Third quarter independent refiner earnings were horrendous. Collapsing product crack spreads and narrowing crude discounts squeezed refiners across the U.S. In the third quarter 2013 independent refiners collectively made $132 MM compared to $4,700 MM in the third quarter 2012. (Take a moment and try to wrap your brain around that, it's simply crazy!)

Independent refiners that suffered from poor margins and downtime saw their earnings plummet. When refining margins are low and a refiner isn’t producing product the earnings will be extremely low.  

Independent refiners continued to see a narrowing of the inland crude price differential as inland crude continues to find ways to the coastal

refining centers. The Brent-WTI price discount narrowed from $18/bbl in the first quarter to $4/bbl in the third quarter. This $14/bbl price decline squashed any margin cushion that independent refiners had going into the third quarter. While seeing

the inland crude price discount collapse $14/bbl, the major refiners along the Gulf Coast and West Coast also saw significant product crack declines. This effectively squeezed refiner earnings from both sides of the equation.  

While the independent refinery suffered from refining margin squeeze from all sides they also had to deal with backwardation in the crude market and RIN obligation cost.   

Market backwardation negatively impacts refiners because the buy crude at a higher price than they get to sell their products. This is especially concerning for refiners if they have a long crude supply chain. One side effect of the new inland crude supply chains especially those delivered by rail is a very long supply chain. Bakken crude by rail to each of the coast could be as long as 4 weeks, which in a backwardation market could be a significant, cost penalty.   

Independent refiners' earnings results are bucketed into two groups. Independent refiners that operated at full rates with limited downtime were at least able to drive down lower operating expenses with increased utilization. Generally lower operating expense per barrel leads to better overall earnings. 

Independent refiners that exceeded their peers in the third quarter 2013 were Tesoro, Valero, and Western. The common trait amongst these independent refiners was strong refinery utilization rates. Each refinery reported minimal unplanned and planned downtime. Higher utilization rates and lower operating expenses enabled relatively strong earnings compared to their peers.  Together Tesoro, Valero, and Western earned $440 MM in the quarter and averaged $10/bbl gross margin and $5.3/bbl operating expense nearly $5/bbl in net margin per barrel.  

Among the independent refiners, Phillips 66 has a unique advantage with its investment in ChevronPhillips Chemical. Strong chemicals margin contributed roughly half of the earnings for Phillips 66, which earned $535 MM. Phillips 66 also did itself a huge favor driving down operating expense per barrel to $4.27/bbl. The third quarter operating expense for Phillips 66 was its best (lowest) result over the past 24 months, congratulations!  

Independent refiners Alon, CVR, Holly, Marathon, and PBF collectively earned $124 MM in the third quarter 2013. Alon, Holly, Marathon, and PBF each had their worst quarterly results over the past 2 years. Alon and PBF posted negative earnings in the quarter losing $42 MM combined.  

We’ve discussed the negative market affects (in crude and products) for the independent refiners, unfortunately each of these refiners are collectively more exposed to the inland crude discount than their peers which can be seen in the earnings results. Compounded by poor market conditions these independent refiners also had unplanned and planned downtime which crippled their limited earnings power.   

For the independent refiners in the third quarter 2013, we continue to learn two refining fundamentals. First, the market will give and the market will take. It is critical for the independent refiners to look for ways to manage market risks. Lastly, downtime and operating expense can kill an independent refiner especially when margins are thin.