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Wells Fargo’s mortgage volume fell in consecutive three-month periods during the fourth quarter, but its mortgage banking income increased.
Released: April 10, 2013
Next Release: April 17, 2013
Next Release: April 17, 2013
The U.S. average retail price for a gallon of regular gasoline has fallen for six consecutive weeks since hitting its 2013 year-to-date peak of $3.78 per gallon in late February. Early in 2013, increasing crude oil prices and strong seasonal crack spreads led to an increase in retail gasoline prices. However, in recent weeks, both of those pressures have abated, and retail prices have declined to $3.61 per gallon. In the April 2013 Short-Term Energy Outlook (STEO), EIA projects that for the summer (April through September) driving season, regular-grade gasoline retail prices will average $3.63 per gallon, similar to the current price level. Last summer that average was $3.69 per gallon. Daily and weekly national average prices can differ significantly from monthly and seasonal averages, and there are also significant regional differences, with prices in some areas exceeding the national average by 25 cents per gallon or more.
The average retail price for regular gasoline is expected to increase to an average of $3.69 per gallon in May, then fall gradually through the summer (Figure 1). Most of the increase from the current price level is attributable to an increase in crack spreads as result of typical seasonal factors such as the switch to summer-grade gasoline, which is more costly to produce (a crack spread is the difference between the cost of crude oil and the wholesale price of the refined product). After averaging 23 cents per gallon in first quarter 2013, gasoline crack spreads based on Brent are expected to increase to an average of 40 cents per gallon in the second quarter, peaking at 42 cents per gallon in May. The refiner price of gasoline for resale (wholesale) is expected to increase six cents per gallon from the first to second quarter, which combined with decreasing projected prices for Brent crude, lead to the higher expected crack spread. As refinery runs increase from the second quarter to the third quarter, wholesale gasoline prices are expected to fall about 8 cents per gallon, pushing crack spreads down to a third-quarter average of 35 cents per gallon.
While the gasoline crack spread is the major driver of seasonality in the retail gasoline price forecast, crude oil prices remain the largest source of uncertainty for gasoline price levels this summer. Brent crude oil prices averaged $112.51 per barrel in first-quarter 2013. Despite declining to as low as $104 per barrel on April 5, Brent prices are expected to average $108 per barrel and $107 per barrel in the second and third quarters, respectively.
The market's uncertainty about crude and gasoline prices is reflected in the pricing and implied volatility of futures and options contracts. While there is not sufficient liquidity in the Brent options market to accurately calculate uncertainty, WTI futures and options provide an estimate for crude oil market uncertainty. WTI futures contracts for July 2013 delivery, traded during the five-day period ending April 4, averaged $96.35 per barrel. Implied volatility averaged 18 percent, establishing the lower and upper limits of the 95-percent confidence interval for the market's expectations of monthly average WTI prices in July 2013 at $82 per barrel and $113 per barrel, respectively. New York Harbor reformulated gasoline blendstock for oxygenate blending (RBOB) futures contracts for July 2013 delivery, traded over the 5-day period ending April 4, averaged $2.97 per gallon. The probability that the RBOB futures price will exceed $3.35 per gallon (consistent with a U.S. average regular gasoline retail price above $4.00 per gallon) in July 2013 is about 12 percent.
Currently, at the beginning of the driving season, total gasoline inventories are within their seasonally-typical range, indicating a normal balance between supply (production and imports) and uses (consumption and exports). At the end of March, total gasoline stocks stood at 220 million barrels, 1 million barrels above the level of a year ago, and the same as the previous five-year average for beginning-of-season stocks. However, gasoline consumption has declined over the past five years, and gasoline stocks on a days-of-supply basis are above their five-year average. Moreover, an increase in refining capacity and production this summer is expected to contribute to a smaller draw on gasoline stocks, with projected end-of-season inventories of 209.5 million barrels, 8.8 million barrels above last year's level and 1.7 million barrels above the five-year average.
Gasoline and diesel fuel prices fall for a 6th week
The U.S. average retail price of regular gasoline decreased four cents from the previous week to $3.61 per gallon as of April 8, 2013, down 33 cents from last year at this time. The U.S. average price has declined 18 cents over the last six weeks. The last time prices declined for six consecutive weeks was October 15, 2012 to November 19, 2012. Prices were lower in all regions of the nation except the Rocky Mountains, where the price is $3.52 per gallon, up three cents from last week. The largest decrease came on the Gulf Coast, where the price dropped five cents to $3.43 per gallon. The East Coast and Midwest prices are both lower by four cents, to $3.59 per gallon and $3.55 per gallon, respectively. Rounding out the regions, the West Coast price is $3.93 per gallon, a decline of two cents.
The national average diesel fuel price decreased two cents to $3.98 per gallon, 17 cents lower than last year at this time. The U.S. average price has decreased 18 cents over the last six weeks. Prices decreased in all regions of the nation except the West Coast, where the price increased less than a penny to remain at $4.12 per gallon. The largest decrease came on the Gulf Coast, where the price declined three cents to $3.89 per gallon. The East Coast and Rocky Mountain prices both declined by two cents and are now $4.01 per gallon and $3.90 per gallon, respectively. Rounding out the regions, the Midwest price is $3.96 per gallon, a drop of one cent.
Propane inventories decline
U.S. propane stocks gained 0.3 million barrels to end at 40.0 million barrels last week, and are 5.4 million barrels (11.9 percent) lower than the same period a year ago. Midwest regional inventories increased by 0.6 million barrels, while Rocky Mountain/West Coast inventories rose by 0.1 million barrels. Gulf Coast inventories dropped by 0.3 million barrels, and East Coast stocks declined by 0.1 million barrels. Propylene non-fuel-use inventories represented 8.9 percent of total propane inventories.
Text from the previous editions of This Week In Petroleum is accessible through a link at the top right-hand corner of this page.
Released: April 3, 2013
Next Release: April 10, 2013
Next Release: April 10, 2013
The differential between West Texas Intermediate (WTI) and North Dakota's Bakken crudes continues to fluctuate, reflecting both production growth and changes in oil transportation capacity. Bakken crude sold at a $25-per-barrel discount to WTI in early 2012 and rose to a $5-per-barrel premium last September, before again being discounted below WTI this winter. So far this year, the gap between Bakken and WTI prices has narrowed, and once again, the Bakken price has risen above the WTI price, albeit modestly (Figure 1).
West Texas Intermediate prices are determined at Cushing, Oklahoma; Bakken prices are those at Clearbrook, Minnesota, where the North Dakota pipeline network joins Enbridge's pipeline running southeast from western Canada. Because of the costs of transporting Bakken crude to Clearbrook, including the pipeline tariff, the price for Bakken at the wellhead will be less than the delivered price at Clearbrook.
The strong growth in Bakken production has frequently outpaced expansion of the local transportation infrastructure, leading to discounts for Bakken crude compared to benchmark WTI. Production in North Dakota, the primary source of Bakken crude, rose 243,000 barrels per day (bbl/d), or 58 percent, in 2012 to 663,000 bbl/d, placing North Dakota second only to Texas in oil production among all states. Meanwhile, pipeline capacity out of the region, which is also used to accommodate increased production of Canadian crude flowing through the region, was estimated at only 395,000 bbl/d in 2012.
Limited pipeline capacity has forced shippers of Bakken crude to use alternative transportation, such as railroads. According to the North Dakota Pipeline Authority, loading capacity at North Dakota rail terminals increased by 660,000 bbl/d between 2007 and the end of 2012, with an additional 355,000 bbl/d of capacity expected to come on line by the end of 2014.
Although transportation of crude oil by rail is generally more expensive than shipping by pipeline, rail-loading capacity has proven cheaper and quicker to build. In addition, the logistical flexibility of rail has enabled Bakken crude to reach refining areas not typically served by pipeline from the Bakken. Historically, crude oil production from the Northern Plains has been discounted against midcontinent crudes to account for the added costs of moving these crudes by pipeline to areas such as Cushing, Oklahoma, and the Gulf Coast (PAD District 3).
Investment in rail offloading capacity at East Coast refineries, such as Philadelphia Energy Solutions's Philadelphia complex, suggests that Bakken offers a cost-competitive alternative to Brent-linked crude imports despite the cost of transporting Bakken by rail from the Midwest. The landed cost of Nigerian crude, the leading source of East Coast imports for most of the past two decades, averaged about $117/bbl in 2012, making Bakken and other domestic crudes economical alternatives. Because of the closure of several East Coast refineries and the availability of cheaper domestic light crude, East Coast imports of Nigerian crude fell from 471,000 bbl/d in 2005 to 166,000 bbl/d in 2012.
For West Coast refineries, cost-competitive access to Bakken crude would allow the Bakken oil to displace more-expensive imports there, as well. West Coast imports, which come primarily from Saudi Arabia, Ecuador, and Iraq, have remained flat since 2006; however, Anacortes, Washington, began receiving unit-train shipments of Bakken in late 2012, potentially signaling new competition for West Coast oil imports.
As Bakken rail shipments reach the East and West coasts, pricing for Bakken crude oil is evolving. The ability to economically reach refineries on the East and West coasts expands the market for Bakken beyond the traditional Midwest and Gulf Coast refineries, which have experienced a glut of midcontinent crudes in recent years. By moving east and west, Bakken escapes the infrastructure constraints that have significantly affected the price of WTI. The Gulf Coast, where Brent-linked imports have already declined significantly, offers less opportunity for Bakken. As light-sweet imports continue to be displaced along the Gulf Coast, Bakken will increasingly compete with other domestic crudes, many of which have lower pipeline transportation costs to the Gulf Coast. As long as Bakken production and transportation capacity scramble to seek equilibrium, continued variation in the differential between Bakken and WTI prices is likely.
Gasoline and diesel fuel prices continue to decrease
The U.S. average retail price of regular gasoline decreased four cents from the previous week to $3.65 per gallon as of April 1, 2013, down 30 cents from last year at this time. The U.S. average price has declined 14 cents over the last five weeks. Prices were lower in all regions of the nation except the Rocky Mountains, where the price is $3.50 per gallon, up three cents from last week. The largest decrease came in the Midwest, where the price dropped six cents to $3.60 per gallon. The East and Gulf Coast prices are both lower by three cents, to $3.63 per gallon and $3.48 per gallon, respectively. Rounding out the regions, the West Coast price is $3.95 per gallon, a decline of two cents.
The national average diesel fuel price decreased one cent to $3.99 per gallon, 15 cents lower than last year at this time. The U.S. average price has decreased 17 cents over the last five weeks. Prices decreased in all regions of the nation except the West Coast, where the price increased two cents to $4.12 per gallon. The largest decrease came on the East Coast, where the price declined three cents to $4.03 per gallon. The Gulf Coast price is $3.92 per gallon, a drop of two cents. The Midwest and Rocky Mountain prices are both lower by a penny, to $3.97 per gallon and $3.92 per gallon, respectively.
Propane inventories decline
U.S. propane stocks fell 1.1 million barrels to end at 39.7 million barrels last week, and are 5.0 million barrels (11.3 percent) lower than the same period a year ago. Gulf Coast inventories dropped by 0.6 million barrels, and Midwest regional inventories declined by 0.4 million barrels. East Coast stocks dropped by 0.1 million barrels, while Rocky Mountain/West Coast inventories decreased slightly. Propylene non-fuel-use inventories represented 9.1 percent of total propane inventories.
Text from the previous editions of This Week In Petroleum is accessible through a link at the top right-hand corner of this page.
Released: April 17, 2013
Next Release: April 24, 2013
Next Release: April 24, 2013
In late 2012, the difference between the U.S. average retail prices for premium gasoline and regular gasoline reached 30 cents per gallon for the first time, a level at which it has remained for most of 2013 (Figure 1). Since 2000, the spread has climbed steadily, increasing from an average of 18 cents per gallon that year to a monthly record of 33 cents per gallon in January 2013. On a percentage basis, however, the price spread between premium and regular has been stable since 2009, with the price of premium averaging 8 percent above the price of regular (Figure 2) and ranging between 6 percent and 10 percent. Before 2009 and starting in about 2001, the spread actually declined, moving from 17 percent in late 2001 to 6 percent in mid-2008. This decline coincides with increased blending of ethanol into the motor gasoline pool.
Over the last decade, ethanol has emerged as a significant component of motor gasoline (Figure 2), along with reformate, alkylate, fluid catalytic cracker gasoline, and butane. Ethanol has also become a significant source of octane. The fuel ethanol that is blended into motor gasoline has an average octane rating of 115, which is greater than the octane rating of either finished regular (87) or premium (91-93) motor gasoline. With the higher octane of ethanol blended into gasoline, the octane of the gasoline blendstock shipped from refineries has declined. The U.S. Environmental Protection Agency estimated that refiners are currently producing 84 octane blendstock that, when blended with ethanol, will meet the 87 octane minimum for regular-grade finished gasoline. Similarly, refineries are producing 88 octane blendstock that, when blended with ethanol, will meet a 91 octane premium-grade finished gasoline requirement.
To lower blendstock octane, refiners reduce the use of certain refinery-produced gasoline blendstocks. Among the first blendstocks to be reduced are the highly aromatic compounds such as reformate. Reformate is a high-octane component for gasoline that is produced in a refinery by a reformer, which processes straight-chain hydrocarbons into aromatics that contain ring-shaped structures. For refiners, the cost of octane depends largely on reformer operation, which involves a tradeoff between the octane of reformate and the amount of reformate produced. As a result, higher-octane reformate, such as that used to make premium gasoline, costs more than lower-octane reformate for the same volume. This tradeoff between octane and yield is not linear, and the decline in reformate yield for a one-number change in octane increases as octane increases. Because of this non-linearity, more cost savings result from reducing octane of gasoline blendstock from 91 to 88 than from 87 to 84. Thus, as ethanol replaces reformate as a source of octane in gasoline, higher-octane gasoline blendstock becomes relatively cheaper, reducing the percentage-based grade differential for premium versus regular gasoline.
In addition to the decline in premium gasoline production costs, the change in the price relationship between premium and regular gasoline likely reflects factors such as vehicle characteristics and consumer preferences. After the use of premium gasoline peaked in the late 1980s, its consumption has fallen by more than 50 percent. In 1989, premium accounted for slightly more than a quarter of all gasoline sold in the United States; since 2006, that share has been between 8.5 and 9.5 percent.
Gasoline and diesel fuel prices fall for a 7th week
The U.S. average retail price of regular gasoline decreased seven cents from the previous week to $3.54 per gallon as of April 15, 2013, down 38 cents from last year at this time. Prices were lower in all regions of the nation, with the largest decrease in the Midwest, where the price fell 10 cents to $3.46 per gallon. The Gulf Coast price dropped seven cents to $3.36 per gallon, and the East Coast price is $3.53 per gallon, five cents lower than last week. The West Coast price declined four cents to $3.89 per gallon, but remains the highest in the nation. Rounding out the regions, the Rocky Mountain price is two cents lower than last week at $3.51 per gallon.
The national average diesel fuel price decreased four cents to $3.94 per gallon, 19 cents lower than last year at this time. Prices decreased in all regions of the nation, with the largest decrease on the West Coast, where the price decreased five cents to $4.07 per gallon. The Gulf Coast price dropped four cents to $3.85 per gallon. The East Coast and Midwest prices are both three cents lower than last week, at $3.98 per gallon and $3.92 per gallon, respectively. Rounding out the regions, the Rocky Mountain price fell two cents to $3.88 per gallon.
Propane inventories decline
U.S. propane stocks fell 1.0 million barrels to end at 39.0 million barrels last week, and are 7.3 million barrels (15.8 percent) lower than the same period a year ago. Gulf Coast inventories dropped by 1.4 million barrels, while East Coast inventories declined slightly. Midwest inventories increased by 0.4 million barrels, and Rocky Mountain/West Coast stocks gained 0.1 million barrels. Propylene non-fuel-use inventories represented 9.2 percent of total propane inventories.
Text from the previous editions of This Week In Petroleum is accessible through a link at the top right-hand corner of this page.
Released: March 27, 2013
Next Release: April 3, 2013
Next Release: April 3, 2013
Despite recent national attention on rising domestic production of light sweet crude oil, especially from tight oil formations in North Dakota, some Midwest refiners are reconfiguring their facilities to process more heavy crude oil, which will likely come from Canada.
The refinery coking capacity in PAD District 2 (the Midwest) is set to increase significantly this year as refiners in the region focus on heavy crude oil. As this additional coking capacity comes online, Midwest refiners will be able to significantly increase runs of heavy crude, such as Western Canadian Select (WCS).
WCS currently sells at a steep discount to other crude oil benchmarks used in the United States, including West Texas Intermediate, Louisiana Light Sweet, and West Texas Sour, and processing WCS reduces refiner crude oil costs. When the additional coking capacity comes online, the average API gravity of crude runs in the region is likely to decrease and the product yield patterns are likely to change.
Coking is a thermal cracking process that converts heavy hydrocarbons such as atmospheric residuum, vacuum gasoil and residuals, and bitumen into lighter hydrocarbons such as unfinished gasoline and gasoils as well as petroleum coke and light gases. Coking allows refiners to increase gasoline and distillate yields from heavy crude oils (details).
Between 2002 and 2012, Midwest coking capacity increased from 400,000 barrels per day (bbl/d) to more than 480,000 bbl/d, an increase of about 20 percent (see chart). Three major coking unit construction projects have recently been completed or are in process in PADD 2. In November 2011, Phillips 66's Wood River, Illinois, refinery (which is jointly owned by Phillips 66 and Cenovus and operated by Phillips 66) completed the addition of a 65,000-bbl/d coker. A year later, Marathon Petroleum completed a 28,000-bbl/d coker at its refinery in Detroit, Michigan. Currently, a 102,000-bbl/d coker is under construction at BP's Whiting, Indiana, refinery and is scheduled for completion later this year.
These three cokers and related refinery projects will enable processing of 509,000 bbl/d of additional heavy crude, which likely will come from Canada. The increase in heavy crude processing is based on increasing overall refinery crude processing capacity and replacing existing runs of light crude with heavier crude.
The displaced light sweet crude, like other crude in the midcontinent, will find its way east, west, and south, moving by rail and pipeline to refineries in those regions and displacing imports of waterborne crude.
The additional heavy crude is expected to lead to decreases in average API gravity in the region. From 2010 to 2012, the average API gravity of crude runs in Indiana, Illinois, Kentucky, Tennessee, Michigan, and Ohio fell by 2 percent, going from 33.64 to 32.98 degrees.
Trade press reports indicate that additional Midwest refiners may undertake coker installation projects in the coming years. Husky's refinery in Lima, Ohio, and NCRA's McPherson, Kansas, facility are said to be considering upgrades that would expand coking capacity, which could lead to further changes in average API gravity and refinery yields in the region.
Three New Midwest Coking Projects FacilityPre-Coker Heavy Crude CapacityPost-Coker Heavy Crude CapacityHeavy Crude Processing IncreaseStart-upPhillips 66/Cenovus, Wood River, IllinoisMarathon Petroleum, Detroit, MichiganGasoline and diesel fuel prices both down for the 4th consecutive week
The U.S. average retail price of regular gasoline decreased two cents to $3.68 per gallon, down 24 cents from last year at this time. The U.S. average price has declined 10 cents over the last four weeks. Prices were lower in all regions of the nation except the Midwest, where the price is $3.66 per gallon, up a penny from last week, and the Rocky Mountain region, where the price is unchanged at $3.47 per gallon. The West Coast price is down 5 cents, and now below the $4-per-gallon mark at $3.96 per gallon. The East Coast price is $3.66 per gallon, down three cents from last week, and the Gulf Coast price declined two cents to $3.51 per gallon.
The national average diesel fuel price decreased four cents for the third consecutive week, to $4.01 per gallon, 14 cents lower than last year at this time. The U.S. average price has fallen 15 cents over the last four weeks. Prices decreased in all regions of the nation, with the largest drop on the West Coast, where the price fell six cents to $4.10 per gallon. The Gulf Coast price is a nickel lower at $3.94 per gallon. The Midwest and Rocky Mountain prices are $3.98 per gallon and $3.94 per gallon, respectively, both down four cents from last week. Rounding out the regions, the East Coast price dropped three cents to $4.05 per gallon.
Propane inventories decline
U.S. propane stocks fell 0.9 million barrels to end at 40.8 million barrels last week, and are 2.9 million barrels (6.5 percent) lower than the same period a year ago. Midwest inventories dropped by 0.5 million barrels, and Gulf Coast regional inventories declined by 0.3 million barrels. East Coast stocks dropped by 0.2 million barrels, while Rocky Mountain/West Coast inventories increased slightly. Propylene non-fuel-use inventories represented 8.2 percent of total propane inventories.
Text from the previous editions of This Week In Petroleum is accessible through a link at the top right-hand corner of this page.
Released: April 17, 2013
Next Release: April 24, 2013
Next Release: April 24, 2013
In late 2012, the difference between the U.S. average retail prices for premium gasoline and regular gasoline reached 30 cents per gallon for the first time, a level at which it has remained for most of 2013 (Figure 1). Since 2000, the spread has climbed steadily, increasing from an average of 18 cents per gallon that year to a monthly record of 33 cents per gallon in January 2013. On a percentage basis, however, the price spread between premium and regular has been stable since 2009, with the price of premium averaging 8 percent above the price of regular (Figure 2) and ranging between 6 percent and 10 percent. Before 2009 and starting in about 2001, the spread actually declined, moving from 17 percent in late 2001 to 6 percent in mid-2008. This decline coincides with increased blending of ethanol into the motor gasoline pool.
Over the last decade, ethanol has emerged as a significant component of motor gasoline (Figure 2), along with reformate, alkylate, fluid catalytic cracker gasoline, and butane. Ethanol has also become a significant source of octane. The fuel ethanol that is blended into motor gasoline has an average octane rating of 115, which is greater than the octane rating of either finished regular (87) or premium (91-93) motor gasoline. With the higher octane of ethanol blended into gasoline, the octane of the gasoline blendstock shipped from refineries has declined. The U.S. Environmental Protection Agency estimated that refiners are currently producing 84 octane blendstock that, when blended with ethanol, will meet the 87 octane minimum for regular-grade finished gasoline. Similarly, refineries are producing 88 octane blendstock that, when blended with ethanol, will meet a 91 octane premium-grade finished gasoline requirement.
To lower blendstock octane, refiners reduce the use of certain refinery-produced gasoline blendstocks. Among the first blendstocks to be reduced are the highly aromatic compounds such as reformate. Reformate is a high-octane component for gasoline that is produced in a refinery by a reformer, which processes straight-chain hydrocarbons into aromatics that contain ring-shaped structures. For refiners, the cost of octane depends largely on reformer operation, which involves a tradeoff between the octane of reformate and the amount of reformate produced. As a result, higher-octane reformate, such as that used to make premium gasoline, costs more than lower-octane reformate for the same volume. This tradeoff between octane and yield is not linear, and the decline in reformate yield for a one-number change in octane increases as octane increases. Because of this non-linearity, more cost savings result from reducing octane of gasoline blendstock from 91 to 88 than from 87 to 84. Thus, as ethanol replaces reformate as a source of octane in gasoline, higher-octane gasoline blendstock becomes relatively cheaper, reducing the percentage-based grade differential for premium versus regular gasoline.
In addition to the decline in premium gasoline production costs, the change in the price relationship between premium and regular gasoline likely reflects factors such as vehicle characteristics and consumer preferences. After the use of premium gasoline peaked in the late 1980s, its consumption has fallen by more than 50 percent. In 1989, premium accounted for slightly more than a quarter of all gasoline sold in the United States; since 2006, that share has been between 8.5 and 9.5 percent.
Gasoline and diesel fuel prices fall for a 7th week
The U.S. average retail price of regular gasoline decreased seven cents from the previous week to $3.54 per gallon as of April 15, 2013, down 38 cents from last year at this time. Prices were lower in all regions of the nation, with the largest decrease in the Midwest, where the price fell 10 cents to $3.46 per gallon. The Gulf Coast price dropped seven cents to $3.36 per gallon, and the East Coast price is $3.53 per gallon, five cents lower than last week. The West Coast price declined four cents to $3.89 per gallon, but remains the highest in the nation. Rounding out the regions, the Rocky Mountain price is two cents lower than last week at $3.51 per gallon.
The national average diesel fuel price decreased four cents to $3.94 per gallon, 19 cents lower than last year at this time. Prices decreased in all regions of the nation, with the largest decrease on the West Coast, where the price decreased five cents to $4.07 per gallon. The Gulf Coast price dropped four cents to $3.85 per gallon. The East Coast and Midwest prices are both three cents lower than last week, at $3.98 per gallon and $3.92 per gallon, respectively. Rounding out the regions, the Rocky Mountain price fell two cents to $3.88 per gallon.
Propane inventories decline
U.S. propane stocks fell 1.0 million barrels to end at 39.0 million barrels last week, and are 7.3 million barrels (15.8 percent) lower than the same period a year ago. Gulf Coast inventories dropped by 1.4 million barrels, while East Coast inventories declined slightly. Midwest inventories increased by 0.4 million barrels, and Rocky Mountain/West Coast stocks gained 0.1 million barrels. Propylene non-fuel-use inventories represented 9.2 percent of total propane inventories.
Text from the previous editions of This Week In Petroleum is accessible through a link at the top right-hand corner of this page.
Investors can certainly make good money investing in well-run personal care companies with solid brands. Along those lines, names like Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL), Unilever (NYSE:UN), and Kimberly-Clark (NYSE:KMB) have all delivered very strong capital gains over the past year. In the case of Kimberly-Clark in particular, though, I do worry that this consumer staples melt-up has gone a little too far. I do like the company's growth potential in emerging markets, but commodity inflation could threaten further margin improvements and I believe the stock is too expensive relative to its growth prospects.
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On-Target Growth And Strong Margins In The First Quarter
Kimberly-Clark helped its case with a strong first quarter result. Revenue rose less than 2% on a reported basis, but organic revenue growth was in excess of 3% despite a challenging year-ago comps. Growth was led by the consumer tissue business (a lucrative cold/flu season) which rose nearly 4%, while the personal care business was up more than 2%. KC Professional revenue was up slightly, while organic health care revenue was down 2%.
As mentioned, margins were surprisingly strong this quarter. Adjusted gross margin improved about 140bp and beat the sell-side average by about 80bp. Likewise, adjusted operating income was considerably stronger than expected, as it increased 16% and beat expectations by about 8%. All told, about half of the company's beat relative to the average EPS estimate can be tied to operating outperformance.
SEE: Understanding The Income Statement
Brand Strength Versus Pricing Pressure
One of the curious things about the recent strength in consumer stocks is that it is coming in the face of relatively weak pricing and volume trends. Consumers tend to be pretty loyal when it comes to products like toilet tissue and facial tissue, but private label brands (particularly at retailers like Walmart (NYSE:WMT) have been picking up quite a bit of share over the past couple of years.
In the meantime, it will be interesting to see how rivals like Procter & Gamble and Johnson & Johnson (NYSE:JNJ) choose to compete against Kimberly-Clark. Nobody seems eager to surrender any margin and there hasn't been much price competition among the major branded players – something that could arguably play into the hands of the private label manufacturers.
International Is Still A Bullish Story
A big part of the bullish thesis on Kimberly-Clark has been its above-average growth potential in emerging markets. Few personal care companies have a larger emerging markets business than Kimberly-Clark (Colgate would be one of the exceptions), and the company has definitely benefited from the growth in consumer demand for products like disposable diapers, facial tissue, and toilet tissue.
Still, these products aren't so entrenched that constant sales growth is a given. Against some difficult year-ago comps, Kimberly-Clark saw international sales up just 4% in consumer tissue (in constant currency) and 6% in personal care – not bad, I'll grant, but certainly weaker than the year-ago levels. I suspect that one of the challenges for Kimberly-Clark in the future will be in maintaining brand value – local production will certainly help the cost structure, but I do believe the company will eventually have to convince local shoppers that there's a good reason to pay premiums for Huggies and Kleenex.
The Bottom Line
Kimberly-Clark has an excellent dividend history, both in terms of the consistency and the growth of the payout. Likewise, this is a company with strong brands and solid consumer loyalty. What is not as consistent, though, is the history of operating income growth and margins. The company has done a good job of improving its manufacturing process and reducing waste, but input costs like fiber, energy, and packaging are still meaningful.
SEE: 5 Must-Have Metrics For Value Investors
I am looking for Kimberly-Clark to continue growing its free cash flow at a low-to-mid single-digit rate. In fact, I'm looking for the company to post stronger growth over the next decade than it has over the past ten years. Even with that growth, though, the shares do not look cheap. Whether you consider discounted free cash flow, EV/EBITDA, or P/E, Kimberly-Clark shares seem to be sporting a significant premium, and I don't see the growth or earnings consistency here to pay such a high multiple today.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.
For better or worse, Schlumberger (NYSE:SLB) is a stock that will give investors multiple second chances. Although this company is regarded as the best of the oil services companies, the ups and downs of the energy market (and the resulting impacts on exploration, drilling, and production activity) lead to wide swings in operating performance and the stock price. With surprisingly solid margins, signs of improvement in North American activity, and strong multi-year prospects in deepwater, subsea, and international projects, this could be a good time to consider these shares.
Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.
Not A Great Quarter, But Somewhat Better Than Expected
With activity trailing off worse than expected in the fourth quarter (and more price competition than expected), Schlumberger did post a slight revenue miss for the first quarter of 2013. Revenue rose 8% from the year-ago period, but fell 5% sequentially.
The revenue miss was generally across all geographies, though least bad in the Mideast/Asia region. Revenue in North America fell 3%, while Latin America and Europe/Russia/Africa rose 9%. In the Mideast/Asia region revenue rose 22%. On an annual basis performance was pretty even among the business lines, as production, reservoir characterization, and drilling revenue rose 7%, 8%, and 9% respectively. Sequentially, though, drilling was flat, while production was down 4% and reservoir characterization was down 11%.
Schlumberger's margins were better than expected, but not exactly strong on their own terms. Operating income rose 5% (and fell 6% sequentially), as oilfield services revenue rose 4% and fell 6% respectively. Operating income was down 19% in North America, but rose by double digits in the other geographies. On a margin basis, the North American region was the only one to see a year-on-year decline in margins. Not uncommonly for this company, Schlumberger once again beat Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL) for the best margins this quarter.
SEE: Key Ratios For Analyzing Oil And Gas Stocks
Looking For Things To Get BetterWhile Schlumberger's management was not particularly aggressive in the wake of these results, they did seem generally positive. Even with the recent drop in oil prices, activity has been improving somewhat and prices are still high enough to make oil production profitable for most producers in North America. Likewise, international pricing is improving somewhat, though the improvements are more skewed to the smaller projects.
Clearly it's anybody's guess as to whether a recovery in the energy sector is on the way. If the Chinese and/or American economy slow further, it's hard to be optimistic about oil and gas prices in the short term.
Longer term, though, it's harder not to be on optimist on Schlumberger. Not only does Schlumberger have a broadly balanced array of businesses, the company has a long history of innovation and operational excellence. With opportunities like the Cameron (NYSE:CAM) joint venture (where they are targeting a doubling of deepwater recovery rates) and the emerging shale market in China, Schlumberger should be looking at years of strong prospects.
SEE: 5 Biggest Risks Faced By Oil And Gas Companies
The Bottom Line
The recent decline in oil prices has hit the oil service and equipment sector, including Schlumberger. With that move, this stock now looks cheap relative to its historical trading multiples. Assuming that the sell-side target for 2013 EBTIDA is accurate (and that's admittedly not a small “if”), Schlumberger should be trading around $74. Keep in mind, too, that I use a multiple that is lower than the company's historical forward multiple and that the multiple usually grows when investors get bullish on the sector again.
Schlumberger, and the sector as a whole, is just too volatile to make sense as a long-term holding for most investors. That said, these shares can do quite well when they run. It may be premature to call the all-clear in oil services, but I do believe that higher energy prices and better earnings for the major service providers is a “when, not if” proposition and that Schlumberger is a good stock to hold for that move.
At the time of writing, Stephen D. Simpson owned shares of Came?ron International Corp.
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