Energy Prospectus

Refining & Marketing: Takeaways from Texas
Evan Calio – Morgan Stanley
September 8, 2015 4:01 AM GMT
US refiners remain constructive on the macro outlook given continued weakness is oil prices that benefits refiners in multiple ways. Buybacks likely active and robust and along with growing dividends provide downside support. Lower seasonal cracks and syncrude outage are near-term headwinds.
Positive sentiment prevails over weaker cracks. Last week we met with 3 of the main Texas based refiners (VLO, TSO, and PSX) and we expect the tone from this sector will remain positive into Fall conference season. See, Coming Out Swinging: Take-aways from Meetings with VLO, TSO and PSX, published September 4, 2015. The messaging from the 3 meetings was similar in many regards as priorities are converging. Refiners are unanimously focused on maximizing shareholder returns (cash returns), optimizing refining margins, growing higher valued midstream, executing strong organic growth programs and accelerating MLP drop-down pace to improve capital efficiency. Refiners believe 2016 will be another strong margin year with lower product prices (lower oil prices) stimulating demand relative to lower global refining start-ups and heavy global turnaround activity (both in Fall and Early 2016). While product demand remains robust (US demand up 3-4% y/y), refiners (state owned in particular) are scaling back expansion plans as they feel the pressure of lower oil price. As long as demand exceeds supply, refining, retail and wholesale margins will remain attractive (earnings tailwind) while current Street estimates are materially backwardated. Refiners also believe given continued weakness in crude prices, a number of high quality midstream assets will come to the market at attractive prices allowing the refiners to further strengthen their midstream portfolios. As one of the few energy sub-segments with strong (record) cash flows, we expect they will remain advantaged and opportunistic yet not rushed in execution.

Doesn't make you feel warm and fuzzy holding oil/gas stocks which, in fact, did nothing on this 400 point Dow day.

positive points about today--

-e&ps following crude

-400 pt day one indication we are not in danger of a recession(recession would kill crude)

-gdp of eu revised up further supporting crude.

-all this with one report of china's problems not affecting its purchases of crude.

-I think crude is ready to explode to the upside as soon as it becomes more apparent that us production is on its way down.

I agree. All these reports from analysts saying crude will be "Lower for Longer" are not supported by the fundamentals.

1. OPEC is producing flat out, there is very little excess production capacity in the world. I have NEVER seen this before. Sanctions against Iran will not be lifted for AT LEAST six months and the world will probably need every drop by then. BTW all OPEC has to do is say they are going to cut production and the price of Brent will be over $60 in a few days. I have seen a few analysts say Saudi Arabia can ramp up to 12 million bbls per day. That is nonsense. They will not risk damage to their large fields.
2. U.S. production peaked in March at 9.7 million barrels per day and will probably drop under 9.0 million in the 4th quarter (if not there already).
3. U.S. production decline will accelerate in Q4. If WTI stays under $60, it will keep falling.
4. Non-OPEC production outside of U.S. is also falling, but we don't hear much about that. At EnerCom the speaker for Core Labs (a company with offices all over the world) estimated that Non-OPEC production outside the U.S. would drop by a million barrels per day from 2015 to 2016.
5. Demand for refined products increases with lower prices.