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Why Marathon Petroleum’s Adjusted Refining Earnings Fell in 4Q16

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Marathon Petroleum’s adjusted refining earnings

Marathon Petroleum (MPC) witnessed a decline in its adjusted refining earnings in 4Q16—compared to 4Q15. During the quarter, its refining margin fell from $12.7 per barrel in 4Q15 to $11.4 per barrel in 4Q16 mainly due to turnaround costs. Also, Marathon Petroleum’s refining earnings fell due to a fall in the sweet-sour differential. It was partially offset by a rise in the blended LLS (Light Louisiana Sweet) 6-3-2-1 crack YoY (year-over-year) and the stable LLS-WTI spread YoY. Let’s take a closer look at these cracks and the differential.

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Blended LLS 6-3-2-1 crack

Marathon Petroleum’s refined product slates and operations closely resemble the Chicago LLS 6-3-2-1 crack spread and the USGC (US Gulf Coast) LLS 6-3-2-1 crack spread. So, Marathon Petroleum calculates a blended LLS 6-3-2-1 crack spread—an average of the Chicago LLS and the USGC LLS crack spread, weighted for region-wise refining capacity. In 4Q16, the blended LLS crack rose by $0.7 per barrel to $7.4 per barrel—compared to 4Q15. During the quarter, the Chicago LLS crack fell, but the USGC LLS crack rose YoY.

Sweet-sour and LLS-WTI differential

Marathon Petroleum can process a high amount of sour crude oil in its refineries, which can be purchased at a discount to sweet crude oil. A higher sweet-sour differential is better for Marathon Petroleum. Similarly, a greater LLS-WTI differential is better for Marathon Petroleum. In 4Q16, LLS-WTI remained stable at $1.3 per barrel—compared to 4Q15. It was partially offset by a fall in the sweet-sour differential by $0.2 per barrel—compared to 4Q15.

Peers’ refining margin

Marathon Petroleum’s peer Valero Energy (VLO) also saw its refining margin fall to $8.2 per barrel in 4Q16—compared to $10.9 per barrel in 4Q15. Phillips 66’s (PSX) worldwide refining margin fell by $2.9 per barrel to $6.5 per barrel in 4Q16—compared to 4Q15. It’s the lowest in the past two years. However, Tesoro (TSO) noted a marginal rise in its gross refining margin by $0.4 per barrel YoY to $9.5 per barrel in 4Q16.

The iShares Russell 1000 Value ETF (IWD) has ~13% exposure to energy sector stocks.

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