Despite falling gasoline and distillate prices, analysts expect U.S. refining and marketing companies to boost adjusted earnings year over year in the fourth quarter of 2018, a quarter during which the companies are expected to have benefited from their ability to sell into markets where their products are priced off of more expensive crude oil benchmarks.
At the end of November 2018, U.S. government data show the U.S. was a net exporter of crude oil and petroleum products for the first time on record.
According to S&P Global Market Intelligence consensus estimates, analysts project the six largest independent U.S. refiners will grow net adjusted earnings by a total of $1.15 billion year over year to $2.87 billion.
While that performance would represent a decline from a strong third quarter, fundamentals are supportive of year-over-year earnings growth.
"We hold a favorable Q4'18 earnings outlook for refiners and our current EPS estimates are +25% above consensus on average," Tudor Pickering Holt & Co. analysts wrote in a Jan. 11 note. "The main drive is highly-appealing discounts on a variety of inland crudes, including [West Texas Intermediate], Bakken, Syncrude, and [Western Canadian Select]."
Average West Texas Intermediate crude oil discounts to Brent increased by 52.9% year over year in the fourth quarter of 2018 to average $9.35 per barrel, boosting average U.S. refinery utilization to 92.5%, up from 91.4% in the year-ago quarter.
High utilization drove increased production of gasoline, and refined product inventories were mixed at the end of 2018, with gasoline inventories above the five-year average and distillate inventories well below the five-year average.
Amid declining crude oil prices, prices for refined products also tumbled, but lower inventories led distillate to trade at a premium to gasoline over the course of the quarter.
The relatively stronger distillate market led the average 6-3-2-1 crack, an indicative refining margin for more complex refiners, to decline by 6% year over year to $14.86/bbl. At the same time, pressured by a weaker gasoline market, the average 3-2-1 crack declined by 17.2% year over year in the fourth quarter of 2018 to $15.80/bbl.
Goldman Sachs analysts wrote in a Jan. 8 report that refining executives see weakness in the gasoline market more as a function of elevated refinery runs than softening gasoline demand, and that lower crude oil prices have led retail and marketing margins to "surprise positively," echoing a Dec. 31, 2018 Tudor, Pickering, Holt & Co. note where analysts noted U.S. retail gasoline margins were "the best we've seen in 10 quarters."
"Despite the solid earnings outlook, refiner equities completely swooned in the quarter," Tudor Pickering Holt & Co. analysts wrote Jan. 11. "Macroeconomic concerns plus narrowing 2019 futures curves for product cracks (especially gasoline) and key crude differentials led to the drop. Every stock in the group is now trading below its respective [three-year] average forward EBITDA multiple."