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'Darkest before dawn': US oil refiners may post 44% YOY revenue decline in Q2

When U.S. refiners report second-quarter earnings, investors will be listening for executives' thoughts on where the petroleum market is headed next as it recovers from an unprecedented, pandemic-driven collapse in demand.

Because of the market turmoil, S&P Global Market Intelligence consensus estimates anticipate second-quarter revenue for the top seven publicly traded U.S. refiners will have fallen in aggregate by $19.29 billion versus the first quarter and $46.89 billion versus the second quarter 2019 to $59.76 billion, leading all members of the group to post a quarterly loss.

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"It's always darkest before dawn. Staring into perhaps the weakest quarter for refining on record, we have cut estimates for 7 of 8 covered names and are expecting negative EPS for every company in what's typically the best quarter of the year," Tudor Pickering Holt & Co. analysts wrote July 10. The analysts said inland refiners, including CVR Energy Inc., Delek US Holdings Inc. and HollyFrontier Corp. "are likely to hold up much better than the rest of the group, due largely to a massive $3.79 [per-barrel] contango benefit on inland [crude oil] barrels in Q2."

"We're buying prompt crude that's lower than the future price," HollyFrontier CEO Michael Jennings explained on the company's May 7 first-quarter earnings call. "By the time it gets into the refinery and [with] the curve staying the same, we get a higher price that way, plus it gives us the ability to … store barrels and roll them on the NYMEX and capture profit that way. So it does help with our crack spreads going forward on the domestic barrels that do have that pricing component in them."

The analysts also said diversified earnings streams, such as Marathon Petroleum Corp.'s and Delek's retail businesses, could act as a buffer from the volatile petroleum market.

"In the retail side, despite the volume decreases that we've seen, margins have remained really sticky, and then we're seeing strong in-store sales as a result of some of the dynamics underway with the box stores in our markets," Delek senior vice president of investor relations Blake Fernandez told investors at a June 16 event hosted by JP Morgan. "The bottom line is that while there may be some changes in the composition of the earnings, we are still very confident that that business generates $40 million to $50 million of annual EBITDA."

About the dynamics, Delek CEO Ezra Uzi Yemin elaborated that big box stores in the markets Delek serves in the rural southwestern U.S. are no longer open 24 hours and that customers wish to avoid "stand[ing] in line outside … to get a couple of things." In addition, "people are afraid that they will be infected by the virus if they are in contact with a lot of people. So the combination of hours, impatience and fear of health caused our same-store sales to be something enormous. … I don't have a clue if this will continue, but it's just something eye-popping," he said.

However, non-refining businesses such as HollyFrontier's lubricants business, Phillips 66's chemicals business, and Valero Energy Corp.'s ethanol business, each face pressure from the COVID-19 economy, the analysts said.

During the second quarter, benchmark spreads indicate that refiners located along the U.S. Gulf Coast, home to the bulk of U.S. refining capacity, made less money off of each barrel of crude oil they processed as volumes were sharply lower.

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To weather the disruption to the market from COVID-19, the industry slashed capital spending, cut expenses, deferred maintenance, and issued debt in order to boost liquidity. Since then, it has also attempted to prevent a petroleum glut.

When discussing first-quarter results, most refining executives said that as a percentage of capacity, they expected their refineries in the high-60% to low-70% utilization range and planned to wait for clear signals of market improvement before ramping utilization rates higher.

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From the first week in May through the end of the second quarter, utilization rates climbed steadily past that target but that recovery seems to have stalled. Analysts warn spiking COVID-19 cases in the U.S. could bring about a second wave of declining petroleum demand at a time when stockpiles, viewed as a "governor" on oil demand, are well above historical averages.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.