Another quarter of weak results looms for US refiners
(Reuters) US independent refiners such as PBF Energy and Phillips 66 are expected to report another quarter of disappointing profits in coming weeks, as hopes that a record summer driving season would turn the industry's fortunes around do not appear to have materialized.
US refiners are in the midst of their worst year since the shale boom began in 2011. High fuel inventories have punished margins this year, forcing some refiners to voluntarily cut production, delay capital work, lay off workers and slash employee benefits.
With margins expected to remain under pressure, relief is not coming anytime soon, analysts say. Overall supply levels are still elevated, and the cost to meet US renewable fuel standards will drag on profits for the remainder of the year.
Earnings expectations have been falling over the last month for an index of nine independent refiners that are part of the S&P 500. Over the last 30 days, the forecast for 3Q has dropped by 3.8% on average, according to StarMine, a unit of Thomson Reuters.
"2016 is probably a lost year for the US refining industry," Barclays analyst Paul Cheng said.
The benchmark US crack spread, a key measure of margins, steadied in 3Q, falling about 2% after crashing more than 22% in 2Q.
Motorists hit US roads in record numbers over the summer, but the demand was not enough to deplete the massive buildup in gasoline inventories that existed heading into the summer driving season. Those inventories - the result of overproduction last winter - hurt margins.
Heading into the winter, distillate stocks are at their highest seasonally since 2010. Refiners built up distillate stocks over the summer as they pushed their plants to pump out gasoline.
The US refining industry has widely blamed its economic misfortunes on the country's renewable fuel program, which forces refiners to either blend biofuels like ethanol into their fuel pool or buy renewable fuel credits. The fuel credits, known as renewable identification numbers, or RINs, have jumped in price this year.
Delta Air Lines opened the earnings season last week, reporting a $45-MM loss at its Monroe Energy refinery for 3Q, versus a $106-MM profit a year ago. The company is expecting the refinery to lose more than $100-MM this year, versus more than $300-MM in profits last year.
Delta, which does not have a blending operation and must buy credits for the fuel it produces, said it spent $48 MM in 3Q on RINs, nearly triple what it paid last year.
Another local refinery, Philadelphia Energy Solutions, blamed the rising cost of RINs for its decision to lay off up to 100 non-union employees and slash benefits.
In May, Marathon Petroleum laid off 46 employees at its Galveston Bay refinery in Texas.
Standalone refineries like PES and Monroe will continue to struggle in the Northeast because they have little advantage over international rivals and face tougher environmental obligations at home, Sandy Fielden, director of research, commodities and energy at Morningstar in Austin, Texas, said in a report due Wednesday.
"US refiner margins as a whole are lower in 2016 versus 2015 and 4Q is not likely to be different with higher crude prices and soft product prices due to higher inventories," he said.
The US Energy Information Administration expects this winter to be about 18% colder than last year's historically mild season.
Reporting by Jarrett Renshaw and Devika Krishna Kumar in New York; Editing by Leslie Adler
Comments