Analysts expect Q4'20 oil refiner earnings will continue lower

Despite an auspicious start to the year, analysts expect U.S. oil refiners to report dismal earnings results for the fourth quarter of 2020, reflecting petroleum demand's continued suffering through the COVID-19 pandemic.

They predict revenue at the seven largest refiners will fall $1.02 billion versus the third quarter of 2020 and $44.83 billion versus the fourth quarter of 2019 to $56.34 billion, with only Marathon Petroleum Corp., CVR Energy Inc. and PBF Energy Inc. showing revenue growth versus the third quarter of 2020. Despite that revenue growth, analysts expect all seven companies to report a decline in quarterly earnings.

Valero Energy Corp. on Jan. 28 will be the first U.S. refiner to report fourth-quarter 2020 earnings.

U.S. Energy Information Administration data show fourth-quarter 2020 distillate demand improved to 3.9 million barrels per day, or 0.4% below the five-year average, up from 3.6 million b/d, or 7.9% below the five-year average in the prior quarter. Jet fuel demand climbed to 1.1 million b/d, or 32.4% below the five-year average, up from 997,000 b/d, or 41.2% below the five-year average in the prior quarter. But gasoline demand slid from 8.7 million b/d in the third quarter of 2020 to 8.3 million b/d, or 9.6% below the five-year average, in the fourth quarter of 2020.

As distillate and jet fuel demand increased, a subset of companies released indicative data showing that fourth-quarter 2020 crude oil processing volumes climbed from the prior quarter, but remained significantly below year-ago levels, with margins remaining tight.

In a series of reports in January, Tudor Pickering Holt & Co. analysts cited rising biofuel blending costs, which have been driven higher by regulatory uncertainty and federal court rulings, as an additional factor that will hit oil refiners' bottom lines in the fourth quarter of 2020.

While oil refining segment results will drive earnings, other business lines bear watching.

"We expect a high degree of focus to be on the non-refining segments of each of the companies, as these represent an important part of the [sum-of-the-parts] valuation framework," Goldman Sachs analysts said Jan. 20 of the large-cap refiners.

The bank recently raised its price target for Marathon Petroleum's master-limited partnership subsidiary MPLX LP, and beyond Marathon's midstream business, they see "positive momentum around strategic change under the current leadership, disciplined capital allocation," and a potential $16.5 billion windfall from the pending sale of its Speedway retail gasoline business to 7-Eleven Inc. parent Seven & i Holdings Co. Ltd.