The cost of the crude oil is subtracted from the cost of the products, and the result is divided by the number of contracts of crude oil. This results in the following expression:. The combined value of heating oil and unleaded gasoline must exceed the crude oil price by more than the refining production costs. Three barrels of crude will produce two barrels of unleaded gasoline, and one barrel of heating oil. Oil and gas companies and refiners will still keep gas stations that they consider core or have good synergy value close to refinery, strategic location.
If the refinery has extensive marketing operations, midstream assets pipelines , barges, rail terminals , analysts may use a Sum of the Parts valuation methodology. However, the valuation drivers for the multiples they trade at can be exhaustive.
Refiners that trade at premium multiples will have well positioned refineries or can lock in an uninterrupted, low-cost supply of crude oil. If a Gulf Coast refiner has strong, contracted volumes for discounted heavy oils such as Western Canadian Select from Alberta, it will realize industry beating margins.
Complex refiners that are flexible will also receive a premium versus peers as they can opportunistically switch between light and heavy feedstock depending on cheapness. Proximity to key end markets is also important. Gulf Coast refiners are not landlocked like refiners in the Midwest are, and can ship gasoline by tanker to demand markets such as Latin America and Europe.
As such, access to tidewater is a positive for valuation. Marketing assets can be hit or miss — the existence of a trading division, even if it is very sophisticated and consistently profitable, may trade at a much lower multiple to the standard refining operations. This is because earnings are volatile and benefit from widening differentials given good supply chain access and market knowledge. The largest public oil company in the world ExxonMobil does not play in the oil marketing space.
Generally, a high ROIC will point to a premium valuation, with the logic that the stock may be expensive now, but would be cheap next year if multiples stayed the same. Given the opaque and unpredictable nature of these considerations, picking the right refinery stocks is very difficult.
The crack spread is the relevant unit net revenue figure for oil and gas companies. The crack spread is the differential between the sale price of the refined products produced output and the price of crude oil the input or the feedstock. Given that costs other than the crude oil can be reasonably predicted, refiners often hedge WTI, refined products or the crack spread itself with derivatives — which may include options, forwards and structured strategies such as collars. A crack spread means 6 barrels of crude oil yields 3 barrels of gasoline, 2 barrels of diesel and 1 barrel of fuel oil or kerosene.
Different cities will have different crack spreads due to the difference in feedstock prices where they are and the price of gasoline in the area gasoline in California will differ greatly from gasoline in Texas.
As LLS is the relevant feedstock for the refineries, the LLS crack spread is the most relevant measure of profitability. The refinery capacity is the limit to the number of barrels it can refine a day. The utilization is how much of the capacity is being used. If spreads are healthy, analysts want to see high utilization and large capacity for the refinery.
A basic crack spread is the crack spread which represents the refining profit margin, that is buying crude oil and selling the refined products i. While crack spread are quoted in dollars per barrel and many refined products are quotes in dollars per metric ton or dollars per gallons, if the refined product is not quoted in dollars per barrel it needs to be converted to dollars per barrel.
If the refined product value is higher than the price of the crude oil, the crack spread is profitable. Add us to your site. Today in Energy. June 2, An introduction to crack spreads U. Gulf Coast conventional gasoline crack spread Crack spreads are differences between wholesale petroleum product prices and crude oil prices.
Crack spreads can be calculated using either a single product or multiple products: Single-product crack spreads: A single-product crack spread reflects the difference in value between a barrel of the specified product and a barrel of crude oil. A common single-product crack spread is the gasoline crack spread, as shown in the figure.
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