Under pressure US oil refiners seen posting painful Q4 earnings

New York

US refiners are girding for a painful slate of fourth-quarter earnings, reflecting the pressure of rising crude prices, weak demand due to renewed Covid-19 travel restrictions, and higher costs associated with blending of renewable fuels into their products.

Seven US independent refiners are projected to post an average earnings-per-share loss of US$1.51, down from a loss of US$1.06 in the third quarter of 2020, according to IBES data from Refinitiv. Both Credit Suisse and Tudor Pickering Holt cut the price estimates of every US independent refiner for the fourth quarter.

In the fourth quarter, independent refiners including Marathon Petroleum, Valero Energy and Phillips 66 coped with uneven demand due to a resurgence of coronavirus cases worldwide.

Consumption of liquid fuels globally is estimated to have fallen by nine million barrels per day in 2020, according to the US Energy Information Administration.

Crude oil benchmarks rallied more than 20 per cent in the quarter, which squeezed US refining margins to less than US$10 a barrel on average - the threshold for which most refiners make money - for the majority of the fourth quarter.

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Meanwhile, tougher restrictions on socialising and businesses clamped down on traffic. Travel on US roads fell by 11 per cent in November from the year-ago period, after a 9 per cent drop in October, according to the U.S. Transportation Department.

Lockdowns in various European countries suppressed international flights and jet fuel demand in the quarter.

Delta Airlines' refinery in Trainer, Pennsylvania, in early January posted a US$102 million refining segment loss in the fourth quarter, and a US$441 million loss on third party fuel sales.

In the fourth quarter, refiners also had to pay more for US renewable fuel credits, which reached a three-year high earlier this month. The cost for Renewable Identification Numbers - the credits used for compliance with US biofuels blending laws - increased by 47 cents per barrel from the third quarter due to rising ethanol and biodiesel prices.

Refiners are required, by law, to blend biofuels into their petrol pool, or pay up so others can do the same. The pandemic has reduced blending activity generally, and as a result, fewer credits have been issued, increasing their costs.

Credit Suisse analyst Manav Gupta said Phillips 66 will lose US$1.16 per share in the quarter. He had originally anticipated a 30-cent loss, but changed that due to lower refining earnings in the Gulf Coast, West Coast and Midwest markets.

"Sales will also see earnings down as crude price rose sharply quarter over quarter and lockdowns impacted volumes," said Mr Gupta in a note.

US refining margins started to improve around the holiday season, and were around US$12.50 per barrel. Refining rates rose last week to their highest since March, government data showed.

However, at about 80 per cent of capacity, refiners are producing approximately two million fewer barrels than at the same time last year.

"While refiners may be getting paid the same amount for gasoline as last year, it's on much lower production," said Bob Yawger, director for energy market futures at Mizuho. REUTERS