Marathon Petroleum Corp.’s $15.8 billion deal to expand its rapidly growing pipeline network highlights one of the most surprising developments in the shale era: after being written off a few years ago, refiners are printing money.
Since June 2011, when Marathon Oil Corp. spun off what some thought would be low-margin refining and pipeline units, the top four energy performers on the Standard & Poor’s 500 Index were fuel processors Tesoro Corp., Valero Energy Corp., Marathon and Phillips 66. Tesoro more than quadrupled.
Read that again: the best energy stocks in the last four years were the assets that many thought were either doomed or not worth owning as a U.S. energy renaissance took hold. The producers that drove the shale revolution have suffered as crude prices fell by more than half in the worst oil crash in a generation.
Why? The main reason is that refiners have access to cheaper crude. The tremendous amount of new oil produced in shale regions is essentially landlocked, because most U.S. exports are banned. That means refiners pay less in the U.S. than competitors in other regions.
Another key reason is that refiners have invested billions to build, expand and update their pipelines and logistics businesses, as Marathon did Monday. Along with Marathon, Tesoro, Valero and Phillips 66 have all created or expanded their pipeline units, helping minimize the inherit volatility in the refining business.