Rising Crude Stockpiles to Benefit Refiners

As U.S. crude stockpiles continue to rise, refiners can expect more robust margins going forward.

May 6, 2014 at 6:41PM

U.S. refiners Valero Energy (NYSE:VLO), Marathon Petroleum (NYSE:MPC), and Phillips 66 (NYSE:PSX) this week reported first-quarter financial results. The first quarter saw the spread between West Texas Intermediate and Brent crude narrow. Despite this, Valero and Phillips 66 managed to beat profit expectations. Marathon Petroleum reported a sharp decline in its profit; however, this was due to the fact that two of its refineries processed less crude oil as they carried out maintenance work.

More importantly for refiners, their outlook has improved as the spread between WTI and Brent has widened due to rising U.S. crude stockpiles.

Refiners report Q1 results
Valero Energy, the largest U.S. independent refiner, last week reported net income of $828 million, or $1.54 per share, for the first quarter; this compares to $654 million, or $1.18 per share, reported in the year-ago period. The company's earnings easily beat the consensus forecast of $1.38 per share. Valero saw a decline in gasoline and distillate margins in most regions.

Also, the spread between WTI and Brent narrowed. According to the Energy Information Administration, the spread between WTI and Brent crude fell to $7 per barrel in March from an average of $13 per barrel between November and January.

Despite these factors, Valero's throughput margin for the first quarter improved by $0.31 per barrel to $10.90 per barrel. This was mainly due to larger light sweet and sour crude oil discounts in the U.S. Gulf Coast, which more than offset the decline in gasoline and distillate margins and lower WTI discounts relative to Brent.

Lower margins also hurt Phillips 66's refining business somewhat. The company's earnings from its refining business fell to $306 million in the first quarter of 2014 from $904 million in the first quarter of 2013. The refining business' earnings were also hurt by plant maintenance.

However, substantial gains in its chemicals and midstream businesses, along with a one-time gain related to a share-exchange deal, helped Phillips 66 post a higher profit. The company's first-quarter profit came in at $1.6 billion, or $2.67 per share, compared to $1.4 billion, or $2.23 per share, reported in the year-ago period. Excluding one-time items, the company's earnings were $1.47 per share, $0.13 above the consensus forecast.

Marathon Petroleum reported earnings of $199 million, or $0.67 per share, for the first quarter; results were down from $725 million, or $2.17 per share, reported last year. The huge drop in profit was mainly due to the fact that two of the company's largest refineries carried out maintenance work and as a result processed less crude. Narrower crude differentials also negatively affected Marathon's earnings.

While a narrower spread between WTI and Brent was a concern, the trend is not expected to continue. In the past few weeks, the spread has indeed widened. More importantly, for refiners the trend could continue as U.S. crude stockpiles continue to rise.

Crude stockpiles rise
Rising U.S. oil production means that crude stockpiles are now at their highest level since the EIA began recording the data in 1982. According to the EIA, crude stockpiles rose 1.7 million barrels for the week ended April 25 to 399.4 million barrels. The report sent U.S. crude prices to less than $100 a barrel, and the spread between WTI and Brent is now at around $9 per barrel.

While stocks in Cushing, Okla. fell to 25.4 million barrels, inventories on the U.S. Gulf Coast rose 2.7% to 215.3 million barrels. This is an all-time high for the U.S. Gulf Coast and indicates that refiners are struggling to accommodate rising U.S. oil production even though refinery utilization is at 92.9% on the Gulf Coast. This is a positive development for refiners, as they can expect more robust margins as the year progresses.

Refiners may also benefit from an expected increase in U.S. gasoline demand as the economy continues to improve. In recent days, the Labor Department reported that the U.S. economy added 288,000 jobs for the month of April, a fresh sign that the economy is continuing to recover. While refiners faced some challenges in the first quarter, the outlook for them is certainly robust.

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Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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