now imperative that there are no incidents at the other refineries until this one is up and running at full capacity again. There is very little wiggle room when you only have three facilities.

Second, much of the upside to PBF is built on the premise that it will be able to utilize cheap domestic crude sources delivered via railcars. We have already seen how little pipeline spills affect pipeline companies, so I don't anticipate a rail car spill having an affect either, if and when one occurs. However, oil price volatility will affect the refining industry. If the price of Brent crude plummets and brings down the global price of refined products with it, that's bad news for the industry. Similarly, if the price of WTI skyrockets, and eliminates the spread between the two crude benchmarks, it will take refiners' profitable margins with it. Though I see both scenarios as unlikely in the near future, predicting oil prices is a fool's errand.

Finally, without an earnings report under its belt, there are more than a few questions that remain unanswered for now, including tangible ideas like a blueprint for the future, and intangible ideas like management's transparency and approach to investor relations.

Foolish takeaway
I think there is significant upside at PBF Energy for the next three years at least, but that is likely true of all well-managed refiners. Interested investors may want to wait until PBF reports earnings for the first time before opening a position, though in this case that may mean missing out on some more immediate gain in share price.

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