Which Way Could Marathon Petroleum’s Refining Earnings Sway in 2Q17?



Marathon Petroleum’s refining earnings indicator

In the previous part, we examined Tesoro’s (TSO) refining index values and Valero Energy’s (VLO) refining margin indicators. In this article, let’s look at Marathon Petroleum’s (MPC) refining earnings indicators.

MPC’s refining earnings are influenced by the blended LLS 6-3-2-1 crack, the sweet-sour differential, and the LLS-WTI spread. According to MPC, a dollar per barrel fall in the blended LLS 6-3-2-1 crack hits its annual net income by $450 million. 

Likewise, a dollar per barrel shift in the sweet-sour and LLS-WTI spreads affect its income by $220 million and $90 million, respectively.

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MPC’s refining margin indicators increase quarter-over-quarter in 2Q17

According to MPC, the blended LLS crack grew by $1.50 per barrel quarter-over-quarter in 2Q17 to $9.20 per barrel. Plus, the LLS-WTI spread expanded by $0.40 per barrel in 2Q17 over 1Q17. However, the sweet-sour differential has decreased by $1.40 per barrel over 1Q17 to $5.50 per barrel in 2Q17. 

The fall in sweet-sour differential quarter-over-quarter could be counterbalanced by growth in the blended LLS crack and the LLS-WTI spread. The situation points toward a possible increase in MPC’s refining earnings in 2Q17 over 1Q17.

However, MPC’s RINs (renewable identification numbers) burden has risen from $3.00 per barrel in 1Q17 to $3.50 per barrel in 2Q17. This suggests that the recovery in refining earnings due to the improved crack environment would be somewhat negated by the increase in RINs costs in 2Q17 over 1Q17.

MPC’s refining indicators grow YoY in 2Q17

Similarly, year-over-year, the blended LLS crack and LLS-WTI spread rose by $1.50 per barrel and $0.30 per barrel over 2Q16. However, the sweet-sour differential has declined by $1.40 per barrel YoY in 2Q17. As a result, a marginal fall in sweet-sour differential year-over-year is expected to be offset by an increase in the blended LLS crack and growth in the LLS-WTI spread. 

This trend implies a possible rise in MPC’s refining earnings in 2Q17 over 2Q16. Its RINs cost rose from $3.30 per barrel in 2Q16 to $3.50 per barrel in 2Q17.

As a result, the refining environment seems to be reviving for MPC, as its refining earnings are expected to grow in 2Q17 YoY as well as quarter-over-quarter. However, the higher RINs cost could suppress the earnings growth in the quarter.

In the next part, we’ll look at the changes in institutional holdings in refining stocks.


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