Hurricanes Stir Up Profits for Refiners

U.S. fuel prices are poised to remain elevated for the rest of the year in the aftermath of hurricanes Harvey and Irma, costing consumers billions but providing a profit boost to some refining companies.

Harvey knocked out 25% of the nation's fuel-making capacity at the height of the storm's flooding in Texas. More than 12% is still shut, with three plants idle and 11 struggling to resume operations. A week later, Irma compounded fuel shortages in the Southeast, as millions of people fled in a mass evacuation that emptied gasoline stations.

A record amount of fuel was pumped out of storage tanks in the week ended Sept. 8, according to federal data, to keep East Coast gas pumps working. It was the largest one-week drawdown in U.S. gasoline stockpiles since 1990.

Nearly every refinery that could went into overdrive in the wake of the storms, but the one-two punch of Harvey and Irma knocked out millions of barrels a day of fuel production, rapidly driving up gas prices to $2.80 a gallon recently. The nationwide average is about 50 cents higher than this time last year.

While some pump prices have drifted lower, increases could persist in some areas for months, analysts and economists said. An extended increase of 25 to 50 cents a gallon would translate to billions of dollars in costs to consumers over the course of 60 to 90 days, according to federal data on U.S. vehicle miles traveled and average fuel efficiency.

Higher fuel prices mean refinery owners -- even some with flooded plants that won't go back into service for weeks -- could see an improvement to their bottom lines.

"You've got a lot of refiners running at full tilt, and they're going to make better margins," said Sandy Fielden, an energy analyst with Morningstar Inc. "Supply and demand is effectively telling the market that there's a big incentive to produce more."

In the Midwest, refineries hummed at their maximum capacities in the days before and after Harvey hit, according to the U.S. Energy Information Administration.

Aggregated across the industry, the boost to profit margins on fuel is likely to be sufficient to offset most lost revenue from the refinery shutdowns, according to a Wall Street Journal analysis of pricing data from FactSet.

Most refiners' margins would get a boost because the price of the fuel they sell will be higher while the cost of the crude oil they buy to run through their plants remains low. That combination has increased profit margins for some fuel makers on the East Coast and in the Midwest by more than a third.

Some wild-card costs could spell losses for a few operators. Those costs include repairing flooded equipment or paying fines for not fulfilling supply contracts, analysts said, although it is possible some corporate insurance policies would mitigate these costs.

Investors have been pushing refiners' shares higher as they anticipate better profits. PBF Energy Inc., which mainly operates refineries in the Northeast and Midwest, didn't need to shut any of its plants and its shares have gained 26% since Aug. 21, the week before Harvey made landfall. Even refiners that slowed or halted operations due to the flooding, including Phillips 66 and Marathon Petroleum Corp., have seen shares rise between 5% and 9%.

Valero Energy Corp., Phillips 66 and Marathon are expected to see sizable increases in their third-quarter earnings compared with the same period in 2016. For Marathon, which shut down units at its Galveston Bay plant due to Harvey, analysts expect earnings per share to more than double, according to FactSet.

Plants where fall maintenance was planned, such as in Illinois, or that normally supply only their local areas, are delaying work so they can churn out more gas, shipping the extra supply down the Ohio and Mississippi rivers on barges to the Gulf Coast.

Several massive fuel factories in the Port Arthur, Texas, area remain hobbled. The 600,000-barrel-a-day plant owned by Saudi Arabian Oil Co. -- the biggest in the U.S. -- is operating at half capacity because many of its motors and electronics were fouled by floodwater, according to a report by Damien Courvalin, a managing director at Goldman Sachs Group Inc.

Valero is trying to restart its plant in Port Arthur, but the effort could take until the end of September, Goldman Sachs said. The investment bank expects Exxon Mobil Corp.'s refinery in nearby Beaumont, Texas, to take a month to fully recover. The companies have said they are ramping up operations.

Transporting the fuel once it is produced is also a problem. The Colonial Pipeline, which analysts have likened to a Mississippi River of fuel, carries more than a million barrels a day from Texas through a dozen states to New York and continues to experience delivery delays to mid-Atlantic states.

The decline in output is a switch for the U.S., which had been producing so much gasoline that stockpiles of the fuel reached a three-decade high of more than 255 million barrels in February. The refinery outages and continued draws on gasoline stocks leaves the U.S. with less of a cushion, which helps push up fuel prices, according to Sam Margolin, an analyst with Cowen & Co.

"We believe it could take all of the fourth quarter to replenish lost supply, with an ongoing inflationary impact to gasoline prices," Mr. Margolin said.

Major storms in the past decade have failed to dent refining profitability in a number of cases.

After hurricanes Ike and Gustav struck the Gulf Coast in succession in 2008, refining profit margins for some fuels more than doubled. Valero, one of the biggest U.S. refiners, said the storms that year cost it about $350 million in lost business, but the company still reported profits of $1.15 billion.

After Hurricane Sandy struck a swath of the East Coast in October 2012, Phillips 66 had to shut its New Jersey fuel plant. The storm cost the company $56 million before taxes, but refining earnings that quarter jumped nearly 10-fold when compared with the same period of the prior year. Gasoline prices in New York remained high for months; the state had the highest price in the continental U.S. in January 2013, according to AAA.

Even after refineries restart, it can take days to get fuel delivered. "When you put fuel into a pipeline in Houston to get to the mid-Atlantic, it travels at 4 miles per hour," said Paige Anderson of the National Association of Convenience Stores.

In Texas, hundreds of gas stations remains closed because gas pumps are flooded and need to be replaced. In Florida, which consumes 5% of U.S. gasoline, or about 21 million gallons a day, assessments on the wind and water damage are ongoing, but large-scale power outages are keeping many gas pumps from operating, Ms. Anderson said.

Write to Lynn Cook at lynn.cook@wsj.com and Bradley Olson at Bradley.Olson@wsj.com

(END) Dow Jones Newswires

September 17, 2017 08:14 ET (12:14 GMT)