Marathon Petroleum’s Refining Margin Outlook for 4Q16



MPC’s refining earnings fell in 3Q16

Before proceeding to the outlook for 4Q16, let’s recap operating earnings trends up to 3Q16.

Marathon Petroleum’s (MPC) operating income fell 72% over 3Q15 to $435 million in 3Q16. The refining segment’s operating income plunged to $306 million in 3Q16 from $1,434 million in 3Q15. This change was due to a fall in gross refining and marketing margins by $6.5 per barrel over 3Q15 to $10.8 per barrel in 3Q16. Also, quarter-over-quarter, MPC’s refining segment earnings fell in 3Q16.

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MPC’s peers Phillips 66’s (PSX) worldwide refining margin fell $6.7 per barrel over 3Q15 to $7.2 per barrel in 3Q16. Plus, Tesoro (TSO) noted a fall in its margin of $10.4 per barrel YoY to $9.1 per barrel in 3Q16. For a cross-sectional analysis of refining stocks, please see MPC, TSO, VLO, PSX: How Are These Refiners Stacking Up in 4Q16? For exposure to refining and marketing sector stocks, you can consider the iShares North American Natural Resources ETF (IGE). The ETF has ~6% exposure to the sector.

MPC’s refining margin outlook for 4Q16

In 4Q16, per MPC, the blended LLS crack has risen $0.74 per barrel over 4Q15 to $7.4 per barrel. The LLS-WTI spread remained flat year-over-year or YoY at $1.3 per barrel. But the sweet-sour differential fell $0.17 per barrel YoY to $6.3 per barrel.

Per MPC, a dollar-per-barrel change in the blended LLS 6-3-2-1 crack spread affects its annual net income by $450 million. Similarly, a dollar-per-barrel change in the sweet-sour and LLS-WTI affects its income by $220 million and $90 million, respectively. So, in 4Q16, the YoY fall in the sweet-sour differential is likely to be offset by the YoY rise in the blended LLS crack.

However, quarter-over-quarter or QoQ, the indicators have declined. In 4Q16, the blended LLS crack has fallen by $0.69 per barrel QoQ. Also, the LLS-WTI spread and the sweet-sour differential have fallen by $0.28 per barrel and $0.04 per barrel QoQ, respectively.


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