Refiners were operating their plants at historically low rates for much of the fourth quarter. Cold weather and a slew of expected and unexpected outages of key refinery units failed to support product prices and profitability on an inventory glut and poor economic conditions.
Gasoline demand is tied to consumer [image-nocss] spending, which has remained depressed as the U.S. unemployment rate crept past 10%. Meanwhile, diesel demand won't rise until industrial activity comes back.
Despite plant shutdowns, an excess of 1 million barrels a day or more of domestic refining capacity continues to weigh on the market, Argus Research analyst Phil Weiss told Dow Jones. "We still need some closure," especially with new, more efficient refining capacity coming on-line around the world.
"I still see more trouble at least for the first half of the year," Weiss said. "I worry it might be into 2011 before we see signs of a turnaround."
How quickly a turnaround happens will depend on whether U.S. refiners shut down more plants. For now the industry is playing a game of chicken, hoping another company will buckle under the pressure first, the report said.
COMPANIES TO WATCH:
Valero Energy Corp.earnings report date: Jan. 27
Wall Street Expectations: Analysts surveyed by Thomson Reuters forecast a fourth-quarter loss of 47 cents a share on revenue of $18.3 billion. That compares to a per-share loss of $6.36 on revenue of $18.6 billion a year earlier.
Key Issues: The largest independent U.S. refiner was hit all year because heavy crude oil, from which the company derives much of its products, is no longer trading at a sharp discount to more expensive light, sweet blends. As a result, the company was forced to shut down the once profitable Delaware City, Del., refinery and idle its Aruba refinery to stop bleeding tens of millions of dollars in cash monthly. The company is expected to take a write-down related to the Delaware City refinery, which was permanently shut in the fourth quarter.
Barclays Capital analyst Paul Cheng wrote Monday that he expects Valero's crude-processing throughput during the quarter to come in 20% below year-earlier levels, with refining margins at $4.30 a barrel vs. $9.40 a barrel a year earlier. He also expects retail fuel sales to slump. Ethanol will likely continue to be a small bright spot for Valero. Cheng expects revenues from the biofuel to rise 41% to $69 million from the previous quarter. Valero purchased three additional Midwest ethanol plants in December, bringing the total to 10, with a combined capacity of 780 million gallons a year.
Marathon Oil Corp.earnings report date: Feb. 2
Wall Street Expectations: Analysts forecast a fourth-quarter profit of 52 cents a share on revenue of $13.7 billion, vs. earnings of $1.44 a share, excluding a write-down and gains, on revenue of $14.8 billion a year earlier.
Key Issues: An integrated oil company, Marathon is relatively sheltered from the downstream business compared to independent refiners, but not as much as the larger integrated rivals. The company has said output available for sale of liquid hydrocarbons and natural gas is expected to average 400,000 barrels of oil equivalent a day, down from 402,000 barrels a year earlier. The refining margin, however, is expected to fall to 1 cent a gallon on a rise in crude prices, down from a margin of 12.5 cents in the fourth quarter of 2008.
Sunoco Inc.earnings report date: Feb. 4
Wall Street Expectations: The company is expected to report a fourth-quarter loss of 26 cents a share, on revenue of $8.3 billion. A year earlier, Sunoco posted earnings of $2.68 a share, excluding items, on revenue of $9.1 billion.
Key Issues: The second-largest independent refiner in the United States has been struggling because its operations are concentrated in the Northeast, which is "probably the most difficult environment to operate in because of competition" in the region and from imports, said Argus' Weiss. The fact that it refines light, sweet crude oil has been a slight benefit, given that the tougher-to-process heavy crude is trading at a narrow discount. Sunoco has announced that it would idle its 145,000-barrel-a-day Eagle Point refinery in Westville, N.J., due to poor economics.
Tesoro Corp.earnings report date: Feb. 2
Wall Street Expectations: Analysts expect a loss of 90 cents a share, on revenue of $4.7 billion, compared to earnings of 99 cents a share, excluding items, on revenue of $4.3 billion for fourth-quarter 2008.
Key Issues: The Western U.S. markets, including New Mexico and Utah, that Tesoro serves have often performed better than other regions, thanks to relatively limited competition. That advantage "is likely to erode" due to additional pipeline capacity that will increase competition in markets that have largely been served by West Coast refiners, said Mark Gilman of investment firm the Benchmark Co. Tesoro also faces greater regulatory hurdles, given that California's ethanol-blending requirement rose for 2010 from 5.7% to 10% of a gallon of gasoline.
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