Have U.S. Refining Margins Finally Bottomed Out?
Baker & O'Brien Announces Third Quarter 2009 PRISM Results
November 12, 2009
The refining industry is experiencing a significant reduction in profitability, with current margins at "exit-the-business" levels for a number of refineries. Margins have contracted due to a recession-induced decline in products demand, incremental supply from new refining capacity, and the continued penetration of ethanol into the gasoline market. Ironically, sophisticated, deep-conversion refineries, usually the most resilient during such periods, have been among the hardest hit during the current downturn. Heavy, sour crude oil discounts have all but vanished. Not surprisingly, the industry is operating at the lowest utilization rates experienced in almost two decades.
Baker & O'Brien has just released its third quarter (3Q) industry data service update to the company's PRISM model subscribers. The latest data highlight the continued downward pressure on refining margins across all U.S. markets. However, it also suggests that margins may have finally bottomed out. While average cash margins (EBITDA1) declined by more than $6.50 per barrel from 3Q 2008, they were relatively unchanged versus 2Q 2009. As has been the case historically, PADDs2 4 and 5, the Rocky Mountains and the West Coast regions, realized higher average margins than other areas, and actually showed some improvement from 2Q 2009. Average margins in other PADDs were essentially flat (PADDs 1 and 3 -- the East Coast and the Gulf Coast) or lower (PADD 2 -- the Midwest) compared to 2Q 2009.
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The PRISM data, derived from public sources using complex refinery supply chain modeling tools, provide greater insights into the impacts on specific refineries. As the data in the above graph indicate, simplified "rules of thumb," such as refinery size and complexity, do not necessarily provide the full story for assessing which refineries are most at risk in this environment. Other critical factors, such as regional crude oil supply advantages and the ability to meet more stringent product specifications, can mean the difference between closure and survival.
While the recent data and company financial reports may hint that refining margins have reached bottom, there are a number of looming threats facing refiners -- carbon regulation, fuels regulation, and new refining capacity -- which have the potential to further depress refining margins or extend the duration of the current poor environment. Given the heightened degree of uncertainty, refiners are actively working to understand and improve the competitive positioning of their assets.
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1 Earnings before interest, income taxes, depreciation, and amortization
2 Petroleum Administration for Defense District
Contact: Benjamin F. Schrader