Free cash flow for North American refiners is expected to stay reasonable throughout the remainder of 2012 despite weakening global demand and other market difficulties, Fitch Ratings said, citing the availability of crude oil from US shale plays.
The US Energy Information Administration shows US demand for gasoline is down 5.4% year-to-date, and current US gasoline demand levels were last seen in 2000.
Economic contraction linked to the European sovereign debt crisis further limits the prospects for near-term gasoline demand growth in the Atlantic market. Other limitations involve downward revisions in global oil demand growth estimates, led by dropping auto sales in China.
Fitch also notes a slowdown in North American capacity rationalization because nontraditional buyers have bought US refineries that had been considered candidates for retirement. These deals include Delta Air Lines’ acquisition of the refinery in Trainer, Pa., from Phillips 66 and PBF Energy’s acquisition of refineries in Delaware City, Del., and Paulsboro, NJ, from Valero Energy Corp.
Other refineries that supply the East Coast might avoid shutdowns especially if they are able to tap into cheaper Canadian oil as well as oil from US shale plays instead of historically expensive Brent crude oil.
Free cash flow still looks reasonable going forward due to the combination of adequate cash flow and limited capital expenditures, Fitch analysts said.
“In general, near-term regulatory and environmental [capital expenditures] appears limited across the industry, leaving room for discretionary use of funds,” the analysts said. “While the economics of processing cheap North American shale-based crudes is very strong, the direct investments refiners will make to tap these crudes appear to be limited. In a number of cases, logistical investments are expected to be funded by midstream and pipelines companies, limiting the direct credit impact on refiners.”
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