By Rebecca Elliott
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 (August 8, 2018).
American fuel makers are posting their best second-quarter
profits in years, thanks to soaring domestic oil production and
regional pipeline bottlenecks that are allowing them to buy crude
on the cheap.
Refining companies typically suffer as oil prices rise because
drivers scale back their travel, reducing demand for gasoline and
diesel. But record U.S. production, coupled with insufficient
pipeline capacity in Canada and West Texas, has depressed the cost
of oil in many parts of the country, even as oil prices have been
rising in general.
That has boosted margins for many stand-alone refiners,
propelling some, including Phillips 66 and Marathon Petroleum
Corp., to their highest second-quarter profits on record.
Phillips 66, the largest independent refiner by market
capitalization, earned an average of $12.28 per refined barrel
during the second quarter, up from $8.44 for the comparable period
last year. The company reported profit of $1.3 billion, up 143%
from 2017's second quarter.
Marathon Petroleum earned $15.40 per refined barrel, compared
with $11.32 a barrel in the year-earlier period. Its second-quarter
profit rose 118% to $1.1 billion.
Both companies seized on the favorable economics by operating
their facilities at full capacity.
"Our ability to take advantage of crude differentials provided
substantial benefits in the quarter," Marathon Petroleum finance
chief Timothy Griffith said.
Valero Energy Corp. reported a refining margin of $10.80 a
barrel, compared with $8.66 a year earlier. Its quarterly profit of
$845 million marked a 54% rise and its best second-quarter showing
since 2015.
Andeavor, which Marathon Petroleum is set to acquire for $23
billion, also posted its best second-quarter earnings since 2015.
Its profit of $515 million was more than 12 times that of last
year's second quarter, with its refining margin rising to $14.26 a
barrel, from $9.45 a barrel.
Distribution pains associated with rapid production increases
have played to refiners' advantage. Benchmark crude prices in the
U.S. fell to as much as $11 a barrel below international prices
during the second quarter, the widest spread in three years,
according to Dow Jones Market Data.
The discount on oil sold in Canada and West Texas, home to the
Permian Basin, the U.S.'s most active oil field, was far steeper
because of regional pipeline bottlenecks.
That was a boon for sellers of refined products, which are
typically priced to the global market. The U.S. exported daily
about 3.4 million barrels of refined products, including gasoline
and diesel, as of May, according to the Energy Information
Administration.
"They're in the catbird seat as far as buying their raw
materials," said Sandy Fielden, director of oil research for
Morningstar Inc., who called refining a "cash cow."
American refiners are the grunts of the energy industry, largely
operating fuel-making facilities that have been in place for
decades. But during the shale boom their stocks so far have
outperformed other sectors of the oil and gas business.
The four largest stand-alone refining businesses in the U.S. --
Phillips 66, Valero, Marathon Petroleum and Andeavor -- have
produced the highest stock returns among energy companies on the
S&P 500 index since April 2012, when Phillips 66 was spun off
as an independent company.
The businesses benefited in the early days of the shale boom
from a U.S. ban on crude exports that depressed domestic prices,
giving them an edge over foreign competitors.
Some expected the companies' fortunes to wane after the U.S.
lifted the export ban in 2015, causing the price differential
between domestic and foreign crude to shrink. The recovery in oil
prices following their crash in 2014 was seen as a potential
headwind, too.
But bottlenecks and rising production have continued to create
buying bargains for refiners. Those discounts are expected to widen
over the coming year as production in Canada and the Permian Basin
continues to overwhelm existing pipelines, analysts said.
"It's going to recur in coming quarters," Doug Terreson, an
analyst with Evercore ISI, said of refiners' performance.
An economic slowdown could of course tamp down demand for
gasoline, drying up refiners' profits. Another factor, Mr. Fielden
said, is political change in Mexico, where energy reforms proposed
by the country's president-elect could reduce demand for U.S.
exports.
Longer term, an international air-pollution rule to cut
emissions from oceangoing ships is poised to boost U.S. refining
companies, particularly those with more technologically advanced
facilities on the Gulf Coast and in the Midwest.
Set to go into effect in 2020, the regulation by the
International Maritime Organization is designed to reduce the
amount of sulfur in marine fuel. Most large vessels now run on a
high-sulfur fuel known as bunker fuel, which is made from the
leftovers of the diesel and gasoline refining processes.
Valero Chief Executive Joe Gorder told investors he expects the
regulation to benefit the company.
"We should see significant increases in our free cash flow," he
said.
Write to Rebecca Elliott at rebecca.elliott@wsj.com
(END) Dow Jones Newswires
August 08, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
Valero Energy (NYSE:VLO)
Historical Stock Chart
From Jun 2024 to Jul 2024
Valero Energy (NYSE:VLO)
Historical Stock Chart
From Jul 2023 to Jul 2024