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PBF Energy poised to reap demand recovery benefits as RFS uncertainty continues

Highlights

PBF Energy raises Q4 runs to over 900,000 b/d

RFS compliance costs remain problematic

Benefits seen from wider sour crude spreads

PBF Energy will raise its Q4 refinery run rates to meet continued strong demand recovery for oil, supported by low refined product inventories and better economics for heavy sour crude, the company said Oct. 28.

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"Demand has continued its gradual improvement and is at or above pre-pandemic levels for certain products," PBF CEO Tom Nimbley said on the company's call to discuss Q3 earnings. "With improving demand and the call for more energy globally, we expect incremental crude supply to enter the market and support wider differentials."

PBF's refinery throughput averaged 848,300 b/d in Q3, lower than originally anticipated due to an unplanned power outage at the Toledo, Ohio, refinery and downtime at the Chalmette plant from Hurricane Ida.

Q4 throughput is expected to average 910,000 b/d, despite planned work on its US Atlantic Coast refineries and installation of new reactors on the cat feed hydrotreater at its Martinez, California, plant to meet updated regulations.

"Gasoline demand has been robust and is currently at pre-pandemic levels, while distillate demand is beyond 2019 levels. We are seeing improvements in all our regions and expect to see strong demand persisting as more people return to their offices, get on planes for both leisure and business and we move beyond the impacts of the current COVID variant," Nimbley said.

He added that increases in demand, "coupled with clean product inventories that are at or below the five-year levels, should be supportive of above mid-cycle margins in the near term."

Wider crude spreads benefit

PBF increased heavy and medium sour crude throughput in in Q3 over Q2, expecting to run more Q4 as heavy-sweet differentials widen, with heavy Mexican Maya crude holding about $7/b discount to Brent.

"Our expectation is that as OPEC+ continues to add notionally 400,000 b/d of crude that the world needs, we need this crude to meet demand," Nimbley said, adding "Given our exposure to heavier and sour barrels, we expect widening differentials to provide an incremental benefit to the strong underlying demand."

However, capital discipline on the part of shale producers to keep a lid on production of light, sweet barrels is also a factor in the wider spread.

"Crude differentials are being driven more by light sweet strength than it is being driven by heavy weakness," Tom O'Connor, PBF's head of commercial operations, said on the call.

O'Connor noted that light, sweet crude availabilities could increase as the high cost of natural gas in Europe is causing some "shifting of the slate in Europe, which could ultimately end up pushing a few more barrels back into the Atlantic Basin."

Uncertain regulatory compliance costs

As the largest US pure play refiner, PBF's fortunes are more closely attuned to refining fundamentals than other refiners with retail, midstream and renewable fuel assets, making it more vulnerable to the costs associated with the US Environmental Protection Agency's Renewable Fuel Standard.

"Despite the improving fundamental backdrop, we continue to be battered by the persistent waffling of the Environmental Protection Agency and never-ending delays in addressing the broken RFS program. These delays are causing economic harm to independent refiners, jeopardizing jobs, creating uncertainty in the market and are penalizing consumers at the pump by supporting high gasoline prices," Nimbley added.

Nimbley said the EPA is "well aware" of the problems with the RFS and the harm it is costing the independent refining sector and "more importantly the American consumers."

"I am hopeful we will see action by the current administration that will enable us to have a workable program in the very near future which will allow us to avoid a major crisis," he said.

The price of RINs credits bought by obligated parties to meet the RFS renewable volume obligation reached record quarterly highs in Q3, averaging $1.545/RIN and $1.655/RIN for ethanol and biomass diesel RINs, respectively, according to Platts price assessments.

So far in Q4, ethanol and biomass diesel RINs are averaging $1.23/RIN and $1.482/RIN, respectively.

PBF reported Q3 net RINs expense of $73 million, and saw close to $100 million in mark-to-market benefits, including the effects of its US West Coast liabilities as the company continues to expense and and accrue its 2020 and 2021 renewable credit obligations.

Credit Suisse analyst Manav Gupta expects PBF to spend $185 million in Q4 RINs expenses along with $250 million in AB32 liabilities associated with California's Low Carbon Fuel Standard program.

However, in an effort to mitigate the high cost of RFS compliance, PBF is moving forward with a renewable diesel project of its own adjacent to its 190,000 b/d refinery in Chalmette, Louisiana, as it seeks partners to develop the 20,000 b/d project.