What about MLPs’ Refiner Customers?

With oil’s collapse, a lot of investor attention has been given to the financial health of midstream’s customers that produce oil and gas. However, several midstream MLPs have refiner customers and/or refiner parents as shown in the table below. Notably, refiners have distinct profitability drivers, which are not necessarily dependent on the absolute crude price.

Refiners make money by processing oil into usable products like gasoline, diesel, jet fuel, and petrochemicals. The profitability of refiners depends on the difference between the price that they can sell their refined products and the cost of crude (referred to as the crack spread), as well as the costs of running a refinery. Refiners can also benefit from widened crude spreads, which occur when regional crude prices trade at a deeper discount than normal to benchmark crudes. Crack spreads can be volatile since they are based on commodity prices. Because refiners make their money on the spread between product prices and crude prices, they are less sensitive to the absolute price of oil than their upstream counterparts that produce oil. This partially explains why refiners have been the best performing energy subsector (excluding renewables) for five of the last eight years (read more). However, weak demand for gasoline, jet fuel, and to a lesser extent, diesel related to COVID-19 resulted in depressed crack spreads as product supply overwhelmed demand, and refiners were forced to lower their processing rates (read more). Per Bloomberg, the Gulf Coast crack spread, which averaged $15 per barrel in 2019, fell into negative territory on April 3, 2020, but has since recovered to almost $8 per barrel as of May 8, 2020.