Earnings Heading Up For Refiners? (MRO, CVX, VLO)

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Marathon Oil (NYSE:MRO) today gave an interim update on its third quarter performance. The company will announce earnings on October 30th.  Production is expected to be up by about 34,000 barrels of oil equivalent/day (boepd) from the second quarter, and production available for sale is expected to be 388,000 boepd. That is higher than previous guidance.  This also leads one down the path of wondering if things at Chevron Corp. (NYSE: CVX) and Valero Energy (NYSE: VLO) might be close to coming around too.

Price realizations per barrel of oil are up $2.01/b in the US, and$8.49/b internationally. Marathon attributes the increase to greatersales in July, when prices were at their peak. Domestic natural gasrealizations "increased slightly" from the second quarter, and gasprices were up about $0.54/thousand cubic feet internationally in thefirst two months of the third quarter. September prices are lower andare expected to result in flat realizations when comparedwith the second quarter.

The most interesting development in Marathon’s quarter was the increasein refining margins, which have been 40% higher than in the thirdquarter of 2007. Marathon attributes this to the lower price ofcrude, which fell about $40/b during the third quarter of 2008 comparedwith a $10/b rise during the same quarter in 2007. Refining throughputalso fell about 90,000 barrels per day, half of which Marathon saidwere caused by hurricane impacts.

We noted thatrefining margins could make a comeback this quarter. The price ofgasoline at the pump was not falling as fast as the price of crude, andcompanies were pocketing the extra pennies per gallon. That seems to beconfirmed by Marathon’s numbers, but we’ll wait to see what Chevron(NYSE:CVX) says tomorrow in its interim report before we declarevictory in our prediction.

Valero Energy Corp. (NYSE: VLO) has been under more pressure than onecould imagine.  It reports earnings October 28.With another 10% drop this morning, shares are down about 73% fromtheir yearly highs and are on 52-week lows.  If anyone can use a break,it is Valero.

Marathon’s share price has been all over the place in early trading today. Shares were up marginally, but the market selling is taking it down to challenge its 52-week low.

Paul Ausick
October 8, 2008