With the rising population and increased usage of vehicles, the global demand for crude oil will increase from 64.4 million barrels a day in 2013 to 92 million barrels a day in 2014 according to the International Energy Agency, reported Bloomberg News. Due to this rising demand, prices of oil products are rising. To take advantage of this scenario, oil and gas refineries are expanding with various cost effective methods of processing feedstock into energy sources. This article discusses three oil and gas refining companies which are adopting strategies for procuring low cost feedstock to refine into oil products.
Transportation of price-advantage crude oil
Phillips 66 (NYSE:PSX) purchases 750 million barrels of crude oil per year to process into different oil products, which is the biggest operating cost incurred by the company. To reduce this cost, the company is focusing on converting its crude oil into price advantage crude oil by purchasing heavy crude oil produced in Canada and Latin America. This crude oil trades at less than the benchmark rate, which makes it price-advantageous. The company converted 62% of its crude oil in 2012, followed by 68% in the first quarter of 2013 and plans to convert 100% of its crude oil into price advantage crude oil over the next couple of years.
Natural Gas liquids, or NGL, is showing robust demand because it is used in home heating appliances in the Gulf Coast market. To monetize this market, Phillips 66 (NYSE:PSX) is continuously investing in the processing and transportation of NGL. The company recently announced that its two new pipelines, Sand Hills and Southern Hills, are completely in service. Phillips 66 developed these pipelines in partnership with DCP Midstream and Spectra Energy Corp. (NYSE:SE), and the pipelines will cover more than 1500 miles. These two pipelines will transport 350 million barrels per day in the growing Gulf Coast market. Therefore, Phillips 66’s transportation revenue could increase from $99 million in 2012 to $137 million in 2013. With these strategies, the company’s EPS could increase from $8.19 in 2012 to $9.09 in 2013.
Expansion for further growth
With the steady exhaustion of non-renewable energy sources, demand for renewable energy sources is showing strong growth. Global renewable diesel has witnessed a compound annual growth rate (CAGR) of 10.5% since 2010. Valero Energy Corporation (NYSE:VLO)’s subsidiary, Diamond Alternative Energy, joined with Darling International Inc. (NYSE:DAR) to form a Diamond Diesel Green project. The project completed construction on June 26, and is ready for operation. The plant will process animal fat and used cooking oil into renewable diesel, which will have properties similar to those of petroleum based diesel.
Darling International Inc. (NYSE:DAR) has been recycling waste material for 130 years and the company has access to the available feedstock for this project. The processed diesel will contain less carbon and will reduce greenhouse gases by 80%, as compared to petroleum-based diesel. The plant will process 9,300 barrels per day of animal fat and used cooking oil, which will clear Darling International’s inventory.
In addition, this plant will provide high quality diesel, which will help Darling International Inc. (NYSE:DAR) meet the Renewable Fuel Standard 2, or RFS2, norms. These norms emphasize the reduction of greenhouse gases from the use of renewable fuel. By meeting the requirements of the RFS2 norms, Darling International will receive $1 per gallon of diesel as a tax credit. This project is expected to contribute towards incremental net income margins from 7.7% in 2012 to 8.8% in 2013, followed by 10.5% in 2014.
Other partner, Valero Energy Corporation (NYSE:VLO) will operate this plant and transport the diesel through its strong network of pipelines. The global demand for renewable diesel is expected to increase from 21 billion liters in 2012 to 24 billion liters in 2013. This plant will produce 530 million liters of renewable diesel, which implies that this project alone will supply 2.1% of global demand, benefiting the company.
Crude oil prices are increasing along with demand and, conversely, natural gas prices are falling. With the high demand for crude oil, Valero Energy Corporation (NYSE:VLO) monetized the opportunity by opening an additional hydrocracker unit at its existing refinery, St. Charles. Hydrocracking is a technique for refining feedstock into oil products by using pressure in feedstock. This new unit will convert natural gas into crude oil with the Hydrocracker process. Valero has spent $1.6 billion on this project, which will increase the profits of the company by providing high priced crude oil, made with low price natural gas. The project could generate an additional EBITDA of $500 million for Valero Energy Corporation (NYSE:VLO) by the end of this year.
Conclusion:
All the above companies are moving towards low cost feedstock to refine oil products. Phillips 66 (NYSE:PSX) is moving towards price-advantage crude oil, and it will add transportation revenue with its new pipelines. Valero Energy Corporation (NYSE:VLO) will take advantage of using lower priced natural gas as a feedstock to produce high priced crude oil. Further, Valero is entering a joint venture with Darling International Inc. (NYSE:DAR) to produce high demand renewable diesel. Looking at the potential of the above companies, I recommend a buy for all three stocks.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Darling International. The Motley Fool owns shares of Darling International.
The article 3 Oil and Gas Refinery Companies Utilizing Alternative Means to High Revenue Ends originally appeared on Fool.com.
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