April 28, 2020 / 6:23 PM / a month ago

U.S. refinery earnings to detail troubled outlooks as fuel use slumps

(Reuters) - U.S. refiners are expected to report poor first-quarter results starting this week, but investors are more concerned about the outlook for coming months as various states ease movement restrictions designed to curb coronavirus infections.

FILE PHOTO: General view of oil tanks and the Bayway Refinery of Phillips 66 in Linden, New Jersey, U.S., March 30, 2020. REUTERS/Mike Segar

Fuel demand has dropped by roughly 25% in the United States and about 30% worldwide as the coronavirus pandemic has kept billions of people from traveling. U.S. refineries have throttled back production, operating at roughly two-thirds of capacity and global refineries have responded similarly to combat the steep drop in auto and jet fuel use.

Most independent refiners are expected to report losses for the quarter, according to Refinitiv Eikon estimates. Valero Energy Corp, the largest U.S. independent refiner, kicks off U.S. refining earnings on Wednesday, followed by Phillips 66 on Friday and several others next week.

That company is expected to lose 17 cents per share on revenue of $18.7 million, according to Eikon figures. The company warned two weeks ago that it could lose up to $2.1 billion for the quarter.

The seven major independent refining companies, including Valero Energy Corp, Phillips 66, PBF Energy Inc and Marathon Petroleum Corp, are expected to lose, on average, 29 cents a share for the first quarter due to the drop-off in demand, according to Eikon data.

Several companies have been cutting overall processing, but only Marathon has begun the process of idling U.S. plants, including its San Francisco-area refinery. Consultants and analysts expect more closures may be needed to rectify the imbalance of crude supply and product demand.

April and May are expected to be substantially weaker than the first quarter, as fuel demand remained relatively strong until mid-March.

“Refiners were doing alright for the first two months of the year, and then everything fell off of a cliff in March,” said refining analyst Matthew Blair at Tudor Pickering, Holt and Co.

U.S. gasoline inventories have surged to a record and U.S. refiners are operating at about two-thirds of capacity. Roughly 85% of worldwide onshore storage was full as of last week, according to Kpler data.

CREDIT CRUNCH

Some refiners are coming out of the first quarter with significantly less liquidity than at the start of the year. PBF Energy said last month it would sell hydrogen gas plants for $530 million to raise cash, but the company still has a high level of debt.

North American refiners and other downstream companies face higher credit risk. Inland refiners with less storage space, such as CVR Energy Inc , are also more exposed, according to Fitch Ratings, because they have less options for product offtake.

“Although refiners have historically shown an ability to adjust quickly to drops in demand, a key consideration is the depth and unknown duration of the current downturn,” Fitch said in a note.

Fitch has downgraded or negatively revised outlooks for refiners including Marathon, CVR Energy, PBF and Calumet Specialty Products Partners, which operates four fuel and specialty products refineries.

Valero and Marathon have each secured about $1 billion each in new credit lending facilities in April.

At least 16 states have announced plans to gradually reopen their economies in the coming weeks. However, equity analysts at Cowen said demand is likely to be depressed for some time.

Refiners’ earnings for coming quarters hinge on how quickly demand returns to more normal levels, which is hard to model because it depends on future work-from-home patterns to public comfort levels using public transportation and airfare.

“A rapid demand recovery seems increasingly unlikely, while a slower opening of the economy will have to contend with high unemployment and reduced air travel,” Cowen analysts said.

Reporting by Laura Sanicola; Editing by Richard Chang

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