How Does Refining Complexity Affect Operating Margins?



Effect of refining complexity on operating margins

In this part, we will look into the impact of refining complexity on refined product slates, revenues, and margins. Higher complexity refineries produce lighter hydrocarbons like gasoline. Lighter products are more expensive than the heavier ones. Thus, the higher the proportion of lighter products in the product slate, the higher the revenues will be for refiners. Plus, as we discussed in the earlier part of the series, higher refinery complexity also means lower crude oil costs. Thus, better prices of refined products coupled with lower crude oil costs result in improved operating margins for refiners.

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Refiners’ product slates

The above chart shows the percentage of various petroleum products produced in 2014. Exxon Mobil (XOM) produced 2.5 MMbpd (million barrels per day) of gasoline in 2014. Gasoline constituted 42% of its entire product slate. Gasoline production for Chevron (CVX) stood at 41%, whereas it was 33% for Royal Dutch Shell PLC (RDS.A) and BP (BP). Gasoline is a lighter hydrocarbon and has a huge global demand. In 2014, finished motor gasoline average yield stood at 45% for the refiners in the United States.

Gasoil, or diesel, which is a heavier hydrocarbon than gasoline, is also a widely used petroleum product. Exxon Mobil (XOM), Shell (RDS.A), and BP (BP) have product slates comprising of 33% diesel oil. The average realization for refiners in the United States from January to August 2015 stood at $2.1 per gallon for gasoline and $1.9 per gallon for diesel.

Refinery complexity varies for different units. But, in general, it can be inferred that the product slates of Exxon Mobil (XOM) and Chevron (CVX) are more valuable than those of Royal Dutch Shell (RDS.A) and BP (BP). The Vanguard Energy ETF (VDE) had exposure of 9.9% to oil refining and marketing stocks in October 2015.

In the next part, we will look into the operating margin indicators for refiners.


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