How Much Money Does the Marland Refinery in Ponca City Earn for Phillips 66?

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Phillips 66's Marland Refinery in Ponca City is the most profitable refinery of Phillips 66's fourteen worldwide refineries, contributing a net profit of over $500 million in 2011 to Phillips bottom line. For 2012, profits are on target for the Marland Refinery in Ponca City to contribute of over $600 million of net profit to Phillips bottom line. Based on Phillips' third quarter earnings report for 2012 with a realized crack spread of $31.83 for mid-continent refineries and a capacity utilization of 102%, the Marland Refinery in Ponca City will contribute at an annualized rate of over $1 billion ($1.032 B) of net profits in 2012 to Phillips bottom line. Derivative Photo: Hugh Pickens

The Phillips 66 Refinery located in Ponca City, Oklahoma, has a published crude oil processing capacity of 187,000 barrels per day[1] making it by far the largest refinery in Oklahoma.[2] The refinery processes a mixture of light, medium and heavy crude oil. Most of the crude oil processed is received by pipeline from the Gulf of Mexico, Oklahoma, Texas and Canada. Additional foreign crude is purchased into the Gulf Coast and delivered by pipeline. The Ponca City Refinery is a high-conversion facility that produces a full range of products, including gasoline, diesel fuel, jet fuel, LPG and anode-grade petroleum coke. Its facilities include fluid catalytic cracking, delayed coking and hydrodesulfurization units. Finished petroleum products are shipped by truck, railcar, and company-owned and common-carrier pipelines to markets throughout the Mid-Continent Region.[3]

The Phillips 66 Refinery in Ponca City contributed a net profit of over $500 million in 2011 to Phillips bottom line, making it the most profitable of Phillips 66's fifteen worldwide refineries.

Based on Phillips' second quarter earnings report for 2012 and the realized crack spread of $26.34 for mid-continent refineries (Borger Refinery, Billings Refinery, Marland Refinery in Ponca City, and Wood River in Ravena, Illinois), profits are on target for the Marland Refinery in Ponca City to contribute of over $600 million of net profits in 2012 to Phillips bottom line.

Based on Phillips' third quarter earnings report for 2012 with a realized crack spread of $31.83 for mid-continent refineries and a capacity utilization of 102%, the Marland Refinery in Ponca City will contribute at an annualized rate of over $1 billion ($1.032 B) of net profits in 2012 to Phillips bottom line.

Contents

Related Topics

There are three leading operating segments in the new company: Chemicals, Midstream, and Refining and Marketing. The refinery in Ponca City falls in the Refining and Marketing Business Segment (R&M) which has a much lower ROCE (Return on Capital Employed) than the other two Phillips 66 business segments. ROCE is a ratio used in finance, valuation, and accounting that compares earnings with capital invested in the company is used to prove the value the business gains from its assets and liabilitiesDerivative Photo: Hugh Pickens
Phillips may purchase 2,000 additional rail cars to provide transportation from US shale formations to refineries.[4] The railroad cars would cost $200 million and enable Phillips to carry 150,000 barrels of oil a day from mid-continent, where oil is cheaper, to Phillips coastal refineries.[5] "We're going to add rail capacity," said Garland. "We're considering buying a couple thousand more railcars so we can get Bakken crude either east and west." The initial goal is to increase delivery of shale crudes to Phillips refineries by 100,000 to 150,000 bpd within two years using railroad unit trains. "That's a pipeline on wheels. So, that could go to the Bakken. It could go to the Niobrara. It can shift as the opportunity shifts around the country." Many analysts say rail will be a bigger part of the oil delivery picture for years because shale wells - often scattered, small and of uncertain lifespan - won't justify pipeline construction.[6] Photo: Railroad Tank Cars by San Diego Model Railroad Museum Flickr Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic (CC BY-NC-ND 2.0)

Background

How Oil Prices are Set

When an oil producer sells to a refiner, they generally agree to a price set on an exchange such as the New York Mercantile Exchange. After the oil is refined into gasoline, it is sold by the refiner to a distributor, again pegged to the price of wholesale gasoline on an exchange. Finally, gas station owners set their own prices based on how much they paid for their last shipment, how much they will have to pay for their next shipment, and, perhaps most importantly, how much their competitor is charging. Oil companies and refiners have to accept whatever price the market settles on -- it has no relation to their cost of doing business. When oil prices are high, oil companies make a lot of money, but they can't force the price of oil up.[7]

Large refiners like Phillips have the capital resources and ability to use their infrastructure to maximize the difference between the spot prices and final product. For decades the mid-continental oil benchmark, West Texas Intermediate (WTI) was priced at a premium above other benchmarks such as North Sea Brent. At the start of 2010 this began to change radically. Brent became more expensive and the last few months Brent has sold around $15-$25 higher than WTI. Even more, interior continental oil plays like Niobrara (Colorado) and the Bakken (North Dakota) have sold for as low as $40 under Brent. Phillips is able to take advantage of the cheap mid-continent oil available to their refineries in Billings, Borger, Ponca City, and Ravena to buy crude oil cheap and sell the refined products high with record realized crack spreads for the mid-continent refineries of $26.34 per barrel reported by Phillips for the 2nd quarter of 2012.[8]

Benchmarks

There are two benchmarks for oil prices that are very important to determining the profitability of the refinery at Ponca City: Brent and West Texas Intermediate (WTI). Brent Crude is a major trading classification of sweet light crude oil comprising Brent Blend, Forties Blend, Oseberg and Ekofisk crudes (also known as the BFOE Quotation). Brent Crude is sourced from the North Sea. The Brent Crude oil marker is also known as Brent Blend, London Brent and Brent petroleum.[9] West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts. The price of WTI is often referenced in news reports on oil prices, alongside the price of Brent crude from the North Sea.[10]

Prior to September 2010, there existed a typical price difference per barrel of between +/-3 USD/bbl compared to WTI and OPEC Basket.[11] Since the autumn of 2010 there has been a significant divergence in price compared to WT with a $10-$15 spread between the two developing that has remained ever since.[12]. Many reasons have been given for this widening divergence ranging from a speculative change away from WTI trading (although not supported by trading volumes), Dollar currency movements, regional demand variations, and even politics. The depletion of the North Sea oil fields is one explanation for the divergence in forward prices.[13] According to James Hamilton writing at Econbrowser, the gap is essentially a geographic difference between the price paid for oil in the central United States and that paid on the U.S. coasts and anywhere else in the world.[14] In February 2011 the divergence reached $16 during a supply glut, record stockpiles, at Cushing, Oklahoma and is currently (August 2011) above $23. Historically the different price spreads are based on physical variations in supply and demand (short term).[15]

Barclays Plc (BARC) cut its 2012 forecast for West Texas Intermediate oil on July 5. WTI will average $96 a barrel this year and Brent will average $113, according to a report published today by analysts Paul Horsnell and Amrita Sen in London. That’s down from $105 for WTI and $120 for Brent that the bank had projected in a report on June 25. So right now the differential is $17 per barrel.[16]

Advantaged Oil

Companies that have pipelines in the Mid-Continent region - which is to say, the Texas Panhandle, Oklahoma, Kansas - are inherently in a position to source cheap crude. And companies that have refining assets on the coasts - the West Coast, the East Coast and the Gulf Coast - are in a much tougher position when it comes to sourcing cheap crude because, generally speaking, they have to buy crude that's imported. And import crudes are at a premium to WTI.[17]

The CEO of Phillips 66 says to process more shale oil "everywhere we can get it." "We want to increase our exposure in both the West Coast and East Coast for some of those advantaged barrels."[18] That includes more rail unloading, rail cars and storage to facilitate, in the medium term, movement of cheaper inland crude to coastal markets until more pipelines are built to alleviate bottlenecks, he said. Phillips 66 is the only refiner that has plants in all U.S.markets.[19] Garland noted several refineries are already well positioned to receive shale oil, such as its 247,000 barrels-per-day (bpd)refinery in Sweeny, Texas, in proximity to the state's prolific Eagle Ford shale play, or Midwest plants.[20]

Last fall Phillips 66 also ran unit trains from the Bakken shale oil play in North Dakota to its 238,000 bpd Bayway refinery in Linden, New Jersey, and has taken trains to West Coast refineries.[21] "You'll see us stepping out and doing some more things around infrastructure," he said. "Like everyone else, we're doing everything we can to get more barrels in front of those facilities."[22] Today we can process about 500,000 barrels a day of TI-related and about 100,000 barrels a day of shale related crudes.[23]

Mid-Continent Oil

Phillips 66 has 15 refineries globally and 2.2 million barrels a day of capacity. "When we think about our refining business we like to think about it in four segments. One is the Mid-Continent, about 21% of our capacity is there. Margins have been very strong in this area, as you know," says Phillips 66 CEO Greg Garland.[24] "Our largest region is the Gulf Coast, about 33% of our capacity is there.We have large economy of scale here. We have very complex refineries on the Gulf Coast. The Western US and Pacific region is about 20%, includes our interests in the Melaka refinery.The West Coast has typically had high margins historically, but the last couple years has been challenged in part due to the economic slowdown in California."[25]

Phillips 66′s most profitable refineries of the past couple years are in what’s called the Mid-Continent — from Texas north to Montana including the Borger refinery, Ponca City, Wood River and Billings. [26] The reason for their high profitability has been the glut of crude oil pouring into the region from newly tapped shale oil plays like North Dakota’s Bakken. "Because there was a lot of new oil and not enough pipeline capacity to get it down to the Gulf Coast mega-refineries, the crude got bottled up in the storage tanks at Cushing," writes Helman. "The bottleneck that kept oil from getting out of Cushing also kept its price at a record-wide discount relative to its rival European benchmark Brent crude.[27] At one point last year you could buy a barrel of WTI for $27 less than a barrel of Brent.[28] In an April conference call with analysts, Garland said the company had been generating $90 million in annual net income for every dollar of WTI-Brent price differential that it could capture for its refineries.[29]

Phillips to Run More Mississippi Lime Shale Crude through the Ponca City Refinery

Mississippi Lime Oil Producing Formations around Ponca City are shown in brown. Mississippi Lime - porous limestone formations in northern Oklahoma and southern Kansas has been yielding reservoirs to horizontal operators such as SandRidge, Chesapeake, Devon and Tulsa-based Eagle Energy LLC during the past two years. The "new" reserves actually lie slightly below formations that were big producers 100 years ago. One advantage of the Mississippi Lime is that limestone's porosity and natural fractures can mean less expense on the drilling and hydraulic fracturing parts of the project. Expenses can total half and even a fourth of typical unconventional well efforts. Another advantage is that there is already plenty of seismic data available for the area from past exploration and drilling. Map created by Hugh Pickens and is a derivative creation from a similar map in the Tulsa World by David Housh.

Reuters reported on Phillips second-quarters earnings report on August 2, 2012 that Phillips is working to run more shale crude from the Mississippi Lime play in Oklahoma and Kansas at its 198,400 bpd refinery in Ponca City, Oklahoma by trucking crude from the company's existing gathering systems.[30] Rod Walton reported in the Tulsa World on September 24, 2011 that Mississippi Lime - porous limestone formations in northern Oklahoma and southern Kansas has been yielding reservoirs to horizontal operators such as SandRidge, Chesapeake, Devon and Tulsa-based Eagle Energy LLC during the past two years. The "new" reserves actually lie slightly below formations that were big producers 100 years ago. Phillips Petroleum Co., for instance, made its name in the nearby Burbank Field, on the eastern edge of the play that includes Osage, Pawnee, Kay, Garfield, Woods, Alfalfa and other northern Oklahoma counties. "It's sort of amazing that all of this has been sitting there and waiting for horizontal drilling," says Eagle CEO Steve Antry. "The vertical wells hardly drained any of that." The move now is toward the deposits containing mostly oil and natural gas liquids. [31]

The Mississippi Lime's ratio is often 52 to 55 percent oil, according to reports. "We're into the second tier of this renaissance," says Chip Minty, a spokesman for Oklahoma City-based Devon Energy Corp. "Now what we're doing is taking the same technology beyond the shales to the carbonates, such as limestone." One advantage of the Mississippi Lime is that limestone's porosity and natural fractures can mean less expense on the drilling and hydraulic fracturing parts of the project. Expenses can total half and even a fourth of typical unconventional well efforts. Another advantage is that there is already plenty of seismic data available for the area from past exploration and drilling. "It's a reasonably low-cost play where hydrocarbons have been found before, with a lot of wells drilled in the past," says RAM spokesman Robert Phaneuf. And that gives you good data points."[32]

Methodology for Determining the Profitability of the Ponca City Refinery

The adjusted earnings (profit) from the Refining and MarketingBusiness Segment of Phillips 66 for the years 2009, 2010, and 2011. From a presentation by Clayton Reasor, Senior Vice President for Strategy and Corporate Affairs to industry analysts on May 24, 2012. Click on the figure to enlarge.
Phillips 66 has 15 refineries globally and 2.2 million barrels a day of capacity. "When we think about our refining business we like to think about it in four segments. One is the Mid-Continent, about 21% of our capacity is there. Margins have been very strong in this area, as you know. Our largest region is the Gulf Coast, about 33% of our capacity is there.We have large economy of scale here. We have very complex refineries on the Gulf Coast. The Western US and Pacific region is about 20%, includes our interests in the Melaka refinery.The West Coast has typically had high margins historically, but the last couple years has been challenged in part due to the economic slowdown in California." Derivative Photo: Hugh Pickens

The methodology for determining the profitability of the refinery at Ponca City is to begin with a very crude estimate of profitability using figures from Phillips 66 presentations to financial analysts, and then to drill down into these figures and add in additional factors, refining the figures through more detailed scenarios to come up with a better estimate.

Phillips 66 does not break out their profitability by refinery. However they do provide the profitability of the Refining and Marketing Business Segment and they break out the profitability of their domestic refineries and their international refineries. Further Phillips 66 CEO Greg Garalnd has provided guidance as to the what portion of the R&M Business Segment is due to advantaged oil that is TI related and refined in Phillips Mid-Continent refineries at Borger, Ponca City, Wood River, and Billings.

In addition, on August 1, 2012 Philips 66 publicly reported the realized crack spreads during their 2nd quarter 2012 presentation to financial analysts for Mid-Continent, Gulf Coast, Atlantic Basin, and Western Pacific refineries.

Our methodology will look at the following scenarios:

  • Scenario 1: Look at the Total R&M Segment Profitability and divide it equally into Phillips 66's fifteen worldwide refineries
  • Scenario 2: Look at the Total R&M Segment Profitability for domestic refineries only and divide it into Phillips 66's eleven domestic refineries by throughput capacity
  • Scenario 3: Determine what the profit contribution has been for advantaged West Texas Intermediate-related crude (WTI) and allocate the portion attributable to the Ponca City Refinery based on the refinery's throughput capacity
  • Scenario 4: Determine the portion of the R&M Profitability which is not attributable to advantaged TI-related oil and allocate it to each refinery based on throughput capacity. Include a correction factor for the portion of the R&M profitability that is attributable to Marketing.
  • Scenario 5: Determine the sum of TI-related net income (Scenario 3) and non-TI-related net income (Scenario 4) for each refinery.
  • Scenario 6: Determine the projected profitability of each refinery for 2012 based on Phillips 2nd Quarter Earnings and the Realized Crack Spread for the Mid-Continent refineries
  • Scenario 7: Determine the projected profitability of each refinery for 2012 based on Phillips 3rd Quarter Earnings and the Realized Crack Spread for the Mid-Continent refineries

Profitability of the Ponca City Refinery

Scenario 1: Total R&M Earnings Divided by Worldwide Refineries

The very simplest formulation for determining the profitability of of the Ponca City Refinery is to simply look at the overall R&M profits for 2011 ($2,664 Million) and divide it by the fourteen Phillips 66 worldwide refineries giving a profit contribution of $178 million for each refinery.

Scenario 2: Total Domestic R&M Earnings Divided by Domestic Refineries

Phillips 66 breaks out the profitability of the Refining and Marketing Business Segment by international refineries and by domestic refineries, so we will look at only the domestic refineries in the second scenario. Dividing the R&M profits for domestic refineries for 2011 ($2,365 Million) by the eleven Phillips 66 domestic refineries gives a profit contribution of $215 million for each domestic refinery.

Scenario 3: Portion of the Net Earnings Attributable to TI-Related Crude

According to Phillips 66 CEO Greg Garland, each dollar of WTI-Brent differential translates to $90 million in additional net income to Phillips 66. West Texas Intermediate is used in Phillips' mid-Continent refineries.[33]

In 2011 the average differential for WTI crude was $15 which contributed $1,350 million in net income to Phillips. Breaking out the TI-related advantaged oil that is refined in Phillips 66 mid-continent refineries.

Location Total Capacity (KBD) Normalized Capacity (KBD)  % of Total Mid-Continent Net Income from TI-related Crude ( $ millions)
Ponca City, OK 187 187 35.2% 475
Roxana, IL 306 153 28.2% 389
Billings, MT 118 118 22.2% 300
Borger, TX 146 73 13.7% 186
Total Mid-Continent 531 100.0% 1,350
  • Note that the Wood River refinery is owned by WRB Refining, Phillips 50-50 joint venture with Cenovus Energy Inc. The Borger refinery is operated by Phillips in a 50-50 joint venture with Cenovus Energy Inc. Therefor only half of the throughput of each of these two refineries is will be attributed to Phillips 66 for purposes of calculating the use of TI-related advantaged crude.

The total throughput of the four mid-continent refineries is 531,000 barrels per day. The Ponca City Refinery, with a throughput of 187,000 bpd, accounts for 35.2% of the TI-related advantaged crude.

Incidental Use of Non-TI Related Crude

As a footnote, the Ponca City refinery does not refine WTI crude exclusively. One of the reasons that ConocoPhillips resisted reversing its Seaway Pipeline from Cushing to the Gulf for so long was that ConocoPhillips had said it was in the company's best interests to maintain the status quo to help supply its 198,400 bpd refinery in Ponca City to produce "premium coke" at the Ponca City Refinery. However, this has a negligible effect on the Marland Refinery's overall profitability because the proportion of non-TI related crude supplied to Ponca is a small percentage of the total, the profit margin on specialty products is also high, and other Phillips mid-continent refineries are in a similar situation of refining a small proportion of non-advantaged crudes.[34][35][36][37]

Scenario 4: Portion of the Net Earnings Not Attributable to TI-Related Crude

Slide 9 from Phillips' April 9, 2012 presentation to investors shows that Phillips 66 expects to Brent-WTI differential to be a significant factor in their profitability for years to come. According to Phillips 66 CEO Greg Garland, each dollar of WTI-Brent differential translates to $90 million in additional net income to Phillips 66. West Texas Intermediate is used in Phillips' mid-Continent refineries.[38] In 2011 the average differential for WTI crude was $15 which equals $1,250 million in net income to Phillips. The Ponca City Refinery, with a throughput of 187,000 bpd, accounts for 35.2% of the TI-related advantaged crude producing $475 million in net profit for Phillips 66 in 2011. Businessweek reports that according to the Barclay's crude price forecasts for 2012, WTI will average $96 a barrel in 2012 and Brent will average $113, according to a report published by analysts Paul Horsnell and Amrita Sen in London - a differential of $17.[39] Under Scenario 6 for 2012, with a contribution to Phillips 66's net profit of over $600 million the Ponca City refinery will contribute one-third off all the net income for Phillips 66's net profits for all refineries and more than the seven least profitable refineries combined.
Phillips 66 does not break out the marketing earnings separately for the Refining and Marketing Business Segment in their reports. However slide 16 from the April 9, 2012 presentation to investors shows that for the years 2009 to 2011 marketing contributed 24% to Phillips 66 total earnings while Refining contributed 40% to Phillips 66 total cumulative earnings earnings for those years. The total adjusted earnings for the Refining and Marketing Business Segment for 2009, 2010, and 2011 was $ 4,057 million. Marketings contribution to the R&M bottom line would be 37.5% which translates to $1,521 million and on the assumption the marketing profitability was relatively stable across the three year period would be $507 million for each of the three years..

Subtracting out for earnings attributable to TI-related advantaged crude gives $1,015 million in net income attributable to normal earnings for refining during this part of the business cycle and attributed to each domestic refinery on the basis of throughput capacity.

Phillips 66 does not break out the marketing earnings separately for the Refining and Marketing Business Segment in their reports. However slide 16 from the April 9, 2012 presentation to investors shows that for the years 2009 to 2011 marketing contributed 24% to Phillips 66 total earnings while Refining contributed 40% to Phillips 66 total cumulative earnings earnings for those years. The total adjusted earnings for the Refining and Marketing Business Segment for 2009, 2010, and 2011 was $ 4,057 million. Marketings contribution to the R&M bottom line would be 37.5% which translates to $1,521 million and on the assumption the marketing profitability was relatively stable across the three year period would be $507 million for each of the three years.

This leaves $543 million in normal non TI-related profitability for 2011 to be divided among the 15 domestic and international refineries, so based on throughput the net income for normal refinery operations attributable to the Ponca City Refinery is 10% of Phillips 1,866,000 bpd in domestic production which translates to an additional $ 54 million in net income attributable to the Ponca City Refinery after the adjustment for marketing has been made.

Scenario 5: Total Net Income for Domestic Refineries

The total net income for each Phillips domestic refinery is the sum of the TI-related net income and the non-TI related net income as shown in the following table:

Location Capacity (KBD) Normalized Capacity (KBD) TI-Related Net Income ($ M)) non TI-Related Net Income ($ M) Total Net Net Income ($ M)
Ponca City, OK 187 187 475 54 529
Roxana, IL 306 153 389 44 433
Billings, MT 118 118 300 34 334
Borger, TX 146 73 186 21 207
Belle Chasse, LA 247 247 71 71
Old Ocean, TX 247 247 71 71
Linden, NJ 238 238 69 69
Westlake, LA 239 239 69 69
Carson, CA/Wilmington, CA 139 139 40 40
Rodeo, CA 120 120 34 34
Ferndale, WA 105 105 30 30
Total 1,866 1,350 543 1,893


With a a contribution to Phillips 66's net profit of over $500 million, the Phillips 66 Refinery in Ponca City contributes more than one-quarter of the net income to Phillips Refining bottom line and contributes more than the the total of the seven least profitable Phillips refineries combined.

Scenario 6: Estimates for 2012 based on Phillips 2nd Quarter Earnings and Realized Crack Spreads

On August 1, 2012 Phillips reported their adjusted earnings for refining operations were $851 million in their 2nd Quarter Earnings Report for 2012. Phillips has taken out R&M earnings attributable to marketing and specialty products($334 million). Phillips also reported the crack spreads for the Mid-Continent, Gulf Coast, Atlantic Basin, and Western Pacific of $26.34, $9.36, $7.76, and $7.91 respectively. The total profit for each refinery is calculated by determining the crack spread times the normalized throughput capacity for each refinery to allocate the total refinery profit to each refinery.


Location Capacity (KBD) [A] Normalized Capacity (KBD) [B] Crack Spread ($) [C] Capacity Utilization (%) [A]*[B]*[C] Per Cent Contribution to Total Refining Profits Annualized Yearly Profit
Ponca City, OK 187 187 26.34 95 4,995 18 600
Roxana, IL 306 153 26.34 95 3,829 14 491
Billings, MT 118 118 26.34 95 2,953 11 379
Borger, TX 146 73 26.34 95 1,827 7 234
Belle Chasse, LA 247 247 9.36 91 2,104 8 270
Old Ocean, TX 247 247 9.36 91 2,104 8 270
Westlake, LA 239 239 9.36 91 2,036 8 261
Linden, NJ 238 238 7.76 95 1,755 6 225
Whitegate, England 71 71 7.76 95 523 2 67
Humber, Germany 221 221 7.76 95 1,629 6 209
Carson/Wilmington, CA 139 139 7.91 89 979 4 126
Rodeo, CA 120 120 7.91 89 845 3 108
Melaka, Malaysia 76 76 7.91 89 535 2 69
Ferndale, WA 105 105 7.91 89 739 3 95
Total 2,245 28,730 100 3,404


Using this method for 2012, the Marland Refinery in Ponca City will make a contribution to Phillips 66's net profit of $600 million, by far the largest of any of Phillips' refineries.

Scenario 7: Estimates for 2012 based on Phillips 3rd Quarter Earnings and Realized Crack Spreads

On October 31, 2012 Phillips reported their adjusted earnings for refining operations were $1,580 million in their 3rd Quarter Earnings Report for 2012. Phillips also reported the crack spreads for the Mid-Continent, Gulf Coast, Atlantic Basin, and Western Pacific of $31.83, $11.42, $13.02, and $13.30 respectively. The total profit for each refinery is calculated by determining the crack spread times the normalized throughput capacity for each refinery to allocate the total refinery profit to each refinery.


Location Capacity (KBD) [A] Normalized Capacity (KBD) [B] Crack Spread ($) [C] Capacity Utilization (%) [A]*[B]*[C] Per Cent Contribution to Total Refining Profits Extrapolated Yearly Profit
Ponca City, OK 187 187 31.83 102 6,071 16 1,032
Roxana, IL 306 153 31.83 102 4,967 13 844
Billings, MT 118 118 31.83 102 3,831 10 651
Borger, TX 146 73 31.83 102 2,370 6 403
Belle Chasse, LA 247 247 11.42 88 2,482 7 422
Old Ocean, TX 247 247 11.42 88 2,482 7 422
Westlake, LA 239 239 11.42 88 2,402 6 408
Linden, NJ 238 238 13.02 100 3,099 8 527
Whitegate, England 71 71 13.02 100 924 2 157
Humber, Germany 221 221 13.02 100 2,877 8 489
Carson/Wilmington, CA 139 139 13.30 97 1,793 5 305
Rodeo, CA 120 120 13.30 97 1,548 4 263
Melaka, Malaysia 76 76 13.30 97 980 3 167
Ferndale, WA 105 105 13.30 97 1,355 4 230
Total 2,245 28,730 100 6,320


Using this method for 2012, the Marland Refinery in Ponca City will make a contribution to Phillips 66's net profit of $1,032 million, by far the largest of any of Phillips' refineries.

Variations in the Realized Crack Spread Among Phillips' Four Mid-Continent Refineries

One of the factors not accounted for in the methodology used to calculate the earnings attributable to the Marland Refinery in Ponca City is that Phillips 66 does not break out the crack spreads by refinery but only provides the composite realized crack spread for the mid-continent refineries which include the Billings Refinery, Borger Refinery, Marland Refinery in Ponca City, and Wood River Refinery in Roxana, Illinois.

On September 7, 2012 Brent was selling at $112.85 and WTI at $91.40 for a Brent-WTI differential of $21.45. North Dakota Sweet was selling at $74.50 for a Brent-North Dakota Sweet differential of $38.40. The Borger Refinery primarily runs WTI while the Billings and Wood River Refineries run Canadian and Bakken crude respectively. Except for some specialty products, the Marland Refinery in Ponca City runs primarily WTI but has been increasing the amount of Mississipi Lime Shale crude that it has been buying from oil producers in Northern Oklahoma and Southern Kansas like Red Fork Energy who recently signed a contract with Phillips to provide Mississippi crude to Ponca City. Phillips 66 hasnot disclosed the amount of Mississipi Shale crude provided to the Marland Refinery in Ponca City nor the price that Phillips has negotiated for the shale crude. The contribution to the realized crack spread from the Brent differential will be somewhere between the Brent-WTI differential of $21.45 and the Brent-North Dakota Sweet differential of $38.40 depending on the quantity of Mississipian run through the Marland Refinery in Ponca City and the price that has been negotiated for the Mississippi Lime Shale crude.[40]

Phillips to Run 60,000 bbl of Shale Crude Through Ponca City

Phillips reported during their second-quarters earnings report on August 1, 2012 that Phillips wants to move the shale crudes from 120,000 to ultimately 450,000 to 460,000 barrels a day and has a plan to get advantaged crude into most of Phillips' refineries. "We are trying to get those crudes to every refinery we can," said Phillips CEO Greg Garland. "Ponca about 60,000 barrels a day."[41]

The Oil and Gas Journal reported on August 8, 2012 that the Pony Express Pipeline company has received sufficient binding shipper commitments to move forward with its Pony Express Oil Project that will deliver crude oil from receipt points near Guernsey, Wyo., to the Phillips 66 Ponca City Refinery as well as to Cushing, Okla. The 220,000 b/d pipeline will enter service third-quarter 2014. Once the Pony Express Pipeline is in operation, this will make interior continental oil plays like Niobrara in Colorado available to the refinery in Ponca City which have sold for as low as $40 under Brent.[42][43]

Phillips did not disclose how much shale oil is presently being refined at the Marland Refinery in Ponca City at the 2nd Quarter Earnings Report on August 1, 2012 nor what the realized crack spread is for the refinery in Ponca City. But every barrel of shale crude that runs through the Marland Refinery in Ponca City replaces a barrel of TI-related crude and adds an additional $17 of Brent differential so once Phillips gets up to their full 60,000 bbl target this will add another $372 million in profit for Phillips. Until Phillips breaks out the realized crack spread for each refinery, the additional profit will be reflected in an increased crack spread for the mid-continent refineries.

How Much Does Phillips 66 Contribute to Ponca City?

The Ponca City News reported on October 21, 2012 that Phillips 66 provides financial and in-kind support to community organizations through corporate and employee based programs. "Our philanthropic contributions in Ponca City and the surrounding area are significant. In 2011, direct contributions to non-profit agencies, matching United Way contributions, and contributions based on employee and retiree hours or monetary contributions were in excess of $1.1 million dollars." The Ponca City Refinery earned profits in excess of $500 million in 2011 for Phillips 66 and based on Phillips' third quarter earnings report for 2012 with a realized crack spread of $31.83 for mid-continent refineries and a capacity utilization of 102%, the Marland Refinery in Ponca City will contribute at an annualized rate of over $1 billion ($1.032 B) of net profits in 2012 to Phillips bottom line. Graphic: Hugh Pickens. Note: The area of each bag of money is proportional to the amount of money. Click on the graphic to enlarge.

Phillips 66's Marland Refinery in Ponca City provides benefits to the local community in wages to local employees, property taxes paid to the community, and direct philanthropic contributions to the community. We will evaluate three categories:

  • Wages Paid to Local Employees
  • Property Taxes Paid the Community
  • Direct Philanthropic Contributions to the Community

Wages Paid to Ponca City Residents

The Ponca City News reported on October 14, 2012 that Refinery Manager Pete Stynes spoke to the Ponca City Lions Club on October 10, 2012 about Phillips 66's Refinery in Ponca City and said that 800 employees work at the refinery with the direct employment of 625 Phillips employees.[44]

FuelFix reported on January 12, 2012 that according to the United Steelworkers International representing 30,000 refinery and chemical workers at 168 production, refining, marketing, transportation, pipeline and petrochemical facilities nationwide the average wage of US refinery and chemical workers is $33.85 an hour.[45] We estimate that of the 800 workers at the Marland Refinery, 100 of them are in engineering or managerial positions earning an average yearly salary of $110,000. We estimate that the cost of additional employee benefits including social security payments, unemployment benefits, pension benefits, vacation days, sick days, holidays, and medical benefits adds an additional 60% to direct wages paid. This cost is known as the burden rate.[46]

Marland Refinery in Ponca City Hourly Employees Salaried Employees
Hourly Wage $ 33.85
Yearly Salary $ 70,408.00 $110,000.00
Number of Employees 700 100
Wages $49,285,600.00 $11,000,000.00
Payroll Taxes (10%) $4,928,560.00 $1,100,000.00
Wages and Payroll Taxes $54,214,160.00 $12,100,000.00
Total Wages and Payroll Taxes for Hourly and Salaried Employees $66,314,160.00

Under these assumptions the total wages and payroll taxes paid to the 800 employees at the Marland Refinery in Ponca City including both hourly employees and salaried employees is $66,314,160.00 (54,214,160.00 + 12,100,000.00).

Comparison with Borger Refinery

By way of comparison with the Phillips Refinery in Borger, Texas, the Borger News Herald reported on July 11, 2012 that refinery manager Chris Coon spoke to the Borger Rotary Club on July 10, 2012 about employment and payroll at the Borger Refinery. Coon told members that the Borger refinery included 920 full time employees (including 200 routine contractors) and paid an annual payroll of $65 million. Phillips also pays $6 million in payroll taxes and about $12 million in property taxes.[47] The Borger Refinery is comparable in capacity with the Marland Refinery in Ponca City having a throughput capacity of 146,000 barrels per day compared with Marland's throughput capacity of 187,000 bpd.

Borger Refinery All Employees
Hourly Wage $ 34.00
Average Yearly Salary $ 70,652.00
Number of Employees and Routine Subcontractors 920
Wages $65,000,000.00
Payroll Taxes (10%) $6,000,000.00
Wages and Payroll Taxes $71,000,000.00

The figures provided by the refinery manager at Borger are consistent with the calculations made for employees at the Marland Refinery in Ponca City. Using the same average yearly salary of employees at Borger Refinery, the annual wages plus payroll taxes for the Marland Refinery at Ponca City is $61,739,000.00.

Phillips 66 Property Tax Paid to Kay County

According to property tax records of the Kay County Assesor's Office Phillips 66 has two different types of property that pay tax in Kay County: the refinery itself and real estate around Ponca City including office buildings, warehouses, and residential properties.

Tax Assessment of the Refinery

The Phillips Refinery is assessed under According to Tax Record 30,446.

Amount
Total Market Value $ 542,889,080
Total Assessed Value (14%) $ 76,004,471
Total Exemption $ 4,255,329
Net Assessed $ 71,749,142
Tax Paid $ 6,771,684

The total annual tax paid by Phillips 66 for the refinery is $ 6,771,684.

Tax Assessment for Real Estate

On May 21, 2012, ConocoPhillips transferred real estate in Kay County to Phillips 66 for a value of $69,223,000.00. Real property in the Ponca City School District is taxed at a rate of .00948 for an annual tax of $656,234 on this real estate.

Phillips 66 Charitable Contributions to Ponca City

The Ponca City News reported on October 21, 2012 that Phillips 66 provides financial and in-kind support to community organizations through corporate and employee based programs. "Our philanthropic contributions in Ponca City and the surrounding area are significant. In 2011, direct contributions to non-profit agencies, matching United Way contributions, and contributions based on employee and retiree hours or monetary contributions were in excess of $1.1 million dollars. When employee and retiree contributions are added to the company contributions, the total is over $1.7 million dollars."[48]

External Links

If you have additional information, insights, or corrections for this report please contact the author at hughpickens AT gmail DOT com.

Corporate Links and Presentations

Third Party Links and Presentations

References

  1. ↑ Ponca City News. "Stynes Shares Refinery Update With Noon Lions" October 14, 2012.
  2. ↑ Bartlesvile Examiner-Enterprise. "ConocoPhillips, Phillips 66 have deep roots in Bartlesville" by Ryan Lance and Greg Garland. May 1,2012.
  3. ↑ ConocoPhillips. "Worldwide Refining"
  4. ↑ Streetinsider. "Phillips 66 (PSX) May Look to Add 'Couple Thousand' Rail Cars in Effort to Expand Capacity" June 5, 2012.
  5. ↑ Fox Business. "Phillips 66 To Boost Rail Capacity for Oil Transport - FT" June 6, 2012.
  6. ↑ Reuters. "Phillips 66 to buy 2,000 rail cars to transport oil" June 8, 2012.
  7. ↑ USA Today. "What — and who — makes gasoline prices rise" by Jonathon Fahey. March 23, 2012.
  8. ↑ Seeking Alpha. "Phillips 66: This Refining Stock Is Pumping Out Cash" by Richard Evans. September 10, 2012.
  9. ↑ Wikipedia. "Brent Crude"
  10. ↑ Wikipedia. "West Texas Intermediate"
  11. ↑ Wikipedia. "Brent Crude"
  12. ↑ Econbrowser. "Brent-WTI spread" by James Hamilton. April 17, 2011.
  13. ↑ Wikipedia. "Brent Crude"
  14. ↑ Econbrowser. "Brent-WTI spread" by James Hamilton. April 17, 2011.
  15. ↑ Wikipedia. "Brent Crude"
  16. ↑ Businessweek. "Barclays Cuts 2012 Oil Price Forecasts for WTI, Brent" July 5, 2012
  17. ↑ Wall Street Journal. "WTI And Import Crude Price Differentials Create Profit Margin Advantages For Mid Continent Refiners Over Coastal Peers; Imports Currently Trade At $10 Premium Over West Texas Intermediate" an interview with Pavel Molchanov. January 9, 2012.
  18. ↑ Reuters. "Phillips 66 aims to run more shale oil" May 1, 2012.
  19. ↑ Reuters. "Phillips 66 aims to run more shale oil" May 1, 2012.
  20. ↑ Reuters. "Phillips 66 aims to run more shale oil" May 1, 2012.
  21. ↑ Reuters. "Phillips 66 aims to run more shale oil" May 1, 2012.
  22. ↑ Reuters. "Phillips 66 aims to run more shale oil" May 1, 2012.
  23. ↑ Reuters. "Phillips 66 aims to run more shale oil" May 1, 2012.
  24. ↑ Seeking Alpha. "ConocoPhillips' CEO Hosts Phillips 66 Analyst Update Conference Call" April 9, 2012
  25. ↑ Seeking Alpha. "ConocoPhillips' CEO Hosts Phillips 66 Analyst Update Conference Call" April 9, 2012
  26. ↑ Forbes Magazine. "As ConocoPhillips Spins Off Refining Assets, Think Twice Before Buying The New Phillips 66" by Christopher Helman. April 30, 2012.
  27. ↑ Forbes Magazine. "As ConocoPhillips Spins Off Refining Assets, Think Twice Before Buying The New Phillips 66" by Christopher Helman. April 30, 2012.
  28. ↑ Forbes Magazine. "As ConocoPhillips Spins Off Refining Assets, Think Twice Before Buying The New Phillips 66" by Christopher Helman. April 30, 2012.
  29. ↑ Forbes Magazine. "As ConocoPhillips Spins Off Refining Assets, Think Twice Before Buying The New Phillips 66" by Christopher Helman. April 30, 2012.
  30. ↑ Reuters. "Phillips 66 profit jumps 14 pct, shares up" by Kristin Hays. August 2, 2012
  31. ↑ Tulsa World. "Horizontal drilling breathes new life into Mississippi Lime oil region" by Rod Walton. September 9, 2011.
  32. ↑ Tulsa World. "Horizontal drilling breathes new life into Mississippi Lime oil region" by Rod Walton. September 9, 2011.
  33. ↑ Seeking Alpha. "ConocoPhillips' CEO Hosts Phillips 66 Analyst Update Conference Call (Transcript)" April 9, 2012.
  34. ↑ Oil Price. "Differences in the Price of Oil: Brent-WTI Spread" by James Hamilton. April19, 2011.
  35. ↑ Reuters. "Conoco marketing its Seaway pipeline stake" October 25, 2011.
  36. ↑ Bloomberg. "Seaway Pipeline Reversal May Face Delay, ConocoPhillips Says" by Robert Tuttle and Bradley Olson. December 6, 2011.
  37. ↑ 4-Traders.com "Enbridge, Enterprise Finish Seaway Pipeline Reversal" May 17, 2012.
  38. ↑ Seeking Alpha. "ConocoPhillips' CEO Hosts Phillips 66 Analyst Update Conference Call (Transcript)" April 9, 2012.
  39. ↑ Businessweek. "Barclays Cuts 2012 Oil Price Forecasts for WTI, Brent" July 5, 2012
  40. ↑ Seeking Alpha. "Phillips 66: This Refining Stock Is Pumping Out Cash" by Richard Davis. September 10, 2012.
  41. ↑ Phillips 66. "Transcript for Phillips 66 second-quarter earnings call" August 1, 2012
  42. ↑ Oil and Gas Journal. "Pony Express Wyoming-to-Oklahoma crude line to proceed" by Christopher Smith. August 8, 2012.
  43. ↑ Seeking Alpha. "Phillips 66: This Refining Stock Is Pumping Out Cash" by Richard Davis. September 10, 2012.
  44. ↑ Ponca City News. "Stynes Shares Refinery Update With Noon Lions" October 14, 2012.
  45. ↑ FuelFix. "Refiners, unions prepare for strike as contract deadline looms" January 30, 2012.
  46. ↑ Investopedia. "Burden Rate" retrieved on November 11, 2012.
  47. ↑ Borger News Herald. "Phillips 66 seeing success in Borger" by Michelle Berry. July 11, 2012.
  48. ↑ Ponca City News. "Phillips 66 Continues to Invest in Community" October 21, 2012.

About the Author

Hugh Pickens
Phillips 66 (PSX) stock performance for 2012. The purpose of this web site is to follow Phillips 66 to document and understand the company's plans and policies and to analyze its business strategy particularly with respect to its Refinery and Marketing Business Segment. Nothing in this report is to be taken as a recommendation to buy or to sell stock in Phillips 66 (PSX). Click the graphic to enlarge. Past performance is no predictor of future results. Photo: Hugh Pickens

Hugh Pickens (Po-Hi '67) is a physicist who has explored for oil in the Amazon jungle, crossed the empty quarter of Saudi Arabia, and built satellite control stations for NASA all over the world. Retired in 1999, Pickens and his wife moved back to his hometown of Ponca City, Oklahoma in 2005 where he cultivates his square foot garden, mows nine acres of lawn, and writes about local history and photographs local events at the Poncan Theatre and Ponca Playhouse.

Since 2001 Pickens has edited and published “Peace Corps Online,” serving over one million pageviews monthly. His other writing includes contributing over 1,400 stories to “Slashdot: News for Nerds,” and articles for Wikipedia, “Ponca City, We Love You”, and Peace Corps Worldwide.

Other Articles by Hugh Pickens about Ponca City

Full Disclosure

I am an independent investor who is a stockholder in Phillips 66 and the purpose of this web site is to follow Phillips 66 to document and understand the company's plans and policies and to analyze the company's business strategy particularly with respect to its Refinery and Marketing Business Segment with a special emphasis on evaluating the impact of Phillips 66 business decisions on the Marland Refinery in Ponca City, Oklahoma. I began building my position in PSX when Phillips 66 went public on May 1, 2012 and am long PSX. I will disclose publicly if I close my position on PSX or go short. Unless stated otherwise, there is a citation for every statement in this article. The only exception is the "Conclusions Section" in this report which includes my own judgments and findings. I am an advocate that that it would be beneficial for both Phillips 66 and the community of Ponca City for Phillips 66 rename its Ponca City refinery the "Marland Refinery in Ponca City" to honor an oil pioneer who together with Frank Phillips brought prosperity and advancement to Northern Oklahoma. Nothing in this report is to be taken as a recommendation to buy or to sell stock in Phillips 66 (PSX).

Updates to the Web Site

This web page is frequently updated so check back periodically to see the latest information added to "An Independent Evaluation of Phillips 66, its Business Strategy, and Execution" or subscribe to the rss feed for this article. If you have any information or insights that you would like to see added to this report on Phillips 66 please contact Hugh Pickens by email at hughpickens AT gmail DOT com.

Copyright

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