The seven largest U.S. oil refining companies largely beat lackluster second-quarter earnings expectations, with some of those beats coming despite underwhelming refining segment performance as the industry coped with narrower crude oil discounts, a factor that executives expect to improve as the second half of the year unfolds.
Executives say tighter marine fuel sulfur standards that go into effect Jan. 1, 2020, will boost refining margins by lowering prices for heavy sour crude oil and increasing diesel prices.
During the quarter, PBF Energy Inc. was the only member of the group to underperform Wall Street expectations. Second-quarter refining revenue declined $887.7 million year over year to $6.55 billion as crude oil and feedstock throughput declined from 866,600 barrels per day to 854,100 bbl/d and gross refining margin per barrel of throughput, excluding a lower-of-cost-or-market inventory adjustment, declined at the company's Gulf Coast and East Coast refineries. PBF Chairman and CEO Thomas Nimbley noted the company had "extended turnaround downtime" in the second quarter, but said the company had completed all of its scheduled maintenance for the year.
"It will be interesting to see how the landscape develops over the next six months," Nimbley said during the company's second-quarter earnings call. "The best way to be prepared to take advantage of opportunities in the market is to have our assets operating well."
At the same time, positive results at Valero Energy Corp. and HollyFrontier Corp. were driven by stronger-than-expected refining segment performance. At Valero, crude oil and other feedstock throughput climbed year over year from 2.57 million bbl/d to 2.64 million bbl/d in the second quarter, helping to offset a $1.70/bbl decline in adjusted refining operating income over the same period. By contrast, improved profitability at HollyFrontier's refining segment drove second-quarter results. Consolidated second-quarter net operating margin climbed from $10.21/bbl a year ago to $13.17/bbl as that of its Mid-Continent region climbed from $7.01/bbl to $12.15/bbl.
Phillips 66 handsomely beat expectations on strong results from its midstream and marketing-and-specialties segments while its refining segment underperformed expectations. Second-quarter refining margin declined year over year from $12.28/bbl to $11.37/bbl as feedstock throughput, including that of equity affiliates, climbed 0.8% to 2.3 million bbl/d. Meanwhile, midstream segment adjusted pretax income was a record $423 million. The company reported adjusted midstream net income of $202 million in the year-ago quarter. Marketing and Specialties second-quarter adjusted pretax income was $353 million versus a second-quarter 2018 adjusted net income of $195 million.
At Marathon Petroleum Corp., the company's retail segment saw operating income climb to $493 million on higher fuel margins and an increase in same-store sales, offsetting a decline in refining operating income. In the year-ago quarter prior to the closure of its acquisition of rival refiner Andeavor, retail segment income at Marathon Petroleum was $159 million while that of Andeavor was $209 million. Meanwhile, Refining and Marketing segment income from operations fell to $906 million in the second quarter from the year-ago level of $1.02 billion.
At Delek US Holdings Inc., "system wide commercial initiatives contributing to bottom-line performance" led corporate/other segment income to climb to $10.2 million in the second quarter from a loss of $11.8 million in the year-ago period as adjusted net income climbed to $90.6 million from $78.9 million. But analysts were skeptical the company would sustain the commercial segment's performance.
"While the company's commercial efforts are appealing, the historical volatility of this segment makes it difficult to underwrite a permanent improvement," Tudor Pickering Holt & Co. analysts wrote Aug. 8.