Let the Good Times Roll – Part 3

Authors: Brian Mason and John Auers

Over the past couple of weeks, we’ve discussed the good news from refiners that have been coming out of earnings calls from both U.S. independents and integrated majors.  This week, as we continue our review of 3rd quarter earnings calls, we’ll take a look at a more niche group of refiners, U.S. plants owned by Canadian producers.  While this is a much smaller universe and certainly more geographically concentrated, some very interesting things were said during those calls.  They also come at an interesting time in the crude supply environment in the upper Midwest, where most of these refineries operate.  As a result of the cross border pipeline limits that have developed, Western Canadian crude prices have crashed with all grades hitting record discounts vs. WTI.  While this has the effect of slowing down “the Good Time Roll” those producers have experienced since crude prices recovered, the ownership of refineries has offset some of the losses.  At least for now, this seems to validate the decisions Cenovus, Husky and Suncor have made in past years to acquire U.S. refining assets.  We review what these companies had to say in their recent earnings calls about not only recent developments but more importantly their plans for the future.

Cenovus

Cenovus owns a 50 percent share in two U.S. refineries as a joint venture with Phillips 66, who also operates the refineries. The two refineries, Wood River in Roxana, Illinois, and Borger in Borger, Texas, have a combined total throughput of just above 440,000 barrels a day.  These plants, both of which process Canadian heavy crude (which makes up most of Wood River’s diet) had record throughputs during the 3rd quarter with Borger refinery operating at 108% of official stream day capacity. The high throughput rates, combined with both the large Canadian crude discount and the generally favorable margin environment to result in excellent operating margins which more than doubled from the same quarter last year. This performance significantly helped Cenovus mitigate losses on the upstream side and considering the discounts have widened even further in the fourth quarter, the refinery ownership position should continue to help soften the blow for Cenovus in the 4th quarter and beyond.

Since Cenovus is not the operator of the refineries, there was minimal discussion of future plans, IMO impacts or other refining issues in the call.  In regards to the upcoming IMO rules, we will note that both the Wood River and Borger facilities seem well positioned to not only weather those regulations but to likely thrive from the expected wider heavy/light crude spreads.  Both refineries have delayed coking units and together with the asphalt plant, Wood River especially can process a very high percentage of heavy sour crude.

Husky

Husky owns a refinery in Lima, Ohio, along with a 50 percent interest (with BP) in the Toledo Refinery, also in Ohio. They also acquired the Superior Refinery in 2017 from Calumet, which is currently closed after an explosion earlier this year during a shutdown.

Total throughput for Husky’s refineries and upgraders averaged 351,000 barrels a day for the quarter. This was impacted by not only the Superior shutdown but also a turnaround at Lima which includes work for a project to add 30,000 barrels a day of heavy crude capacity by the end of next year.  Husky discussed plans for the Superior Refinery rebuild and restart and announced an anticipated restart in 2020. These plans include rebuilding the FCC, parts of the crude unit, and a total expansion of 5,000 barrels a day of additional heavy crude capacity.  While Husky didn’t specifically mention IMO 2020, both the Lima and Superior projects will be beneficial and overall their refineries should be well positioned for those rules.

Suncor

Suncor operates three Canadian refineries in Alberta, Ontario, and Quebec and one refinery in the U.S. Their refineries are primarily focused on processing oil sands feedstocks, much of it heavy.  Suncor also owns over 58 percent stake in the Syncrude Upgrader, which takes bitumen and converts it into high valued sweet crude. Suncor has a total of 550,000 barrels a day of upgrading capacity, including460,000 barrels a day of refining capacity.

As with the other Canadian refiners, Suncor has been able to partially offset their exposure to the widening Canadian heavy differentials by leveraging their downstream assets. Suncor had a 99% utilization on the downstream side for the quarter with 457,000 barrels a day of throughput compared to 344,000 in the second quarter.

Syncrude has returned all three cokers to service which are operating over 90 percent of nameplate capacity. Syncrude and Suncor have agreed on two bidirectional pipelines between the plants. They believe a pipeline is required to drive long-term reliability. The pipeline is expected to be completed later in 2020.

While Suncor made no specific mention of its preparedness for IMO 2020, as with Husky and Cenovus, the significant heavy crude upgrading capabilities at their refineries combined with the benefits of their Upgrader (which produces a distillate reach/IMO advantaged crude) will position it very well.  .

Takeaways

With the recent court ruling out of Montana causing further delays in Keystone XL and the TransMountain expansion still caught up in its own legal challenges, the pipeline constrained environment will continue to depress Canadian crude oil prices for quite some time.  Combined with the negative impacts IMO will have on heavy crude prices, Canadian producers can expect a challenging environment for the next few years.  However just as the refining and petrochemical divisions of the integrated majors helped them weather the low price environment after the 2014 crash, those Canadian companies with refining assets will also be able to better withstand the persisting Canadian discounts.  For those companies it will be critical to maximize those downstream assets through both efficient operations and properly targeted investments.  It appears from the 3rd quarter earnings calls that they are accomplishing these goals, but challenges and opportunities will continue to develop.  In this environment we could also see a possibility of other Canadian producers looking at downstream investments.

Turner, Mason & Company, continues to monitor developments in the maritime and refining industries as we approach IMO 2020.  We are also following closely the midstream environment, particularly the progress and roadblocks of the Keystone XL and TransMountain pipelines. Our latest views are being incorporated in our Crude & Refined Products and World Refining Construction Outlooks, which will be issued to clients with our 2019 publications in February and August. If you would like more information on this, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call at 214-754-0898.