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Will Marathon Petroleum’s Refining Earnings Rise in Q2?

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May. 29 2019, Published 11:16 a.m. ET

Refining earnings indicator

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

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 second quarter, the blended crack has risen by $6.4 per barrel YoY to $18.8 per barrel. The increase was driven by a rise across the zones in the cracks. The Midcon WTI 3-2-1 crack, the USGC LLS 3-2-1 crack, and the WC ANS 3-2-1 crack have risen by $4.7 per barrel YoY, $0.7 per barrel YoY, and $11.3 per barrel YoY, respectively, in the second 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 region-wise refining capacity.

However, the prompt sour differential has narrowed by $5.7 per barrel YoY in the second quarter. The fall could impact Marathon Petroleum’s refining earnings. The prompt sweet differential has fallen by $1.3 per barrel YoY in the second quarter.

Overall, the rise in the blended crack points towards a likely increase in Marathon Petroleum’s refining earnings YoY in the second quarter. Higher volumes led by the integration of Andeavor could support the company’s refining earnings in the second quarter. However, the higher volumes could be partly offset by narrower sour and sweet differentials.

Peers’ indicators in the second quarter

Valero Energy (VLO) and HollyFrontier’s (HFC) refining margin indicators have also risen in the second quarter. HollyFrontier’s refining index values have increased YoY in the Midcon and Southwest regions in the second quarter. These regions accounted for 80% of HollyFrontier’s total throughput in the first quarter. Valero Energy’s refining cracks have risen YoY in three of its four operating areas in the second quarter.

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