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Refinery earnings Wildcard
We can track crack spreads pretty closely, coupled with refinery rates, and predict revenue fairly accurately.

The wildcard is operating expenses.

Fixed expenses are up about 15%-20%. Predictable based on current inflation rates.

Variable expense's are much harder to pin down from refiner to refiner. These expenses are up 50%-100% in some cases. I've laid out the reasons for this before, much of which is the run at all cost mentality (high cost temporary repairs, increased inspection, fitness for service engineering, etc.). We are also seeing increased labor cost (both headcount and wages, and higher fuel prices, especially natural gas cost.

About half of the increased cost is being attributed to natural gas prices, with the remaining attributed to the other factors I mentioned.

I don't have the specific numbers, but anecdotally from a few refiners with retail outlets attached, retail is also struggling currently and could pull down some profit this quarter.

Even though we are seeing great historical crack spreads, the cost of postponing turnarounds for major repairs, and cutting back on reliability programs during the pandemic is catching up to the industry. I'm already hearing rumblings of cutbacks on variable expenses going into the 4th Q.

It's not all doom and gloom however. Increased budgets are still getting funded for 2023, and the message is slow down spending, not cancel spending. Meaning the plan is to push more expense into 2023, which tells me that companies expect to see good crack spreads and profits into next year.

I think this is more of an issue of slowing down on catchup work and trying to smoothen out the profits over the next few Q's. It's tuff to model expenses for individual refiners, so it will be a wildcard in my earnings model.

In summary, expenses are higher in 3Q (we knew that), revenue will be lower than 2Q (we knew that), but earnings will still be good; and refiners are expecting them to be good through next year at least.

So no bad news, just a little muted on good news. I'll be looking to incorporate these increased expenses and look for consensus estimates that may be off base going into 3Q earnings season.

More to come...

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Forgot to mention... cracks were up again yesterday (about +5%), fourth day in a row.

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