Live by the sword, die by the sword.
U.S. refiners have benefited from the WTI-Brent spread caused by the shale revolution for over three years. Domestic refiners typically use cheap WTI as inputs but price their end products based on the more expensive Brent. Because of this, U.S. refiners such as Valero Energy (NYSE:VLO), Marathon Petroleum (NYSE:MPC), and Phillips 66 (NYSE:PSX) have experienced a renaissance of sorts as their earnings have increased and their stock prices have rallied.
The future existence of that WTI-Brent spread is now in doubt, however. On June 24, The Wall Street Journal reported that the Commerce Department gave Enterprise Products Partners (NYSE:EPD) and Pioneer Natural Resources (NYSE:PXD) the go-ahead to export ultralight crude oil to their foreign customers.
The market took the export approvals as a potential sign of a narrowing WTI-Brent spread, and many refiners fell after the report.
Even though the Commerce Department ruling pertains to only two companies and one particular grade of crude oil, refiners fell because many market participants viewed the ruling as a precursor to potentially more approvals.
Because the government gave Pioneer Natural Resources and Enterprise Products Partners ultralight crude export approvals, other domestic oil companies will likely ask for the same approvals. Since the U.S. government allowed for one particular grade of crude oil exports, it may allow for other grades as well. This slippery slope could lead to more U.S. oil exports in the future, which would mean a narrower WTI-Brent spread and narrower profit margins for refiners.
Even if the U.S. government allows for only ultralight crude oil exports, it would still lead to a narrower WTI-Brent spread because ultralight-grade crude oil accounts for a significant part of recent production growth. According to the Energy Information Administration, 96% of new production from 2011 to 2013 was light or ultralight crude oil.
The Brookings Institution estimates that if there were no ultralight crude export bans, domestic oil companies may export as many as 700,000 barrels of ultralight crude oil per day by next year. This represents a significant percentage of total U.S. crude oil production of 7.4 million barrels per day.
The bottom line
That being said, the ruling does not change the long case for refiners.
A rising tide lifts all boats, and U.S. refiners should continue to benefit from the U.S. shale boom for the foreseeable future. Even though they may not benefit as much from the WTI-Brent spread, Phillips 66 and Marathon Petroleum both own midstream assets that should benefit from increased domestic oil and natural gas production. All three refiners should also benefit from low domestic natural gas prices. As long as the shale revolution continues, domestic oil and natural gas production will likely increase and natural gas prices will likely remain low.
In addition to positive fundamentals, all three refiners have substantial stock repurchase plans that should boost shareholder returns in the long term.
While the Commerce Department ruling does hurt refiners, the refining renaissance is not over. It is just not as bright as it was before.