Refiners could see record second quarter

SAN ANTONIO -- As the price of oil has plummeted, drilling companies have been hit hard. Rigs have been laid down, and drillers have been forced to lay off thousands of workers.

But conditions are much sunnier for energy companies that turn crude oil into gasoline, diesel and other products. Analyst Roger Read of Wells Fargo Securities summed it up this way in a recent note to clients: "Another good week for refiners and a tough one for producers."

The good times are expected to lead to strong results when independent refiners, including San Antonio-based Valero Energy Corp. and Tesoro Corp., report second-quarter earnings in the coming days.

Record-setting results for independent refiners in the second quarter "are on the way," Read said, as a result of "very strong" gasoline crack spreads, the difference between the cost of making the fuel and its selling price. Officials for Valero and Tesoro declined to comment on their respective company's upcoming quarterly results.

Refiners "are in a sweet spot," said Brian Milne, energy editor at Schneider Electric, an energy management company. "The low price of crude oil has certainly benefited refiners."

"And when you add that that gasoline demand has been really strong, that has helped widen that margin," Milne said. "Refiners are seeing some pretty good returns for producing gasoline."

"Gasoline has been the big winner" for independent refiners, said John Auers, senior vice president at Turner, Mason & Co., a Dallas energy consulting firm.

Spurred by low retail prices, gasoline demand has soared to prerecession levels. "We're at the highest level (in demand) since summer 2007," Auers said.

Analysts remarked on the stability of gasoline prices during the second quarter, as did AAA, which tracks gasoline prices.

It has helped demand that gas prices have remained relatively stable. In Texas, the price of gas averaged $2.53 a gallon on July 23, the lowest average for this time of year in at least five years, AAA spokesman Doug Shupe said. A gallon of regular gas costs 89 cents less, on average, than a year ago in Texas and 90 cents a gallon less than a year ago in San Antonio.

Gas prices "have stayed low, and that has been very good for demand," Auers said. "Consumers see this as being a longer-term event."

That's led to people hitting the road more and buying higher-mileage vehicles. While prices are the main stimulus for booming gasoline sales, the slowly improving economy is part of that, analysts said, along with improved consumer optimism.

Refiners are running full out to take advantage of the favorable conditions, averaging 95.5 percent of capacity. For the week ended July 17, crude oil runs rose 45,000 barrels per day to 16.87 million, a record high, according to Energy Information Administration data that goes back to 1982. Analysts had expected the refinery utilization rate to decrease slightly.

Investors have taken notice, recently sending shares of Valero and Tesoro to 52-week highs. Valero shares reached a 52-week high of $68.27 on July 14, while Tesoro shares zoomed to an annual high of $104.44 on July 16.

"Tesoro, because of its strong presence in California, should do really well," Auers said. There has been a shortage of gasoline in California because of outages at some refineries.

"That's led to very high margins, really, in the first half of the year," he said.

Valero will benefit, too, from strong West Coast margins, Auers said, although its California plants are a much smaller part of its overall business.

Tesoro is the largest refiner on the West Coast. Valero owns 16 refiners, two in California.

Refiners also continue to be aided by being able to buy favorably priced North America crude oil, including from the Eagle Ford Shale and North Dakota's Bakken Shale.

Valero and Tesoro continue to plan ways to expand their capacity to process North American light, sweet crude that it can acquire at a discount compared to many other crude types. Light crude oil, such as the benchmark West Texas Intermediate, is less expensive to process, and a larger fraction can be made into gasoline.

Valero plans light crude expansions at its McKee, Houston and Corpus Christi refineries. Also, it has an option until January to buy a 50 percent stake in the $900 million Diamond Pipeline that would transport light sweet crude from shale plays from Cushing, Oklahoma, to Memphis, Tennessee, where it owns a refinery.

Tesoro and partner Savage Cos. plan to rail 360,000 barrels of oil a day of Bakken crude from North Dakota to the Port of Vancouver USA on the Columbia River, but the project has faced regulatory delays.

In addition, the low price of natural gas continues to be a plus. Valero's plants, for example, use millions of cubic feet of natural gas per day, so cheap natural gas helps the company achieve significant savings.

"Because of the crude cost advantage, and the natural gas advantage, we're more competitive than the rest of the world," Auers said.

Despite the favorable conditions for refiners, analysts aren't quite ready to say it's a reprise of the "golden age of refining" of 2005-07, because it hasn't been sustained over a significant period of time yet.

"This is more of the CliffsNotes version," Milne of Schneider Electric said.

Gasoline demand should stay strong into late August, but after that a seasonal decline begins.

For now, though, independent refiners and their shareholders can revel in the good times.