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Analysis - Did Buffett purchase miss the golden age for U.S. refiners?

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Reuters NEW YORK

By Jarrett Renshaw

NEW YORK (Reuters) - With the United States about to lift its longstanding ban on crude oil exports and refinery shares falling sharply from near record highs, it's a good time to wonder if Warren Buffet got his huge bet on the sector wrong.

Earlier this year, Buffett's Berkshire Hathaway bought another $2 billion of Phillips 66 shares, more than doubling its stake. Phillips is the largest of a dozen or so independent U.S. refiners who have enjoyed a five-year profit bonanza in part by buying up cut-priced domestic crude and exporting some of it in the form of refined fuels, which do not fall under the ban.

 

This month, however, shares of Phillips and others such as PBF Energy and Tesoro have tumbled from 8 to 12 percent, some from record or near-record highs, a turnaround that some dealers have linked to talk of ending the exports ban, a move that could boost costs for U.S. crude flowing from shale plays by increasing competition from overseas buyers.

The largest half-dozen refiners made over $60 billion over the past five years, some notching record profits.

Analysts argue that market forces have already eliminated the supply advantage many U.S. refiners' have enjoyed in recent years. They say 2016 earnings, while unlikely to match this year's levels, will largely be unaffected if U.S. crude is allowed to be sold abroad.

Indeed, Phillips 66 is still up 14 percent on the year and is not even the best performing refining stock. Berkshire Hathaway did not respond to requests for comment.

"We don't see U.S. refiners hugely exposed in the short term, no matter what happens with the export ban," said Alan Gelder, a London-based refinery analyst at Wood Mackenzie.

But in the long term, the impact of lifting the ban could cost U.S. refiners billions of dollars while creating billions in profits for producers, according to a September report by the U.S. Energy Information Administration.

Without restrictions, profits for refiners would be $22.7 billion lower in 2025 than with limits in effect, the EIA said. Conversely, U.S. producers will see a nearly $30 billion revenue bounce by 2025 from lifting the ban, EIA said.

In 2012, West Texas Intermediate crude futures averaged a $17.50 discount to Brent, the global benchmark, offering U.S. refiners unparalleled access to cheap crude. Refiners along the East Coast and the Gulf Coast built multi-million rail terminals to take advantage of the cheaper crude flowing out of North Dakota.

Today, the spread is under $1.50, forcing refiners to shun U.S. crude for foreign imports, a trend most analysts expect to continue into next year, and perhaps well beyond.

Congress on Tuesday reached a spending deal that includes repealing the 1970s-era ban on crude exports in exchange for subsidies on green energy. The vote could come as early as Friday, and President Obama signaled Wednesday that he would sign the bill, despite his opposition to lifting the ban.

Equity markets are "overreacting" to the news of the potential lifting of the export ban, says Wells Fargo analyst Roger Read, arguing no one is expecting a swift return to the days when bottlenecked U.S. crude traded at a significant discount to Brent, now the global benchmark.

Even without lifting the ban, the discount has narrowed substantially over the past year or two as more pipelines in North Dakota's Bakken region came online and production slowed under the weight of low oil prices.

On Tuesday, U.S. crude for March, April and May sold at a slight premium to global Brent, the first time that has occurred since 2010. January U.S. crude was down 3.7 percent at $35.95 a barrel late Wednesday.

E.COAST WOES

East Coast refiners such as PBF Energy, Philadelphia Energy Solutions and Delta Airlines' Monroe Energy - the biggest opponents of lifting the ban - are most affected by the swings in the spread. Phillips 66's biggest refinery is in Bayway, New Jersey, and was among the biggest buyers of Bakken crude when spreads were favorable.

When Brent-WTI is wide, they haul U.S. crude by rail from the shale fields of North Dakota to their refineries. But when the spread is narrow, the East Coast refineries rely on foreign imports, as most have in recent months.

So far this month, PBF is down 14.7 percent, HollyFrontier Corp is down 14 percent, Tesoro Corp is off about 12 percent and Phillips 66 has slid some 11 percent. With a 17 percent decline in December, Western Refining Inc shares are in negative territory for the year.

The broader S&P energy sector <.SPNY> is off about 22 percent in 2015. Berkshire purchased 22.2 million shares of Phillips 66 in the second quarter, and another 3.51 million in the third quarter, bringing its total to 61.5 million shares, valued over $5 billion.

Buffett's refining bet is the fifth largest in the Berkshire portfolio and since the beginning of the month the position has lost $633 million.

But even with recent slides, shares of Tesoro and Valero Energy Corp have each climbed more than 40 percent this year, while PBF Energy Inc has risen 31 percent. As a group, they are expected to have a 16.0% decline in earnings in 2016 compared to 2015, according to Thomson Reuters data. One month ago, analysts were expecting a 19.7% earnings decline.

(Reporting By Jarrett Renshaw. Lewis Krauskopf contributed reporting from New York; Editing by Alden Bentley)

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First Published: Dec 17 2015 | 1:57 AM IST

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