Oil Giants Start Losing Safety Net as Refining Margins Squeezed

Finding Signs of Price, Demand Hope in Oil Markets
  • Fourth-quarter margins show steepest drop in 8 years: BP data
  • Analysts have cut EPS estimates for Exxon, Shell, Total, BP

Refining profits that buttressed earnings for Exxon Mobil Corp. and Royal Dutch Shell Plc as crude prices plunged are now slumping, further pressuring all of the world’s biggest oil companies as they move into 2016.

Global refining margins, the estimated profit from turning oil into gasoline and diesel, fell 34 percent in the fourth quarter, the steepest decline in eight years, to $13.20 a barrel, data on BP Plc’s website show. Every $1 drop cuts BP’s pretax adjusted earnings by $500 million a year, according to its website.

The companies face a squeeze on processing profits as a mild winter curbs demand for heating oil and diesel, creating huge stockpiles in the U.S. and Europe. That’s a reverse from the past two years, a period when refining earnings doubled, and kicks away one of the remaining buffers for integrated oil giants grappling with crude prices at a 12-year low.

“It’s a bit of a double whammy, lower oil prices and refining margins starting to weaken,” said Iain Reid, an analyst at Macquarie Capital Ltd. in London. “The safety net is still there, but there are some holes in it now.”

Analysts have cut their fourth-quarter 2015 and first-quarter 2016 adjusted earnings per share forecasts in the past month for Exxon, Shell, Total SA, Eni SpA, Statoil ASA and Repsol SA, data compiled by Bloomberg show. 

Oil’s slump of more than 70 percent over the past 18 months has resulted in 250,000 job losses in the industry globally and more than $2.7 trillion of market value of oil companies being wiped out, an amount almost equal to France’s gross domestic product. There may be more pain to come as oil trades near $30 and refining margins keep narrowing.

Exxon Earnings

Exxon’s net income from refining and marketing fuels doubled to $2 billion in the third quarter from a year earlier, surpassing earnings from oil and gas production for the first time in at least 15 years. Shell’s $2.6 billion adjusted net income from refining and trading helped it report a profit after a loss of $425 million from exploration and production.

For European refiners, average profit from producing gasoil, the most common fuel, was $9.50 a barrel above benchmark Brent crude in December, the narrowest for the time of the year since 2010, ICE Futures Europe data show. Refining margins in northwest Europe fell to a two-year low of $10.90 in the fourth quarter, BP said. Those profits are often referred to as crack spreads, a rough measure of earnings based on the difference between the price of the fuel and that of crude.

Shell’s Results

Shell, which is scheduled to declare interim fourth-quarter earnings on Jan. 20 and full results on Feb. 4, and BP and Exxon, both due to report on Feb. 2, declined to comment. Chevron Corp., which is scheduled to announce earnings on Jan. 29, and Eni, which releases results on Feb. 26, also declined to comment.

Total, which reports on Feb. 11, didn’t respond to e-mails seeking comment on the impact of shrinking refining margins.

While refining margins are typically the lowest from October to December, the drop in the last quarter was significant for the companies because it was accompanied by the slump in oil prices. Brent crude, the international benchmark, fell 23 percent in the three months, with the average price the lowest since the beginning of 2009. Prices on Tuesday rebounded from the lowest level in more than 12 years to climb 0.7 percent to end the session at $28.76 on the London-based ICE Futures Europe exchange.

Refining margins climbed to a three-year high in the quarter ended Sept. 30, helping to push up BP’s profit from that business by 55 percent. Refining accounted for almost two-thirds of the company’s adjusted earnings before interest, taxes, depreciation and amortization. 

That performance probably won’t be repeated in the fourth quarter as margins for diesel and gasoil, known as middle distillates, slumped amid a warm winter. Global refining margins dropped further to $12.50 a barrel so far this month.

“In Europe and the U.S., the main reason for the margin contraction is the middle distillate crack,” said Olivier Abadie, senior oil market analyst for refining at the International Energy Agency, a Paris-based adviser to 29 developed nations. “Clearly middle distillates, unless there’s a big cold spell, aren’t going to be strong.”

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