U.S. Refiners Squeezed by Collapse in Crude Oil Discounts

 |  Includes: FTO, TSO, VLO
by: Research Recap

Fitch Ratings says the recent collapse in heavy and sour crude oil discounts could dent the near-term earnings power of deep conversion refiners, leading to either further reductions in capital expenditure plans or additional pressure on balance sheets. Spread compressions could also lower returns and prolong payback periods for those refinery conversion upgrades already in the pipeline and due online over the next several quarters.

A sustained drop in crude discounts would have several implications on the downstream - Mark Sadeghian, senior director at Fitch Ratings.

Those refiners which run light sweet crudes other than WTI may see gross margins lower than are implied by benchmark WTI crack spreads due to higher feedstock costs. A continued compression in discounts could also translate into underperformance by higher complexity, deep conversion refiners relative to their light sweet counterparts due to the absence of the feedstock discount.

Such a list includes independents like Valero Energy Corp. (NYSE:VLO), Frontier Oil Corp. (NYSE:FTO) and Tesoro Corporation (NYSE:TSO).

According to the report, by reducing cash flow, compressed spreads may further slow the speed with which refiners are able or willing to bankroll ambitious capacity expansions and upgrade projects announced in recent years. Fitch notes that capex reductions by refiners to date have been quite sharp and include cuts by Valero (40% drop in 2009 announced capex from $4.5 billion to $2.7 billion); Tesoro (45% decrease from $1.1 billion to $600 million) and Sunoco (38% cut in 2009 refining capex from $877 million to $546 million).

For details, see Collapse in Crude Oil Spreads: Implications for Refiners.