Midcontinent refiners not in bad shape despite share price drop: analysts
New York (Platts)--17Nov2011/533 pm EST/2233 GMT
US Midcontinent refiners are not in as bad shape as the recent drop
in share prices and margins makes them out to be following the Seaway
pipeline reversal announcement, analysts and market watchers said
Thursday.
The unusually wide WTI-Brent spread that discounted WTI-priced crude
purchases was already deemed unsustainable, though it has collapsed
earlier than expected, they said. Some production from Canada and new US
shale plays is expected to remain landlocked in the Midwest due to
pipeline constraints, underpinning margins there.
"Crudes, e.g. some of the Bakken, Niobrara or Utica production, that
cannot get to Cushing via pipeline will still trade at a $10-12/bbl
discount vs LLS i.e. a $7-9/bbl discount to WTI based on rail logistics
costs," said Credit Suisse analysts in a report Thursday.
"As management teams watch next year's profits shrink, we believe there
is still more than enough free cash flow to support a decent
yield...there is longer term upside," said the analysts, while cutting
earnings forecasts for US independent refiners by 42%. "With EPS in
freefall one year earlier than expected and macro uncertainty in Europe
remaining center stage, share price appreciation could take some time,
even if value remains."
In the meantime, "the market spoke yesterday," in the words of one
industry source, who pointed out the sharp drops in the share prices of
several WTI-related refiners: CVR Energy (down 16% on Wednesday and
another 4.6% on Thursday to $17.53), Western Refining (down 13.5% and
then another 9.8% to $12.10), HollyFrontier (down 10% and then another
3.5% to $23.93) and Delek (down 7% and then another 11.1% to $12.15).
The tighter spreads mean "from a profitability perspective, Midcontinent
refiners relative to the third quarter results that we saw, they're
certainly down," said Doug Aron, executive vice president and CFO with
HollyFrontier, in an interview.
The company's refineries include: Artesia, New Mexico (100,000 b/d);
Tulsa, Oklahoma (125,000 b/d); Woods Cross, Utah (31,000 b/d); El
Dorado, Kansas (135,000 b/d); and Cheyenne, Wyoming (52,000 b/d).
HollyFrontier's share price was above $32 on November 8, when it posted
record third-quarter earnings as the company's first quarter as a
combined entity of Holly and Frontier coincided with strong refining
margins due in part to the wide WTI/Brent spread.
"Medium-term, until that Seaway reversal gets to their full 350,000 b/d
and really until even another pipeline project is announced...we still
think there's more supply" destined for the Midcontinent between the
Bakken Shale, Canadian oil sands production and the Permian Basin, said
Aron. He cited expectations of 50,000-100,000 b/d of new production from
each of those areas each year for the next several years. "Plus the
Niobrara [Shale]...and a couple of the newer developing plays like
Wolfberry and the Wattenberg and some others," he added.
"We think that we will certainly continue to see some differential
between WTI and Brent. We never would have guessed that it would have
gotten as wide as it did...but we also don't think that it's going to go
away overnight," said Aron. "At $10 WTI-Brent spreads and the current
gasoline and distillate margins we still have plenty of incentive to run
our refineries full," he said.
The NYMEX WTI-ICE Brent spread ended the day Thursday at $9.29/b.
The Seaway "sale has occurred, and the mid-con refining stocks
're-calibrated' accordingly," said Deutsche Bank analysts in a report.
They said until the WTI/Brent spread and margins stabilize, refiners
"face a relative headwind after such strong performance."
"This group is lightly held (high proportion of hedge fund ownership)
and the year is near a close; it may be a tough end for refining
stocks," said Deutsche Bank.
--Beth Evans,
beth_evans@platts.com
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