U.S. crude oil climbs 3.2% to $52.45/bbl after EIA data showed that refiners processed a record amount of crude and that supplies fell at the Cushing, Okla., storage hub.
U.S. refiners churned 17.1M bbl/day of crude into fuel last week, the highest weekly figure going back to 1982, while Cushing stockpiles, which have been rising in recent weeks, fell by 579K barrels.
Prices recovered after initially falling in reaction to a higher than expected rise in total crude oil inventories to 4.1M barrels, and U.S. production jumped to more than 8.9M bbl/day during the week, the highest read since April.
But analysts say the stockpile gains largely were driven by an increase in oil imports, which rose to their highest level since 2012 as shipments of crude that were delayed at the end of last year for tax purposes are starting to appear.
Valero Energy (VLO -3.6%) is sharply lower after Deutsche Bank downgrades shares to Hold from Buy with a $65 price target, while HollyFrontier (HFC +2.2%) is higher following the firm's upgrade to Buy from Hold with a $38 target, raised from $30.
Deutsche Bank says VLO remains a fundamentally strong operator with sustainably strong capture rates, but shares are fully valued current levels, trading at a historically premium 7.1x forward EBITDA, which would more than fully price in a full repeal of RINs expenses and corporate tax reform, two major tailwinds for the refinery sector in 2017.
On HFC, the firm sees attractive leverage to key themes for the group. including RINs relief, corporate tax cuts, widening of narrow inland differentials and limited exposure to potential import/export border tax adjustments.
Refiners are mostly lower in today's trade: TSO -3.2%, PSX +0.7%, MPC -2.7%, WNR -3.2%, PBF -4.9%, CVI +0.2%.
In an update on its refinery maintenance, HollyFrontier (HFC -1.2%) says that unplanned Q4 maintenance on its Navajo Catalytic Reforming Unit has wrapped up -- and that cold weather there resulted in boiler outages that affected run rates.
Issues with the CRU at Tulsa also caused a rate reduction, it says. That refinery will use downtime to accerlate maintenance for units originally planned for later in 2017, including the East Crude Unit.
Because of the maintenance, HollyFrontier now says it expects crude oil throughput for the quarter to average 425,000 to 435,000 barrels per day.
With margins high, many refiners have delayed routine work over the past couple of years to run flat out, but now pipe fitters and ironworkers are in short supply amid a glut of billion-dollar projects, including liquefied natural gas export terminals from Cheniere (NYSEMKT:LNG) and a new petrochemical unit for Dow (NYSE:DOW).
U.S. refiners are expecting to spend $1.26B on planned maintenance next year, a 38% increase and the highest level since at least 2010, according to IIR -- but IIR also expects the Gulf Coast region to be short about 37,400 craftsmen needed to complete all the planned projects.
HollyFrontier (HFC +6.3%) pops more than 6% higher after Credit Suisse upgrades shares to Outperform from Neutral with a $38 price target, raised from $29, seeing reasons to believe 2017 will be much brighter for the company after falling 22% YTD.
Credit Suisse cites the possibility that the obligation to buy Renewable Identification Numbers may shift away from refiners, and that a lower corporate tax rate would help HFC more than its peers.
With a solid balance sheet and organic cash flow, HFC's 5% yield is well supported, and total shareholder return, including capital appreciation, should be healthy as EBITDA recovers, the firm says.
The EPA today issued final regulations requiring that the amount of ethanol and other biofuels that must be blended into the U.S. fuel supply must increase by 6% next year.
Since the result is a significant gain over the 4% the EPA recommended in an earlier draft proposal, it is a victory for ethanol makers and a defeat for oil companies that say using more biofuels in gasoline and diesel is costly and unachievable.
The EPA set the 2017 target for total renewable fuel use at 19.28B gallons, higher than the initial proposal for 18.8B gallons as well as this year's 18.1B gallon requirement; the new mandate includes 15B gallons for conventional biofuel, which is mostly corn-based ethanol, vs. 14.5B gallons last year.
Tesoro (NYSE:TSO) exec Stephen Brown says the plan is "unworkable" as it forces the use of biofuels beyond the blend wall and that it highlights the need for a legislative overhaul of the program.
Valero Energy (NYSE:VLO), HollyFrontier (NYSE:HFC), Monroe Energy and the American Fuel and Petrochemical Manufacturers have petitioned the EPA to consider changing the rule to reduce the onus on refiners that have little capacity to blend biofuels at their operations.
The change the refiners are requesting "would not address the challenges associated" with boosting availability of advanced fuels and getting more ethanol into the fuel system, the EPA says.
Tesoro (NYSE:TSO) and Marathon Petroleum (NYSE:MPC), which have invested in biofuels blending capacity, say they support the EPA's move toward denying the change.
HollyFrontier (HFC -1.1%) turns lower despite beating Wall Street expectations for Q3 earnings and revenues, as lower costs helped soften a steep decline in refining margins.
HFC's Q3 refining margin was cut in half to $9.83/bbl from $19.85/bbl a year ago, following other refiners that have reported shrinking margins due to the spike in U.S. inventories of refined products.
Q3 revenues fell 20.6% Y/Y to $2.85B, but total operating costs and expenses fell nearly 17% to $2.72B.
HFC says it refined ~457K bbl/day in the quarter, vs. ~474K bbl/day in the year-ago quarter.
HFC says it expects 2017 capital and turnaround spending of $400M-$450M, depending on the 2017 margin environment.
HFC says the deal will immediately add to its EPS and cash flow, and make it the fourth largest lubricants producer in North America, with a capacity of 28K bbl/day, or ~10% of North American production.
The Petro-Canada Lubricants plant, located in Mississauga, Ontario, is the largest producer of base oils in Canada with 15.6K bbl/day of lubricant production capacity.
HollyFrontier (NYSE:HFC) rose 4.7% in today's trade following a Reuters report that it is in advanced talks to acquire Suncor Energy's (NYSE:SU) Petro-Canada lubricants division for a little over $1B, after submitting the highest bid in an auction.
A potential deal would allow HFC to diversify its refining business, which has been hurt by the gasoline glut that has eroded profit margins, while giving SU a cash boost to help pay down debt incurred as a result of recent acquisitions, according to the report.
Petro-Canada produces more than 350 advanced lubricants for industries ranging from beauty to heavy manufacturing, and is the world's largest manufacturer of white mineral oil.