US refiners tighten belts as golden era fades

By Jarrett Renshaw

NEW YORK, May 11 (Reuters) -- US independent oil refiners, such as Marathon Petroleum and Phillips 66, are shelving projects and tightening budgets as a global glut of diesel and gasoline erodes profits, ending a golden era of high refining margins.

For the past six years, US refiners have spent billions of dollars on expansion, enjoying bumper profits fueled by growing domestic and global demand for gasoline and diesel amid rising supply of domestic crude.

Now however, there are signs that the industry is gearing up for leaner times and the belt-tightening could sap demand for crude and potentially derail recent recovery in prices from 12-year lows plumbed early this year.

Flint Hills Resources, a private operator of refineries in Minnesota and Texas owned by the Koch brothers, suspended a multi-million dollar upgrade its desalter due for later this year because of lower margins, and CHS has put on hold planned work on its gasoline-making unit at its Montana refinery due to "market conditions", two sources familiar with the matter have said.

It is not clear whether the projects will be resumed and while they are relatively small, interviews with contractors and engineers suggest the efforts to rein in costs are deepening across the industry.

They said refiners are increasing their focus on routine projects, such as replacing valves that help control the flow of oil and products, in order to maintain output while conserving cash.

David Nunez, CEO of Apache Refinery Services, which helps refiners with turnarounds and other construction projects, said refiners are tightening their belts in ways he hasn't seen in years.

"Right now, contractors that wouldn't even touch some of the smaller jobs are bidding on them to keep going," said Nunez. "Refiners are coming to us and asking us where we can shave off some costs for them, and we are cutting our markups on supplies and other items."

The belt-tightening follows the industry's worst quarter since 2012.

The largest 10 independent US refiners booked a combined net income of $944 million in the first quarter, down 74% from last year's $3.6 billion, a Reuters analysis shows. That compares with annual profits of more than $10.6 billion in the past five years, when the refiners feasted on the newly found abundance of domestic crude flowing from US shale fields.

Corporate filings and statements show that the largest six US refiners plan to cut their total capital spending by 17% to $10.9 billion this year in response to swelling US inventories. Rising production at home and abroad where major crude importers, particularly China, have started to export excess gasoline and diesel supplies, have contributed to the glut, eroding refiners' profits.

When asked about the shelving the project, a Flint Hills Resources spokesman said the information was inaccurate, but declined to provide specifics. CHS declined to comment, citing internal policy of not publicly discussing operations.

The cuts come as US gasoline crack spreads, a measure of refiners' profits from turning crude into gasoline, languish roughly 25% below their average for the past five years heading into the US summer driving season, the busiest period of the year.

Several company executives acknowledged during recent earnings calls that they have collectively contributed to the present squeeze by pumping out more and more gasoline to capture high margins, only to see those margins collapse under the weight of growing inventories.

US gasoline inventories dropped to 241.8 MMbbl last week, but remain up roughly 6% over the same period last year and at a five-year high for this time of year.

Analysts say US refiners are now meeting domestic and international demand for gasoline, diesel and other products, without any additional investment and unless the demand balance changes, they will stay put.

"We are going to have a prolonged period where the refiners can meet the sum of domestic and international demand without expansion," said Mark Routt, a senior economist with KBC Advanced Technologies, an international energy consulting firm.

"Unless a refiner can prove the investment will generate additional dollars quickly, they are not going to move."