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This is “Economic Hardship”?

May 9, 2018

           

Just weeks after the news broke that EPA has secretly handed out dozens of RFS compliance exemptions to “small refineries” on the grounds of so-called “disproportionate economic hardship,” many oil companies—including those that likely received exemptions—are reporting their financial results for the first quarter of 2018. Not surprisingly, the quarterly earnings statements do not paint the picture of a struggling refining sector enduring “economic hardship” at the hands of the RFS. Rather, the financial results show that companies involved in oil refining—both large and small, merchant and integrated—are thriving. The earnings statements also shine some light on the huge windfall that some refiners are receiving as a result of the RFS exemptions. Nearly all of the public companies with oil refining assets reported quarterly earnings that were well above the corresponding quarter a year ago. Profits for many refiners far surpassed analyst expectations, while shareholders enjoyed larger-than-expected dividend distributions. In the wake of a bullish quarterly earnings cycle, some refiners have experienced record or near-record stock prices in the last few weeks. In total, the Q1 net profits for six companies that likely received small refinery exemptions came to $8.8 billion, up 31% from $6.7 billion in Q1 of 2017. Oh, pity the poor refiner.  Here’s a quick rundown of results for companies that reportedly received “small refinery” exemptions on the basis of purported “disproportionate economic hardship.”

  • HollyFrontier: The company, which acknowledged it received small refiner exemptions from EPA, recorded Q1 profits that were an astounding 700% above year-ago levels. As a result, “…shares in the company hit an all-time high of $63.57, up 24 percent this year.” During HFC’s earnings call, a Bank of America analyst patted executives on the back for a “really terrific quarter” and a Wells Fargo analyst chimed in with “well done!”
  • CVR Energy: CVR, in which billionaire Carl Icahn holds a majority ownership stake, also reportedly received an RFS exemption. The company’s Q1 profits tripled from a year ago and its stock surged to a 52-week high following the release of its earnings, as Goldman Sachs upgraded the stock recommendation from “neutral” to “buy.” The company also reported that it “turned a $23 million profit on RIN credits in the first quarter, nearly quadrupling the $6 million it earned in the market for biofuels credits in the same period of 2017.”
  • Andeavor: The refining giant, which recently announced plans to merge with Marathon to form the nation’s largest refining company, also is believed to have secured RFS exemptions despite $1.5 billion in net profits last year. For Q1 of 2018, “Andeavor beat Wall Street estimates with…profit that more than tripled from a year ago.”
  • Delek: The company has previously acknowledged that it received RFS exemptions for two of its refineries (even though one reported throughput above the 75,000-bpd “small refiner” threshold). In Q1 of 2018, Delek reported adjusted net income of $28 million compared to adjusted net income of $10.1 million in the prior year period—a 180% increase.
  • ExxonMobil: While including the world’s most profitable oil company in discussions of “small refiners” and “economic hardship” might seem laughable at first, it has been reported that ExxonMobil did indeed request an RFS exemption for one of its refineries. The company saw its profits increase $640 million in Q1 versus the year-ago period, or 16%.
  • Chevron: Like ExxonMobil, there is nothing “small” about Chevron, but it too asked for a small refinery exemption according to press reports. As for Q1 performance, Chevron’s profits were up $1 billion—36%--over a year ago its CEO reported that “first quarter earnings and cash flow improved significantly from a year ago.”

  Call me crazy, but when I hear “economic hardship,” I don’t think of surging profits, record stock prices, generous dividends, and Fortune 100 companies. Now, a cynic might suggest that these companies performed so well because they received exemptions from 2017 RFS compliance obligations and therefore no longer had “compliance costs” with which to contend in Q1. It is true that the exemptions led to a huge RINs windfall for the companies that received them (see table below showing RIN/RFS compliance cost savings reported by the companies), but how did their profits compare to the oil/refining companies that did not receive exemptions?

 

The argument that the RFS exemptions are the reason for improved financial performance can be put to the test simply by looking at the Q1 performance of companies that likely did not receive small refinery exemptions (i.e., because their refinery throughput was larger than the threshold level required to qualify). If RFS compliance exemptions truly saved “small refiners” from experiencing financial hardship and led them to strong performance in Q1, then we should surely expect the financial performance of their peers who still have RFS obligations to be noticeably worse, right? Wrong. In reality, refiners that did not receive RFS exemptions often reported even stronger earnings results in Q1 than their peers who were bailed out of their RFS obligations by EPA. For example, vocal RFS critic PBF Energy reported net profits of $30 million in Q1, a nearly 200% increase compared to the net loss of $(31) in the same quarter a year ago. Meanwhile, Valero saw its Q1 profits jump 54% compared to a year ago and it was reported that “…shares of Valero Energy have been on an absolute tear so far this year. Resilient refining margins and management’s plan to give a lot of cash back to shareholders in the form of a higher dividend and significant share repurchases have sent shares up 22% since the beginning of the year. That’s already on top of its impressive run in 2017...” In fact, a select group of seven large refining companies that likely did not receive small refiner exemptions reported total profits of $9.5 billion in Q1, up 68% from $5.7 billion in Q1 of 2017—more than double the increase of the six companies mentioned above who likely received exemptions.  So, what are the key takeaways? In a nutshell:

  • Companies that likely received small refiner RFS exemptions on the grounds of “disproportionate economic hardship” reported very strong quarterly profits, undermining the ridiculous notion that they are experiencing financial harm of any sort and need bailouts from RFS compliance obligations.
  • While small refiner exemptions amounted to a windfall of at least $275 million for publicly traded refining companies in Q1, they were not the primary cause of improved financial performance.
  • Companies that likely did not receive small refiner exemptions in many cases outperformed companies that likely did receive exemptions, disproving the faulty argument that RFS obligations somehow create a “disproportionate” competitive disadvantage for certain “small” refiners.