US refiners expect consolidation to ebb

US independent refiners have seen buying opportunities fade as the industry prepares for an upswing in revenues.

Refining executives this earnings season found little reason to chase Marathon Petroleum's proposed $23bn acquisition of fellow refiner Andeavor. US refiners have amassed billions of dollars in cash and are heading into what the industry expects will prove to be a period of higher margins.

But bountiful cheap crude and natural gas, pending changes to marine fuel regulations favoring complex US refiners and promising export demand have lifted valuations for refining assets, executives said. Industry leaders are looking to invest more money in logistics or other associated businesses rather than pay full price for refineries.

"It is basically a seller's market within the refining space," US independent refiner Delek chief executive Uzi Yemin said during a quarterly earnings call. "That will bring, in my mind, refining trying to get into other spaces to try and diversify their earnings."

The US market does have sellers. Petrobras said earlier this year it would seek a buyer for its US subsidiary's 100,000 b/d refinery in Pasadena, Texas. LyondellBasell is focused on demonstrating stable operations at its 266,000 b/d complex refinery in Houston, Texas, following fires and other operational problems that marred a proposed sale in 2016.The company expected the refinery's heavy crude capacity and sulfur-reducing equipment to drive profits next year as marine fuel changes push down sour crude prices and place a premium on low-sulfur fuel.

Other facilities in the Rocky Mountain and west coast regions remain unconfirmed but potential sales candidates.

But recent refinery buyers said asset prices have climbed too high. PBF Energy wanted to continue eight years of acquisitive expansion with a second California refinery to complement its 2016 purchase in Torrance, California. The US independent refiner's model of picking up struggling or undervalued facilities was running out of targets, chief executive Tom Nimbley said on a recent earnings call.

"We bought five refineries, and it is not clear to me that there are five more refineries, or even three refineries, out there that you can get under that same model right now," Nimbley said during a quarterly earnings call. "The bid-ask has widened out quite a bit."

Refiners have turned to midstream to spend their cash. Delek, which has amassed $1bn, was considering assets radiating from its infrastructure in west Texas' Permian basin. A quarter of its $310mn capital expenditures budget was earmarked for Permian logistics this year. The company was coy on a recent call about its ability to move crude to the coast.

Phillips 66, which reported $842mn in cash, dove into the infrastructure movement last month with a joint venture 700,000 b/d Gray Oak pipeline to Corpus Christi, Texas. Investors favor midstream investments to refinery revenues, chief executive Greg Garland said at a sharehold meeting last week.

Valero's refinery spending focused inside its existing fencelines, adding alkylation or power units. It plans to spend $500mn each on logistics and refining over the next three years.

Valero chief executive Joe Gorder saw little need for another refinery.

"I just do not think there is going to be a lot of opportunity for consolidation on the refining side of the business, from Valero's perspective, because we really like our portfolio today," Gorder said in April. "There are things that we could bolt on to it that would be nice to have, but as far as needing to do a transaction to create a lot more critical mass, that is just not something that we need to do today."