After remaining range-bound for much of the second quarter, oil prices have mounted a significant rally, with analysts saying oil markets are finally waking up to the fact that fundamentals have tightened significantly. After remaining in surplus for months, many experts have predicted that demand will begin to surpass supply thus improving oil prices and margins for oil refiners.

For instance, StanChart’s demand model projects a supply deficit of 2.81 million barrels per day in August; 2.43 mb/d in September and more than 2mb/d in November and December.

The analysts have also projected that global inventories will fall by 310 mb by end-2023 and another 94 mb in the first quarter of 2024 thus pushing oil prices higher.  

Although U.S. oil refinery margins have halved since the middle of 2022, they remain at historically high levels and are likely to remain elevated through the summer of 2023 thanks to high operating rates and low fuel stocks.

Gross margins for refining three barrels of crude to produce two barrels of gasoline and one barrel of distillate fuel oil have retreated to $33 per barrel from a record $60 at the start of June 2022. Still, margins are in the 95th percentile for all trading days since 2001, underpinning refinery profitability and encouraging high levels of capacity utilization. 

Revenues and profits for refining companies have declined from last year’s historical highs but remain at healthy levels. Here are three refining stocks to keep an eye on.

Marathon Petroleum Corp

Market Cap: $54.3B

Dividend Yield: 2.6%

YTD Returns: 22.5%

Marathon Petroleum Corporation (NYSE:MPC) is an integrated downstream energy company and the largest petroleum refinery operator in the United States. The company’s latest earnings revealed strong refinery demand despite general economic malaise. Marathon’s Q2 2023 revenue of $36.82B (-32.1% Y/Y) beats the Wall Street consensus by $2.94B while GAAP EPS of $5.32 beat by $0.74.

Net income fell to $2.23B, or $5.32/share, from $5.87B, or $10.95/share from a year ago while adjusted EBITDA was cut in half to $4.53B from $9.06B a year ago. Refining & Marketing segment adjusted EBITDA fell to $11.88/bbl from $27.79/bbl for the prior-year quarter while segment margin was $22.10/bbl compared with $37.54/bbl in last year’s corresponding quarter.

Crude capacity utilization clocked in at 93% with total throughput of 2.9M bbl/day.

Marathon Ol continues returning copious amounts of cash to shareholders: The company revealed that it returned ~$3.4B of capital through $3.1B of stock buybacks and $316M of dividends in the second quarter. The company’s diversification into renewables gives Marathon Oil better protection from fluctuating oil prices and refining margins.

PBF Energy Inc.

Market Cap: $6.0B

Dividend Yield: 1.3%

YTD Returns: 26.2%

PBF Energy Inc. (NYSE:PBF) engages in refining and supplying petroleum products. PBF is one of the youngest oil refiners in the United States having been created in 2008. The company released its quarterly earnings report on Thursday, with revenue of $9.16B (-34.9% Y/Y) beating by $230M while Q2 Non-GAAP EPS of $2.29 beat by $0.05.

In-line with the industry trend, Q2 net income fell to $1.02B, or $7.88/share, from $1.2B, or $9.65/share, in the year-earlier quarter.  production fell slightly to 945,700 bbl/day from 958,800 bbl/day a year earlier. Refinery throughput fell to 935,800 bbl/day from 958,800 bbl/day a year ago and expects full-year production to average 915K-975K bbl/day.

And, just like its bigger peer, PBF Energy is diversifying into renewables: the company announced it had begun operations at its St. Bernard renewable fuel joint venture in New Orleans, and managed to sell the first products from the facility in July. The 50-50 joint venture with Eni S.p.A.(NYSE:E) has a processing capacity of ~1.1M tons/year of raw materials and will produce ~7.3M bbl/year of renewable diesel.

Phillips 66

Market Cap: $48.5B

Dividend Yield: 3.9%

YTD Returns:9.0%

Phillips 66 (NYSE:PSX) is one of the oldest refineries in the United States. The company operates as an energy manufacturing and logistics company, with its refining segment one of its largest. Phillips 66 reported Q2 Non-GAAP EPS of $3.87, beating the consensus by $0.31.

The company does not report revenue figures but said it generated $1.0 billion of operating cash flow ($2.0 billion excluding working capital).  Realized refining margins fell to $15.32/bbl from $28.62/bbl a year ago. Phillips 66 revealed that it plans to run its refineries in the mid-90% range of their combined crude oil throughput capacity of 1.9M bbl/day in Q3, close to second quarter’s figure at 93%.

Phillips 66 announced that its Rodeo refinery in California will be fully converted to renewable diesel production by the first quarter of 2024 when it is scheduled to begin commercial operation.

Oilprice.com by Alex Kimani, August 8, 2023