Narrower crude oil discounts and lower refinery runs may weigh on third-quarter earnings for U.S. refiners, but analysts are highlighting fundamentals that improved late in the quarter.
Excluding Marathon Petroleum Corp., which closed on its acquisition of Andeavor in October 2018, S&P Global Market Intelligence consensus estimates show analysts expect revenue of six of the largest refining companies to fall by a net $6.43 billion, with all companies posting lower earnings per share than they did a year ago. Marathon's third-quarter 2018 results do not include Andeavor's results.
The outlook contrasts with third-quarter 2018 results, when the companies grew their collective adjusted net income by 25.6% year over year to $3.93 billion.
During the third quarter, the Brent premium to West Texas Intermediate crude oil averaged $5.74 per barrel, 10.1% lower than a year ago, while refinery runs declined 1.6% over the same period.
Despite the weaker expectation, analysts pointed to several positive trends that began to unfold late in the quarter. On Oct. 3, Tudor Pickering Holt & Co. analysts raised their outlook for PBF Energy Inc., citing "a September that featured better cracks than we were expecting, notably in the gasoline markets on both the East Coast and West Coast." The analysts noted that late in the quarter, PBF may have contributed to outages from Royal Dutch Shell PLC, Chevron Corp. and Marathon that helped to drive west coast indicative margins higher.
On the East Coast, pipe corrosion caused a June 21 explosion that led to the shutdown of a 335,000-barrel-per-day refinery in Philadelphia, leading European refineries to fill some of the East Coast petroleum supply gap.
"Atlantic Basin margins were at their highest level since Q317," Jefferies analysts said in an Oct. 4 note. "As expected in the lead-up to [tighter marine fuel sulfur standards], diesel cracks improved significantly [quarter over quarter]. … Pick your favorite recent bearish macro-economic data point, but the margin environment contradicts the idea that refined product demand is collapsing."
Experts say the regulations, known as IMO 2020, could strain an already tight distillate market this winter to boost profitability at global refiners through 2020.