Booming North American oil supply boosts regional refining profits


A growing influx of cheap, North American-produced oil once again lifted the profits of refiners Valero Energy and Marathon Petroleum, as the companies said they expected even more domestic crude to reach their gates in the near term.

Valero's intake of light, sweet crude, most of it produced in the US, reached an all-time high of 1 million bpd in the first quarter, up 25% from the year before. That helped the San Antonio refiner beat expectations with a profit of $654 million, or $1.18/share, versus a loss of $432 million a year earlier. Analysts polled by Thomson Reuters had most recently forecast earnings of $1/share on revenue of $30.41 billion.

Meanwhile, Marathon Petroleum earnings rose 22% to $725 million, as the company's new Galveston Bay refinery, which it bought from BP in February, added to its sales volumes.

The results underscore how US refiners continue to benefit from the booming activity unleashed in the US and Canada by hydraulic fracturing and massive investment in the oil sands.

The unexpected geological bounty keeps being revised upward, promising ample supplies for refiners for years to come; the US Geological Survey on Tuesday doubled its estimate of how much technically recoverable oil was lying in ground in the Bakken Shale, an oil-rich formation in North Dakota, South Dakota and Montana, to 7.4 billion bbl.

The industry's recent good fortunes mark a departure from the immediate aftermath of the 2008 financial crisis, in which refiners' profits cratered amid a combination of stagnating fuel demand and the high cost of imported crude. Some analysts think the effect might be long lasting; Morningstar analyst Allen Good said the inpouring of domestic crude would dampen the historical volatility of refining profits, and even if profits moderate in the future, there will be less chance for out-and-out losses.

"We're in the early innings of this," Mr. Good said.

Still, others are worried that refiners won't be able to sustain the profit levels shown in the first quarter, especially if an improving transportation network wipes out the discount seen in much US-extracted crude, which is the result of localized gluts. Because some US coastal refiners rely on imported crude from overseas, the price of fuel is set by international oil prices, and refiners with access to domestic crude pocket the difference.

But US benchmark oil prices are already inching closer to global prices: on Tuesday, the premium traders paid for European benchmark Brent versus its US counterpart shrank to its narrowest level since December 2011, at $8.91/bbl. Edward Jones analyst Brian Youngberg said that the shrinking gap helped put pressure on refiner shares despite the increase in earnings: Valero shares were trading at $40.09, down 2.7%, and Marathon Petroleum shares were down 5.4% at $77.98.

"The general concern is that the first quarter was a peak and we'll see earnings pull back in the next couple of quarters," said Brian Youngberg, senior energy analyst at Edward Jones.

Nevertheless, refiners are investing in their capacity to handle the US oil boom. Valero plans to spend about $500 million to increase the amount of domestically produced light, sweet crude at its Houston and Corpus Christi refineries by a combined 160,000 bpd. It will also raise the amount of US oil it ships to its 265,000-bpd refinery in Quebec; by the end of the year, the refinery will no longer need to import crude from outside of North America, Valero CEO Bill Klesse said.

Access to discounted oil, plus strong diesel and jet fuel sales, helped drive operating income at Valero's Midwest refineries to $12.49/bbl, almost double what it was a year ago. Operating margins swung to a positive 3.2% from negative 0.7% the year before, helping to offset flat fuel demand in the US, which is still struggling to shake up a lethargic economy.

Houston-based Marathon expects to process more cheap US crude at its Galveston Bay refinery as pipelines are built out to help crude from areas like the Permian basin in west Texas make its way to Gulf Coast at attractive prices, said Mike Palmer, the company's senior vice president of supply distribution.

The combination of falling oil prices and stagnant fuel demand should help bring relief to drivers. Travel association AAA said it expects US gasoline prices this summer to average as low as $3.20/gal for unleaded regular. A gallon of regular costs an average of $3.50 on Tuesday, down from $3.82 a year ago, according to AAA Fuel Gauge.

"Gas prices in much of the country have declined this spring because of lower oil costs, ample refinery production and continued weak demand," said AAA spokesman Avery Ash.

Dow Jones Newswires

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