Frontier Shows Some Cracks

Whenever I write about refiners these days, conflagrations always seem to enter the conversation. First it was Valero Energy (NYSE: VLO  ) and its Aruba blaze, and then there was Alon USA (NYSE: ALJ  ) and its great balls of fire at Big Spring. Frontier Oil (NYSE: FTO  ) , a generally well-run outfit, unfortunately had an incident of its own during the fourth quarter.

Management estimated on its conference call that a fire at the firm's Cheyenne, Wyo., refinery burned up about $10 million. That's between the maintenance expenses incurred and the production that was lost. With about $43 million in reported net income, we're talking about a serious hit. Incidentally, this wasn't a mechanical problem, but a people problem. It's a lot harder to diagnose a malfunctioning employee in advance of such an incident.

At first glance, the fourth quarter looks like a stinker in terms of crack spreads, or the difference between crude costs and refined product sales. Actually, diesel, the "crown jewel," was very solid, so really I'm just talking about gasoline. Gasoline cracks ran negative for most of December in the Denver area, on account of possibly the worst winter in a quarter-century.

Once you consider that the crack spread is computed in terms of the benchmark West Texas Intermediate (WTI) crude, the situation doesn't look so dire. No one in her right mind would run WTI when she had the ability to run heavy stuff available at a $28+/barrel discount, which was the actual light/heavy differential at Cheyenne. Add in a roughly $7 sour crude differential, and you can see why Frontier still made a decent chunk of change in the quarter.

Frontier gets another chance to prove its mettle with a big turnaround at its El Dorado, Kan., refinery next month. Execution last year was fine indeed, so we'll have to wait and see whether the crude converter still has its edge.

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