Over the past few days several refiners have provided earnings for the quarter. Most of these have been quite good with top line numbers beating estimates and only a few missing on the bottom line. In reality, the pullback in the refiners seems overdone as we will continue to produce cheap crude and natural gas in the United States for at least a period of years. Many refineries have been shut down since 2008, and even more are currently mothballed. The fear seems to be which ones will be the first to go, as new and more efficient refineries are built in the Middle East and China. Europe is not as fortunate, as high natural gas prices and Brent feedstocks pressure margins. Refineries with high Nelson complexities may survive, as these can run both light, heavy and sour crudes. Without feedstock flexibility, it can be almost impossible to turn a profit.
The sector as a whole looked good and below I have listed some of those results.
- Valero (VLO): EPS of $1.18 vs. $0.98 estimate
- Marathon (MPC): EPS of $2.17 vs. $2.16 estimate
- Western (WNR): EPS of $0.94 vs. $0.97 estimate
- CVR Energy (CVI): EPS of $1.90 vs. $1.48 estimate
- Tesoro (TSO): EPS of $0.73 vs. $.72 estimate
- Phillips 66 (PSX): EPS of $2.19 vs. $1.89 estimate
As you can see results were good on the bottom, and this was in the face of declining margins. PBF Energy (PBF) is the only refiner so far to miss badly. It reported an EPS of $0.48 vs. $1.16. It is important to note it beat revenue estimates handily at $4.8 billion vs. the analyst estimate of $3.51 billion.
When looking at PBF as an investment, it generally sells at a discount to the other refiners. There is a reason for this discount and it has to do with refinery locations. It has three refineries. The first is its Toledo refinery which has a throughput of 170000 bbls/day. It has a Nelson complexity of 9.2. Its other two refineries are located on the northeastern coast. The Delaware City refinery has 190000 barrels of throughput capacity and a Nelson Complexity of 11.3. PBF's Paulsboro refinery has 180000 bpd of capacity and a Nelson Complexity of 13.2. Although the last two are not in as good an area to receive cheap domestic crude, both are large and complex refineries that have the ability to process a wide variety of crude slates. More importantly they are the only two refineries on the east coast with coking capacity.
Right now PBF is railing in Bakken crude, but the hope is that the Utica will ramp up oil production providing cheap crude very close to all three of its refineries. For those that follow the Utica, it has not produced as well as hoped. The Utica produces a large amount of condensate, but the oil window has not been as good as anticipated. I have looked at the geology, and although several operators are trying to sell acreage, I believe it is an economic play. The problem with the oil dominated area has to do with being lower pressured from a shallow depth. This, combined with very low cuts of natural gas, have made this area one that does not produce huge IP rates. Once operators get comfortable, I believe this area will be a very good crude producer.
PBF did realize negative impacts to its balance sheet this past quarter. Its unplanned downtime at the Toledo refinery impacted EBITDA by more than $80 million. Keep in mind margins at its Toledo refinery are almost four times those on the east coast. Those 18 days were very expensive for PBF. The Toledo refinery averaged 123000 bpd, this will increase to an estimated 160000 bpd in the second quarter. The rising costs of renewable fuel standards were $10 million greater than was previously budgeted. The first quarter was impacted by a tightening of differentials for heavy Canadian crude.
The second quarter should see improvements in Delaware City and Paulsboro margins as more domestic crude is railed. In the first quarter Delaware City received 17000 bpd of WCS and 38000 bpd of light Bakken crude. Bakken shipments will increase to more than 80000 bpd in the second quarter and WCS will increase to 24000 bpd. PBF anticipates third quarter volumes of WCS will average 33000 bpd. By the mid-point of the fourth quarter, we could see WCS deliveries of approximately 80000 bpd. Crude will start being shipped by barge from Delaware City to Paulsboro at the end of May. PBF expects crude pricing to stabilize at $100/bbl of Brent and $90/bbl of WTI in the second quarter. It costs roughly $12/bbl to rail Bakken crude to the northeast. If Bakken crude sells at a $6 differential to WTI (this seems to be the lowest number by my estimates), PBF will save $4/bbl on feedstock costs.
PBF's comments on RINs was very important on the conference call. It currently blends about 50% of its gasoline, and plans to increase this to 75% later this year. It also plans to increase its exports to avert RIN exposure. This should also decrease the cost impact. It also will start passing these costs on to the consumer.
In conclusion, the quarterly miss by PBF may, in a way, be a gift. We will see improvements in feedstock costs to the northeast, and better differentials with respect to Bakken crude and WCS. RIN costs will start to be passed on to the consumer, and increased blending should also help. The U.S. refining sector is in a very good place right now and this will continue for a very long time. PBF may have the best risk/reward of its competitors, with increased growth provided by a higher percentage of domestic feedstocks.
Additional disclosure: This is not a buy recommendation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take in consideration commissions, margin interest and other costs, and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. For more articles like this check out my website at shaleexperts.com. Fracwater Solutions L.L.C. engages in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines and disposal wells. It also provides contracting services for all types of construction at well sites. Other services include soil remediation. Please contact me via email if you are interested in working with us. More of my articles and other pertinent information on the oil and gas sector, go to shaleexperts.com.