Bloomberg: Oil Company Second-Quarter Profits Will Benefit From Refining

Extract: Royal Dutch Shell Plc will decide later this year whether to go ahead with a project to double capacity at its joint-venture refinery in Port Arthur, Texas.

By Stephen Voss

July 3 (Bloomberg) — Major oil companies are set to reap profits from their refining businesses for the second quarter as prices for gasoline and other refined products outperform the raw- material cost of crude oil.

A refining index published yesterday by BP Plc, Europe’s second-largest oil company, showed global refining margins averaged $16.74 a barrel in the second quarter through June 28, up from $12.75 a year earlier and $9.45 for the first quarter of 2007.

“Refining margins are up and there should be a strong set of earnings” for refining businesses, Peter Hitchens, a London-based analyst at Kepler Teathers & Greenwood Merrion, said in a telephone interview.

BP’s refining and marketing division reported a net income of $1.1 billion in the first quarter, even though it lost revenue while it repaired its Texas City refinery. The division accounted for nearly a quarter of BP’s companywide profit of $4.7 billion.

For smaller oil companies whose main business is refining, not exploration, such as San Antonio-based Valero Energy Corp. and Switzerland’s Petroplus Holdings AG, the gains from wider refining margins may be more dramatic.

“There’s not a shortage of crude in the world — it’s turning it into gasoline and other refined products that’s going to be a problem, going forward,” said Helen Henton, the head of commodity research at Standard Chartered Plc in London. Longer-than-expected plant maintenance has helped keep margins high, she said.

Projects Delayed

Several projects to build new refineries and expand existing ones have been shelved or delayed, including in the United Arab Emirates, Kuwait and U.S., because of escalating labor and construction costs. Royal Dutch Shell Plc will decide later this year whether to go ahead with a project to double capacity at its joint-venture refinery in Port Arthur, Texas.

“There is a lack of investments because the costs are very high,” Claude Mandil, the executive director of the International Energy Agency, said in an interview in Madrid yesterday. “It is very difficult to build new refineries, particularly in developed countries.”

Hitchens said higher profits from refining will more than offset any decreases in marketing profits. Major oil companies often don’t capture all of the profit that’s shown in BP’s Global Indicator Margin when oil prices are rising fast, he said.

The BP data showed the highest indicative refining margins for the U.S. West Coast, Gulf Coast and Midwest, where margins were $22.68, $24.57 and $26.18, respectively, for the second quarter.

“Any refiners with big refining operations in the U.S. will do well,” Hitchens said. Those include Exxon Mobil Corp., BP, Shell and Chevron Corp., he said.

Better This Year

UBS AG analysts said today they expect this year’s per-barrel refining earnings before interest, taxes, depreciation, and amortization, to exceed last year’s for most European oil-refining companies. Those companies are Compania Espanola de Petroleos SA, ERG SpA, Galp Energia SGPS SA, Hellenic Petroleum SA, Mol Nyrt, Motor Oil Hellas SA, Neste Oil Oyj, Petroplus, Saras SpA, Tupras Turkiye Petrol Rafinerileri AS and Unipetrol AS.

The UBS analysts, including Anish Kapadia in London, said Polish refiners Grupa Lotos SA and PKN Orlen would have lower per- barrel earnings in 2007 than in 2006.

European refining stocks are, on average, trading at 15 times their earnings, and 2007 “will be the peak year for refining margins,” the UBS note said. Margins “should stay robust over the coming years,” it said.

BP and Shell, Europe’s two biggest oil companies, report second-quarter earnings on July 24 and July 26, respectively. Hitchens has a “buy” recommendation on BP shares and a “reduce” on Shell.

To contact the reporter on this story: Stephen Voss in London at [email protected]

Last Updated: July 3, 2007 04:50 EDT

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