Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
Last week, the premium of Brent over WTI dropped to its lowest level in months. This recent fall is part of a downward trend that could have a negative effect on oil refiners, including Valero Energy (NYSE: VLO ) and Marathon Petroleum (NYSE: MPC ) . Let's take a closer look at the impact the Brent-WTI spread has on these companies' profit margins.
Despite the recent recovery of the oil market, the spread between Brent and WTI crude narrowed to single-digit territory. The chart below shows the progress of the premium of Brent over WTI year to date.
As you can see, the premium fell from around $15 at the beginning of the year to around $5 as of last week. Moreover, the average first quarter premium was around $9 -- nearly $9 below the average recorded in the same quarter a year back. This lower premium cut into refiners' profitability in the first quarter.
The chart below presents the changes in the quarterly gross profit margin of Valero Energy and Marathon Petroleum and the average quarterly premium of Brent over WTI.
The chart shows the relation between the profitability of these companies and the shifts in the Brent-WTI premium. As of the fourth quarter of 2013, the average premium was nearly $12 -- the highest level since the first quarter of 2013. This higher premium improved these companies' profitability. Their revenue also grew during the quarter. Therefore, the modest decline in the premium reduced their profitability during the first quarter.
Based on the above, Valero Energy and Marathon Petroleum's first quarter reports are likely to show a modest decline in profitability.
Finally, the recent harsh winter conditions could have reduced the throughput of Valero Energy and Marathon Petroleum in the past quarter. Nonetheless, both companies expect to increase their capital expenditure this year -- a signal for a potential rise in throughput. Valero Energy will increase its capex by nearly 9%; Marathon Petroleum's midstream and retail capital expenditures alone are projected to rise by over 130% over the next three years.
Despite the weather concerns, according to the U.S. Energy Information Administration, crude oil refinery input reached an average of 15.41 million barrels per day in the first quarter of 2014, which was 5.6% higher than average during the first quarter of 2013. But the weather may have still had a negative effect on these companies' operations, which could result in lower than expected throughput for Valero Energy and Marathon Petroleum.
Based on the above, the fall in the premium of Brent over WTI has had a negative effect on leading refiners' revenue during the first quarter of 2014; it has also slashed their profit margins. Finally, the harsh weather conditions may have also adversely affected these companies' throughput in the first quarter of 2014, which could further reduce their revenue.
3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free.