Europe: The New Lucrative Market for Refiners

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In the US, the value of fuel exports has grown faster than other goods and commodities during Barack Obama's presidency. The country became a net exporter of fuel in 2011 for the first time since 1949, as rising exports were met with lower imports.

Unfortunately, by law companies are not allowed to export basic crude out of the United States. However, there are no restrictions on the movement of refined products. As a result, refiners such as Valero Energy  (NYSE: VLO  )  and Phillips 66  (NYSE: PSX  ) are exporting more and more refined products, such as gasoline and diesel, which is proving to be highly lucrative. 

Indeed, during the first two weeks of July alone, refiners booked 77 tankers to ship fuel from the US Gulf Coast to Europe, Africa, and Asia, which nearly surpassed the total value of tankers booked for the whole month of July last year.

Profit in Europe
The reason behind this sudden rush to export fuel lies in the consumption of diesel. In particular, the consumption of diesel has been rising within Europe as European drivers seek to become more fuel efficient.  

Moreover, refiners are realizing a wider profit margin on diesel, a margin that over the past three years has expanded faster than that of gasoline. For example, the profit margin for gasoline refined products has been slightly below $8 per barrel for the first half of this year. In comparison, the margin for diesel has been upwards of $16 per barrel.

During the second quarter, Phillips 66 looked to take advantage of this trend and increased exports by 70% year on year, or 75,000 barrels per day, to a total of 181,000 barrels per day. Although, this figure pales in comparison to the company's total 2,229 million barrels per day of total global refining capacity.

The company's management has also been active in driving down costs and changing the firm's crude slate to including more advantaged crude, which for Phillips includes a mixture of heavy crude oil from Canada and Latin America as well as lighter Canadian grades and West Texas Intermediate (WTI).  At the end of 2012, 67% of Phillips' crude input was advantaged.

Furthermore, Phillips has been investing heavily in its midstream operations, and the recent opening of the Southern Hills Pipeline, which provides midcontinent producers access to the Gulf Coast markets, should benefit from the drive to export crude and refined products into Europe. Phillips should see the drive to export refined products boost earnings and reinforce some declines from the closing of the Brent-WTI spread.

A 2007 law that requires refiners to blend ethanol with gasoline costs refiners a lot of money and no company is more aware of this than Valero. Valero is forecasting that ethanol credits used to comply with these regulations will cost the company $600 to $800 million during 2013, up from the original estimate of $500 million to $750 million.

However, exports to Europe and the rest of the world do not require such credits and costs, posing a highly lucrative opportunity for the refiners. Indeed, Valero, like Phillips is seeking to make use of this, ramping up export capacity to 70,000 barrels per day of gasoline and 170,000 barrels per day of diesel fuel.

Once again this is nothing compared to the company's total output, but Valero is spending heavily to improve its Gulf Coast infrastructure. It will soon have the capacity to export 225,000 barrels per day of gasoline and 280,000 barrels per day of diesel fuel. That said, CEO Bill Klesse has stated that he does not want to put the company in a position of being an all-out exporter to avoid the issue of ethanol credits, but the use of exports to lower costs is certainly an attractive proposition.

Getting it there
Meanwhile, Enterprise Products Partners (NYSE: EPD  ) is seeking to gain from the transportation boom as more and more crude is demanded at refineries along the Gulf Coast in preparation for export. It is building downstream crude assets through the Houston Ship Channel expansion to accommodate more tankers alongside a pipeline project that will connect 12 Gulf Coast refineries with the export facilities in Beaumont and Houston. 

It is also focusing on expanding its Enterprise Crude Houston (ECHO) crude oil terminal, which can process nearly 6 million barrels per day and is crucial to the Gulf Coast refining market. This puts Enterprise Product Partners in a key position to benefit from the huge flows of crude that are moving to the Gulf Cost for refining, exportation and transportation.

Foolish summary
As the Brent-WTI spread stays under pressure, refiners are pushing into the highly lucrative European market for refined products. This expansion should keep profits from collapsing. In addition, the drive to export will benefit the related industries such as pipelines and shipping.

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Related Tickers

9/27/2016 2:48 PM
EPD $27.03 Down -0.09 -0.33%
Enterprise Product… CAPS Rating: ****
VLO $54.99 Up +0.70 +1.28%
Valero Energy CAPS Rating: ****