Published on Tuesday, May 19 2020
Authors : Sam Davis and John Auers

In last week’s blog, we mentioned steps the integrated majors were taking in response to the COVID-19 pandemic. The U.S. independent refiners were no different. They all took steps to support community efforts, from manufacturing and distribution of hand sanitizers to hospitals and emergency responders, to donations towards pandemic relief efforts in support of first responders, food banks, and healthcare organizations.

U.S. independent refiners have also had to take unprecedented steps to respond to the historic demand decline from the lockdowns mandated by federal and state governments in response to the pandemic. Refineries dialed down capacity operating rates to levels averaging below 70% for the nation as a whole, with the facilities on the East and West Coast operating at even lower rates. Multiple gasoline producing FCC units have been idled and two U.S. refineries (Marathon’s Martinez, CA and Gallup, NM plants) have temporarily halted operations. In an effort to boost liquidity and shore up cash reserves, refiners also reduced capital and operating costs by postponing projects, deferring final investment decisions, reducing salaries, suspending share buybacks and in some cases selling assets.

This week’s blog highlights key takeaways from the recent 1Q earnings calls of the Independents, which included an update on the status of key strategic capital projects they have been pursuing.


Valero kicked things off by providing updates to the company’s major strategic projects. The Pasadena terminal project was completed during the quarter and now expands Valero’s capacity for biofuels blending and enhances flexibility for product exports; while the St. Charles alkylation unit project remains on track to be completed this year. The company announced progress on the Diamond pipeline expansion slated to be completed next year but has delayed the completion of the Port Arthur coker expansion, along with the Pembroke, UK cogeneration unit projects by six to nine months due to COVID-19. In its renewables business, Valero is also progressing the expansion of its Diamond Green diesel facility in LA and on a potential new renewable diesel facility at its Port Arthur, TX refinery.

Valero discussed (during the call) that it had reduced operating rates at its refineries and had shutdown the FCC unit at the St. Charles refinery following a recent turnaround as they attempt to balance gasoline production with reduced consumer demand.  With demand also declining for ethanol, the company has also shut down eight of its operating ethanol plants and has been running less than 50% utilization in its overall ethanol manufacturing system.

Phillips 66

Phillips 66 announced it had commenced full operations of its Gray Oak pipeline in which the company has a 42.25% interest. The 900 MBPD pipeline is now transporting crude from the Permian and Eagle Ford basins to destinations in Corpus Christi and Freeport, including P66’s Sweeny Refinery. The company also announced the completion of its Beaumont terminal expansion which added 2.2. million barrels of crude storage and increases the terminal’s crude and product storage capacity to 16.8 million barrels. P66 reported progress on its Sweeny Fractionator #2 and #3, Beaumont Dock #4, the Clemens Caverns expansion and the South Texas Gateway Terminal, all of which it expects to be completed by the end of this year. However, in response to COVID-19 impacts, the company has deferred the Red Oak and Liberty pipeline projects and postponed its final investment decision on the ACE pipeline project aimed at improving crude delivery options in the Mississippi River refining corridor in Louisiana.  

Refining projects were also impacted by the pandemic with discretionary projects being deferred and cancelled, some turnarounds being pushed back till later this year and also into 2021.  P66 stated funding for sustaining capital to maintain safe and reliable operations was prioritized and will continue.  P66 reduced crude runs across their system in response to the demand decline with crude utilization averaging 65-70% in April. The company, however, announced the completion of the FCC unit upgrade at the Sweeny refinery during the quarter, and expects to close on the acquisition of 100 retail sites on the West Coast in Q2 2020.

Marathon Petroleum

Marathon (MPC) announced that while they have deferred capital spending across the company, they continue to progress two key growth projects in the Galveston Bay STAR project (which increases resid processing capacity) and the Dickinson renewable diesel project. According to the company, both projects are expected to account for the majority of MPC’s 2020 growth capital, with the renewable diesel project slated for completion later this year while the STAR project is expected to be completed in 2021.

The company made news last month when it announced the idling of its refinery operations in Martinez, CA, in response to demand decline from the lockdowns which significantly impacted refining margins on the West Coast. This decision followed the idling of its Gallup refinery in New Mexico, also due to regional demand decline.  According to executives on the call, the decision to idle both facilities was supported by the ability of the company to replace the supply from the two higher cost refineries with production from lower cost facilities within its system.

The conference call featured MPC’s new CEO Michael Hennigan who took over from Gary Heminger in March. During the call, Hennigan outlined three priority areas of focus for the company to achieve higher profitability and long-term value creation: (i) strengthening the competitive position of its portfolio; (ii) improving commercial performance and being dynamic in responding to market opportunities and (iii) lowering its overall cost structure and increased discipline in the capital allocation process. These priorities follow the decision by MPC’s board in March to retain its existing midstream segment following a review of strategic options for the business. Marathon is also progressing plans to separate Speedway, its retail marketing arm, into an independent publicly traded company. According to executives, the Speedway work is progressing as planned with separation targeted for completion in Q4 2020.

PBF Energy

PBF announced perhaps the most drastic response to COVID-19 related impacts by reducing 2020 planned capital spending by 50% and suspending its quarterly dividend payments. In connection with steps taken to generate and preserve liquidity, PBF also announced last month it had completed the sale of five hydrogen plants located at the company’s Martinez, Torrance and Delaware City refineries. The sale, which generated $530 million in cash proceeds, along with the issuing of $1 billion in senior notes constitutes strategic transactions taken by PBF, along with a $600 million reduction in 2020 spending to shore up cash reserves. According to company executives, they are continuing to evaluate various other liquidity and cash flow optimization options to increase its flexibility and responsiveness to the lockdowns.

PBF also mentioned on the call that it had reduced operating rates in its refining system by 30% in response to demand decline and had also shutdown the FCC units at its Toledo and Paulsboro refineries.


Similar to its peers, HollyFrontier announced cuts to its 2020 spending, reducing its consolidate capital budget by 15% in response to the COVID-19 lockdowns and its impact on product demand. Despite the decline in spending, the company is still proceeding with its two major strategic projects in 2020 – the renewable diesel and Cushing connect projects. In November 2019, HFC announced plans to construct a 125 million gallon per year renewable diesel unit at its Artesia refinery, capable of processing soybean oil and other renewable feedstocks. The project is expected to be completed in Q1 2022. The Cushing connect joint venture project is a new build 50 mile, 160 MBD crude pipeline expected to supply crude from Cushing to its Tulsa refinery. The pipeline is expected to be completed by Q1 2021.

Since taking over the CEO role for the second time earlier this year, Mike Jennings has reiterated his areas of focus for the company on refinery reliability, safety, environmental performance and disciplined capital allocation. During the call, Jennings discussed how these areas are now even more important as the company responds to the impact of COVID-19.

Our Takeaways from the earnings calls

The Q1 earnings calls provided a window into a difficult overall refining margin environment for U.S. refiners and the industry as a whole but it also shed light on how refiners are responding to improve financial performance and position their companies to get through this crisis.

The U.S. refining industry moved quickly to adjust throughput rates at their refineries to match product supply with demand. These efforts were all the more challenging due to the differences in demand trajectories for the various products. With air travel falling dramatically, refiners were able to reduce jet production by dropping kerosene into the diesel pool (consistent with product specifications) as diesel demand held up reasonably well during the early part of the lockdowns.  More recently, this has proved more difficult as diesel demand has fallen and the oversupply has pressured distillate margins.  Gasoline demand which also fell rapidly in March and April is now returning as more and more states reopen their economies meaning refineries will have to reorient themselves to a more gasoline-centric product slate. Refiners are wisely proceeding with caution in bringing utilization rates back up slowly in order to not create an oversupply situation as they continue to try to maintain balance in refined product markets. Serving the refining industry very well throughout these challenging times has been the investments refiners have made over the past several years to increase product slate flexibility and the experience they have gained from past disruptions related to hurricanes and other events.

Consistent with the moves we noted last week by the Integrated Majors, the U.S. Independent Refiners are also progressing efforts to prepare for a lower carbon future by investments in renewable fuels. As noted earlier, Valero is certainly at or near the forefront of these efforts, through the continued capacity expansions in its Diamond Green Diesel joint venture partnership.  The other Independents are making similar moves.  Even though P66 did not proceed with the renewable project at Ferndale, the company is moving ahead with renewables investment project at its San Francisco refinery and is already producing renewable diesel at its Humber, UK refinery. Marathon is progressing plans to convert its Dickinson, ND refinery to a renewable diesel refinery, while PBF with the acquisition of Martinez has agreed with Shell to jointly move forward with reviewing the feasibility of building a renewable diesel facility at the refinery. HollyFrontier, with its announcement of the Artesia, NM renewable diesel project, is also making investments in low carbon fuels.  

Turner, Mason & Company will continue to closely monitor developments related to the COVID-19 pandemic, the progress made by states and countries to reopen their economies, crude and refined product supply/demand dynamics, and all other events that could impact the various segments of the oil industry. We will continue to comment on our changing views on all these issues in upcoming blogs over the next several weeks and incorporating our updated market forecasts into the next edition of our Crude & Refined Products Outlook which will be published to clients in late July.  If you would like more information on this publication or for any specific consulting engagements with which we may be able to assist, please visit our website: and send us a note under ‘Contact’ or give us a call at 214-754-0898.

Leave a Reply

Copyright © 2021 Turner. All Rights Reserved.
  • Sign up

Your email address will be your User Name

Password Strength Very Weak
Lost your password? Please enter your username or email address. You will receive a link to create a new password via email.
We do not share your personal details with anyone.