At the request of one of my followers, I've done a little work to try to put some numbers on the supply and logistic situations that have been going on in Oil Refining for the past few months. This is useful to try to understand why differences in feedstock costs and access to certain markets allows some of these independent refiners to prosper in niche situations.
Here is a table of spot prices for various crude oil grades:
|West Texas Intermediate||97|
|Light Louisiana Sweet||109|
|Gulf Coast Sour||105|
|Alaska North Slope||112|
|Arabian Extra Light||107|
Next, here are some of the wholesale gasoline prices around the country. I have derived most of this data from Gasbuddy.com.
|Retail Price||Local Tax||Fed Tax||Distribution||Est. Whol Price||$/bbl|
The wholesale unleaded gas crack spread is just the selling price of gasoline, dollars per barrel, minus the crude oil price. That is the spread between feedstock costs and wholesale selling price for the product. Note that this does not include conversion cost, the cost to turn the oil into gasoline, nor does it include any transportation costs or other expenses associated with the activity.
Based on this, we can derive a little table of feedstock cost versus crack spread:
|Estimated Fuel Price/$/bbl (wholesale)|
|Los Angeles||Denver||Chicago||Phoenix||Houston||Seattle||Atlanta||New York|
|West Texas Intermediate||97||33||25||18||25||10||32||15||35|
|Light Louisiana Sweet||109||21||13||6||13||-2||20||3||23|
|Gulf Coast Sour||105||26||17||11||17||3||25||7||27|
|Alaska North Slope||112||19||10||4||10||-4||18||0||20|
|Arabian Extra Light||107||24||15||9||15||1||23||5||25|
Example: A refiner in Los Angeles, selling to the local market can have a crack spread of $19 per barrel (minus transportation costs) using North Slope oil, but can improve to $33 per barrel if he can magically get West Texas Intermediate to appear at the back door without additional cost.
Interestingly, Houston appears to be the least profitable place in the country to make gasoline, which is probably correct if one considers that there are so many refineries in the area, and all of the major integrated oil companies, that do not necessarily pay the spot price for feedstock are participants in the market, and so the preferred strategy in that case would be to pay the transportation cost and put the product into the pipeline system and sell it in places like New York, rather than locally or alternately, use lower cost heavier feedstock than those listed here.
We can look at a sampling of specific cases, as laid out for us in the recent quarterly reports:
|Company||Refinery||Market||Crude Oil Source||Conv Cost||Gross Marg/bbl||Comments|
|Holly Frontier (HFC)||Cheyenne||Denver||Canada/Bakken||6.25||$ 26.5||49% Sweet|
|Holly Frontier||El Dorado||Denver/KC||Texas/Canada||4.23||$ 22.1||75% Sweet|
|Western Refining (WNR)||El Paso||Phoenix||West Texas||5.41||$ 20.0||82% Sweet|
|Tesoro||Los Angeles||Los Angeles||California/Foreign||6.51||$ 14.9||20% Light|
|Tesoro (TSO)||Anacortes||West Coast||Alaska||3.32||$ 15.0||80% Light|
|Marathon (MPC)||Robinson IL||Chicago||Various||NA||$ 13.2||Varies|
The favorite example of a logistical advantage is Western Refining (WNR), which has refineries in El Paso, and near Gallup, N.M., and is using "landlocked" local feedstocks from West Texas, and selling the finished products into the Phoenix area.
The gross crack spread using WTI and the Phoenix marketing area is around $25, and if the processing costs are subtracted, which for them is about $5.41, minus a little more for transportation, that company's reported gross margin of $20 is in the ballpark. Keep in mind also that these gross margins also include the 40% or so of the output of the refinery that is diesel, heating oil or other distillates, and for a thorough analysis one should include that in the calculation.
Also, per the above chart, the heavier and more sour the feedstock is, the more expensive it is to process.
Transportation is a significant problem, and most of these companies are engaging in some kind of pipeline or logistics business, and a little industry has developed to take advantage of the WTI pricing differential situation. One interesting one of these is Tesoro Logistics, which is involved in a system to deliver crude oil from the Bakken in North Dakota, to Anacortes, WA. This presentation (pdf) from Marathon Petroleum (MPC) talks a little about transportation economics: To transport Syncrude from Alberta, to the middle of the US, costs somewhere on the order of $5 to $7 per barrel depending on the route, so they are working on the logistics and converting the refinery to Detroit, to more economically process this feedstock.
While converting crude oil into gasoline is an important skill, what we as investors are really interested in is how good these companies are in turning crude oil into money. One of the factors on this is the method of financing:
|Interest Exp MRQ||Throughput BPD||Interest Exp $/Barrel|
|Delek US (DK)||$ 16,400,000||59,812||3.05|
|Western Refining (WNR)||$ 33,195,000||149,556||2.47|
|Holly/Frontier (HFC)||$ 25,074,000||435,110||0.64|
|Tesoro (TSO)||$ 38,000,000||609,000||0.69|
|Marathon Petroleum (MPC)||$ 15,000,000||1,368,000||0.12|
|Valero (VLO)||$ 88,000,000||2,317,000||0.42|
This table is the interest expense reported on last quarter's 10K for each of the companies, per unit of throughput. I have also thrown in a couple of the other companies in this group for comparison. The Western Refining and Delek US high rates of financing have significant effects on the bottom line that are not included in the above favorable gross margins.
The Delek US case is interesting. It is operating a refinery in El Dorado OK, which uses "sour" Oklahoma feedstock, which can be an additional $5-$10 less expensive than WTI, and selling the finished products into West Texas, where the prices are more like they are in Phoenix, per the above chart. The conversion cost is a little more than $5, and the El Dorado refiinery has a gross margin of $14.33, which is pretty comparable to the bigger participants in this group. The gross margin of the refinery in Tyler, Texas, is in the mid $20s per barrel range.
One final chart: Here is the ability of each of these companies to make money, based on Earnings Available to Shareholders per unit of throughput:
|Company||Throughput BPD||Earnings MRQ||Earnings per Barrel|
|Western Refining (WNR)||149,556||84,928,000||6.31|
|Holly Frontier (HFC)||435,110||523,088,000||13.36|
|Delek US (DK)||142,129||92,500,000||7.23|
I have omitted two companies, Sunoco (SUN), which took a big writeoff for discontinued operations in the last quarter, like all of these companies do from time to time, and my favorite Calumet Specialty Products Partners (CLMT), which had an unrealized hedging loss on its last quarterly report that affected its bottom line, as that company frequently does.
So what are we to make of all of this?
First of all, it is quite true that location is an important factor in this industry, and right now, being favorably located to take advantage of lower feedstock prices has been helpful to a couple of these companies.
However, it is not the total picture. The conversion costs, which are driven by feedstock quality and the financing costs, can also affect how much money goes to the bottom line. HollyFrontier Corp. did a particularly good job of this in the last quarter. Marathon Petroleum, despite not having any particular advantage on logistics but running an efficient, flexible operation with little debt is second most on this list.
The world is chaotic, and there are no guarantees on anything. This is particularly true as it applies to the WTI price relative to the rest of the feedstocks. We will check back in a quarter and see who the winners were.