Refining’s silver lining fades at Exxon, Chevron

By Ernest Scheyder

HOUSTON, April 29 (Reuters) -- ExxonMobil and Chevron posted sharp drops in quarterly results on Friday as an oversupplied fuel market shrank profits from their refining units, which until now had provided healthy margins that helped insulate them from a 60% slide in oil prices since mid-2014.

In this downturn, large integrated energy companies have touted the virtues of a business model that both produces oil and refines it. Refiners typically see profitability increase when the price of their main feedstock -- oil -- falls.

But growing fuel inventories and weak demand are now hammering the refining industry, turning a typical advantage for integrated oil companies on its head.

First-quarter pain in the downstream units, which came after major US refiners slashed the amount of cheap crude they were processing in February, is a sign the road ahead for oil majors may turn even more rocky. Their upstream exploration and production units have been reeling for months from the crude price crash.

"Global refining margins weakened upon lower distal demand and continued surplus inventory," Jeff Woodbury, Exxon's vice president of investor relations, told analysts on a conference call.

Lower profits from Exxon sand Chevron's refining divisions contributed to weaker overall results for both companies.

Exxon reported net income of $1.81 billion, or 43 cents/share, down from $4.94 billion, or $1.17/share, a year earlier.

Chevron reported a net loss of $725 million, or 39 cents/share, compared with a year-earlier net profit of $2.57 billion, or $1.37/share.

For the past six years, US refiners from Texas to Philadelphia have bought every barrel of crude they can lay their hands on to cash in on a golden era of healthy margins.

But those are fast disappearing. Among refiners, Marathon Petroleum barely eked out a profit in the first quarter, and Phillips 66's consolidated earnings fell by more than half a billion dollars to $385 million.

Profits were down by nearly half at $906 million at Exxon's refining unit and at $735 million at Chevron's.

But at least five US refiners have voluntarily reduced output of fuels in the most widespread cuts since the global financial crisis.

Independent refiners including Valero Energy, PBF Energy, Philadelphia Energy Solutions and Monroe Energy, a unit of Delta Air Lines, have curbed output, capitulating to record stockpiles and sluggish demand.

Exxon has also cut the amount of crude it processes at one Texas refinery.

While so-called run cuts are common for maintenance, they are rare for purely economic reasons.

If the closures gather pace and refineries curb their purchases of crude further, this will heap further pressure on prices for crude received by exploration and production companies.