Earnings Recap for the Refiners

by: James Shell

Here is a summary of the earnings announcements and conference calls that were held within the last week or two:

General observations: Our pre-earnings estimates of what was going on in all of these companies have proven to be pretty accurate. This whole group is dependent to some degree on refinery utilization and overall refining margins, which have gotten weaker in the last few weeks, as they normally do because of seasonality. No one in this business ever wants to be less efficient than the previous quarter. There are always capital projects going on of one kind or another that are going to impact EPS, but the numbers pretty much work out along with the overall margins, and the overall economy. Reliability continues to be a key predictor of success.

Valero (NYSE:VLO): Higher refining margins contributed to an NOI of $900M (close to expectations based on our little model). Since the announcement, they have indicated their desire to sell their Paulsboro refinery.

Tesoro (TSO): Our little model suggested that their NOI should have been around $100M for the quarter and it was actually a little higher than that, at $142M. However, there are some ongoing issues. Their refinery utilization will be only 72-78% reflecting weak conditions on the West Coast. They are still assessing the effects of the fire at Anacortes and like all of the group, are trying to improve their efficiency. Since their earnings announcement, their credit rating has been downgraded and the analysts are pessimistic.

Frontier (FTO): The model suggested an NOI of about $100M and the reality was about $100M. However, they have already warned about their next quarter earnings due to the reliability problems they are encountering in Cheyenne.

Calumet Specialty Products (NASDAQ:CLMT): Their hedging activities have obscured the fact that they managed to make $19M NOI versus the model which suggested about $11M, and had improving refinery throughput. The only downside, if you want to call it that, was that since the stock price has increased about 10% since early June, the dividend yield has fallen below 10% slightly.

Western Refining (NYSE:WNR): Their conference call sounded like they were running two companies, which they essentially are. Their operations in the southwest are doing just fine, but they are actually going to shut down their Virginia operation over the next quarter. They had a positive cash flow of only $1M last quarter because they chose to build inventory, the value of which continues to be higher than the market cap of the company at the moment. They outperformed their little refining margin model ($68M NOI), but they still have all of that debt on their books. The stock is still bouncing around $5.

Marathon Oil (NYSE:MRO): They had a 72% increase in earnings, based on refining margin recovery. The stock is up about $1 since their announcement. They did lose $60M on their involvement in the oil sands business, which rained on their parade a bit. I think they'd like oil prices to stay above 80 for awhile.

Summary: The companies in this group that were struggling last quarter are going to continue to struggle. The companies that did well are going to continue to do as well as the refinery margins will permit. So much of this whole group depends on strong demand for the finished products, and that will be the main driver of success in the next little period, until the economy really does turn around.

Stay tuned.

Disclosure: none