Mike Wirth, the CEO of oil giant Chevron (NYSE: CVX), says he doesn't believe there will ever be another new oil refinery built in the U.S. He made that comment during a recent interview with Bloomberg TV discussing what the country can do to ease record prices at the pump. Even if oil producers like Chevron increased their production, there's not enough refining capacity to meet the demand for petroleum products like gasoline, jet fuel, and diesel. That means prices will remain elevated even if oil companies pump more crude oil.
While that's bad news for consumers, it's good news for refiners. It suggests refining margins will stay strong. That could give refining stocks the fuel to continue producing strong results.
No quick fix for high gas prices
According to AAA, the average U.S. retail gasoline price is currently around $4.75 per gallon. That's a record high and 45% above last year's level. Unfortunately, there's no easy solution to address high gas prices. While elevated oil prices contribute to the surge in gasoline prices, it isn't the only factor.
Another issue is that refining margins have surged in recent weeks. That's due to lower refined product supplies from Russia and China and red-hot demand for those products, even though international air travel and Chinese consumption aren't yet back to their pre-pandemic levels. Those higher margins have a big impact on the price paid at the pump because refining is the second-largest input cost:
As refining margins rise, changes in oil prices have less influence on prices paid at the pump.
Because of that, even if Chevron and other oil companies increased their crude oil production -- and that's easier said than done -- it wouldn't put as much of a dent in gasoline prices as consumers might hope. The industry can't quickly add new refining capacity.
In Wirth's view, the U.S. won't ever build another refinery. That's because it's impractical for an energy company to consider building a refinery due to the current environment. Wirth said, "You're looking at committing capital 10 years out, that will need decades to offer a return for shareholders, in a policy environment where governments around the world are saying, 'We don't want these products to be used in the future.'" So even if a company like Chevron was willing to commit the time and capital to build a refinery, it doesn't make sense given the shift toward cleaner alternative energy.
A great time to be a refiner
With demand for refined products strong, and no new capacity coming down the pipeline, refining companies are in an enviable spot these days. That was certainly the case for Chevron's U.S. downstream business in the first quarter. The company reported $486 million of earnings, reversing a $130 million year-ago loss. Chevron cashed in on higher demand by increasing its refinery run to capitalize on higher margins for refined products.
Meanwhile, energy companies focused on refining made even more money. For example, leading independent refiner Marathon Petroleum (NYSE: MPC) generated $1.4 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from refining and marketing in the first quarter. That's up from a mere $23 million in the year-ago period. Marathon benefited from higher margins -- $15.31 per barrel in the first quarter of 2022 versus $10.16 per barrel in the prior-year period -- and higher utilization (Marathon used 91% of its available capacity, compared to 83% in the first quarter of 2021).
Fellow independent refiner Valero (NYSE: VLO) also cashed in on improving conditions in the refining market during the first quarter. It tallied $1.47 billion of adjusted operating income, a significant improvement from an adjusted loss of $506 million in the year-ago period.
With refining margins only improving in recent weeks, and refiners operating closer to max capacity, the industry appears poised to produce an even bigger earnings gusher in the coming quarters. Most of that windfall will go toward enriching investors via higher dividends and share repurchases since refiners aren't spending capital on increasing their traditional refining capacity. Instead, most refiners have already shifted their focus to the fuels of the future. For example, Marathon recently formed a joint venture to build a $2 billion renewable fuels project, while Valero is accelerating the expansion of its Diamond Green Diesel project to finish it by the fourth quarter of this year.
How to invest in the refining boom
The U.S. hasn't built a new refinery in decades. Given the current environment, it likely won't build another one anytime soon, if ever again. Because of that, there's no quick solution to the industry's capacity issues.
That suggests refiners should continue to thrive in the near term. While Chevon will be one of the beneficiaries of these market conditions, refining is a small part of its operations. Because of that, investors looking to cash in on the current refining boom might want to consider pure-play refiners like Valero or Marathon over an integrated oil giant like Chevron. They'd have more upside potential if refining margins remain strong.
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