Katrina’s Aftermath – Energy Profits Likely to Keep Rising;

Published on

Industry executives and analysts expect refiners’ gains to continue to be strong
into next year.

Los Angeles Times

Companies that refine oil into gasoline and other fuels, already benefiting from market disruptions caused by Hurricane Katrina, are likely to keep seeing robust profit gains through next year, industry executives and analysts said Wednesday.

Even before the storm, fuel prices and refiners’ profit margins were rising to record levels because of low supplies coupled with strong demand for gasoline, diesel fuel, jet fuel and heating oil.

Katrina tightened that squeeze by knocking out much of the Gulf Coast’s critical production and refining capacity. And with the rebuilding effort expected to take several months, refiners’ earnings gains are expected to keep surging during 2006.

Valero Energy Corp., which became the nation’s largest refiner a week ago with its $6.9-billion purchase of Premcor Inc., is “in the right business at the right time,” Valero Chief Operating Officer William Klesse said at a Lehman Bros. energy conference in New York.

Although San Antonio-based Valero and others are toiling to restart refineries and production facilities damaged by the hurricane, “longer term we believe gasoline margins will continue to be strong,” he said.

The price increases swelling the refiners’ earnings also have sparked outrage
among many motorists, lawmakers and consumer advocates, along with widespread
allegations of price gouging.

Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, said the industry hasn’t built new refineries in decades and otherwise keeps supplies low, “so every disaster means a big hike in profits.”

“The Congress and the statehouse need to focus on regulating [fuel] supplies in the same way they regulate electricity supplies,” he said.

Meanwhile, crude oil and gasoline futures prices fell again as the Energy Department predicted that overall U.S. oil and gasoline production would return to pre-hurricane levels by December.

The benchmark U.S. grade of light crude oil for October delivery dropped $1.59 to $64.37 a barrel, and gasoline for October delivery shed 3.28 cents to $2.022 a gallon.

The department’s statistics arm, the Energy Information Administration, said the speed of the Gulf Coast recovery was difficult to predict because the damage was still being assessed, and would vary depending on the pace of repairs. About 57% of the region’s oil production, and 40% of its gas output, remained shut down Wednesday, the U.S. Minerals Management Service said.

A return to normal operations should be achieved by December in any case, the Energy Information Administration said in a report.

That would bring total U.S. oil production back to just under 5.4 million barrels a day, and the production of gasoline and other fuels to nearly 16.4 million barrels a day, the same levels as in August, the agency said.

One of the largest refineries in the Gulf Coast is Chevron Corp.’s Pascagoula, Miss., facility, with a production capacity of 325,000 barrels of oil a day.

Chevron, based in San Ramon, Calif., said Tuesday that the refinery avoided “catastrophic damage” but that it would “be days before a full estimate of damage is known” or when the refinery could be restarted.

Wholesale oil and gasoline prices came off their post-Katrina peaks after the 26-nation International Energy Agency committed 60 million barrels of oil and gasoline to the U.S. market, the White House released oil from the U.S. Strategic Petroleum Reserve and the Environmental Protection Agency eased air-quality rules for gasoline — all of which were aimed at averting shortages.

Because California has its own stringent air-quality requirements for gasoline production, the staff of the California Air Resources Board issued an emergency recommendation that the state also waive certain refining restrictions to “help ensure adequate supply and availability of gasoline fuel to California consumers.” The board is scheduled to hold a hearing on the matter today in Sacramento.

Although wholesale energy prices have retreated, retail prices for gasoline have remained stubbornly high.

The U.S. average for self-serve regular edged up to $3.042 a gallon from $3.041 on Tuesday, according to AAA. In California, the average rose to a record high $3.052 a gallon from $3.049.

But investors are seizing on the disruption — and the refiners’ bullish outlook — as an opportunity.

Valero’s stock price has soared 24% since Katrina struck Aug. 29; it closed Wednesday at $111.03 a share, up $1.62 for the day. Shares of Sunoco Inc., another major refiner, have jumped 22% since the hurricane and closed Wednesday at $77.25 a share, down 17 cents for the session.

Even those gains don’t accurately reflect the potential boon for the refiners, analyst Doug Leggate of Citigroup Global Markets said in a report Monday, in which he upgraded Valero, Sunoco and Tesoro Corp. to a “buy” rating.

Although he expects fuel prices and profit margins to fall from their current, near-record peaks, “we believe current earnings expectations materially understate the earnings outlook for the U.S. refiners,” he wrote.

Valero was expected to earn $9.85 a share this year, up from $6.53 in 2004,
according to the most recent survey of analysts by Thomson Financial.

But in the aftermath of Katrina, Leggate hiked his estimate for Valero to show 2005 profit more than doubling, to $13.50 a share.

Sunoco Chief Executive John Drosdick said he “wouldn’t disagree with any of our peers, or any of the analysts, that say it’s going to be strong for a while. How long I don’t know,” he said at the Lehman Bros. conference. “Obviously our strategy is to try and enjoy the upside, but guard against the time when it might come back down to Earth.”

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