De Zwarte Ridder: Ter informatie: US OIL REFINERS, Market Watch,
M.v.g. Ronald
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U.S. oil refiners are once again making good money, but investors aren’t quite piling into the shares. They should be, a top energy analyst tells me. The profit boom could last through the end of the decade, helped by a price mishap that won’t be easy to fix: the giant premium Europe must pay for natural gas.
Two key things to know about natural gas are that it plays a bigger role in the production of gasoline and other fuels than many investors realize, and it’s a colossal pain to transport.
Any moonshiner will tell you that stills require plenty of heat to turn fermented mash—sloppy beer, essentially—into high-alcohol vapor that can then be cooled back into liquid. At refineries, the sloppy beer is crude oil, and the stills are massive towers. The moonshine ranges from fuel gases to thick bitumen, with plenty of best-sellers in the middle: gasoline, jet fuel, and diesel, to name a few. The heat can come partly from burning the fuel gases that are produced, but it’s supplemented by outside purchases of natural gas.
Natural gas is also useful for sludge-scrubbing. For example, thick fuels can be used to power ships, but a 2020 maritime rule slashed the amount of sulfur that fuel may contain. Treating the fuel with hydrogen can banish sulfur, and industrial gas suppliers like Linde (ticker: LIN) and Air Products and Chemicals (APD) will happily sell the hydrogen. But high-volume users can also make their own by chemically “cracking” the methane in natural gas into hydrogen and carbon dioxide.
Refineries have increased their natural-gas consumption as they have done more cooking to increase production of light fuels, and more scrubbing to make the best of heavy ones.
Meanwhile, over the past year, the price of U.S. natural gas has doubled to a recent $5.50 per metric million British thermal units, or MMBtu. But a key Dutch benchmark has multiplied more than five times, to about $36.
I’m converting. Dutch natural gas is generally quoted in euros per kilowatt-hour. There’s an orgy of competing measurements in the world gas trade, because until recently it hasn’t been much of a world trade. Transporting gas requires building pipelines or terminals that can liquefy it for shipping, and either can take years.
Perhaps you’ve seen a vertical pipe with an open flame near an oil well. That’s called flaring. Wells often produce both oil and gas, and drillers that don’t have means to bring the latter to market will sometimes simply burn it, rather than release it as harmful methane.
Side note: A newly published study from Stanford University looks at wells and pipelines in New Mexico’s Permian Basin and finds that methane leakage is equal to 9.4% of production. If that’s even close to accurate, the industry is about to spend time in the naughty corner, because the Environmental Protection Agency had estimated 1.4% leakage. The EPA says that methane is 25 times as potent as carbon dioxide as a greenhouse gas.
The Stanford number is thus easily high enough to make natural gas more harmful than coal, even though it burns cleaner. Expect a war on leaks.
Back to business. Russia had provided more than a quarter of Europe’s oil before the spigot was shut. That loss is manageable, because oil is easy to ship, so although prices are up everywhere, Texas crude at $112 a barrel isn’t far from Brent at $118. Natural gas is a different story. Russia supplied 40% of European demand, and there’s no easy replacement.
At the current $30 differential per MMBtu between the U.S. and Europe, American refiners have a $9-a-barrel cost advantage, according to Doug Leggate, who runs U.S. oil and gas coverage at Bank of America Global Research. Under normal conditions, their long-run cash margin is only $5 a barrel.
Prices won’t stay this skewed forever, of course. The U.S. and Europe are likely to put a rush on new shipping terminals. But those could nonetheless take several years to build. Leggate assumes the natural-gas price differential will fall to about $5 per MMBtu by the end of the decade. But even that would add $1.50 a barrel to U.S. cash profits, leaving them 30% larger than usual.
Some European refiners could fold loss-making plants, leading the Continent to reduce shipments of refined products to the U.S., which would make the market here tighter. Already, demand is running ahead of supply, because during the pandemic, when roads emptied, refiners had to offer gasoline at a loss, and some cut capacity to save money.
The bottom line for refiners is just that—bigger numbers on the bottom line. Valero Energy (VLO) is expected by Wall Street to earn $7.67 a share this year, versus a loss two years ago, and a $7.37 profit in its most recent year of plenty, 2018. The shares, at a recent $97, are up from pandemic lows, but they’re below their peak of over $120 reached in 2018. Leggate’s earnings estimates are much higher than consensus numbers, and he says that U.S. refiners are entering a new “golden age” that could propel share prices well higher. His price target for Valero, his top pick in the group, is $135, suggesting nearly 40% upside. He expects similar good things from shares of Marathon Petroleum (MPC), Phillips 66 (PSX), and HF Sinclair (DINO).