By the time a refiner's quarterly earnings are released, the results are old news. Crack spreads are reported on a weekly basis, and there are few surprises as to how magnificently or poorly companies in the group fared in response. This is the only way to make sense of the subdued market reaction Tuesday morning to Tesoro's
Tesoro's refining margin averaged $21.76 per barrel for the quarter, which is 22% above last year's levels. Combine those higher cracks with better throughput and yields, and you're looking at a 34% improvement in operating income.
The greatest improvement came in the mid-continent region, where cracks were up roughly 60% on both a quarterly and a six-month basis. Outperformance here was partially due to the significant discount at which Tesoro is able to purchase Midwestern crudes. The differential on Wyoming sweet crude, for example, was something on the order of $8 per barrel. This discount to the benchmark West Texas Intermediate crude can be explained by constrained midstream infrastructure, and therefore limited market access, in these more remote regions.
The most pertinent data point today is probably the fact that West Coast cracks have plummeted from the low $30 range to $12 and change in a very short period of time. Management stated on the call that it believes neither level to be sustainable, and it has several reasons to be optimistic that margins will rise from today's levels.
First, higher imports have been pressuring gasoline prices. Now that such imports have become uneconomic, management doesn't see enough supply coming to match last year's inventory levels. Gasoline stockpiles are a key driver of prices, and thus refining margins.
Second, Tesoro's chief economist sees crude prices coming down from an excessive run-up. I'm glad someone knows which way oil prices are going!
And finally, the company noted that operational risk is always to the upside. A fire here, an explosion there, and margins experience their own fireworks. This would sound like a bogeyman, if such events weren't so regrettably persistent. I have to admit to being skeptical that utilizations can carry along at today's clip without stumbling. And that, of course, lends support to the case for owning a refiner like Tesoro, Valero Energy