U.S. Refineries in Worst Year Since Shale Boom Started
U.S. independent refiners such as Valero Energy Corp and Phillips 66 look set to post another quarter of disappointing earnings, putting the industry on track for its worst year since the U.S. shale boom began in 2011.
The companies had hoped to rebound from a weak first quarter on the back of strong U.S. gasoline demand. But while U.S. motorists have taken to the highway in record numbers, refiners have been undone by record supplies of gasoline and diesel products.
High volumes of imports, combined with refiners switching to maximum gasoline output earlier than usual, resulted in inventories climbing well above seasonal highs and even hitting record highs on the East Coast.
In recent weeks, analysts have slashed second-quarter estimates ahead of earnings season and tempered their expectations for the remainder of the year. Several are now predicting that refiners may have to take more drastic action to protect margins and force a drawdown of stockpiles.
"I expect the refiners to exit summer driving season with higher-than-usual inventories, so margins will get to the point that refiners will need to consider run cuts to balance things," Blake Fernandez, a Houston-based analyst at Scotia Howard Weil, said. "The back half of the year will be rough."
Over the last 30 days, analysts have sharply reduced earnings expectations for big refiners. Valero, for instance, has seen earnings-per-share forecasts for the next 12 months drop by 19 percent, according to StarMine, a Thomson Reuters subsidiary. Phillips 66 estimates are down 17 percent in that time. Several other refiners have seen estimates decline a similar amount.
Wells Fargo (WFCNO) analysts Roger Read and Lauren Hendrix said the weak start to the third quarter means any optimism for a good summer performance is "rapidly evaporating."
Delta Air Lines (DAL) kicked off the poor earnings season earlier this month by announcing that its 182,000 barrel-per-day refinery outside of Philadelphia lost $10 million in the second quarter, following a loss of $18 million in the first quarter. Chief Financial Officer Paul Jacobson said Delta now expects the refinery to lose money this year.
The facility, which Delta bought in 2012, reported $176 million in operating income in the first half of 2015 and was profitable in both 2014 and 2015.
The largest 10 independent U.S. refiners booked a combined net income of $944 million in the first quarter, down 74 percent from last year's $3.6 billion, a Reuters analysis showed. That compares with annual profits of more than $10.6 billion in the past five years, when the refiners feasted on the abundance of domestic crude flowing from U.S. shale fields.
The group of refiners recorded $6.2 billion in profits in the second quarter of last year, the best quarter in the past five years, Reuters data showed. The U.S. gasoline crack spread <1RBc1-CLc1>, a proxy for refiner margins, averaged more than $25 a barrel during the second quarter last year. It hovered around $19 a barrel during the same period this year.
Among other headwinds for refiners in the second quarter, global oil prices hit six-month highs in June. That squeezed margins and costs rose for renewable fuel credits, which refiners can earn by blending biofuels like ethanol into gasoline and diesel.
Renewable fuel credits averaged about 78 cents apiece in the second quarter of 2016, about 25 percent above the same period a year ago, according to prices from the Oil Price Information Service analyzed by Reuters.
Prices for the credits, which can also be bought in an opaque market, have rallied on what traders and industry sources have said are more ambitious targets from U.S. regulators on the volumes of ethanol required to be blended with gasoline.
Reporting by Jarrett Renshaw
