With several major players more than doubling their share prices during 2012, investors who jumped into this sector early on rode terrific industry margins to great success. The energy boom here in North America has led to a fruitful crack spread because of the lower oil costs here versus markets abroad. Throughout the year, West Texas Intermediate crude oil -- which provides the typical U.S. benchmark price -- and its domestic counterparts remained below the Brent crude price that the rest of the world is expected to pay. As a result, refiners within our borders experienced margins that have escaped them for quite a while.
Some integrated oil executives, such as Chevron (NYSE: CVX ) Chairman and CEO John Watson, believe that this downstream success could be a "short-term phenomenon." But what about those more intimately tied to this business? For that answer, we turned to conference calls and presentations held by some of the most recently successful refiners here in the U.S. to see what they had to say.
In its first full year since being spun off from Marathon Oil, Marathon Petroleum (NYSE: MPC ) treated its investing faithful with 88.6% growth in its share price. In the company's Jan. 30 conference call, President and CEO Gary Heminger was excited about what 2013 has in store, stemming in part from the company's moves late in 2012 to increase its capacity, which included upgrading its Detroit refinery and purchasing BP's Texas City refinery near Galveston Bay. The remainder of his excitement revolves around his expectations for the marketplace:
Our outlook for U.S. gasoline demand for 2013 is flat, and U.S. distillate demand to be up about 3.5%. In addition, we expect export opportunities to remain attractive in 2013. Our distillate exports rose to 151,000 barrels per day during the fourth quarter, compared to the 94,000 barrels per day in the same quarter last year. We remain optimistic about the global competitive position of our US Gulf Coast refineries, and the prospects for future exports of gasoline and distillate.
At Marathon Petroleum's recently spun-off peer, Phillips 66 (NYSE: PSX ) , company Chairman and CEO Greg Garland offered a bullish long-term sentiment for his company's midstream segment, which benefits from the oversupply of oil and gas and the abundant demand from refineries resulting from current crack spreads. During the Q&A period, he said:
Long term, we think that fundamentally the midstream business is a good place to invest. We've got aggressive growth plans in there. ... [W]hat you're going to see is a reduced sensitivity longer term in the midstream space, as there [are] more fee-based assets put in service.
Sticking with another of the largest refiners in the game, it remains hard to find negative sentiments regarding what to expect in the near to mid-term for Valero Energy (NYSE: VLO ) . However, when discussing the company's 2013 capital spending plans, Chairman and CEO Bill Klesse noted that Valero and many of its peers are investing heavily in logistics and rail because of the long lead times to get crude to refineries via pipelines. The hold-up of the Keystone XL pipeline in the White House is just one example of the difficulties that can arise when attempting to develop new pipeline systems here in the United States.
Said Klesse: "[T]here is no question, rail is growing very rapidly by every single company. ... But the supply is there, and the market demand is in these refining centers, and you would not get any argument from us, or I think any of our competitors, since all of us are buying railcars, that this is a big part of our future in this business, is your logistics capability to move distressed crude oils to your refineries."
These sentiments don't solely rest with the largest companies in the downstream business, either. Looking at some of the things that Tesoro (NYSE: TSO ) President and CEO Greg Goff had to say after his company's wildly successful 2012 campaign echoed Klesse's statements about the need for greater rail and hinted that the company might expand its delivery of Bakken crude to the California market for both domestic use and export to South America.
Based on reading through these calls, it appears that the refineries have taken advantage of these recent boom times by reinvesting in their operations and are well positioned to absorb any potential margin contraction. While this pullback is certainly possible, several of the executives here remained optimistic that the spreads they experienced in 2012 will remain relatively intact over the next year or two. Based on these outlooks, investors could certainly still experience some upside to these stocks, even after the tremendous run last year.
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