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Will Marathon Petroleum’s Refining Earnings Fall in Q1?

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Refining earnings indicator

In this part, we’ll discuss the trend in Marathon Petroleum’s (MPC) refining earnings indicators.

Marathon Petroleum’s refining earnings are influenced by the blended crack, the sweet differential, and the sour differential. According to Marathon Petroleum, a dollar-per-barrel rise in the blended crack expands its annual net income by $900 million. A dollar-per-barrel shift in the sour differential and the sweet differential alters the company’s yearly net income by $450 million and $370 million, respectively.

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Refining margin indicators

So far in the first quarter, according to Marathon Petroleum, the blended crack has fallen by $2.1 per barrel YoY (year-over-year) to $6.5 per barrel. The fall was driven by a decline in cracks across the zones. The Midcon WTI 3-2-1 crack, the USGC LLS 3-2-1 crack, and the WC ANS 3-2-1 crack have fallen by $1.7 per barrel YoY, $5.1 per barrel YoY, and $3.9 per barrel YoY, respectively, in the first quarter. The Midcon, USGC, and WC cracks are weighted by 38%, 38%, and 24%, respectively, to arrive at the blended crack. The weights are based on Marathon Petroleum’s s region-wise refining capacity.

The prompt sour differential has narrowed by $2.6 per barrel YoY in the first quarter, which could impact Marathon Petroleum’s refining earnings. However, the prompt sweet differential widened by $3.2 per barrel YoY in the fourth quarter.

Overall, the fall in the blended crack and sour differential points towards a likely fall in Marathon Petroleum’s refining earnings YoY in the first quarter. However, higher volumes led by the integration of Andeavor could support the company’s refining earnings in the quarter.

Peers’ indicators

Valero Energy (VLO) and HollyFrontier’s (HFC) refining margin indicators also have fallen in the first quarter. HollyFrontier’s refining index has fallen YoY in the Midcon and Rockies in the first quarter. Valero Energy’s refining cracks have fallen YoY in all the four operating areas in the first quarter.

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