Canadian Oil Sands Trust

Refining business pumping bigger profits into oil patch

A sudden turnaround in the business of transforming crude oil into gasoline and jet fuel has sparked a sharp jump in profits among companies whose refining margins have more than tripled from last year.

Only a year ago, refineries had fallen on to such hard times that the industry began shutting down plants and selling off others. Now, analysts say refining strength, which has resulted from a market oddity that has seen the industry buy crude on the cheap and sell gasoline at high prices, could last a few years.

That means companies that have held on to refining capacity through recent lean times are now being rewarded for their diversified strategy.

Because of maintenance outages and a production stoppage in Libya, for example, Suncor Energy Inc. produced just 460,000 barrels a day in its second quarter, down more than 25 per cent from the same time last year. But it posted a profit gain of 4 per cent to $562-million in the second quarter compared with the same period last year. Cash flow, at $1.98-billion, grew by 16 per cent.

Higher crude prices, of course, played a role, but across the oil patch, refining margins have also been a strong contributor. Profits have flowed both from the refineries that produce gas and diesel jet, and from the pre-refineries or “upgraders” that take heavy oil sands crude and transform it into a lighter oil.

For Suncor, the math so far this year has worked like this: Netbacks, or operating profits, on bitumen worked out to about $54 per barrel. Upgrading that bitumen added another $34. And refining added a further $35.

“And those numbers are additive,” Suncor chief financial officer Bart Demosky told investors on a conference call Thursday. “The resulting increase in margin captured year to date is over $1.3-billion versus the strategy of a straight bitumen seller into the marketplace.”

In other words, processing crude oil, a business that has fallen out of favour lately as companies abandoned upgrader plans and shelved refineries, has suddenly turned into a cash fountain.

“The good times are rolling, definitely,” said Katherine Spector, a commodities strategist with CIBC World Markets in New York.

At Husky Energy Inc., per-barrel profit margins in the second quarter reached $21.37 (U.S.), more than three times last year, when they stood at $6.03. Cenovus Energy Inc., which is a 50-per-cent owner of a pair of U.S. refineries with ConocoPhillips, said refining is now a critical pillar in supporting its growth, after refinery cash flow rose to $322-million this past quarter from a $24-million loss last year.

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