Massive rationalization under way in Canada's refining/marketing sector will yield increased utilization rates, improved efficiencies, and a boost in profits.
At the same time, independent marketers in Canada will bear the brunt of a shrinking market, which is occurring at a time when sharply higher environmental spending will further squeeze them.
Those are the main points of an analysis by Wood Gundy Inc., Toronto.
RESTRUCTURING
Canada's refining/marketing sector has begun a major restructuring that after about 18 months will result in a significantly smaller industry, Wood Gundy said.
All major integrated companies in the country have disclosed restructuring plans that will result in closure of perhaps three or more refineries and more than 2,700 service stations.
Underlying the restructuring is industry's recognition that an 11% decline in product demand during 1990-91, stemming from restructuring of the Canadian economy and progress in energy conservation, is permanent.
In response to the Free Trade Agreement with the U.S., small and inefficient manufacturing capacity is being closed in Canada, resulting in a permanent loss in industrial and commercial demand for fuel, Wood Gundy noted.
COMPETITION
Majors view independent marketers as their most effective competitors and thus will seek to trim independents' 2-5 cents/1. cost advantage, Wood Gundy said.
The analyst credits majors with giving independents this advantage. Traditionally, majors have extended credit terms of 30 days and have been tax in enforcing them, it said.
"By comparison, U.S. refiners extend maximum terms of 10 days to the independents and often demand cash on sale.
"The critical point is that an efficient independent can turn over inventory in about 7 days or at least four time's before paying for it.
"Hence, to keep refineries full, refiners have been financing the companies that have been the most effective in taking away their market share."
As of Mar. 23, Imperial Oil Ltd. installed a new credit policy with 30 day terms but strictly enforced deadlines.
"While it is our opinion that the other majors will want to follow Imperial's lead, the reality is that tighter credit terms cannot stick across the industry until excess refining capacity is removed," Wood Gundy said.
"As long as excess capacity exists, independents will simply continue to play one refiner off against another and receive attractive terms."
REFINERY CLOSURES
Current throughput in Canada's refineries is about 1.5 million b/d, resulting in a relatively low capacity utilization rate of 82% Wood Gundy noted.
"For the industry to be properly rationalized, we estimate that utilization rates should be...92-95%, indicating that 10-13% of existing capacity must be eliminated."
That works out to 186,000-242,000 b/d of capacity that must be removed from Canada's refining to assure a high utilization rate.
Wood Gundy cites these developments in Canada's refining sector:
- Petro-Canada's plans to close its 39,000 b/d Port Moody refinery near Vancouver and 41,000 b/d Mississauga refinery near Toronto.
- Private independent marketer Payless' proposed acquisition of Canadian Turbo, with closure of the latter's 29,300 b/d refinery near Calgary a likely result this spring.
- Imperial's plans to make refinery closure decisions in the third quarter. The analyst thinks Imperial will close its 44,006 bid loco refinery, likely its 84,000 b/d Dartmouth refinery, and one of two crude trains at its Sarnia refinery.
In all, the combined closures could remove almost 250,000 b/d of capacity, enough to boost utilization rates to more than 95%.
RETAIL OUTLET CLOSURES
Wood Gundy noted Canada has twice as many service stations per capita as does the U.S.
There are about 19,000 retail outlets in Canada, but at least 3,000 will be closed within the next 18 months. Imperial alone will slash its number of retail outlets to 3,000 from 4,000, the number it had before its acquisition of Texaco Canada.
Retail closures will bring to the forefront the issue of environmental remediation in expectation of stringent new federal and provincial legislation, Wood Gundy said.
"The majors are far ahead in terms of underground storage tank monitoring and replacement," it said. "Independents who have not made this investment will find their environmental liabilities eclipsing their real estate values, providing them with a negative end game value."
The upshot of all of this rationalization and market upheaval, Wood Gundy contends, is continued strong profits for efficient, well capitalized regional refiners, short term heavy costs but long term improvements in profits for majors, and elimination of less efficient, poorly capitalized independent marketers.
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