Thanks for the input.
I looked into it and it seems to be a matter of degree. Some fires/shutdowns mean less or more than others. Surely [Pernis] the largest refinery in Europe going down isn’t comparable to an exploratory rig in terms of revenue/profits lost.
According to the Energy Information Administration (‘EIA’):
“Crack spreads are differences between wholesale petroleum product prices and crude oil prices.
These spreads are often used to estimate refining margins. Crack spreads are a simple measure based on one or two products produced in a refinery (usually gasoline and distillate fuel). They do not take into consideration all refinery product revenues and exclude refining costs other than the cost of crude oil.”
Full article for those interested in “An Introduction to Crack Spreads”:
https://www.eia.gov/todayinenergy/detail.php?id=1630
The EIA also provides the following data:
- (June, 2017) RBOB-Brent crack spread ~$0.35/gallon →
$14.70/bbl
- (June, 2017) Distillate-Brent crack spread ~$0.30/gallon →
$12.60/bbl
- (2012-2016 August Average) RBOB-Brent crack spread ~$0.25-$0.35/gallon →
$10.50-$14.70/bbl
- (2012-2016 August Average) Distillate-Brent crack spread ~$0.36-$0.39/gallon →
$15.12-$16.38/bbl
Information was above derived from graphs found here:
https://www.eia.gov/finance/markets/products/prices.php
NASDAQ reported on Monday that the Pernis refinery’s shutdown effect on diesel crack spreads “drove up… to a session high of
$14.60 a barrel… its highest level since November 12, 2015.”
In addition, “
Traders said concern over how long the refinery would be down was leading to an even bigger rally and one that could extend to support refinery margins in Asia and the United States…
The gasoline refining margin in northwest Europe was up by over 12 percent at $13.43/barrel.”
The full NASDAQ report can be found here:
http://www.nasdaq.com/article/shells-per...0731-01074
It seems that the refinery shutdown has at least had an effect on the market place for their products, not to mention the profitability of their competitors’ operations and any stocks Shell may have in store for immediate sale themselves. It is clearly important.
The reason I brought up crack spreads earlier was because they can be a useful heuristic for determining the amount of damage this shutdown might cause Shell.
I’ll be conservative and select the lowest crack spread of the bunch to be representative of foregone earnings during the shutdown, that is $10.50/bbl. The refinery has a capacity of roughly 400,000 bbl/day, which translates to $4,200,000/day. It’s simplistic to think of this number as foregone earnings, but nevertheless, it’s at least foregone “crack spread” for each day the refinery is closed.
I cannot find the damn article I read a day ago, but I recall it saying that Shell commented on a “loss” of $2MM per week and an expected shutdown until at least the second half of August. Two weeks and only a $4MM loss??? I’m not sure what they meant by “loss,” but I’m skeptical that they only stand to lose $4MM during this shutdown whether it’s revenue or earnings.
At very conservative crack spreads ($10.50/bbl), they stand to lose $4.2MM/day ($10.50 x 400K bbl = $4.2MM). Assuming Pernis is up and running by mid-August, that’s a loss of: 15 days x $4.2MM =
$63MM.
Last quarter (2Q 2017) Shell reported a net profit of $3.6B, which according to a CNBC article was an increase of 245% from last year’s 2Q earnings. Still, just looking at 2Q’s phenomenal earnings, let’s be generous and say $3.6B is an average quarter’s earnings. Divide that by 3 mo. = $1.2B/mo.
Based on the conservative crack spreads I’m using above and the generous assumption of earnings, Shell should be looking at about $63MM in lost earnings for the month of August, which is roughly 5.25% less than might be anticipated otherwise.
This is just rule-of-thumbing it, but what other tools do we have? I’ll grant that at the time (Monday) there was no indication as to the duration of the refinery shutdown, whereas now we have some sort of an official statement that it will take “at least” until the second-half of August for things to get up and running again at Pernis. Still, the uncertainty at the time (Sunday/Monday/Tuesday) alone should have caused some hesitation in traders and investors. I am still bewildered by their lack of concern. Let’s face it, they shrugged and took the news as a boon.
A boon, they forged onwards and pumped Shell’s NYSE stock (RDS-A) upwards from a closing on Friday @ ~$55.76 to an open on Monday @ ~$56.33 (+1%), which closed @ ~$56.54 (+1.4% from Friday). Tuesday opened near Monday’s close and then rose to ~$56.81 (+1.9% from Friday). Wednesday opened near Tuesday’s close and then rose to ~$57.40 (+2.9% from Friday). Now, I’m holding my junk in my hand wondering why in the hell I’m paying $57+ per share instead of $55 or less?
Within a few days of the Pernis fire and knowing that it’s an indefinite shutdown with undetermined damage, I’d at least expect some hedging. But no, on Monday traders/investors pumped that sucker higher and higher, and continued to do so the next day and even higher the next day after learning about the planned duration of the shutdown.
Simply saying that “the markets don’t care” does not explain to me how an immediate 5% loss in monthly earnings doesn’t matter.
Look now, I do get it and I understand that it only matters if the markets think it matters. I just don’t get why the markets are shrugging and don’t think it matters!!??
