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Why Refinery and Logistics Stocks Tumbled Today

By Matthew DiLallo – Updated Mar 23, 2020 at 7:58AM

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Demand for refined products is evaporating as the global economy shuts down to battle the COVID-19 outbreak.

What happened

The price of crude oil continued its freefall today. The U.S. oil price benchmark, West Texas Intermediate, fell more than 20%, closing at its lowest level in 18 years. 

Usually, lower oil prices are good news for refineries, which need to buy crude so that they can turn it into gasoline and diesel. However, these aren't normal times, as demand for refined products has cratered because of the COVID-19 outbreak, which is causing governments around the world to restrict travel. That's weighing on refining margins, which have crashed 95% to their lowest levels since 2008. It's also putting pressure on the share prices of oil refiners as well as logistics companies that transport and store refined products. Among the notable decliners today were Valero Energy (VLO 2.54%)Phillips 66 (PSX)Marathon Petroleum (MPC 1.62%)Sunoco (SUN 2.73%), and Holly Energy Partners (HEP 1.03%)

Pipelines heading to a refinery with the sun shining in the background.

Image source: Getty Images.

So what

The significant compression in refining margins, which briefly flipped negative (meaning refineries paid money to turn oil into refined products), will have a considerable impact on refining earnings in the near term. That's bad news for the nation's three biggest independent refining companies -- Valero, Phillips 66, and Marathon Petroleum -- which had already been struggling with weaker refining margins.

Valero, meanwhile, was under additional pressure today as ethanol prices plunged to their lowest level since 2003. The company is one of the nation's leading ethanol producers, which it blends into gasoline. 

Marathon Petroleum also had some additional factors weighing on its shares today. First, it had to evacuate its Salt Lake City refinery because of an earthquake. As a result, the company had to temporarily halt operations at that 61,000-barrel-a-day refinery so it could inspect the facility for damage. The company also named Mike Hennigan as its new CEO. Hennigan currently serves as the CEO of its master limited partnershipMPLX (MPLX 0.86%). Finally, Marathon said it would maintain its current midstream structure, which includes remaining as the general partner of MPLX. 

The issues in the refining market are also weighing on midstream logistics companies like MPLX, Sunoco, and Holly Energy Partners, which support the sector. As demand for refined products declines, fewer barrels will flow through their pipelines, storage facilities, and distribution assets. While these entities do have minimum volume commitments from their shippers to help cushion the blow, a significant decline will still affect their cash flow. That will make it harder for these entities to maintain their lucrative dividends. Investors are already pricing in reductions at these entities, with their yields all spiking above 25% in recent weeks.

Now what

No one knows when travel restrictions will start to ease, which is causing the energy markets to push down prices in panic. The only clear thing is that refineries will struggle to make money in the coming months.

However, low energy prices, along with pent-up demand once people are free to move about once again, will probably fuel a significant increase in consumption. Better days lie ahead for refineries; it's just not yet clear how long it will be until they're finally here.

Matthew DiLallo owns shares of Phillips 66. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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