Analyst predicts strong third quarter for refiners

Oct. 6, 2003
US integrated refiners should enjoy a profitable third quarter, according to a recent report from UBS Securities LLC.

US integrated refiners should enjoy a profitable third quarter, according to a recent report from UBS Securities LLC.

According the report, integrated refiners have enjoyed an "extremely healthy" macro environment, characterized by:

  • Oil prices that increased sequentially and year over year. West Texas Intermediate prices averaged $31/bbl in July and August, which is $2/bbl greater than the previous quarter and almost $3/bbl greater than the same period in 2002.
  • Lower natural gas prices. Even though natural gas prices are higher than they were in 2002, they have decreased from the second quarter of 2003, to $4.87/Mcf from about $5.40/Mcf.
  • Sharply higher US refining margins in July and August. The study reported that US refining margins have increased by 10% and 70% for July and August compared to the second quarter 2003. Additionally, in the first week of September, margins were approaching the highs experienced in 2001.
  • The report attributed these strong margins to a combination of market factors including the blackout in the Northeast and Midwest, unplanned refinery maintenance, and the shutdown of a major pipeline in the Phoenix area.
  • Normal refining margins outside US. According to the report, European margins are at historically average levels. Asian margins have "averaged approximately $4/bbl, below the mid-cycle average of $4.73/bbl." Both regions have recovered from the "abysmal" levls of a year ago.
  • A decreasing light-heavy differential. Third quarter results could decrease due to a shrinking light-heavy differential. The differential averaged $5.83 in July and August, down from $7.18/bbl in the second quarter of 2003, but up from the $4.99/bbl average in the third quarter of 2002.
  • Declining chemical margins. Despite the decline in natural gas prices, key petrochemical margins have also declined from the previous quarter. UBS believes that the third quarter could "shape up to be a quarter of sequential decline for the chemical earnings of integrated oil companies."

Based on these macro factors, UBS is predicting that third quarter US integrated oil earnings will be down 3% compared to the second quarter and up 28% compared to the third quarter of 2002.

The improvement in refining margins will raise worldwide downstream earnings for the third quarter. UBS expects that worldwide downstream earnings will increase 342% year over year, and 10% sequentially. Notable earnings increases will occur in the US Gulf Coast region.

For independent refiners, there will be a slight pullback in margins for September; however, margins will still be above the second quarter 2003 levels.