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Valero, Phillips 66 see negative first quarter from February freeze

Highlights

Higher electricity, gas prices add to costs

Low refinery utilization hurts revenues

New York — Valero Energy warned it will post a loss when it reports first quarter earnings later this month, with mid-February polar vortex's impacting its earnings and operations, the company said in an April 8 statement.

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The company expects to report a first quarter net loss between $835 million and $735 million, due to lower production and higher operating costs. Most affected were facilities on the US Gulf Coast and Midwest as a prolonged bout of freezing weather destabilized electrical power grids and cut natural gas supply, forcing plants to close down or cut rates.

At the mid-February cold peak, S&P Global Platts estimated that as much as 7.6 million b/d of refining capacity was offline or running at very low rates. By the end of the month, almost half of USGC refining capacity, about 5.4 million b/d, capacity was still offline.

"The company expects electricity and natural gas costs incurred primarily by its refining and ethanol business segments to be higher than expected for the first quarter of 2021 due to the impacts of Winter Storm Uri," Valero's statement said.

Valero expects the impact of excess energy costs to account for a loss of between $535 million to $520 million, or a loss of $1.18-$1.14/share. Of this, losses related to USGC facilities are expected to range from $485 million to $475 million, and losses in the Midwest region to range from $45 million and $40 million.

In mid-February, a wave of arctic cold, dubbed Winter Storm Uri by some weather forecasters, swept over Texas and parts of the lower Midwest, which impacted the reliability of the electrical grid.

The Electricity Reliability Council of Texas, which is not connected to other electric grids, struggled to provide power as the extreme cold froze wind turbines and natural gas field compressors alike, taking about two-thirds of power generation capacity offline and causing a severe spike in the price of electricity and natural gas.

At the request of Texas Governor Greg Abbott, many refineries shut down operations to conserve energy for consumers. Some refiners, including Phillips 66, ExxonMobil and Deer Park, even sold power into the grid from their cogeneration plants in an effort to increase power available as well as mitigate their own electric costs.

USGC hardest hit

Following Valero's guidance, some analysts reduced the company's first quarter earnings-per-share estimates, with JP Morgan cutting them to minus $1.95 from minus 73 cents.

Analyst Phil Gresh said in an April 8 note the reduction is to account for a "one-time headwind from higher energy costs" associated with the winter storm.

"While the energy cost update is not ideal and worse than peers, we believe that this is a function of [Valero] having significantly greater exposure to the Gulf Coast," which he puts at 40% of the total company.

JP Morgan estimates Valero's first quarter USGC refinery throughput at 1.45 million b/d, below the company's previous guidance of 1.49 million-1.54 million b/d, as a result of the weather

USGC per-barrel operating costs were estimated much higher at $7.78/b, up from the first quarter's $3.67/b, a direct result of higher electricity and natural gas.

Lesser impact to Midwest, Phillips 66

Valero's first quarter Midwest refinery throughput was estimated at 393,000 b/d by JP Morgan, below Valero's previous guidance of 410,000-430,000 b/d, with operating expenses estimated by JP Morgan at $5.66/b, compared with the first quarter's actual $4.19/b expense.

The Southwest Power Pool, which serves Kansas and Oklahoma north through Minnesota, also experienced grid instability and a spike in power prices, but the impact was not as severe. Valero reported some operating issues at its Ardmore, Oklahoma, refinery as a result of grid issues and the severe cold.

Phillips 66, which has less USGC exposure and more Midwest refinery concentration, including its Ponca City, Oklahoma, plant, on April 6 came out with their announcement that they, too, would be booking a loss for the first quarter on the polar vortex.

"The severe winter storms had significant impacts on the company's operations in the Central and Gulf Coast regions," Phillip 66 said in a statement.

"These winter storms resulted in lower utilization of assets, as well as higher utility, maintenance and repair costs primarily in the midstream, chemicals and refining segments," the company said.

Phillips 66 said the higher utility costs were driven by "significant" increases in prices for natural gas and electricity due to increased demand and supply outages caused by the storm.

However, Phillips 66 said "these negative impacts were partially offset by the sale of electricity to help meet demand in the Texas market."

JP Morgan forecast first quarter loss estimates for Phillips 66, estimating the USGC losing $508 million and its Midcontinent operations losing $128 million. They put refinery utilization for USGC and Midcontinent plants at 68% and 80%, respectively, with refinery throughput at 523,000 b/d and 424,000 b/d.

Per-barrel operating losses for the USGC and Midcontinent were forecast at $9.36/b and $3.23/b, respectively, JP Morgan said.