Sector Snap: Oil refiners trade lower

Oil refiners trade lower as analysts say ethanol rules could hurt profits in 2013

Associated Press

NEW YORK (AP) -- Shares of oil refiners slumped Wednesday, as analysts evaluated the effects that renewable fuels standards could have on the companies' earnings.

The Renewable Fuels Standard law requires companies that sell petroleum in the U.S. to produce renewable fuels, like biodiesel made from vegetable oil. As an alternative, they can purchase credits called renewable identification numbers, or RINs, from producers of those fuels to satisfy the requirement aimed at increasing clean energy. Analysts said prices for those credits have risen sharply this year.

That means it's becoming more expensive for refiners to comply with the laws, said Macquarie Capital analyst Chi Chow, who wrote that the credits cost less than a penny per gallon in late 2012 and were above $1 per gallon in early March. Citi Investment Research analyst Faisel Khan said prices have declined somewhat since then.

Chow said the higher cost for credits could reduce profits for many refiners. The analyst thinks CVR Energy Inc. and Valero Energy Corp are in the worst shape because they might have to buy larger amounts of the credits. He downgraded both stocks, as well as HollyFrontier Corp., to "Neutral" from "Outperform."

Shares of CVR Energy lost $3.99, or 6.7 percent, to $55.66 in afternoon trading. Valero Energy shares gave up $1.84, or 4 percent, to $43.71. HollyFrontier fell $2.02, or 3.7 percent, to $52.62.

Chow said companies like Marathon Petroleum Corp., Northern Tier Energy LP, Tesoro Corp., and Western Refining Inc. are better positioned.

In 2012 corn prices climbed because of severe drought in the U.S. Before that Khan said some refiners built up a stockpile of credits in previous years by producing as much ethanol as they could when corn prices were low. He said those supplies should be exhausted by late next year.

In afternoon trading Marathon Petroleum fell $1.84, or 2.1 percent, to $87.15 and Tesoro shares dropped by $2.32, or 4 percent, to $55.47. Western Refining stock lost $1.92, or 5.2 percent, to $35.37, while Northern Tier slipped by 24 cents to $32.46.

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