Lifting of refining curse allows Big Oil to shine
The doubling of crude prices since last year isn’t the only thing giving a healthy glow to Big Oil’s earnings. The refining sector, which splattered the accounts of ExxonMobil and ConocoPhillips in red ink last year, is finally looking less bloody. Exploration and production profits are finally able to take center stage.
At the end of 2009 refining was every oilman’s nightmare. Crack spreads — the margin refiners are paid to turn crude into useable fuel — had slimmed to anorexic proportions. From $14 in 2007, the spread between WTI and gasoline had shrunk to $3.21 by November.
The pain was more intense for companies that had invested heavily in refiners that could transform even stubborn lower quality crude — which can typically be snapped up at a large discount. As producers of heavier crude in OPEC nations and Canada scaled back production, their advantage dwindled — all but disappearing.
With global demand reviving, refiners worldwide are slowly being freed from this headlock. The greatest sigh of relief is coming from ConocoPhillips, the most exposed of the U.S. oil majors. Refining losses of $215 million slashed more than 10 percent off profits in the final quarter of 2009. Coming close to breakeven on refining in the fourth quarter seems like a merciful release. With this burden removed and its $10 billion asset sale program off to a roaring start, the company is looking positively hardy.
Exxon, where refining stripped $189 million from profits in the fourth quarter, actually turned a modest profit of $37 million. The company’s refining business — with its meaty exposure to the more robust Chinese market — looks better placed still. It was to non-U.S. cracking that Exxon owed its return to refining profitability.
Refining will be no walk in the park for some time. Much of the new demand from gas-guzzling Americans is likely to be met from ethanol, which will enjoy rising sales courtesy of government edicts. But the stabilization of the refining business will at least allow oil majors to capture more of the benefits from high crude prices. For those like Exxon with heavy Asian exposure, refining may even start to be a business that investors take pride in.