Top U.S. refiners boost rewards for shareholders as profits soar

Top U.S. fuel makers boosted returns to shareholders in the second quarter as prolonged disruptions to crude supplies through the Strait of Hormuz sent fuel prices and refining margins surging.

Industry analysts said refiners’ massive profits and strong buyback programs were likely to continue into the third quarter, underscoring how U.S. fuel makers have been among the biggest financial beneficiaries of the Iran war.

The conflict has disrupted global energy shipping and made international buyers willing to pay more to lock in supplies. A wave of attacks on oil refineries in Russia has further tightened supplies, driving up prices for consumers who were already facing inflationary pressures.

Three of the biggest U.S. independent oil refiners, Marathon Petroleum, Phillips 66 and Valero Energy, earned combined profits of US$12.6-billion in the quarter, the most since Russia first invaded Ukraine in 2022.

“To say that they made a lot of cash is an understatement,” said Gabelli Funds portfolio manager Simon Wong.

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The three refiners returned US$6.3-billion to shareholders through stock repurchases and dividends in the second quarter, according to Reuters calculations, the largest amount in more than two years. That compares with US$2.6-billion returned during the same quarter a year ago, when profits totalled US$2.9-billion.

“We think the buyback programs will continue to be pretty robust for Valero and Marathon,” said Jason Gabelman, an analyst at TD Cowen.

Gabelman estimated that the two refiners will repurchase about 20 per cent of their market value between the third quarter and the end of next year.

Marathon is valued at about US$91.3-billion while Valero is valued at around US$90.1-billion. Phillips 66, with its greater focus on growth investments and debt reduction, is expected to repurchase roughly 10 per cent of its market value of US$81.2-billion, Gabelman said.

In July, Phillips 66’s board of directors approved a US$10-billion increase to its share repurchase program. Valero Energy authorized a new $5 billion share repurchase program in addition to the remaining capacity under a prior US$2.5-billion program, a filing showed. Smaller rival HF Sinclair raised its quarterly dividend by 5 per cent.

Year-to-date, shares of Marathon, the top U.S. refiner by volume, are up around 110 per cent to about US$342 on Wednesday. Shares of Valero, the second-largest U.S. refiner by capacity, are up more than 98 per cent, while shares of Phillips 66 are up about 75 per cent. That compares with the S&P 500 energy sector’s 36-per-cent increase so far this year.

Disruptions to fuel supply that have tightened global inventories have pushed U.S. gasoline and diesel crack spreads, a measure of refiner profitability, to record levels.

The ultralow sulphur diesel futures crack spread jumped to a record high of US$93.84 per barrel on Aug. 10. The U.S. gasoline futures crack spread rose to US$60 per barrel on July 17, its highest level since April, 2020. The U.S. average price at the pump rose above US$4 a gallon at the end of March for the first time in more than three years, the sharpest monthly rise in decades. Refining executives were cautiously optimistic heading into the second half of the year, which typically experiences seasonal weakness when gasoline and heating oil demand transition between peak summer driving and winter heating seasons.

Product margins remain robust, but have eased from the stronger levels seen in the second quarter and the early part of the current quarter, Rick Hessling, chief commercial officer of Marathon, said during a call with investors earlier this month.

Valero benefited from strong jet fuel margins in the second quarter, but that support has been absent so far in the third quarter, said Gary Simmons, chief operating officer at Valero Energy. However, an arbitrage opportunity has reopened for jet fuel exports to Europe, he said, and the company expects jet fuel margins to strengthen over the remainder of the quarter as refiners switch to winter diesel specifications.

“I suspect we’ll start to see jet strengthen as we move throughout the quarter,” Simmons said.