Why Did Refiner Stocks Plunge This Week?

Shares of U.S. oil refiners such as Valero Energy (NYSE: VLO  ) and Marathon Petroleum (NYSE: MPC  ) took a nose dive following the latest news that the U.S. Commerce Department may allow the export of ultra-light oil, a step toward lifting a four-decade ban on most petroleum shipments outside the U.S. Will this development continue to drive down the valuations of oil refiners in the U.S.? 

The U.S. Commerce Department made its ruling after Pioneer Natural Resources (NYSE: PXD  ) filed a petition to allow the export of ultra-light oil. This ruling can be used as a precedent in future claims by other oil companies, and thus the Commerce Department opened the door to a rise in exports of this type of oil. 

What may have prompted this decision is the sharp rise in crude oil inventories in the Gulf of Mexico, which reached 215.7 million barrels of oil as of May 9. 

The news led to huge sell-offs of U.S. oil refiners, as several analysts estimated that if this decision turns into a policy for other oil producers, it could have an adverse impact on the profit margins of oil refiners: They could face additional competition from other oil refiners in Asia; this, in turn, may lead U.S. oil refiners to pay more for the oil they purchase to refine. In such a case, the margins on refined oil could contract, and thus bring down their earnings.  

But the plunge in shares of Valero Energy and Marathon Petroleum may have been an overreaction. 

First, this isn't a policy change yet. It's a long way until the U.S. Commerce Department actually changes its ruling and allows all oil producers to export oil outside the U.S. 

Second, refiners aren't likely to sit on their hands; they could adjust down the line to the new reality: Valero Energy plans to expand its light crude processing capabilities by allocating a portion of its $3 billion capital expenditure budget for 2014. Perhaps the potential changes in U.S. Commerce Department policy would lead the company's management to allocate additional funds to this cause. 

Keep in mind, during the first quarter, Valero Energy was able to expand its margins, despite the drop in Brent to WTI premium, partly due to the rise in margins of sour oil over Brent oil prices. This means, the company's margins on other types of oil such as sour oil also play a significant role in its profit margins and might not by affected by this recent turn of events.

Nonetheless, if the company were to face higher light oil prices, the margins could come down. The Gulf Coast, where the light oil is concentrated, accounted for nearly 58% of its total throughput in the first quarter. Thus, a decline in oil margins from this region could have a strong impact on the company's total profitability. For Marathon Petroleum the Gulf Coast is also a very important region, and it accounts for roughly 50% of its volume.  

Final note
The recent market reaction may have been too harsh. The U.S. Commerce Department opened the door to oil exports, but it's a long way until other major oil producers could start exporting ultra-light oil. Moreover, the impact of such a change in policy on oil prices is unclear. This could all lead to only a modest drop in U.S. refiners' margins.

Finally, refiners could change their strategy by increasing their ultra-light oil throughput, thus modestly reducing, over time, the adverse effect of this policy change on their profit margins. 

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

 


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3009290, ~/Articles/ArticleHandler.aspx, 8/30/2014 12:14:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement