HollyFrontier's access to price-advantaged crudes from the Permian Basin and Western Canada will continue to benefit the refiner's margins throughout the second quarter, a company executive said Wednesday.
As Permian Basin crude production exceeds takeaway pipeline capacity to the US Gulf Coast, local mid-Continent refiners like HollyFrontier are reveling in higher margins, a result of growing Midland crude discounts from stranded barrels.
"With widening Permian differentials and consistent discounts for WCS and black wax crude oils, we anticipate continued margins across our refining system in the second quarter," Thomas Creery, president of HollyFrontier Refining and Marketing, said on the company's first quarter earnings call.
HollyFrontier's overall first quarter refining margins were $12.83/b, 70% higher than $7.54/b in the first quarter of 2017, when WTI Midland held a 39 cent/b discount to WTI Cushing.
Cushing prices are key for HollyFrontier, which uses the oil hub of Cushing, Oklahoma, to calculate its margins. The company has six refineries with throughput capacity of 489,630 b/d. They serve the Midwest Group Three market, the Rockies Region, and Arizona and Nevada.
So far this quarter, WTI Midland is trading at a $5.24/b discount to WTI Cushing, S&P Global Platts price assessments show. This quarter's much deeper Midland-Cushing discount will help strengthen second quarter margins further.
When compared to Permian export barrels looking for line space to the USGC refining and export market, Midland WTI holds an even greater benefit for local refiners like HollyFrontier. So far in the second quarter, WTI Midland is trading at a $7.91/b discount to WTI at Magellan East Houston, according to Platts data.
And forward markets portend wide differentials well into 2019, said CEO George Damiris, due to an imbalance of takeaway capacity to drilling activity and additional takeaway capacity.
"There are some recently announced or previously announced pipeline production projects that will be completed later this year that will help remedy it, but those are already built into the price," he said.
LOCAL BENEFITS OF PIPELINE CONSTRAINTS
HollyFrontier's first quarter system throughput of 415,000 b/d included 174,000 b/d of Permian crude. Of this, 106,000 b/d went to the Navajo refinery, which runs only Permian crude. There, the first quarter crude slate was comprised of 60% Permian West Texas Sour and 31% West Texas Intermediate.
About 68,000 b/d of Permian crude flowed through the Centurion pipeline from Cushing into the El Dorado, Kansas, plant.
HollyFrontier expects second quarter run rates of between 440,000-450,000 b/d, said James Stump, senior vice president of refining.
This is slightly above first quarter crude run rates which were affected by a turnaround at the Tulsa, Oklahoma, refinery and an unplanned outage at Woods Cross, Utah, due to a fire in a crude unit.
HollyFrontier's second quarter maintenance is confined to the El Dorado refinery, Stump said.
HollyFrontier ran 86,000 b/d of Western Canada Select in its Cheyenne, Wyoming, and El Dorado plants in the first quarter.
And besides firm Permian access, HollyFrontier has enough firm commitments on various pipelines "to purchase and deliver adequatevolumes of price advantaged heavy crude from Canada to meet our refining needs," Creery said.
WCS ADVANTAGE
HollyFrontier's strong first margins also benefited from access to price-advantaged heavy Western Canada Select crude as well as lighter, sweeter Permian barrels.
"We could swing 100% sweet to sour," said Damiris.
WCS differentials are still struggling to shed historically weak levels following the temporary shutdown of TransCanada's Keystone Pipeline on November 16, 2017.
Despite the restart at reduced pressure on November 28, differentials remain weak.
"In Canada, we saw dips blow up as wide as 25-ish and step that up back into the $16, $17 range," said Damiris.
In the first quarter, WCS barrels from the wellhead in Hardisty, Alberta, held a $19.33/b discount to those held in Cushing, Platts price assessments showed. The differential so far this quarter has narrowed, with WCS Hardisty holding a $11.09/b discount to WCS in Cushing, but is expected to widen back out as turnarounds end and increased light production takes back pipeline space.
"So that's going to be a function of how much crude can be taken out by rail in the interim year until the next incremental pipeline," he added.
Costs to rail crude from Hardisty to the USGC are about $16-$19/b, market sources said.
At its Woods Cross refinery, HollyFrontier will benefit from increased production of black wax crude from the Uinta Basin, which crossed the 100,000 b/d mark for the first time since 2015. This was due in part to "significant technology improvements" in oil production and a higher oil price, the company said.
"We think as long as crude is above the $60 per barrel range, we [will be] pleased with...the production in that region," said Damiris.
