Unconventional hydrocarbons Boost Profit for Refining Companies

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The U.S. is witnessing an oil revolution of sorts, thanks to the booming production of unconventional hydrocarbon. While producers are obvious gainers, another group benefiting immensely are refining companies. U.S. refiners benefit from North American crude, heavily boosting refining margins.

This gains being made in this industry was obvious after Valero ’s (NYSE: VLO) latest quarterly results when the company reported a profit of $1 billion, up from $45 million in 2011 fourth quarter profit.

Valero said that the encouraging results were mainly due to a much-improved feedstock supply picture in the U.S.; the tight oil boom has unlocked increasing volumes of economically priced domestic crude.

The company also reported a strong top line which included revenues of $34.70 billion, just a slight gain from previous gross earnings of $34.67 billion.  The company's numbers were well ahead of analysts’ expectations of $31.01 billion. This top line may seem stagnant to some, but cheaper domestic crude means that the company is processing more quantity now than ever.

In fact, the company said it will continue to reduce its reliance on foreign crude at its North American refineries and is expanding its capacity for West Canada heavy crude.

Higher refining output does not appear to be an issue yet as U.S. refiners have been able to export surging volumes of oil products abroad. Their competitiveness has been rising thanks to the domestic oil boom.

Although integrated oil companies stand to gain the most from the new boom - as they are the ones with access to both cheap hydrocarbon supplies and the capacity to turn them into high value petroleum products that can be shipped abroad -  refiners are making distinct niche for themselves as well.

The U.S. refining industry is expected to take advantage of this situation for another one or two years before the new refining capacity makes the market more competitive again. Refiners have been making significant hydro-cracker investments over the past one and half years.

As indicated above, integrated players will make the most of the opportunity and Marathon Oil (NYSE: MRO) is one such player. The company has announced it will spend over $1.8 billion in 2013 on 215 to 250 net wells in the Texan Eagle Ford Shale.

To put things in perspective, Marathon Oil has allocated $800 million to the liquids-rich Bakken play in North Dakota and $100 million for further development of the Oklahoma resource basin. Its investment in Texan Eagle Ford Shale will further boost the company’s profitability which scaled to  new heights in 2012. It reported its refining and marketing gross margin increased to $10.45 per barrel for the year, up significantly from $7.75 per barrel in 2011.

While most companies are busy with investments, some players are getting rid of unprofitable operations as well. Murphy Oil (NYSE: MUR) , which has substantial downstream operations including refining and marketing, has announced its plans to spin off its U.S. downstream subsidiary into an independent and separately traded company.

The move is aimed at providing investors with options of buying different businesses of the company instead of one consolidated entity.

While this shift is obviously drawn from a perspective of hiving off the refining business, which is traditionally less lucrative than the exploration business, the ongoing boom in refining margins could offer some arbitrage opportunity to traders and aggressive buyers.

The fact that the Murphy Oil's profits are growing is underlined by a special dividend of $2.50 per share for a total dividend of approximately $500 million and a share buyback program of up to $1 billion.


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