US refiners push cash to turnarounds, investor returns

US refiners expect to spend big on turnarounds and shareholder returns this year as the effects of the Covid-19 pandemic reverberate well past 2020.

Major US refiners were eager to herald the return of domestic road fuel demand in outlooks presented over the past month alongside 2021 earnings. Valero expects gasoline and diesel markets to remain "very tight" in 2022, and Marathon Petroleum said it is "less concerned about the pace of recovery and transportation fuels demand" as Covid-19 heads towards an endemic phase in the future. After sustaining nearly two years of demand shocks related to the virus, refiners suggested the pandemic may have ended with a whimper— Phillips 66, Valero, and Marathon all strode to fourth-quarter profits in the face of Omicron.

But there are bills left to pay. Refiners envisage entering a catch-up phase of facility maintenance in 2022, after delaying projects amid the pandemic to conserve cash flow. PBF Energy, Phillips 66 and ExxonMobil are expected to perform busy maintenance schedules after stretching five-year turnaround cycles in recent years, according to research from US bank Wells Fargo.

Marathon expects an active turnaround schedule at its US Gulf coast refineries in the second half, with full-year expenses exceeding the "normal range" of $600mn-700mn. Phillips 66 plans to spend $800mn-900mn on maintenance in 2022 — a record high. "We were able to stretch runs [after the pandemic] and put a lot of work in making sure we could do it from a mechanical integrity standpoint," Phillips 66 refining head Robert Herman said of the company's move to delay full facility turnarounds at its Ferndale, Washington, and Billings, Montana, refineries. "But you cannot do that forever."

The delayed maintenance trend has already caused slowdowns that are tamping refining utilisation in the US, despite the closure of a handful of older, less-efficient refineries in 2020 and 2021 that should have helped raise combined utilisation. "We see an issue in terms of where utilisation is versus closures," Valero senior vice-president of refining Lane Riggs said last month. "There are probably some slowdowns that are occurring, maybe because of maintenance deferrals or turnaround deferrals in the industry."

The net effect is bullish for margins, even if higher operating costs will eat into refiners' profits. US refining margins should rise with increased maintenance, as restricted throughputs will further pressure product stocks that are already in a relatively thin state. That could tempt some refiners to continue to stretch turnaround timelines, as CVR Energy did late last year by kicking a planned 2022 turnaround at its 132,000 Coffeyville, Kansas, refinery into 2023.

Investor incentives

And what will companies do with cash gathered on the back of strong margins? Return it to shareholders, most likely. Marathon has announced a new $5bn share buyback plan it will execute alongside a $10bn buyback launched last year. Those plans mean restricted growth — the firm has earmarked just $1.7bn in capital expenditure (capex) this year, 72pc below its pre-Covid 2019 level.

Phillips 66 built a hefty debt load during the pandemic, but that may not stop it from joining the buyback line. The company aims to pay down debt to within $1bn of a $12bn debt target this year, after its liabilities ballooned to nearly $16bn at the end of 2020. But it expects to introduce a buyback programme around the mid-year if refining returns remain strong, while 2022 capex of $1.9bn will trail far behind its 2019 level of $3.9bn. "It is time to step back into those [share repurchases]," chief executive Greg Garland says. "For all the right reasons, we want to keep capital constrained across the portfolio for the next couple of years."

By Dylan Chase