I note with interest that the price of Calumet Specialty Products (CLMT) has increased 33% in the last two days. I assume this means the Bank of America / Merrill Lynch Energy conference presentation held yesterday and today went well. I also note a number of other seeking alpha contributors have been putting out comments and articles mentioning increased crack spreads.
Contrary to what these sources seem to indicate, I would be cautious. The current Chicago 2-1-1 crack spread quoted in the Howard Weil report QTD is a sign of weakness not strength. It remains significantly below the 5 year range for this time of year. I would point out that the $16.50 average Q2TD in that report does not mean it started at $12 and is now at $20 as some seem to imply. As a matter of fact, that same report provides evidence to the contrary. Notice the graph to the right of the Chicago 2-1-1 crack spread located on page 5 of the report. It shows indeed spreads remain below norms for this time of year and have been poor all year. The confusion might stem from not studying the graph accompanying the number nor noticing that the month in the legend is placed at the end of the month period, not as is more typical in the beginning. Thus we can see from the graph that the Chicago 2-1-1 crack spread was at about $15 at the beginning of Q2, has had a fluctuating slight uptrend since then, but is still well below the lows of its normal 5 year range for this time of year. The trend in Q2 may be positive, but not meaningfully so, particularly when seen in the context of typical seasonality in the sector.
Also of note certain specific refineries are having out of the norm issues which are likely reducing volume. CVR Refining (CVRR) is having volume issues with product pipeline off-take, due to floods. CLMT and likely others are probably having different volume issues related to the Fort McMurray fire. I note CLMTs Superior WT and Great Falls MT refineries purchased 32k barrels of cheap Canadian crude in Q1. I also note that a significant portion of the crude Enterprise Product Partners (EPD) transports comes out of this force majeure effected Fort McMurray region.
Last but not least, RIN prices, a meaningful cost for some refiners including CVRR, have been increasing during the quarter from the low 70s to the low 80s. They are currently relatively high at about 83 cents / gallon for the e16s. CVRRs RIN cost was $43.1 million last quarter when RINs were closer to 70¢, implying about a $50 million cost this quarter. CLMTs RIN cost is Q1 was only $9.6 million implying a less concerning $11 million for Q2.
2nd quarter for refiners is typically stronger than this one is stacking up to be. I don't follow ALDW or NTI but I would be surprised if they had a decent quarter. More to the point, CLMT and CVRR are unlikely to have had a strong enough Q2 to offer any distribution.
While Enbridge (EEP) will likely continue its distribution in Q2, it is unlikely cash flow from operations will cover that distribution much less planned capex. EEP is going to need to raise funds. It has a $625 million dollar annual revolver due to be renewed on July 1st and $300 million in notes coming due at the end of this year. With debt / equity at close to 100% in the current market, I think it unlikely the $300 million in notes will be refinanced at an attractive rate. More likely, EEP will be issuing more shares. I can assure you I will not be the one buying them.
(Note, in my original blog post above I kept typing EPD when I actually meant EEP. The stock I shorted and meant to refer to as possibly being negatively effected by the Fort McMurray fire is EEP. Sorry for the confusion.)
WCS (Canadian oil sands) to Brent spread:
Q1 2015 $18
Q4 2015 $15 (no distribution from CVRR, 68.5¢ distribution from CLMT)
Q1 2016 $12 (no distribution from CVRR or CLMT)
6/7/2016 $13.23 (vs. $19 a year ago for example; distribution from CVRR or CLMT unlikely)