Refiners’ earnings bottoming out
The estimated EPS (earnings per share) decline rates of downstream companies such as Phillips 66 (PSX), Valero Energy (VLO), Tesoro (TSO), and Marathon Petroleum (MPC) for 4Q15 over 3Q15 are around 52%, 55%, 67%, and 51%, respectively, as per Wall Street analysts’ consensus estimates.
The EPS decline rate of the equal-weighted portfolio comprising these stocks is about 56% in 4Q15 over 3Q15. A year ago, the EPS of these refiners fell by approximately 14% in 4Q14 over 3Q14. The estimated fall in EPS coincides with the bottoming of the crack spread from September to December of the last five years compared to its value from June to August of the same years.
Normally, the crack spread picks up for the first two quarters of a year relative to the last quarter of the previous year, and then it flattens and ultimately bottoms out. This seasonality effect is irrespective of the direction of a change in crude oil price.
The crack spread measures the difference between the cost of crude oil and the cost of the products extracted from it. The 3:2:1 crack spread measures the profit earned by converting three barrels of crude oil into two barrels of gasoline and one barrel of diesel.
The crack spread is an indicator of the profit margins of refineries. Above is a chart that shows the EPS growth rates of theses downstream companies over time.
Volatility of downstream companies
The volatility of these refiners in 3Q15 was around 13.4%, up by 9% with an estimated fall in EPS of about 17.5% over 2Q15. The quarter-over-quarter estimated EPS decline rate for 4Q15 is more than threefold compared to 3Q15.
The volatility of the S&P 500 (SPY) in 3Q15 was about 8%. Refiners were more volatile than the market in 3Q15.