Refiners feel pain as effects of slump spread

Houston-based Phillips 66 reported Friday that its refining profit dived by nearly 85 percent in the first three months of the year as the nation’s flood of crude oil has led to a glut of refined products such as gasoline, diesel and heating oil.

The first quarter is expected to represent a low point for the industry as demand for gasoline increases amid low prices and the busier driving season. But Phillips’ dismal earnings show that the pain experienced by oil producers has worked its way down to refiners.

“Refineries ran hard and built inventories of products,” said Jeff Dietert, senior research analyst for Piper Jaffray & Co., a financial services firm. But then demand fell off in January and February, he said, leaving refiners with excess supplies.

Even integrated energy giants like Exxon Mobil Corp. and Chevron Corp. took bigger hits to their profits in the first quarter because their oil production losses were compounded by the struggles of their refining operations, which had helped partially offset their oil losses last year.

Refiners profited through most of 2015 because of the low cost of crude oil, which serves as the feedstock of refineries, and higher prices for fuels and other refined products. But as supplies grew and wholesale prices fell, refiners profit margins shrank dramatically, sometimes to nothing.

“Weaker margins impacted our financial results in the first quarter,” Phillips 66 chief executive Greg Garland said. Phillips 66 even cut production in February as profit margins temporarily disappeared, Garland said.

Phillips 66 reported that its overall quarterly profits — be-

yond just refining — fell by 61 percent to $385 million from $987 million in the same period in 2015. Phillips earned $650 million in the fourth quarter of last year.

Only 22 percent of Phillips 66’s quarterly earnings came from refining, compared with 55 percent during the same time last year. Most of the company’s profit in the first quarter came from its petrochemical business. Phillips 66 stock closed Friday at $82.11 a share, down $5.68, or 6.5 percent.

Phillips 66 ’s profit was stronger than many of its rivals. Ohio-based Marathon Petroleum Corp. re- ported a minuscule $1 million quarterly profit, down from $891 million last year. Marathon’s refining segment posted a $62 million loss, most of which was offset from profits by its Speedway retail outlets.

New Jersey-based PBF Energy posted a $29 million overall loss against an $87 million gain last year, while Sugar Land’s CVR Energy reported a $16 million loss versus a $55 million profit in early 2015. San Antonio’s Valero Energy and Tesoro Corp. announce their earnings next week.

Most analysts don’t expect 2016 to come close to matching last year’s unusually strong refining profits, Dietert said.

There are, however, signs for optimism as federal data projects record demand for gasoline through the rest of 2016 as motorists take advantage of increasing, but still low, prices at the pump.

But, Dietert said, gasoline alone cannot save refining. The demand for distillates, used to make heating oils and diesel fuel, is expected to remain near six-year lows. A mild winter kept heating oil demand down, while a softening manufacturing market is cutting the need for diesel, which is used to fuel industrial operations and engines.