Refiners rake in profits — for now
Strong profit margins, higher demand for diesel and lowercost biofuel blending credits lifted second-quarter earnings for the nation’s largest refiners amid a tepid outlook for gasoline demand as fuel-efficient and electric vehicles claim a growing share of the auto market.
Phillips 66, Valero and Marathon Petroleum Corp. each beat Wall Street expectations with results that rekindled optimism for an industry that has for years been banking on petrochemicals and pipelines to drive earnings as traditional refining growth plateaus. The earnings momentum began building last year after hurricanes drove up gasoline production and prices, and analysts expect the refining profits to continue to grow as the industry prepares for marine fuels regulations that, come 2020, could further boost profits for refiners capable of processing marine fuels that can meet tougher emissions standards.
“Overall performance was really strong,” said Matthew Blair, refining analyst at Houston energy investment bank Tudor, Pickering and Holt & Co. “Refining investors gain a lot of confidence when big-cap companies come through in the most important quarter of the year.”
Refiners last quarter increased profit margins even during an upswing in crude oil pric-
es by capitalizing on discounts on oil from both the Permian Basin in West Texas and oil sands in Western Canada, regions that have faced pipeline capacity constraints as production rates surge. A wide gap between U.S. and international crude prices also benefited domestic refiners.
On top of that, demand for diesel has boosted refinery operating rates to their highest levels in years with both Phillips 66, based in Houston, and Marathon Petroleum Corp., based in Findlay, Ohio, reporting 100 percent utilization. The booming U.S. economy is increasing demand for all kinds of goods and the trucks needed to move them.
The Commerce Department reported last week that a substantial increase in consumer spending pushed the economy’s second-quarter growth to 4.1 percent, the highest rate since 2014. The Energy Department expects economic growth to push average diesel consumption to 4.1 million barrels a day this year, a 3.6 percent increase over 2017.
Average gasoline consumption, though, is expected to decline this year.
Refiners required by federal mandate to purchase biofuel blending credits benefited from lower prices, which fell with demand as the Environmental Protection Agency granted waivers to dozens of small refiners claiming the requirement is too costly. The price of a credit has fluctuated between 20 and 35 cents in recent months, down from roughly $1 late last year, according to WoodMackenzie.
Phillips 66 owed most of its second-quarter growth to its refining business. The company last week reported $1.3 billion in secondquarter earnings, more than twice the $550 million it reported in the same period last year.
On the refining side, quarterly earnings rose to $910 million from $224 million a year earlier.
The San Antonio refiner Valero reported quarterly profits of $845 million, up from $548 million the prior year. Operating income from refining reached roughly $1.4 billion, a 48 percent increase from the prior year period.
Marathon Petroleum nearly doubled its second-quarter refining earnings from the previous year with profits of just over $1 billion and record crude throughput of 1.9 million barrels per day. The company announced earlier this year its decision to buy San Antonio refiner Andeavor for $23.3 billion, an acquisition that will make it the nation’s largest refiner.
Executives from all three companies expressed optimism that strong refining margins and utilization rates will continue through next year, when they expect to see additional benefits from International Maritime Organization regulations to reduce shipping industry emissions with cleaner fuel blends.
“It’s going to be a nice tailwind for the industry,” said Phillips 66 CEO Greg Garland. “We’ve got a strong economy going.”