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Refining Stocks: MPC, HFC, VLO, and PSX Have Fallen in Q4 2018

Maitali Ramkumar - Author

Nov. 20 2018, Published 11:36 a.m. ET

Refining stocks

So far in the fourth quarter (since October 1), Valero Energy (VLO) stock has fallen 26.3%—the highest among its peers including Marathon Petroleum (MPC), Phillips 66 (PSX), and HollyFrontier (HFC). So far, Marathon Petroleum, Phillips 66, and HollyFrontier have declined 20.6%, 15.6%, and 8.2%, respectively, in the fourth quarter. The SPDR S&P 500 ETF (SPY), which closely resembles the S&P 500 Index, has fallen 6.2% in the fourth quarter.

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Refining stocks have fallen

The refining environment is weak in the fourth quarter—represented by a narrowing crack environment. The benchmark refining crack, the US Gulf Coast WTI 3-2-1 crack has fallen steeply in the fourth quarter. The USGC WTI 3-2-1 crack shows how much refiners earn when they refine three barrels of crude oil (namely WTI) to produce two barrels of gasoline and one barrel of distillate. Usually, when the crack is higher, the refining margin and earnings are better.

The USGC WTI 3-2-1 crack has fallen 30.3% on October 1 to the current level of $13.5 per barrel. Also, if we analyze the average quarterly trend, then the crack has declined. The USSC WTI 3-2-1 crack has fallen 11.9% year-over-year to $15.8 per barrel sequentially in the fourth quarter.

During the same period, Valero Energy’s refining indicators and HollyFrontier’s refining index values declined in their main operating areas. Valero Energy’s refining crack indicators have declined 36% in the US Gulf Coast and 38% in the North Atlantic—two of the company’s major refining areas. HollyFrontier’s refining index values have fallen in two of its primary operating regions—the Midcontinent and Southwest—in the current quarter.

What to expect

Refining companies are facing a weaker refining crack environment in the fourth quarter. Lower refining cracks could result in lower refining margins and earnings for these companies in their next earnings. Concerns about weaker fourth-quarter earnings have likely impacted refining stocks.


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