By Lynn Cook and Bradley Olson
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 18, 2017).
HOUSTON -- U.S. fuel prices are poised to remain elevated for
the rest of the year in the aftermath of hurricanes Harvey and
Irma, costing consumers billions but providing a profit boost to
some refining companies.
Harvey knocked out 25% of the nation's fuel-making capacity at
the height of the storm's flooding in Texas. More than 12% is still
shut, with three plants idle and 11 struggling to resume
operations. A week later, Irma compounded fuel shortages in the
Southeast, as millions of people fled in a mass evacuation that
emptied gasoline stations.
A record amount of fuel was pumped out of storage tanks in the
week ended Sept. 8, according to federal data, to keep East Coast
gas pumps working. It was the largest one-week drawdown in U.S.
gasoline stockpiles since 1990.
Nearly every refinery that could went into overdrive in the wake
of the storms, but the one-two punch of Harvey and Irma knocked out
millions of barrels a day of fuel production, rapidly driving up
gas prices to $2.80 a gallon recently. The nationwide average is
about 50 cents higher than this time last year.
While some pump prices have drifted lower, increases could
persist in some areas for months, analysts and economists said. An
extended increase of 25 to 50 cents a gallon would translate to
billions of dollars in costs to consumers over the course of 60 to
90 days, according to federal data on U.S. vehicle miles traveled
and average fuel efficiency.
Higher fuel prices mean refinery owners -- even some with
flooded plants that won't go back into service for weeks -- could
see an improvement to their bottom lines.
"You've got a lot of refiners running at full tilt, and they're
going to make better margins," said Sandy Fielden, an energy
analyst with Morningstar Inc. "Supply and demand is effectively
telling the market that there's a big incentive to produce
more."
In the Midwest, refineries hummed at their maximum capacities in
the days before and after Harvey hit, according to the U.S. Energy
Information Administration.
Aggregated across the industry, the boost to profit margins on
fuel is likely to be sufficient to offset most lost revenue from
the refinery shutdowns, according to a Wall Street Journal analysis
of pricing data from FactSet.
Most refiners' margins would get a boost because the price of
the fuel they sell will be higher while the cost of the crude oil
they buy to run through their plants remains low. That combination
has increased profit margins for some fuel makers on the East Coast
and in the Midwest by more than a third.
Some wild-card costs could spell losses for a few operators.
Those costs include repairing flooded equipment or paying fines for
not fulfilling supply contracts, analysts said, although it is
possible some corporate insurance policies would mitigate these
costs.
Investors have been pushing refiners' shares higher as they
anticipate better profits. PBF Energy Inc., which mainly operates
refineries in the Northeast and Midwest, didn't need to shut any of
its plants and its shares have gained 26% since Aug. 21, the week
before Harvey made landfall. Even refiners that slowed or halted
operations due to the flooding, including Phillips 66 and Marathon
Petroleum Corp., have seen shares rise between 5% and 9%.
Valero Energy Corp., Phillips 66 and Marathon are expected to
see sizable increases in their third-quarter earnings compared with
the same period in 2016. For Marathon, which shut down units at its
Galveston Bay plant due to Harvey, analysts expect earnings per
share to more than double, according to FactSet.
Plants where fall maintenance was planned, such as in Illinois,
or that normally supply only their local areas, are delaying work
so they can churn out more gas, shipping the extra supply down the
Ohio and Mississippi rivers on barges to the Gulf Coast.
Several massive fuel factories in the Port Arthur, Texas, area
remain hobbled. The 600,000-barrel-a-day plant owned by Saudi
Arabian Oil Co. -- the biggest in the U.S. -- is operating at half
capacity because many of its motors and electronics were fouled by
floodwater, according to a report by Damien Courvalin, a managing
director at Goldman Sachs Group Inc.
Valero is trying to restart its plant in Port Arthur, but the
effort could take until the end of September, Goldman Sachs said.
The investment bank expects Exxon Mobil Corp.'s refinery in nearby
Beaumont, Texas, to take a month to fully recover. The companies
have said they are ramping up operations.
Transporting the fuel once it is produced is also a problem. The
Colonial Pipeline, which analysts have likened to a Mississippi
River of fuel, carries more than a million barrels a day from Texas
through a dozen states to New York and continues to experience
delivery delays to mid-Atlantic states.
The decline in output is a switch for the U.S., which had been
producing so much gasoline that stockpiles of the fuel reached a
three-decade high of more than 255 million barrels in February. The
refinery outages and continued draws on gasoline stocks leaves the
U.S. with less of a cushion, which helps push up fuel prices,
according to Sam Margolin, an analyst with Cowen & Co.
"We believe it could take all of the fourth quarter to replenish
lost supply, with an ongoing inflationary impact to gasoline
prices," Mr. Margolin said.
Major storms in the past decade have failed to dent refining
profitability in a number of cases.
After hurricanes Ike and Gustav struck the Gulf Coast in
succession in 2008, refining profit margins for some fuels more
than doubled. Valero, one of the biggest U.S. refiners, said the
storms that year cost it about $350 million in lost business, but
the company still reported profits of $1.15 billion.
After Hurricane Sandy struck a swath of the East Coast in
October 2012, Phillips 66 had to shut its New Jersey fuel plant.
The storm cost the company $56 million before taxes, but refining
earnings that quarter jumped nearly 10-fold when compared with the
same period of the prior year. Gasoline prices in New York remained
high for months; the state had the highest price in the continental
U.S. in January 2013, according to AAA.
Even after refineries restart, it can take days to get fuel
delivered. "When you put fuel into a pipeline in Houston to get to
the mid-Atlantic, it travels at 4 miles per hour," said Paige
Anderson of the National Association of Convenience Stores.
In Texas, hundreds of gas stations remains closed because gas
pumps are flooded and need to be replaced. In Florida, which
consumes 5% of U.S. gasoline, or about 21 million gallons a day,
assessments on the wind and water damage are ongoing, but
large-scale power outages are keeping many gas pumps from
operating, Ms. Anderson said.
Write to Lynn Cook at lynn.cook@wsj.com and Bradley Olson at
Bradley.Olson@wsj.com
(END) Dow Jones Newswires
September 18, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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