Once a "Dog," Refinement becomes Driver of Oil Profits
From
Exxon Mobil
Corp.
to
Phillips 66
Energy companies reap banner profits by taking cheap oil that is locked in North America and turning it into fuel.
A huge increase in oil output has overwhelmed pipelines and depressed raw prices in some regions of Texas and Canada. It has created a bonanza for companies that can exploit themselves by converting it to gasoline and diesel.
Nowhere has the opportunity been greater than near Canada, where commodities trade for 43 dollars a barrel under US reference prices due to bottlenecks. It's a bad thing for manufacturers there, but very lucrative for companies with nearby refineries in Canada or the Upper Midwest, from Exxon to smaller fuel makers such as
Holly Frontier
Corp.
"US refining has really gone from being a dog to being a pretty attractive business model," said John Auers, Executive Vice President of Turner, Mason & Co. "I do not think it will change soon." [1[ads1]9659006] Phillips 66, which says it is the largest industrial buyer of heavy Canadian crude oil, drove its nearby refineries in 108 percent of capacity in the third quarter and earned an average $ 23.61 per barrel processed there. It helped lift the quarterly profit to nearly $ 1.5 billion, an increase of 81% from the same period last year.
Exxon's CEO Darren Woods quoted the company's access to cheap commodities from Canada and West Texas for its refineries as one of the benefits of contributing to trace it to 6.2 billion dollars in the third quarter, the profits, the highest sum of four years. The company said it could process as much as 500,000 barrels per day with Canadian raw from seven refineries is.
"We see the benefits of integration as we capture value from distributed raw materials from Perm and Western Canada to our North American refineries," said Mr. Woods.
As much as John D. Rockefeller collected his fortune by refining crude oil collected in the first US oil boom, the refineries once again gained an advantage as the United States became one of the world's largest crude producers. 19659005] North American oil production has increased as oil prices have risen over the last two years, increasing 24% to more than 15 million barrels a day in July, according to the US Energy Information Administration.
The rapid growth has overwhelmed existing pipelines and made it difficult for producers to move all their oil to the market in areas like Western Canada and Permian Basin in West Texas and New Mexico. The oil that is oiled eventually goes too far in these areas than oil sent via pipelines to large sales departments like Cushing, Okla.
Fuel producers with access to cheap commodities have reap the benefits.
BP PLC
s
Underlying quarterly earnings increased to $ 3.8 billion, the highest level of five years, partly driven by the company's massive refinery in Whiting, Ind. The plant, opened by Rockefeller's Standard Oil in 1889, is capable of driving around 320,000 barrels a day with heavy raw from Canada.
Heavy Canadian commodity traded for $ 28 a barrel below US reference prices in the third quarter, according to S & P Global Platts, while oil sold in Permian was discounted by an average of 14 dollars a barrel. Oil in both regions is expected to remain relatively cheap for at least one year when new pipelines are set to start functioning.
Permian, heavy Canadian and other similar commodities accounted for about 57% of HollyFrontier's oil processed in the third quarter, the company told investors Wednesday. The Dallas-based refinery generated a profit of over $ 340 million, the highest revenue for the third quarter since 2012.
Refining companies missing out on Canadian trade showed it in its results.
Marathon Petroleum
Corp.
so quarterly earnings fall 18% from the same period last year to $ 737 million, partly because some of its Midwest refineries were offline for maintenance. The company told investors that it is now possible to process about 500,000 barrels of Canadian raw daily. It also expects to benefit in the coming quarters of rising oil prices from North Dakota Bakken Shale.
"We see it as a perfect storm," says Rick Hessling, senior vice president.
Oil in Clearbrook, Minn., One of Trade Hubs for Bakken Crude, sold for almost USD 13 under US benchmark prices this week, according to S & P Global Platts.
Domestic demand for diesel and other propellants remains high, but data from the Danish Energy Agency show that gasoline demand has declined a year ago, as oil prices have risen and refineries have operated at full tilt and increase stocks.
"The real surprise, especially on the gasoline side, is just the very high refinery," said Gary Simmons, senior vice president of
Valero Energy
Corp. "You've had a 2 to 1 increase in output over demand, and it has caused a surplus in inventory."
The export market has been a key release valve. US exports of refined products peaked 5.3 million barrels daily in October, an increase of 33% from two years earlier, according to EIA. Top buyers include Mexico, Canada and Japan.
"If you can get your hands on reduced crude oil, you're inclined to drive it and hope you can find a home for it," says Amy Kalt, Baker & Brien Inc. consultant, an energy consultant.
Write to Rebecca Elliott at rebecca.elliott@wsj.com and Bradley Olson at Bradley.Olson@wsj.com
