Oil: From Crude to Fuel

Refiners: bringing culture to crude oil everywhere

Thomas Pangia
Thomas Pangia
Apr 3, 2014 at 12:08PM
Energy, Materials, and Utilities

The process of gathering oil for use has many stages, so presents multiple investing opportunities. Worldwide oil consumption grew 2.3% from 89.2 million barrels per day (bpd) in 2012 to 90.4 million bpd in 2013 . Also, the U.S. Energy Information Administration projects oil consumption will increase to 91.6 million bpd in 2014 and again to 93.0 bpd in 2015. As the world continues to develop, oil usage continues to grow.

Also growing is America's output of crude oil. From 2008 to 2012 American oil production has jumped from 8.5 million barrels of oil per day (MPD) to 11.1 MPD. This was largely due to advances that have allowed better access to shale oil such as the Eagle Ford Shale, bringing Eagle Ford production from 15,000 bpd in 2010 to 690,000 bpd in 2013 . However before crude oil can be used, it must be treated and refined. The United States has the world's largest oil refining output, 15 MPD by the end of 2012 . For comparison, China was second with 9 MPD throughput by the end of 2012.

Valero Energy Corp. (NYSE: VLO) has 16 refineries producing various oil products for consumer use, which makes it the world's largest independent refiner . Production capacity of its facilities is 2.9 million barrels of oil per day. Fourth quarter quarter 2013 revenues of $1.3 billion contributed to net 2013 revenue of $2.7 billion, an increase of 35 % over 2012 net revenues of $2 billion. Valero was able to put $1.2 billion in 2013 toward expanding the business, with $550 million toward increasing transport capacities and efficiencies by producing or upgrading more rail lines and pipelines. Additionally Valero is adjusting to the greater abundance of light crude arriving from the oil shales in the US, and plans to spend $375 million to increase light crude processing capacity. Production capacities and plans to expand existing capacities to diversify processing capabilities make Valero one of the better players in the refiner industry.

Another refiner, Marathon Petroleum Corporation (NYSE: MPC), operates a 7-refinery network and distributes Marathon brand gasoline from over 5,000 retail outlets. Marathon Petroleum also owns or leases 8,300 miles of pipelines used to distribute oil throughout its network, and has worked its refinery productivity capabilities up to 1.7 MPD. 2013 income from refining/marketing totaled $3.2 billion, which was lower than 2012 income due largely to weaker 3Q 2013. The difference resulted from narrower crude oil price differentials, that is, different crude oil grades were priced similarly which forced Marathon to spend more to purchase crude for refining .

However net revenues for 2013 were slightly over $100 billion, nearly 25% year over year. Marathon is also expanding export capabilities to better satisfy overseas demand. Gulf Coast export capacity has been more than doubled in 2013 to 320 MPD from 2012's 150 MPD. Marathon's network seems to be established in providing crude and fuels domestically, with a focus on expanding overseas transport capacity. Increasing revenues despite higher prices for crude combined with increased export abilities indicate that Marathon is another strong refiner play.

Phillips 66 (NYSE: PSX) is the second largest independent refiner in the United States . Going public in May 2012, its network of 15 refineries with 11 in the United States, produces 2.2 MPD. 65% of this network is able to process light and medium crude grades with a 50/50 ratio of sweet/sour crudes, which allows Phillips to refine a wide range of viscosities and sulfur content. Aside from refining operations, Phillips 66 also deals with the transport of oils and oil products. Additionally, Phillips 66 processes and distributes petrochemicals produced from crude oil byproducts, such as plastics like high density polyethylene (Recycling number 2, for those of you who recycle your milk bottles).

Furthermore, Phillips launched an MLP in July of 2013, Phillips 66 Partners (NYSE: PSXP), which is to be used to develop the midstream segment of the business. Phillips 66 took advantage of the $3.7 billion in earnings over 2013 to pay down debt from $8 billion to $6 billion, continuing a trend of debt reduction. EBITDA from 2013, $6.7 billion, was the second largest EBITDA from Phillips for the past five years. Only EBITDA from 2012 was higher, $9.0 billion, which could have been due to wide crude price differentials, since West Texas Intermediate grade was an average of $10/barrel cheaper in 2012 than 2013. Phillips 66 has a diversified base of refinery capabilities and provides a range of petroleum and petrochemical products, which could place it in a good position to adapt well to continued changes in market conditions. This adaptability of Phillips 66 helps make it one of the best refiners in the business.

Follow the path

There are many businesses involved with the portion of the carbon cycle concerning oil and other hydrocarbons. Oil refining processes the increasingly large amounts of crude oil available in America into forms that can be used efficiently, which is necessary for the foreseeable future. Valero Energy, Marathon Petroleum Corporation, Phillips 66 and related companies are taking advantage of this. Positions in these companies could benefit investors as well.