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Refiner profits to fall sequentially in Q3 as 'COVID-related carnage' lingers

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Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


Refiner profits to fall sequentially in Q3 as 'COVID-related carnage' lingers

On the heels of one of the most challenging quarters the industry has faced, analysts expect U.S. oil refiners to report another round of dismal earnings results for the third quarter as the industry continues to endure fallout from the COVID-19 pandemic.

In the second quarter, analysts had expected the revenue of the seven largest refiners to fall by $46.89 billion year over year. Instead, the group reported a total revenue decline of $62.03 billion.

"After COVID-related carnage that hit in Q2, it was hard to imagine that things could get any worse in Q3," Tudor Pickering Holt & Co. analysts wrote Oct. 12. "Well, apparently life finds a way because our current estimates reflect worse [quarter-over-quarter] earnings for 6 of our 8 refiners under coverage."

Although analysts expect aggregate revenue for the top seven U.S. refiners to climb by $14.67 billion versus the second quarter, they expect it to come in $42.80 billion below the year-ago level. Based on consensus estimates, only two members of the group will report better earnings than they did in the second quarter, and all seven are expected to report third-quarter losses.

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Among the challenges facing the industry in the third quarter, the Tudor Pickering Holt analysts cited lower indicative per-barrel profits for refining oil into diesel, lower discounts for domestic crude oil because of production cuts, a relatively flatter oil price forward curve and an increase in the cost of biofuel blending credits.

"The net impact is that refiner margin capture rates are coming down across the board," the analysts wrote. But they did note a few bright spots for the industry, including an increase in processed crude oil volumes and better indicative gasoline refining margins.

A subset of the group released indicative data that shows processing volumes are off by about 25% year over year and indicative profits are worse.

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"On the whole, we expect [the third quarter] to remain challenged from an earnings perspective given unfavorable refining fundamentals during the quarter," Goldman Sachs analysts wrote Oct. 5. "That said, we expect to see improvements in non-refining businesses, including midstream and chemicals sequentially, supporting our preference for diversified refiners over merchant refiners."

Through the third quarter, demand remained well below historical averages, so much so that even one of the most active Atlantic Basin hurricane seasons on record failed to materially lift petroleum prices. That sort of weakness could persist well into 2021, S&P Global Ratings warned Oct. 20.

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Valero Energy Corp. kicks off the group's earnings season when it reports before 10 a.m. ET on Oct. 22.