Jan 30 The uneven impact of the shale oil boom on the U.S. refining industry was brought into stark relief this week as Midwest and Gulf Coast refiners with easy access to cheap domestic crude posted strong earnings, while weak margins spelled the death of another East Coast plant.
Phillips 66 and Marathon Petroleum Corp reported quarterly earnings on Wednesday that far exceeded Wall Street estimates as they fattened margins by processing more of the cheaper crude from North American shale fields.
Valero Energy Corp -- which said on Tuesday that its net income soared to $1 billion in the fourth quarter from $45 million a year earlier -- said it was looking to boost exports of refined products to South America as it used more domestic crude oil instead of more expensive imports.
"Exports of refined products are at record level," said Raymond James Analyst Pavel Molchanov. "This is boosting refineries that are on the Gulf Coast, which is really where this is taking place."
But the sudden flood of domestic crude has done little to help companies whose refineries are mostly in eastern states.
Hess Corp announced on Monday that it would exit the refining business altogether to focus on exploration and production. The company's Port Reading refinery in New Jersey, which will be closed by the end of February, incurred losses in two of the past three years.
Chief Executive John Hess has said his company's strategy is to focus on lower-risk, higher-return assets such as its position in the Bakken oil shale in North Dakota.
Boosted by rising shale oil production, U.S. crude output is expected to grow by 900,000 barrels per day (bpd) this year to a record 7.3 million bpd, the U.S. Energy Information Administration said earlier this month.
In November, the International Energy Agency forecast that U.S. oil output, aided by surging volumes from shale and other onshore rock formations, could top production from Saudi Arabia and Russia by 2017.
The biggest increase is expected to come from the Bakken shale field in North Dakota and Montana, and the Eagle Ford shale in Texas.
Phillips 66 said on Wednesday it expects to process more than 200,000 bpd of domestic shale crude this year -- 80 percent more than in 2012.
"Phillips 66 is enhancing refining returns by increasing access to advantaged feedstocks, as well as increasing export capabilities at its coastal refineries," said the company, which was spun off from ConocoPhillips last year.
Marathon, which has increased the capacity of its Detroit refinery by 13 percent to 120,000 bpd to help it process much cheaper Canadian heavy crude, said on Wednesday it also plans to boost earnings at its Midwest and Gulf Coast refineries by increasing its use of cheap domestic crude.
To increase its Midwest refineries' access to cheap crude from the Bakken field and the Canadian tar sands, Marathon will be the anchor shipper on Enbridge Inc's proposed Southern Access Extension, which will transport crude oil from Flanagan, Illinois, near Chicago to Patoka, Illinois, a crude storage and blending hub.
Phillips 66's adjusted earnings rose by more than three times from a year earlier to $1.37 billion, or $2.06 per share in the fourth quarter. Analysts on average were expecting $1.68 per share, according to Thomson Reuters I/B/E/S.
Adjusted earnings in its refining business soared to $916 million from $27 million.
Marathon reported a profit of $755 million, or $2.24 per share, handily beating the average estimate of $2.10 per share.
The company's refining and marketing gross margin averaged $9.17 per barrel of oil, up from 39 cents per barrel a year earlier.
Findlay, Ohio-based Marathon said it expects to complete the purchase of BP Plc's 451,000 barrel-per-day Texas City refinery on Feb. 1. It also said its board had approved an additional $2.65 billion share buyback program.