Crippled by last fall's hurricanes and facing the prospect of more storms this year, U.S. petroleum refiners have struggled to reopen and boost production.And yet, refiners see another year of record profits on the horizon, boosted by sky-high gasoline prices and tight new fuel standards. Wall Street appears to agree. This year, analysts have increased their earnings estimates for nearly all independent refiners. Investors have followed and share prices have risen by as much as 59% since January. "Refiners could counterfeit money, but it wouldn't be nearly as profitable," says Tom Kloza, publisher of the Oil Price Information Service in Wall, N.J. A perfect storm of sorts is expected to boost this year's earnings. Aside from the usual switch to cleaner gasoline blends in the summer, refiners had to pay out billions of dollars to meet strict regulations for gasoline and diesel. These changes, combined with limited capacity -- some refiners are still battling to return to full production following Hurricanes Katrina and Rita -- are driving up wholesale gasoline prices, tightening supplies and padding refiners' profit margins. Independent refiners, unlike most major oil companies that drill and refine crude, earn all of their money from refining. They make money when they can sell refined products -- not only gasoline, but other products like propane and jet fuel -- for more than a barrel of crude. Despite higher oil prices, their profit margin, or "crack spread," has nearly tripled over the past six months, to $17.55 a barrel. Although oil prices have climbed 20% over the past six months, prices for refined products have risen more. That increase, and the ability to process crude that is high in sulfur, has cemented refiners' profits. Although high-sulfur crude is more complicated and costly to process, it is more abundant and costs less. For instance, Mexican Maya crude, which has high levels of sulfur, sells for $14 less per barrel than West Texas Intermediate.
|Spreading Out |
Stock gains for major refiners over the last six months.
Crude heavy in sulfur is less expensive because not many refiners can process it. New government specifications that lower sulfur levels in gasoline and diesel have also dampened its price because some refiners only want oil with little sulfur.
During the first quarter, low prices for heavy oils and rising prices for gasoline and other refined products helped boost refiners' earnings. At Valero Energy (VLO - Get Report), the country's largest refiner, profits soared 59%, while earnings jumped 67% at Frontier Oil (FTO) and 54% at Tesoro (TSO). Holly's (HOC) profits skyrocketed 244%. In contrast, Sunoco's (SUN - Get Report) profit plummeted 32% largely because it can only process costly oil low in sulfur.
"We had the highest first-quarter earnings in the company's history, and the outlook for the rest of the year is even better," said Bill Klesse, Valero's chief executive, in a conference call last month.Analysts, accordingly, raised their annual estimates for Valero's earnings over the past month to a mean average of $7.92 a share in a Thomson First Call poll. At Holly, projections advanced to $6.13 a share from $5.91. Forecasts for Frontier Oil climbed to $5.19 a share, and Tesoro is expected to make $8.01. The estimates surpass results in 2005, when a pair of hurricanes shut down much of the Gulf Coast's refining industry. Last year, Valero earned $6.10 per share, Holly made $5.30, and Frontier $4.80. Tesoro earned $7.20 a share. "We have a tiger on our hands in the energy complex," says James Ritterbusch, president of Ritterbusch & Associates, an energy consultancy in Galena, Ill. "Refineries are plugged in for another good year." This year, changes in fuel requirements are expected to cut supplies and drive up prices in the short term, boosting refiners' returns. Refiners have been draining their tanks of gasoline containing methyl tertiary butyl ether, or MTBE, which, though it reduces tailpipe emissions and allows gasoline to burn cleaner, has been linked to groundwater pollution. Starting May 5, refiners lose protection from hundreds of water-contamination lawsuits, as mandated by the federal Energy Policy Act of 2005.