Assessing MPC’s Refining Earnings Outlook for 3Q17
MPC’s refining earnings
Marathon Petroleum’s (MPC) Refining segment reported a fall of 45% YoY (year-over-year) in its operating income to $562 million in 2Q17. This was due to a decline in its refining margin.
MPC’s gross refining and marketing margin fell $1.4 per barrel over 2Q16 to $11.3 per barrel in 2Q17, primarily due to higher oil and feedstock costs, led by a tighter sweet-sour spread but somewhat offset by the wider blended LLS (Louisiana light sweet) 6-3-2-1 crack.
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By comparison, Phillips 66’s (PSX) worldwide refining margin rose $1.3 per barrel, or 18% YoY, to $8.4 per barrel in 2Q17. Valero Energy (VLO) saw an expansion in its gross refining margin by $0.07 per barrel YoY to $8.66 per barrel in 2Q17. But Andeavor’s (ANDV) refining margin fell $6.3 per barrel YoY to $9.5 per barrel in 2Q17.
MPC’s refining earnings outlook for 3Q17
MPC’s refining earnings are influenced by the sweet-sour differential, the LLS-WTI spread, and the blended LLS 6-3-2-1 crack. According to MPC, a dollar-per-barrel decline in the blended LLS 6-3-2-1 crack dents its annual net income by $450 million, while a dollar-per-barrel variation in the sweet-sour and LLS-WTI spreads changes its income by $220 million and $90 million, respectively.
In 3Q17, the blended LLS crack grew $4.6 per barrel YoY to $12.7 per barrel, and the LLS-WTI spread has grown by $1.8 per barrel in 3Q17 over 3Q16. However, the sweet-sour differential has fallen $0.9 per barrel over 3Q16 to $5.4 per barrel in 3Q17.
Presumably, the YoY fall in the sweet-sour differential is likely to be offset by the increase in the LLS-WTI spread and blended LLS crack, which indicates a likely improvement in MPC’s refining earnings.
However, MPC’s RIN (renewable identification number) expenses have risen from $3.8 per barrel in 3Q16 to $4.0 per barrel in 3Q17, which suggests that the recovery in refining earnings due to the better crack environment could be partly negated by the increase in RIN costs in 3Q17.
Meanwhile, quarter-over-quarter, MPC’s gross margin has put up a similar performance, implying likely growth in MPC’s refining earnings.