Lower oil prices were supposed to be good for the refiners.  Yesterday, Marathon Oil Corporation (NYSE:MRO) released its interim update for the fourth quarter of 2008. Today, Tesoro Corporation (NYSE:TSO) followed suit, releasing preliminary fourth quarter results. The short version is that neither company anticipates matching third quarter results, or for that matter, even coming close.  Valero Corporation (NYSE:VLO), another major refiner, has not publishedan interim report, but plans to report third quarter results on January27th.

Marathon noted that fourth quarter realized prices for liquidhydrocarbons were lower in the October and November, falling to$68.01/barrel domestically and $62.86/barrel internationally. For thefull quarter, Marathon expects realizations to reach just $59.08/barreldomestically and $55.48/barrel internationally. In the third quarter,Marathon’s realized prices were $118.22/barrel domestically and$115.09/barrel internationally.

Marathon’s price realizations for its synthetic crude production inwestern Canada also dropped in October and November by $54.43/barrel,from $113.42 in the third quarter to $58.99/barrel. At that pricepoint, squeezing the oil out of the oil sands is only barely profitable.

Tesoro makes it easier to compare the fourth quarter to the thirdquarter of 2008. Tesoro expects fourth quarter EPS of $0.60-$0.75, faroff the $1.86 fully diluted EPS for the third quarter. The projectionincludes a net one-time adjustment of -$0.29 according to the company.The company has also identified one "material" account that may beuncollectable, but says it has reserved enough to cover the unspecifiedamount in the event the account can not be collected.

Refinery throughput and total barrels refined in the fourth quarter areexpected to drop at both Marathon and Tesoro. One bright spot for bothcompanies is gross margin on refining and marketing. Marathon expectsmargins of $0.12/gallon, down from $0.25/gallon in the third quarter.Tesoro expects fourth quarter retail margins to be "consistent" withthird quarter margins.

The drop in commodity prices for both crude oil and natural gas ispunishing operating revenues and profits for both Marathon and Tesoro.Normally, low crude prices would benefit a refiner. In this quarter,however, the low crude price does not offset the overall costs ofrefining and marketing. Low retail prices don’t help either.

In the third quarter, retail prices fell more slowly than crude pricesand refiners pocketed the difference. In the fourth quarter, retailprices reflect crude prices more accurately.

After seeing all this, maybe all of the analyst downgrades in the oil patch we saw this morning are not as late as they seem.  Marathon shares are off more than 4% so far today, Tesoro shares are down nearly 9%, and Valero is off nearly 10%.

Paul Ausick
January 14, 2009

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