TALKING POINT-U.S. indepedent refiners on the rise
Reuters Story - May 06, 1998 22:43
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Jump to first matched term By Marguerita Choy
NEW YORK, May 6 (Reuters) - The good news on U.S. oil
refiners is starting to filter through.
Though shares of sector leader Tosco Corp have
risen by 12.5 percent in the past month and outperformed the
broader Dow Jones Index, other leading independents have
started to show strength only in the past week or so. Sun Co.
Inc. , Valero and Ultradiamond Shamrock
have all been outpacing the market since the start of May.
Analysts have started talking about a bumper 1998, even
better than last year's strong performance.
"U.S. refining margins are moving up explosively," said
Paul Ting, Salomon Smith Barney's oil sector analyst. "Gasoline
demand is very strong. In the U.S., gasoline demand grew by 4.6
percent for 1998 year-to-date," he said.
U.S. refiners, on average, are seeing wholesale margins
push up to $4.50 per barrel, or about 50 percent higher than
during the first quarter, he said.
The Department of Energy says U.S. highway travel and
gasoline demand this summer should post the largest annual
increase in a decade, rising about 2.8 percent between April
and September.
The driving season, which usually kicks off in the second
quarter of the year, started early this year because of warm
weather, the strong economy and low pump prices.
Ken Miller, a sector analyst at Purvin & Gertz, said
first-quarter refiners' profits were the best for a winter
season in four years. Even year-on-year, this winter's margins
were nearly double at around 80 cents barrel, from 42 cents in
the first quarter of 1997, as crude prices fell to record
nine-and-a-half year lows in March.
For the second quarter, usually the best season of the
year, Miller projected even better margins of $1.64 per barrel,
compared to $1.42 a year ago.
Costs have been a problem for some, though, and among the
"Big Four" independents, Valero and Ultradiamond Shamrock
posted declines in their first-quarter income of nine and three
percent respectively, while Tosco Corp.'s rose by 11.5 percent
and Sun Co Inc's income nearly tripled.
Strong refining margins, however, have prompted all the
companies to be highly optimistic on their performance
projections for second quarter and beyond.
Scott Smith, refining and marketing analyst at UBS said
refiners are more likely to realize the full impact of the
record-low crude prices in the second quarter because of the
time-lag of up to 60 days between purchase and processing of
crude.
"It is fundamentally good since the margins are better but
I would be cautiously optimistic on their (the independents')
performance in the second quarter," said Smith. Among the
reasons for caution were the number of acquisitions by the
independents in the past year, which would eat into their
profits, Smith said.
"The best performer in the first quarter was Sun, but both
Sun and Tosco had better performances (than the other
idependent refiners) because of their low operating cost
structures...which should continue to boost their performance
in the next quarter," said Brude Lanni, analyst at CIBC
Oppenheimer.
Sun has cut its operating costs to $2.25 per barrel in the
first quarter from $3.70 in 1996 after reconfiguring its
Northeast refining units, while Tosco's operating costs were
pared down by purchasing refineries at relatively low prices
where the depreciation value is low.
Although refiners in general looked set to benefit with
higher volumes and improved utility in April, geographical
margins and marketing margins remain determining factors on
their performance.
With the majority of its refineries in California, Tosco
has and is expected to benefit from the strongest gasoline
demand in the country, analysts said.
Refining margins on the west coast remain the star
performer, nearly doubling to $12 per barrel at the end of
April from $5.60 per barrel in the first quarter, Lanni said.
But at the same time, a gasoline price war in the region
has spurred a "major swing" in marketing margins which have in
the same period collapsed to $4.15 in the red from a positive
$5.92.
Although most refineries are more leveraged towards
refining rather than retail, companies like Valero without
marketing, are expected to benefit in the face of the lowest
pump prices on record nationwide.
- New York Energy Desk +1 212-859-1626, fax 859-1629.
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