Published on Tuesday, February 18 2020
Authors : Sam Davis and John Auers

Today, we continue our blog series reviewing highlights from the recent Q4 2019 earnings calls. In last week’s blog, we shared key takeaways from the earnings calls for the Integrated Majors, focusing primarily on their downstream businesses, and also highlighting efforts being taken to reduce carbon footprint as the industry transitions to a low carbon future. This week’s blog provides highlights from U.S. Independent Refiners who also generally reported lower Q4 results, although note that they performed better than their oil major peers. We will take a look into what led to this superior performance and also examine steps the Independents are taking toward improving their competitive positioning going forward.  Like the Integrateds, some of these moves are geared toward adjusting to the anticipated lower carbon future, including expansion of capacities to produce alternative fuels such as renewable diesel.  Another major theme in the calls was IMO, with many of the Independents highlighting the actions they have taken to prepare for the expected beneficial market impacts from the Low Sulfur Bunker fuel regulations which took effect at the beginning of the year.  Unfortunately, as discussed in the calls, it appears that refiners feel a bit like Tom Petty as he sang, “The Waiting is the Hardest Part” back in 1981. A variety of both supply (heavy crude production declines) and demand (decreased diesel consumption) factors have certainly delayed the margin boosting effects of IMO; however, we note that the refiners still expect (as do we) that they should be reaping the fruits of IMO in the coming months as they, ”Take it on faith, take it to the Heart”.

Valero

Valero kicked things off by providing updates to the company’s major strategic projects. The Houston alkylation unit and the Central Texas pipeline and terminal projects were all completed last year with the Pasadena terminal, St. Charles alkylation unit, and Pembroke cogeneration unit projects on track to be completed this year. The company expects the Diamond Green Diesel expansion to 44 MBPD and the Port Arthur Coker projects to be completed in late 2021 and 2022, respectively.

During the call, Valero discussed opportunities it took to run higher volumes of discounted high sulfur resids, along with processing bitumen directly into its refining system. The company mentioned it is in discussions with Canadian producers and expects to run additional volumes of the undiluted barrel in the future as its refineries are well suited to process this, particularly at the St. Charles refinery.

In the renewable fuels area, Valero seeks to continue growth opportunities. The Diamond Green Diesel joint venture is reportedly in the advanced engineering review phase for a new renewable diesel plant at the Port Arthur refinery, which it expects to commence operations in 2024 pending project final investment decision. If approved, Diamond Green Diesel’s renewable fuels production capacity will increase to over 1.1 billion gallons annually, making Valero the largest producer of renewable diesel in North America.

Phillips 66

Phillips 66 announced it had begun initial start-up of its Gray Oak pipeline, in which the company has a 42.25% interest, with full service expected in Q2 2020. The 900 MBPD pipeline will transport crude from the Permian and the Eagle Ford to destinations in Corpus Christi and Freeport, including P66’s Sweeny Refinery. The pipeline will also connect to export facilities in Corpus Christi, including the South Texas Gateway terminal. The terminal, in which P66 midstream company PSXP owns a 25% interest, will have a throughput of 800 MBPD and is expected to begin operations in Q3 of this year.

The company also provided an update on two other major pipeline projects – Liberty and Red Oak – each in which it has a 50% interest. The Liberty pipeline will transport crude from the Rockies and Bakken to Cushing while Red Oak is expected to connect Cushing and the Permian Basin to destinations along the Gulf Coast. According to P66, both pipelines are expected to be in initial service in the first half of 2021.

P66 also announced investment plans at their Beaumont Terminal to capitalize on the continued growth in Gulf Coast crude exports. Construction is under way to increase crude storage by 2.2 million barrels. Upon completion during Q1 of this year, the terminal is expected to have a total of 16.8 million barrels of crude and product storage capability. Additionally, it is also constructing a new 200 MBPD dry dock at the Beaumont terminal, expected to be completed in Q3 2020, which will bring total dock capacity to 800 MBPD.

Refining projects for P66 remain on track, namely the FCC upgrade projects under way at both Sweeny and Ponca City refineries with planned completion dates of Q2 2020 and Q4 2020, respectively. During the earnings call, the company announced it had cancelled the renewable diesel project at the Ferndale refinery due to permitting uncertainties and related project schedule delays and cost increases. Executives did however make clear their strategy on renewable fuels had not changed as it continues to pursue opportunities leveraging their existing infrastructure.

Marathon Petroleum

Marathon announced that the crude revamp project and the first phase of the coker expansion project at the Garyville refinery were commissioned during Q4 2019. According to the company, the coker MAX project, which expanded the capacity of the two existing cokers by 14% and replaced the four existing 30-foot diameter drums with 32-foot diameter drums, has exceeded expectations by achieving a 17% capacity increase from their early operating results. Phase 2 of the coker MAX project remains on schedule for completion in Q1 2020, with expectations of achieving a similar rate increase.

The company also announced progress it is making on realizing synergies from its acquisition of Andeavor in October 2018. Marathon reported achieving over $420 million in synergies during Q4, bringing full year 2019 synergies to $1.1 billion and exceeding the $600 million of gross run rate synergies targeted for last year. Of the total synergies realized in Q4, more than 80% were in Refining & Marketing with the rest coming from corporate activities and retail. Within refining, Marathon was able to realize $62 million from catalyst formulation improvements at multiple refineries, $55 million in crude supply optimization in the Mid-Continental region and $15 million in marine optimization.

Marathon also provided an update on its strategic actions following the announcement last October to separate Speedway, its retail marketing arm, into an independent publicly traded company and the formation of a special committee to review strategic options for its Midstream business. According to executives, the Speedway work is progressing as planned with separation targeted for completion in early Q4 2020. Meanwhile, the company expects to provide an update during this quarter as to its progress with the special committee tasked with the midstream business review. These activities are all in addition to the CEO search currently underway as Marathon seeks a replacement for Gary Heminger who announced his retirement last October after 45 years of service. The Board intends to complete this CEO search process by the end of Q1 2020.

PBF Energy

PBF began the call by confirming that the acquisition of the Martinez refinery from Shell had officially closed on February 1, 2020, bringing its total refinery assets to six and increasing crude capacity to over 1 MMBPD. The company plans to integrate the site with its existing Torrance refinery through crude and feedstock optimization. Also announced on the call was the successful restart of the previously idled coker unit at the Chalmette refinery which is part of a plant-wide optimization effort to improve the site’s profitability. PBF mentioned that the coker unit started up in November and has achieved operating rates in line with expectations. PBF also mentioned that it expects the Delaware City refinery hydrogen plant project to be completed and in service by the end of Q1 2020.

Like other refiners who took advantage of the weak high sulfur fuel oil prices in Q4, PBF processed increased amounts of high sulfur resid in its high complexity refining system. The company also highlighted the delays in IMO effects from the combined effect of reduced demand in Q1 resulting from the Coronavirus outbreak and warmer than normal winter weather. PBF says it still recognizes and expects the benefits of IMO to play out with Executives anticipating resurgence in demand sometime in Q2 but acknowledged the timing was very much dependent on where things get to on the Coronavirus global health crisis. In readiness for realizing high utilization rates at its refineries, PBF has begun its largest turnaround this year at the Toledo refinery which it expects to be completed by the end of this quarter. This is in addition to completing maintenance turnaround activities last year which led to four out of their five refineries conducting turnarounds or significant maintenance. The company believes these actions would put them in a favorable position of being able to operate unimpeded for the remainder of the year to capture IMO 2020 benefits.

HollyFrontier

HollyFrontier will be releasing its Q4 and full year 2019 earnings results on Thursday, February 20. In November last year, the company announced plans to construct a 125 million gallons per year renewable diesel unit at its Artesia refinery, capable of processing soybean oil and other renewable feedstocks. We expect to hear mention of this on the earnings call as the company targets a Q1 2022 project completion.

The call will likely be led by new CEO, Michael Jennings, who took over at the helm on January 1, 2020, following the retirement last year of George Damiris, who had served as CEO since 2016. Jennings had previously led HollyFrontier as CEO from 2011 – 2016.

Our Takeaways from the earnings calls

The Q4 earnings calls provided a window into a difficult overall refining margin environment to end 2019 but it also shed light on how refiners are executing their strategies to improve financial performance as we enter the early innings of IMO 2020.

Processing of high sulfur resid featured in many of the earnings calls given the wide sweet-sour discounts we saw in Q4. Many refiners took advantage of this and ran significant volumes of high sulfur fuel oil, cutting back crude runs in favor of processing resid. With weak gasoline economics in Q4, refiners also mentioned diverting VGO streams away from cat crackers and into the bunker market where blending economics were more attractive. As high – low sulfur fuel oil price spreads have begun to narrow during Q1 2020; we expect refineries will switch back to running less high sulfur fuel oil. This type of market and price spread volatility will be a theme in 2020 as the industry adjusts to the new IMO fuel oil spec change. It will also be a test of how quickly refineries can react to price signals in order to capture opportunities. In this environment, we believe having high complexity assets will present refiners with optionality to respond quickly as market conditions dictate.

The IMO effects in 2020 so far have been muted by the ongoing concerns over the Coronavirus which has limited commerce and mobility and is expected to put a dent in Q1 2020 global oil demand. The virus has put significant pressure on Chinese oil demand with reports of crude run cuts already taking place which is already starting to have an impact on global crude and product prices and trade flows; however, the industry has shown itself to be resilient, and we would expect markets to rebalance.  We still believe the fundamental drivers of increased demand for distillate to meet new IMO specs continue to exist and while the effects appear to be muted at the moment, we expect the IMO demand boost to show itself as the Coronavirus impacts go away and could even be supplemented by a “bounce back” reaction in Asian demand.

Consistent with the moves we noted last week by the Integrated Majors, the U.S. Independent Refiners are also progressing efforts to prepare for a lower carbon future by investments in renewable fuels. As noted earlier, Valero is certainly at or near the forefront of these efforts, through the continued capacity expansions in its Diamond Green Diesel joint venture partnership.  The other Independents are making similar moves.  Even though P66 did not proceed with the renewable project at Ferndale, the company is moving ahead with renewables investment projects at its San Francisco and Humber refineries and continues to also invest in other low carbon technologies such as organic photovoltaics, solid oxide fuel cells for heavy duty trucks and light duty vehicles that have demonstrated to increase fuel mileage and also result in greenhouse gas emissions reductions. Marathon is progressing plans to convert its Dickinson refinery to a renewable diesel refinery, while PBF with the acquisition of Martinez has agreed with Shell to jointly move forward with reviewing the feasibility of building a renewable diesel facility at the refinery. HollyFrontier, with its announcement of the Artesia renewable diesel project, is also making investments in low carbon fuels.

Turner, Mason & Company, continues to monitor developments in the global refining industry. Our latest views are being incorporated in our Crude & Refined Products and World Refining Construction Outlooks.  We are publishing our first update this year by the end of the month with the next issue due out to clients in August. If you would like more information on these reports, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call at 214-754-0898.