2020 was supposed to be a great year for many U.S.-based pureplay refiners, with a strong economy expected to drive robust refining margins and the new IMO-2020 rules for cleaner maritime emissions expected to benefit those with more complex refining capacity. Unfortunately, COVID-19 dramatically changed the global economic landscape and government shutdowns and other restrictions on individual movement resulted in precipitous drops in demand for jet fuel, gasoline and other refined products. This brought with it a steep decline in refining utilization and refining margins. While demand for gasoline has recently begun to see dramatic improvement and margins have begun to improve, particularly following recent progress made on the vaccine front, individuals around the globe remain wary of air travel and demand for jet fuel continues to lag. This article discusses many of the trends and responses seen among many of the pureplay U.S. refiners (as opposed to more integrated companies like Exxon, Chevron and Shell) from late February – October 2020. While many uncertainties remain, particularly as the Biden administration’s agenda continues to take shape, COVID-19 has accelerated certain trends discussed in this article that are likely to continue far beyond 2020.
Need for Liquidity
As government shutdowns and quarantines began to take hold in mid-March 2020 and it became apparent that COVID-19 was destined to dramatically impact our way of life, many U.S. pureplay refiners, even those with strong financial heath, rushed to shore up their balance sheets and secure liquidity to prepare for the potentially long-lasting negative effects of COVID-19.
The primary method U.S. pureplay refiners used to shore up liquidity was through short-term borrowings. By the end of April 2020, Marathon Petroleum Company (“Marathon”), Phillips 66 and Valero Energy Corporation (“Valero”) had each put in place new short-term 364-day revolving credit facilities to supplement their existing credit facilities. On May 7, 2020, PBF Energy Inc. (“PBF”) also increased the borrowing capacity under one of its asset-based revolving credit agreements. Many also tapped the capital markets, taking advantage of historically low interest rates to scoop up short-term debt at attractive rates. In April 2020 alone: (i) Marathon issued $2.5 billion of senior notes, with short-term tranches maturing in 2023 and 2025; (ii) Valero issued $1.5 billion of senior notes, with short-term tranches maturing in 2023 and 2025; and (iii) Phillips 66 issued $1 billion of senior notes, with short-term tranches maturing in 2023 and 2025. On May 7, 2020, PBF also launched a private placement of $1.0 billion of senior secured notes due 2025. As it became clear that the pandemic would last longer than expected, (i) Phillips 66 reentered the public debt markets, issuing an additional $1.0 billion of senior notes in June 2020 that included a re-opener of its recently issued senior notes maturing in 2025 and an additional 10-year tranche; (ii) Valero issued an additional $2.5 billion of senior notes that included a re-opener of its recently issued senior notes maturing in 2025, and three additional tranches all with maturities of less than 10 years; and (iii) Holly Frontier Corporation (“Holly”) issued $750 million of senior notes, with tranches maturing in 2023 and 2030 that contained coupon-step up provisions such that the interest rate Holly owed on the notes would increase in the event its credit profile deteriorated to a specified level.
As the pandemic begins to subside and demand begins to return, there may be an increase in liability management transactions to deal with the significant amount of short-term debt these companies took on to weather the storm.
To further strengthen their liquidity and shore up their balance sheets, many U.S. pureplay refiners took actions with respect to their dividends and share repurchase programs. While the bigger, more financially stable refiners, such as Valero, Marathon, Phillips 66 and Holly have all thus far maintained their dividend at pre-pandemic levels, in March 2020 PBF Energy announced the suspension of its dividend and CVR Energy lowered its dividend declared in May 2020 by 50% compared to pre-pandemic levels. Marathon, Valero and Phillips 66 each also temporarily suspended their share repurchase program at the beginning of the pandemic, noting that they would continue to closely monitor the landscape.
As it became clear that COVID-19 was going to crater demand for oil and gas for much of 2020, U.S. pureplay refiners began to react by rightsizing their operations and utilization. On the capacity and utilization front, by the end of April 2020, (i) Holly announced that it was running its refining segment at 70% of capacity; (ii) Marathon announced that it was reducing the amount of crude oil it processes and temporarily idled portions of its refining capacity; (iii) PBF announced that it sold off five hydrogen plants; and (iv) Valero announced that it idled various gasoline-making units at certain refineries, reduced jet fuel production and temporarily idled certain ethanol plants. Additionally, virtually all of the U.S. pureplay refiners announced reductions in their capital budgets and plans to either defer, postpone or cancel certain projects. The long-term ramifications of project deferrals and their impact on subsequent refinery costs and turnarounds will be interesting to observe. Many of these refiners have since increased utilization and reopened plants, a trend that will hopefully be accelerated by recent positive vaccine news.
Magnanimity in the Face of Challenge
Despite the unprecedented challenges presented by COVID-19, which were exacerbated at the beginning of the pandemic by the actions of many oil and gas producing countries in OPEC, the magnanimity and continued focus by many of the U.S. pureplay refiners on the health and safety of the communities in which they operate should not go unmentioned. For instance, when the nation was facing a shortage in hand sanitizer at the beginning of the pandemic, Valero began producing hand sanitizer at one of its midwestern ethanol plants. Valero also contributed more than $3 million for COVID-19 relief in the first part of 2020 alone. In April 2020, Marathon donated $1 million to American Red Cross Disaster Relief, as well as over 575,000 N95 respirator masks to healthcare facilities. Phillips 66 also announced that it would be donating $3 million to COVID-19 relief efforts, with $500,000 of that going to the Houston Food Bank. The ability of these leading refiners to step up to support their communities in the face of such dramatic economic and operational difficulties is laudable.
Push to Renewables
Depressed oil and gas consumption also accelerated the shift by many U.S. pureplay refiners into renewables. While Valero has long been at the forefront of the renewables market, and is now the world’s second largest renewable diesel producer and the world’s second largest corn ethanol producer, it recently signaled its commitment to this market by announcing that 40% of its overall growth CapEx for 2020 and 2021 is expected to be allocated to expanding its renewable diesel business. Phillips 66 announced that it would convert its San Francisco area refinery to largely produce renewable diesel. Holly announced its continued commitment to producing renewable fuel, that it would continue with construction of a renewable diesel unit at its Artesia refinery, and that it expects to invest between $650–$750 million in its renewables business. Marathon also said that it was considering converting a California refinery that it closed last spring to a renewable diesel facility. As governments continue to push for decreased carbon emissions and restrictions on traditional gasoline powered vehicles, the demand for renewable diesel is expected to increase. Given that renewable diesel has a higher compatibility with our current infrastructure system relative to current electric vehicles, the relative demand between the two over the long-term should be interesting to see play out.
Once our way of life again begins to more closely resemble pre-pandemic activity, look for refining margins and demand to revert back to normal and the bigger, more complex refiners to emerge healthier than the competition. Project deferrals and refinery turnarounds, when combined with the likelihood of increased regulation under a Biden Administration, are likely to benefit those refiners who continued to invest in maintenance and growth CapEx as much as possible during the pandemic. The push into renewables, particularly renewable diesel, is also a trend that is likely to continue and this is a resource that may be getting much more publicity in the coming years. Overall, while the market begins to focus more and more on climate change, the fact of the matter is that myriad products used in day to day life beyond gasoline, jet fuel and diesel (such as plastics, synthetic rubber, many medicines, and makeup) come from refined petroleum products. With an auspicious pivot into renewables, together with the fact that our system will still depend on fossil fuels in some manner for decades to come, refiners are likely to be around and successful for the foreseeable future.
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