US refiners seek shot in the arm for debt

US independent refiners are looking for more confident consumers to boost transportation demand and enable them to pay down debt amassed last year.

Hopes for stronger US gasoline and diesel demand in the second half of 2021 are rising with Covid-19 vaccination rates and falling hospitalisations. US implied diesel consumption has already returned to roughly average seasonal rates, and gasoline use is lingering about 10pc below typical winter levels. US gasoline demand fell by almost 50pc on the year last April as communities restricted business and travel to limit the spread of the pandemic.

Improved control over the virus by the new US administration would return students to classrooms, workers to commutes, drivers to roads and hope to refiners. Confident consumers could unleash pent-up travel demand. "If we can really get the government functioning appropriately on the distribution, I think we are going to be in much better shape — perhaps quicker than we all realise," Valero chief executive Joe Gorder says.

Refiners say they are waiting for demand to pull their crude processing higher, rather than ramping up rates now ahead of an uncertain summer driving season — a decision that will ripple through crude markets to the end of 2021. Their plan should see crude demand rising in the second half of the year, encouraging increased output and widening narrow crude-quality discounts to more typical levels. "Definitely better times ahead," Marathon Petroleum's Speedway retail segment president Tim Griffith says. "We just think it is going to take a little bit of time to really see that."

Refiners need the recovery after losing billions of dollars in 2020. Valero, Phillips 66 and Marathon all narrowed their quarterly losses at the close of last year compared with the third quarter. The industry quickly amassed debt to survive the spring demand shock, and the pace of the fuel demand recovery and an energy transition now supported by federal and some state officials will dictate how quickly those borrowings come off of their books, refiners say.

Companies have cut capital programs but maintained growth spending for investments in renewable diesel production. Debt-to-capital balances may not immediately return to pre-pandemic levels. "We recognise we are in a very dynamic time, which is exciting," Valero chief financial officer Jason Fraser says. "We will keep our minds open and see as things evolve."

Repayment plans

Valero hiked its debt load by over 50pc on the year in 2020, to $14.7bn. Phillips 66 grew its debt by more than a third across its consolidated businesses, to $15.9bn. Recovering refinery margins will help draw down this debt. "I think we feel pretty confident that we will be able to make some good progress — but not get all the way to where we want to get — over the next couple of years," Phillips 66 chief financial officer Kevin Mitchell says.

Marathon, consolidated with its master limited partnership MPLX, expanded its already high debt by 8pc to $31.7bn. About $11.6bn of that is attributed to its refining and marketing business, up by 26pc on the year. The firm can immediately address $2.5bn in debt, it says, in part through a $21bn sale of its Speedway retail assets that is expected to close at the end of the first quarter. A portion of those proceeds will be paid back to shareholders. The company plans to ultimately bring the refiner debt load down to $6bn. "We do want to protect our investment-grade rating, that's important to us," chief executive Mike Hennigan says. His reasoning is clear, given the uncertain pace of the demand recovery. "We want to see how the pandemic continues to play itself out."

By Elliott Blackburn