Masterpiece Refining – Part 2 Holy Toledo

On Friday (December 14, 2012) PBF Energy stock closed up at $27 two days after its initial IPO listing at $26. The company purchased 3 refineries with 0.5 MMb/d capacity during the past two years. PBF’s Midwest refinery has since profited handsomely from access to cheap US and Canadian crudes. PBF is also leading the way with a novel outsourcing approach to its supply and marketing arrangements. Today we complete our two part analysis of PBF’s refineries.

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Again we’ll repeat our disclaimer.  RBN Energy is not an investment advisor.  The purpose of this article is not investment advice or an endorsement of PBF Energy or any other company.

In Part 1 of Masterpiece Refining, we looked at the operation of PBF Energy’s two East Coast refineries 30 miles apart on the Delaware River in Paulsboro, NJ and Delaware City, DE. The two refineries had primarily been processing imported crudes that have been priced higher than domestic grades over the past two years. PBF has developed infrastructure at Delaware City to facilitate rail shipments of domestic light sweet crude from North Dakota as well as heavy crude from Western Canada. Refinery profitability has also gained from higher refined product prices in the Northeast because refining capacity in the region is limited.

This time we turn our attention to PBF’s third refinery located in Toledo Ohio. This 170 Mb/d refinery was purchased from Sunoco in March 2011 as that company retreated from the refining business. [Sunoco is now a subsidiary of Energy Transfer Partners]. The Toledo refinery is located in the current “sweet spot” of US refining – the Midwest “PADD II” region. The Midwest is a sweet spot because increased production of US domestic light sweet crude oil in North Dakota (the Bakken) as well as heavy crude in Western Canada over the past two years has swamped Midwest refineries since pipeline takeaway capacity to the larger Gulf Coast refining market has been slow to develop. The result has been that crude supplies have backed up in the Midwest and at the Cushing, OK storage hub. That logjam has led to a $20 or higher discount in crude prices based on the Midwest benchmark, West Texas Intermediate (WTI) versus more expensive crude at the Gulf Coast priced against the international benchmark Brent. Crude supplies for Midwest refiners have become cheap as a consequence.

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