What: Shares of independent refiners PBF Energy (PBF 0.83%), HollyFrontier (HFC +0.00%), Western Refining (WNR +0.00%), and Alon USA Energy (NYSE: ALJ) all tumbled more than 14% in May. The largest reason for the decline has been the persistent weakness in refining margins throughout the month.
So what: One of the big misconceptions about refining stocks is that their success is completely reliant on cheap crude oil and is therefore a "natural hedge" for oil and gas stocks. While true that cheap crude can help these companies out a little, it's somewhat misleading to say it's the only thing that matters. What's more important for a refiner is the crack spread or refining margin -- basically the price difference between a barrel of crude oil and a barrel of refined products.
This is why, despite crude oil remaining relatively cheap in 2016 -- we're still at less than $50 a barrel, people -- refining stocks have not performed as well as one might expect. That's because this cheaper oil is being offset by lower prices for wholesale gasoline and diesel. So far in 2016, refinery utilization rates across the U.S. have been trending on the higher side of the 5-year average, which means more product is being delivered to market. As a result, refining margins have been well below their 5-year average, according to the weekly refining report put out by analyst group Scotia Howard Weil. These results have had a rather large impact on these companies' profits.
| Company | Gross Refining Margin Per Barrel (Q1 2016) | Gross Refining Margin Per Barrel (Q1 2015) |
| PBF Energy | $4.99 | $10.57 |
| HollyFrontier | $7.59 | $16.69 |
| Western Refining | $10.79 | $16.83 |
| Alon USA Energy | $4.68 | $11.56 |
Data source: Company earning reports.
As we have continued through the second quarter, there hasn't been much improvement in terms of refining margins. Crude oil prices have ticked up slightly thanks to the slowdown in output from U.S. shale and the Canadian wildfires, while refining output has remained high. As long as these conditions exist, refiners will likely see another weak quarter of results.
Now what: Refining margins will come and go -- it's just the nature of the beast when it comes to this business. Those who like to speculate on stocks and oil prices may have pushed down shares of these companies, but the underlying business for each of them hasn't changed much. Gasoline and diesel demand remains steady in the U.S. thanks to growing SUV and truck sales, and refined petroleum exports from the larger Gulf Coast-based refiners is giving the market another outlet to help grow demand even more than the tepid growth we've seen in the U.S. in recent years.
The more important thing to focus on regarding these companies' performance over the long term is their focus on safe and efficient operations. Refiners that can maintain high refinery output and keep operational costs per barrel low will do well no matter the refining margins of the day, and today's cheaper stock prices may offer an opportunity to take a deeper dive into these companies' underlying fundamentals.
