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US refiners to address unprecedented petroleum market during Q1 earnings calls from SNL Energy Finance Daily US refiners to address unprecedented petroleum market during Q1 earnings callsSection: DATA DISPATCH; Exclusive Byline: Everett Wheeler Instead of windfalls from tighter marine fuel sulfur standards, investors should expect executives at the seven largest U.S. refiners to discuss how their businesses will weather an unprecedented decline in demand for their products, a direct consequence of the COVID-19 pandemic, when they report first-quarter earnings. In the U.S., demand for gasoline and jet fuel has plunged below historical seasonal ranges, which exposes the sector's creditors to higher risk, according to rating agencies. Anton Korinek, an economics professor at the University of Virginia, warned in an April 14 interview that as society recovers from the pandemic, it would "take at least two years" for petroleum demand to return to pre-coronavirus levels as shelter-in-place orders are eventually lifted. "A lot of the activities that are very high in oil consumption" such as travel "would be precisely the ones that would come back online last." The collapse in gasoline demand has also put pressure on prices for crude oil, raising questions about what the unprecedented oil glut means for refining margins at a time when consumers are driving less despite low gasoline prices. The oil forward price curve is steepening as oil storage nears tank tops at Cushing, Okla., the delivery location for the benchmark NYMEX West Texas Intermediate crude oil futures contract. That should benefit all U.S. refiners, including inland refiners such as HollyFrontier Corp., Delek US Holdings Inc. and CVR Energy Inc. in particular, analysts said. "There are fundamental reasons why elevated contango should persist, as refineries have cut runs faster than [oil producers] have cut production," Tudor Pickering Holt & Co. analysts wrote April 21. The dynamic pushed prices for May delivery to negative levels. As the contract approached expiration, financial hedgers, with no place to put their crude, sought to unwind positions that would obligate them to take physical delivery. "[West Texas Intermediate's] fall into negative territory degrades the effectiveness of the contract as a risk-mitigation instrument and signals that Cushing storage is already fully leased, even if tank tops are not hit for another 3-4 weeks," Jefferies analysts said April 24. They called the "seeming recovery" in U.S. refining margins "misleading." "Many of the market prices we use to calculate the cost of crude were affected by negative pricing," the Jefferies analysts said, citing a 21% expansion in U.S. Gulf Coast refining margins despite an 8% drop in gasoline prices and a 10% drop in diesel prices. "We expect that the 13% fall in [northwest] European margins is more representative of the trajectory of Atlantic Basin refining fundamentals." In response to the weak margin environment, U.S. refiners have taken actions such as cutting the amount of crude they process, borrowing money to boost liquidity, lowering capital expenditures and suspending capital returns to shareholders. But some have yet to announce detailed plans for addressing today's market. Of its peers, PBF Energy Inc., which serves the hard-hit Northeast U.S., has so far announced the most aggressive steps to shore up its business, including a 38.5% cut to 2020 capital expenditures, an executive compensation-driven $20 million reduction to its corporate overhead expenses, a $125 million reduction in operating expenses, the suspension of its quarterly dividend, and the $530 million sale of five hydrogen facilities to Air Products & Chemicals Inc. On March 24, Phillips 66 announced it cut 2020 capital expenditures by $700 million to $3.1 billion, secured a $1 billion, 364-day term loan to boost liquidity, and said it might limit 2021 capital spending to below $2 billion if economic turmoil persists. HollyFrontier, which prior to the economic crisis had announced it was doubling capital expenditures to improve reliability at its plants, said April 8 that it would trim that budget by about 15%. For the rest of the group, 2020 spending plans in a COVID-19 world are scant on details. Valero Energy Corp. on April 13 only said it may defer or delay some capital expenditures related to its refining and ethanol businesses. The Gulf Coast refiner also secured a 364-day, $875 million revolving credit facility. The company said it has not repurchased any of its outstanding shares since mid-March. Although it plans to evaluate buybacks "when appropriate," Valero said it is under "no obligation" to resume that program. Marathon Petroleum Corp. said April 23 that it is idling refining capacity and tapping debt markets to provide liquidity during the crisis. The company has refinanced $2.5 billion in debt and expanded borrowing capacity under its revolving credit facilities by $1 billion. Marathon said it has not made any share repurchases this year and will weigh future buybacks "when appropriate." In addition to financial strategy, there is also COVID-19's impact to corporate strategy. Before the current crisis, Marathon announced plans to spin off its Speedway business, a 4,000-store convenience store chain. A rumored $22 billion sale of the business to 7-Eleven Inc. parent Seven & i Holdings Co. Ltd. reportedly fell through in early March because Seven & i's board had concerns about Speedway's large physical store footprint in an era of fast-growing e-commerce. There is also speculation that Carl Icahn's CVR Energy is once again making a play for Delek. On March 20, Delek's board adopted a poison-pill strategy to ward off a takeover after Icahn acquired 14.86% of Delek's outstanding shares March 19. Meanwhile, there is growing concern that the oil market will come under increased government management to address the near-term oil glut. In March, Delek dropped its Big Spring crude oil gathering system to its master limited partnership subsidiary, Delek Logistics Partners LP. The 200-mile, 350,000 barrel-per-day system in Howard, Borden and Martin counties in Texas connects to Delek US' terminal near Big Spring, Texas, and to a third-party pipeline system. |
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