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Refining executives outline shareholder return philosophy during pandemic

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European Energy Insights - September 2020

Refining executives outline shareholder return philosophy during pandemic

The COVID-19 pandemic has devastated oil refiner earnings and forced the industry to find creative ways to either defend shareholder returns or resume them in the near future.

Year-to-date through the end of the third quarter, cash returned to shareholders of the seven largest U.S. oil refiners fell 45.1% year over year to $4.51 billion, with reduced share repurchases accounting for nearly all of that decline. During third-quarter earnings calls, executives discussed their philosophy surrounding dividends and share repurchases in the midst of a pandemic.

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On Nov. 5, HollyFrontier Corp. CFO Richard Voliva called dividends "the primary source of our cash return to shareholders" that are "fundamental in a mature, low-growth industry like ours." The company is betting its renewable diesel projects will generate the cash to sustain its dividend in the future.

But weak petroleum markets have forced PBF Energy Inc., CVR Energy Inc. and Delek US Holdings Inc. to suspend their quarterly dividends. Of the three, only Delek has repurchased its own shares in 2020. Those buybacks have come at a rate far below that of a year ago.

Besides suspending its dividend, Delek has taken other aggressive steps to preserve cash, including cutting its workforce and adjusting operations at its 74,000-barrel-per-day Krotz Springs, La., refinery.

Despite those actions, Delek President, Chairman and CEO Ezra Uzi Yemin said Nov. 5 the best use of its cash right now would be to repurchase its own shares.

The pandemic has put PBF at the bottom of the list in terms of the volume of cash returned to shareholders so far this year. Executives on Oct. 29 sought to defend the company's liquidity position. The company announced it would close one of its East Coast refineries in order to help preserve $1.3 billion in cash and equivalents. The company also has access to another $700 million through a revolving credit facility. PBF executives expect to burn through $100 million of cash per month over the six to nine months that follow.

Instead of paying dividends, CVR Energy is weighing converting some of its oil refinery units into renewable diesel processing units. The inland refiner has facilities in Oklahoma and Kansas, and is also exploring expanding its oil refining business into other markets through acquisitions.

By contrast, some members of the group reiterated their commitment to returning cash to shareholders.

Marathon Petroleum Corp. expects $16.5 billion in net proceeds from the sale of its retail gasoline business to 7-Eleven Inc., a wholly owned, indirect subsidiary of Seven & i Holdings Co. Ltd. After retiring some debt, Marathon expects to return a substantial portion of that windfall to shareholders, but it is still weighing its options for doing so.

For their part, Valero Energy Corp. executives called the COVID-19 pandemic an "isolated event" that would not steer the company from its long-term capital allocation strategy.

Phillips 66 Chairman and CEO Greg Garland said Oct. 30 the company is "committed" to dividend growth through the market downturn. "As you look at Q3, essentially, we covered our capex and our dividend through cash. … If things don't get any better … then we feel really comfortable that we can cover sustaining capex and our dividend from our cash."

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