While overall corporate strategies haven’t changed all that much since 2018, we continue to see a fair amount of headwinds and tailwinds for the downstream energy sector. Below are three key trends we’re closely monitoring in 2019 that will certainly have broader implications impacting this dynamic sector going forward heading into 2020.
- M&A Activity: Outside of Marathon Petroleum’s acquisition of Andeavor last year, the U.S. downstream M&A market has been relatively quiet until recently. We have seen several refining transactions take place over the last 12 months, which signals refiners are seeking opportunities to expand and optimize their downstream supply chains, as well as capitalize on attractive bid-ask spreads for assets. Notable acquisitions this year include Par Pacific acquiring assets from U.S. Oil & Refining Co. in Washington and PBF Energy acquiring the Shell Martinez Refinery in California. It is worth noting that we do see some distressed companies from time to time in the downstream sector. For example, Philadelphia Energy Solutions recently entered bankruptcy for the second time in three years – this time on the heels of a large explosion at their Philadelphia refinery. As a result, it is likely that one of the oldest refineries in the U.S. will permanently close this year.
- Impending Marine Sulfur Regulation: The upcoming International Maritime Organization (IMO) bunker fuel standards scheduled to go into effect on January 1, 2020 will dramatically lower the acceptable levels of sulfur in bunker and marine fuels. Many U.S. refiners don’t have facilities that can produce fuels at these new levels, so capital investment will be required – OR they can purchase the fuel from refiners that can produce to conform with the new specification.
- Vertical Integration Opportunities: Downstream organizations with exposure to downstream logistics and marketing (including retail marketing) have seen higher earnings than the pure independent/merchant refiners. The importance of vertical integration was seen in 2015-2016 when oil prices fell to multi-year lows. Motiva Enterprises’ recent acquisition of Flint Hills Resources’ chemical plant adjacent to its Port Arthur, Texas oil refinery is evidence of a value chain integration play. Investments further downstream serve as a hedge against low oil prices Look for continued investments into expanding midstream assets, as well as potential expansion into marketing, and even petrochemicals.
Matt Flanagan is a Partner in Opportune’s Energy Consulting practice and leads its Downstream Industry Sector. Matt brings nearly 25 years of experience in global refining and marketing, midstream pipelines and transportation (liquids and gas), exploration and production, petrochemicals and mining, encompassing corporate strategy, operations, transportation, marketing and back-office functions. His primary focus areas include mergers and acquisitions, business operations and planning, energy trading and risk management, manufacturing execution systems, supply chain management, logistics, asset maintenance and reliability and leading large-scale business transformation initiatives.
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