Want to See Who's Happy About Low Oil Prices? Look at Refiners

Why Now Is a Good Time to Invest in Oil Producers
  • Tesoro ran its refineries at 101% during record third quarter
  • Refiners are using windfall to purchase pipeline assets

While oil and gas drillers cut spending to the bone, U.S. refiners are reaping a windfall from low prices.

Tesoro Corp. reported record profit in the third quarter, while Valero Energy Corp., Phillips 66 and Marathon Petroleum Corp. posted their best quarter in at least three years. Crude prices are down by more than half from their 2014 peak, while American drivers are on pace to set a record for miles driven.

“Refining is one of the better places to be in right now,” said Carl Larry, head of oil and gas for Frost & Sullivan LP in Houston. “They have the luxury of low crude feedstock prices and high demand for their products.”

Shares of Phillips 66, the largest U.S. refiner by market share, rose 3 percent on Oct. 30 to $89.05, a record high. An index of the four companies is up 26 percent on the year. The broader Standard and Poor’s 500 Energy Index is down 14 percent over the same time.

The profit margin for converting oil into gasoline has soared this year as crude prices fall and driving demand rises. On the Gulf Coast, home to about half the nation’s refineries, the margin has averaged $12.21 a barrel this year, the highest since at least 2010.

Because of the high margins, refiners are churning through as much crude as they can. U.S. plants set a processing record during the last week of July, going through more than 17 million barrels a day. Tesoro said it ran its plants at 101 percent of their capacity during the third quarter.

Next Year

The refining party won’t be stopping anytime soon, said Harold York, vice president of integrated energy research at consulting company Wood Mackenzie Ltd. Margins may weaken next year from this record level, but they will still be good enough for plants to operate at high rates.

“It’s going to be strong again in 2016,” York said in an interview in Houston. “Crude runs are going to reach another all-time high.”

Refining can be a cyclical business. Less than four years ago Marathon’s refining margins were just 39 cents a barrel for a quarter. Companies are using the current windfall to diversify by buying pipelines and other assets that offer more stable profits because they’re less impacted by commodity prices.

Marathon is trying to buy MarkWest Energy Partners LP, a natural gas gathering and transporting company. Valero said it may exercise an option to take a 50 percent stake in Plains All American Pipeline LP’s $900 million Diamond oil pipeline.

“Refining is cyclical. Pipelines and storage are always going to be in demand,” Larry said. “It’s a safety net for them if things start to turn south sooner than they expect.”

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