Have U.S. Refining Margins Finally Bottomed Out?

HOUSTON, TX, Nov 12 (MARKET WIRE) --
The refining industry is experiencing a significant reduction in
profitability, with current margins at "exit-the-business" levels for a
number of refineries. Margins have contracted due to a recession-induced
decline in products demand, incremental supply from new refining
capacity, and the continued penetration of ethanol into the gasoline
market. Ironically, sophisticated, deep-conversion refineries, usually
the most resilient during such periods, have been among the hardest hit
during the current downturn. Heavy, sour crude oil discounts have all but
vanished. Not surprisingly, the industry is operating at the lowest
utilization rates experienced in almost two decades.

Baker & O'Brien has just released its third quarter (3Q) industry data
service update to the company's PRISM model subscribers. The latest data
highlight the continued downward pressure on refining margins across all
U.S. markets. However, it also suggests that margins may have finally
bottomed out. While average cash margins (EBITDA(1)) declined by more than
$6.50 per barrel from 3Q 2008, they were relatively unchanged versus 2Q
2009. As has been the case historically, PADDs(2) 4 and 5, the Rocky
Mountains and the West Coast regions, realized higher average margins than
other areas, and actually showed some improvement from 2Q 2009. Average
margins in other PADDs were essentially flat (PADDs 1 and 3 -- the East
Coast and the Gulf Coast) or lower (PADD 2 -- the Midwest) compared to 2Q
2009.

The PRISM data, derived from public sources using complex refinery supply
chain modeling tools, provide greater insights into the impacts on
specific refineries. As the data in the above graph indicate, simplified
"rules of thumb," such as refinery size and complexity, do not
necessarily provide the full story for assessing which refineries are
most at risk in this environment. Other critical factors, such as
regional crude oil supply advantages and the ability to meet more
stringent product specifications, can mean the difference between closure
and survival.

While the recent data and company financial reports may hint that refining
margins have reached bottom, there are a number of looming threats facing
refiners -- carbon regulation, fuels regulation, and new refining capacity
-- which have the potential to further depress refining margins or extend
the duration of the current poor environment. Given the heightened degree
of uncertainty, refiners are actively working to understand and improve
the competitive positioning of their assets.

About Baker & O'Brien, Inc.

Baker & O'Brien is an independent professional consulting firm
specializing in technology, economics, and management practice for the
international oil, gas, chemical, and related industries. With offices in
Dallas, Houston, and London, the firm focuses primarily on the downstream
industry to assist clients with strategic studies, mergers and
acquisitions, and technology evaluations. The firm also actively provides
expert services to support insurance claims and a wide range of
commercial disputes in the energy industry.

About PRISM

PRISM is Baker & O'Brien's refining database system that provides detailed
analysis of individual refineries as well as the full refining value chain
from crude load port to truck rack. The system combines a large historical
database with a robust refinery simulator to provide analytical support to
competitive analysis, strategic planning, crude oil valuation, and
delivered cost of supply. The PRISM system currently includes operational
and economic performance details for refineries in the U.S., Canada, and
Northwest Europe.

PRISM is a trademark of Baker & O'Brien, Inc. All rights reserved.

(1) Earnings before interest, income taxes, depreciation, and amortization

(2) Petroleum Administration for Defense District

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