by Tajinder Dhillon.
Oil refineries finished reporting 20Q1 earnings, posting positive earnings surprise across the board. Valero Energy posted the largest positive surprise with an actual result of $0.34 compared to consensus of $-0.15 as seen in Exhibit 1.
Exhibit 1: S&P500 20EQ1 Earnings Result for Oil Refiners
While oil refiners beat Wall Street expectations, the outlook for growth remains very challenged. According to I/B/E/S data from Refinitiv, year-over-year earnings growth for the oil & gas refining & marketing sub-industry for 20Q1-20Q4 are expected to be 66.8%, -138.8%, -98.0%, and -94.6% in each quarter, respectively.
Similarly, year-over-year revenue growth for the sub-industry for 20Q1-20Q4 is forecasted to decline -11.9%, -51.9%, -33.4%, and -27.7% in each quarter, respectively.
Due to travel reductions and shelter-in-place orders, refineries are not using as much crude to produce gasoline, diesel and jet fuel. HollyFrontier noted that, “in response to the demand destruction associated with the COVID-19, we have reduced run rates at all our refineries by an average of 30%.” Marathon Petroleum also stated, “we expect total throughput volumes of just over 2 million barrels per day, approximately 2/3 of our nominal — normal operating capacity.” Phillips 66 also confirmed that capacity utilization was in the high 60% range (Source: 20Q1 earnings call). Exhibit 2 highlights how much crude oil is being run through U.S. refineries, which is approximately 12.9m barrels per day, a level not seen since the ’08 financial crisis.
Exhibit 2: U.S. Crude Oil Refinery Input
Looking again at Exhibit 2 above, we observe a slight pickup in refinery oil input at the end of April due to shelter-in-place orders being slowly lifted in certain states. That’s put drivers back on the road, resulting in increased gasoline demand. Philipps 66 states that 35% of gasoline demand is driving to and from work. HollyFrontier mentioned in its earnings call that gasoline demand has picked up by 10-15% in the areas where they operate (excluding Denver). Exhibit 3 shows that U.S. gasoline supply from refineries has picked up in April and validates the trend seen by refiners.
Exhibit 3: U.S. Gasoline Supply
However, jet fuel demand appears to be more challenged in the long-term according to HollyFrontier. “Jet fuel demand drops have been severe, and we continue to minimize the production of jet fuel. I don’t think we’re going to see jet demand rebound until probably sometime next year to 2019 levels. I just can’t imagine that it’s going to happen this year.” (Source: 20Q1 earnings call).
Phillips 66 highlights optimism concerning the start of a global recovery led by China and how this will lead to a pickup in oil demand. “I think as we think about demand, it’s really the combination of domestic demand and exports into the international market. Asia’s starting to come back, and particularly China, South Korea, Japan and Thailand. So I think you’ll see barrels continue to be exported.” (Source: 20Q1 earnings call). Exxon Mobil also reported a similar outlook regarding China in its earnings call.
Marathon Petroleum believes the bottom of the oil market has passed us, leading the way for measured optimism. “We have seen really the profile of the decline. It was really the last two weeks of March where we really — things clipped off very fast really across all geographies. We hit the bottom of the market. So the week of April 6 was really what we’re calling kind of the bottom of the market. And over the last three weeks, we’ve seen steady week-on-week growth. So we see that as an optimistic trend. But measured optimism. This is an unprecedented event. Not exactly sure what the profile of recovery looks like, but we’re seeing positive trends.” (Source: 20Q1 earnings call).
While management remains cautiously optimistic, analysts are still bearish when looking at the StarMine Analyst Revision Model (ARM). The ARM model is a stock ranking model that is designed to predict future changes in analyst sentiment by looking at changes in estimates across EPS, EBITDA, and revenue over multiple time periods. Analysts remain bearish with all four oil refiners mentioned in this note having model scores below 42 (1-100, where 100 is the most bullish). Phillips 66 has seen the most significant increase in ARM score, rising from a score of 3 in March to 42 in May. The ARM model also looks at changes in recommendations (instead of the absolute recommendation rating), which bodes well for Phillips 66. It has seen analysts revise their recommendations upward in May as seen in Exhibit 4.
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Exhibit 4: Recommendations & Price Target for Phillips 66