Refiners are joining the pipeline boom
BY BRADLEY OLSON Bloomberg News
Tuesday, January 01, 2013
1/01/13 at 6:58 AM
Refiners from Tesoro Corp. to Phillips 66 that gained as much as 86 percent this year are investing in pipelines for new revenue as margins for turning oil into gasoline narrow from record levels.
Refiners are set to beat all except three of 154 industry groups on the Standard & Poor's index for 2012, as a U.S. production glut let them buy oil at a record average of $17.46 a barrel below the global benchmark. That spread will diminish in 2013 as more than 20 new pipelines enter service and route oil to new buyers along the Gulf Coast, Deutsche Bank AG forecast.
Phillips 66 and Marathon Petroleum Corp., with a combined market value of $53 billion, have responded by expanding in the very business that's eroding their margins - pipelines.
Phillips 66, which has surged 52 percent since it was spun off from ConocoPhillips in May, is predicting a more modest decline in refining profitability in 2013 than Deutsche Bank, according to a presentation by Chairman and CEO Greg Garland at the Houston-based company's first analyst day Dec. 13.
The company plans to create an MLP in 2013 with pipeline assets, which would make Phillips 66 the fourth refiner since 2011 to do so. The company could also boost the potential value of the partnership over time by using additional assets it owns, growth projects or acquisitions, Garland told reporters.
Within as few as five years, Phillips 66 plans to earn as much from pipelines and making chemicals as refining crude, he said.
Refining "is a very volatile business" and buying new plants isn't necessary given growth opportunities in the other business units, Garland said. "Shifting capital into the higher returning parts of the business makes a lot of sense."
Valero Energy Corp., a San Antonio refiner that may create a crude transportation unit, was named the top energy stock pick of 2013 by Bank of America Corp. analysts, even after its 61 percent gain in 2012.
"The key to success for these independent refiners is diversity, flexibility," said Harold York, principal oils analyst in Houston for Wood Mackenzie Ltd., which doesn't rate stocks.
"When one segment gets hot and the other gets cool, the ability to shift emphasis from the waning segment to the hot segment, that's going to be a critical path for them."
While transportation projects including oil-by-rail and pipelines are booming, providing a natural diversification for refiners, some of the world's most successful investors are betting that the companies have at least another year of gains.
Warren Buffett's Berkshire Hathaway Inc., billionaire investor Carl Icahn and BlackRock Inc. have taken stakes of 4 percent or more in refiners this year, attracted in part by diversification. Buying into the so-called midstream business is one of several corporate strategies refiners used along with dividend increases and share buybacks to boost returns.
All were largely made possible by the boom in U.S. oil and natural gas output stemming from the use of new production techniques.
U.S. oil output increased to an average 6.7 million barrels a day in November, the most since 1993, as the combination of horizontal drilling and hydraulic fracturing, or fracking, allowed companies to access crude previously trapped in tight rock formations from Texas to North Dakota, according to the Energy Information Administration.
The rapid production ramp-up outstripped existing pipeline and refining capacity, creating a glut in several regions of the U.S. that played into the hands of crude processors selling gasoline and diesel at prices linked to the global cost of oil.
The record $17.46-a-barrel spread to the benchmark should diminish by 66 percent to as low as $6 a barrel in 2013 as more than 20 pipelines go into service, "taking the U.S. crude transportation market from heavily distorted to very efficient in less than 24 months," Paul Sankey, an analyst with Deutsche Bank in New York, said in a Dec. 19 note to investors.
Plans to turn pipeline assets into tax-exempt investment vehicles and small-scale projects aimed at securing access to cheaper crude have prompted analysts at Bank of America and Barclays Plc to name refiners among their top energy stock picks for 2013.
Marathon, based in Findlay, Ohio, rose 86 percent in 2012 and provided a 91 percent return to shareholders, the highest of refiners on the Standard & Poor's 500 index.
Of the top 10 performers on the Russell 1000 Energy Index in 2012, four were U.S. refiners, led by HollyFrontier Corp., which has doubled in value, Tesoro, Valero and Marathon.
Original Print Headline: Refiners join pipeline boom
The Phillips 66 refinery in Rodeo, Calif., is shown. The company also owns a major refining operation in Ponca City. Courtesy