Would Crude Exports Mean the End for Refiners' Moats?
They would eliminate a key competitive advantage, but aren't necessarily a death knell.
The Commerce Department's decision to allow two companies to export lightly processed lease condensate raises the question of whether a full repeal of the domestic crude export ban is coming. Unmitigated exports of domestic crude remain unlikely, but the risk is now higher. In the event of repeal, we think refiners would lose the primary source of their cost advantage, as light crude feedstock discounts would be diminished. While refiners' narrow moats rest largely on this cost advantage, its loss does not automatically mean they will lose their Morningstar Economic Moat Ratings. Some refiners would continue to enjoy a feedstock cost advantage, while other competitive advantages could contribute to ensuring excess returns. After analyzing refiners' competitive advantages and returns, we find HollyFrontier (HFC), Western Refining (WNR), and Phillips 66 (PSX) would retain their moats. Valero (VLO), Tesoro (TSO), and Marathon Petroleum (MPC) would not. We find the greatest value in Western and Tesoro. HollyFrontier is undervalued as well, but is more exposed if exports occur.
With Crude Exports, Most Refiners Lose a Key Competitive Advantage
Access to cost-advantaged feedstock was the primary factor behind U.S. refiners earning narrow economic moats. Growing U.S. unconventional light crude production and a ban on crude oil exports resulted in domestic production being discounted to world prices. This discount granted U.S. refiners a cost advantage relative to international peers. With discount light crude, U.S. refiners' crude slates could be composed completely of cost-advantaged feedstock. The earnings uplift from light crude discounts, combined with the relatively low capital intensity of the logistics assets and processing equipment needed to capture those discounts, produced higher sustainable returns compared with the past. Thus, refiners earned narrow moats.
Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.