Please ensure Javascript is enabled for purposes of website accessibility

What Does a Declining Brent-WTI Spread Mean for Refiners?

By Lior Cohen – Feb 20, 2014 at 2:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What's the outlook for oil refinery companies in the coming months, and what does this mean for investors?

The ongoing decline in the spread between Brent and WTI crude prices during 2013 slashed the margins of leading oil refineries such as Valero Energy (VLO -1.64%) and Marathon Petroleum (MPC -2.37%). Will the premium of Brent over WTI continue to decline in 2014? And what should investors expect for the first quarter of 2014? 

Will refinery crude pick up in the first quarter?
Year to date, refinery inputs dropped by 5.7% to 15.224 million barrels per day, as of last week. Despite this fall, according to the International Energy Agency, the current estimates are that refinery throughput will pick up in the coming weeks. This might also be reflected in higher throughput for leading refinery companies such as Marathon Petroleum and Valero Energy.

In particular, Marathon Petroleum is likely to show a higher throughput in the first quarter of 2014, year over year, mainly due to its Galveston Bay refinery, which was purchased back in February 2013. Keep in mind, the company increased its refinery throughputs from 1,363 million barrels per day in 2012 to 1,802 million barrels per day in 2013 -- an approximately 32% gain. This gain was mostly due to the purchase of the Galveston Bay refinery. For 2014-2016, Marathon Petroleum plans to increase its capital expenditure, which could also translate to higher volume of refinery throughput.  

Valero Energy slightly increased its refinery throughput by 2.6% in 2013, year over year. For 2014, the company also plans to augment its capital expenditure by 9% to $3 billion. The higher capital expenditure might translate to higher refinery throughput in the coming years. Let's turn to the changes in the Brent-WTI spread and the current outlook for 2014.  

Outlook for 2014
During January and February the average premium of Brent over WTI came in at $11.15 per barrel -- roughly 6.3% lower than in the fourth quarter of 2013 and almost 40% lower than in the first quarter of 2013. The drop in the premium is likely to hit the profit margins of refinery companies in the first quarter of 2014.

The drop in the premium over the last year was also reflected in the decline in Valero Energy's and Marathon Petroleum's refining and marketing gross margins: Valero Energy's  refining margin declined from $10.96 in 2012 to $9.69 in 2013. Despite this decreased margin, the company maintained an operating profit margin of around 3% -- nearly unchanged from 2012. This was mainly due to a $325 million nontaxable gain related to the disposition of Valero Energy's retained interest in CST Brands. After controlling for this non-operational provision, the company's operating profit per barrel dropped from $4.8 in 2012 to $3.4 in 2013 -- a nearly 29% drop.  Marathon Petroleum also recorded lower margins. 

Looking further down the line, in 2014 the U.S. Energy Information Administration estimates this premium will reach $12 a barrel -- nearly 11% higher than in 2013. If this projection is accurate, this could widen refining margins, which will improve the above-mentioned companies' profit margins during the year. 

Takeaway
Based on the above, leading refinery companies are likely to keep increasing their throughput in the first quarter of 2014. Conversely, the recent fall in the premium of Brent over WTI is likely to pressure their operating profits. But on a yearly scale the premium is expected to slightly rise, which could improve their profitability. 
 

Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Valero Energy Stock Quote
Valero Energy
VLO
$132.99 (-1.64%) $-2.21
Marathon Petroleum Stock Quote
Marathon Petroleum
MPC
$120.55 (-2.37%) $-2.92

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.