Refining Trends and Outlook 2019 TXOGA Property Tax Conference Karl Bartholomew, PE, ASA, MRICS Manager, US Property Tax Shell Oil Company 1 March 2019
Refining Trends and Outlook
2019 TXOGA Property Tax Conference
Karl Bartholomew, PE, ASA, MRICSManager, US Property TaxShell Oil Company
1March 2019
Agenda
▪ Historical market overview
▪ Boiling Oil
▪ Refining & petrochemical economics
▪ Refining transactions
▪ Challenges & Concerns
Any views and opinions expressed in this presentation are the sole views and opinions of the presenter and do not
any way represent the views or the opinions of Shell Oil Company or any of its affiliates.
2March 2019
Fundamental Rules of the Road (for valuation)
◼ Unless building a thermonuclear device, ensure a material balance (lbs in = lbs out)
◼ Economics beats technology – every time!
◼ You cannot forecast history
◼ Those who forget the lessons of history are doomed to repeat them
◼ Rising tides float all ships
◼ Correlation does not automatically mean causality
◼ Stewart’s Corollary: Politics beats economics – every time!
◼ Ziesmer’s Corollary: Remember there’s math, then there’s government math
◼ An industrial facility (like a refinery / chemical plant / gas plant) is just a wide spot in the line between producer
and consumer
March 2019 3
The storyboard is as important as the numbers
Historical market overview
1March 2019 4
Oil Price History
0
20
40
60
80
100
120
140
160
Jan-
90
Oct
-90
Jul-9
1
Apr
-92
Jan-
93
Oct
-93
Jul-9
4
Apr
-95
Jan-
96
Oct
-96
Jul-9
7
Apr
-98
Jan-
99
Oct
-99
Jul-0
0
Apr
-01
Jan-
02
Oct
-02
Jul-0
3
Apr
-04
Jan-
05
Oct
-05
Jul-0
6
Apr
-07
Jan-
08
Oct
-08
Jul-0
9
Apr
-10
Jan-
11
Oct
-11
Jul-1
2
Apr
-13
Jan-
14
Oct
-14
Jul-1
5
Apr
-16
Jan-
17
Oct
-17
Jul-1
8
$/ba
rrel
Global, U.S. marker prices for oil
WTI
Brent
March 2019 5Source: EIA
Heavy Oil Discount
-20
-10
0
10
20
30
40
50
Jan-
10
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
Oct
-12
Jan-
13
Apr
-13
Jul-1
3
Oct
-13
Jan-
14
Apr
-14
Jul-1
4
Oct
-14
Jan-
15
Apr
-15
Jul-1
5
Oct
-15
Jan-
16
Apr
-16
Jul-1
6
Oct
-16
Jan-
17
Apr
-17
Jul-1
7
Oct
-17
Jan-
18
Apr
-18
Jul-1
8
Oct
-18
Jan-
19
$/ba
rrel
US HOD (WTI-Maya) Cdn HOD (WTI-WCS)
March 2019 6Source: EIA, Pemex, ICIS
Major crude fields - 2010
March 2019 7
Source: 2011 ENI
World Oil & Gas
WTI
Urals
Major crude fields – 2017
March 2019 8
Source: 2017 ENI
World Oil & Gas
Urals
WTI
Major crude oil production changes by country2010-2017
March 2019 9
(2,000,000)
(1,000,000)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
Barr
els
per
Cale
ndar
Day
Source: EIA International Energy Statistics
US Shale oil productionSource: EIA
10March 2019
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
Barr
els
per
Cale
ndar
Day
Anadarko Appalachia Bakken Eagle Ford Haynesville Niobrara Permian
US Shale gas productionSource: EIA
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
Thou
sand
Cub
ic F
eet p
er C
alen
dar
Day
Anadarko Appalachia Bakken Eagle Ford Haynesville Niobrara Permian
11March 2019
Supply (Feed) + Hardware = Demand (Product)
Boiling Oil
2March 2019 12
Global oil demandSource: BP Statistical Review of World Energy 2018
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017
Barr
els
Per
Cale
ndar
Day
By Region
North America So. & Cent. America Europe & Eurasia Middle East Africa Asia Pacific
March 2019 13
Refining throughputSource: BP statistical review of world energy 2018
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
100,000,000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Barr
els
Per
Cale
ndar
Day
U.S. World
14March 2019
U.S. Refining CapacitySource: EIA
80
82
84
86
88
90
92
94
96
98
100
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
2010 2011 2012 2013 2014 2015 2016 2017 2018
% U
tiliz
atio
n O
pera
ble
Capa
city
Barr
els
Per
Cale
ndar
Day
US Operable Capacity US % Utilization TX GC % Utilization
March 2019 15
US net import/export balance crude & productSource: EIA
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
Barr
els
per
Cale
ndar
Day
16March 2019
Operating RefineriesSource: EIA
March 2019 17
0
50
100
150
200
250
300
350
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Idled
Refineries
Operating
Refineries
Refining & petrochemical economics
318March 2019
Renewables (Ethanol RINs)Source: Valero
0
10
20
30
40
50
60
70
80
90
100
Cent
s pe
r G
allo
n
March 2019 19
Refining economics indicatorsSource: Company filings, SEC
March 2019 20
Steam cracker light feed advantage
(10)
(5)
0
5
10
15
20
25
30
35
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Cent
s pe
r po
und
mar
gin
(Ethane - Nap) Ethane Naphtha
March 2019 21
Olefins Additions
◼ First wave of new capacity additions well underway◼ (Source: ICIS)
◼ Second wave to come post-2020
◼ CP Chem Orange; Penn Chem
March 2019 22
Source: CP Chem
Source: Author
Chemicals economic indicatorsSource: Company filings, SEC
March 2019 23
Refining Transactions
424March 2019
PAR Pacific – Tacoma, WA
March 2019 25
PAR Pacific – Tacoma, WA
March 2019 26
Chevron – Pasadena, TX
March 2019 27
Refinery Transactions
Year Location Buyer Est. FMV $MM2015 Chalmette PBF 3052016 Torrance PBF 1582016 Newcastle PAR Pacific 1142016 Dickinson Tesoro 662017 Superior Husky 4352018 Tacoma PAR Pacific ~150-1752019 Pasadena Chevron ~190-220
March 2019 28
U.S. refinery sales - % RCN
March 2019 29
0.00
5.00
10.00
15.00
20.00
25.00
30.00
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
$/ba
rrel
gro
ss m
argi
n
% R
epla
cem
ent C
ost N
ew
Inland Coastal WTI 3-2-1 LLS 3-2-1
Inland refining economics
Coastal refining economics
U.S. refinery sales - $/complexity barrel
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
$ pe
r co
mpl
exity
bar
rel
Inland Coastal
March 2019 30
Astra – Petrobras
Crown-AstraPetrobras-Chevron
U.S. Oil - Trailstone
Trailstone-PAR Pacific
Challenges & Concerns
531March 2019
Challenges & Concerns
▪ IMO forecasts all over the map
▪ Some show major spikes; others spike up then moderate
▪ Reliance on cost
▪ Asset Ledger Cost ≠ Reproduction Cost ≠ Replacement Cost ≠ Fair Market Value
▪ All sales aren’t distressed sales
▪ As prices go up (as %RCN), intangibles or goodwill will increase
▪ Seller’s (or buyer’s) WACC ≠ Discount rate for Income approach
▪ IMHO, direct cap or market multiple won’t properly value complex properties
March 2019 32
Forecast accuracy
March 2019 33
Short-term forecast accuracy
March 2019 34
What is IMO and how does it impact refining?
▪ IMO – International Maritime Organization
▪ Starting January 1, 2020, no more high sulfur fuel oil can be sold as bunker fuel
▪Compliance will be met by:
▪Onboard ship scrubbers
▪Marine diesel
▪More resid destruction (cokers)
▪ Lighter crude slate
▪Cheat
▪Historical forecasts on new regulations overestimate impact, duration
March 2019 35
Many forecasts
Year forecasted
Maya 2-1-1
2017 23.602018 38.502019 31.30
March 2019 36
Income Approach
◼ Real-world transactions look mostly at an income approach for bidding
◼ Often at much higher discount rates than a company’s WACC or taxing authorities schedules
◼ Direct capitalization or market multiple approach is too simple
◼ Discounted cash flow model is the proper approach due to volatility in hydrocarbon markets
◼ Terminal value assumption can make or break valuation
◼ Multiple margin scenarios appropriate to consider
◼ Third party forecasts
◼ Forecast using historical look-backs (3-5 years)
March 2019 37
Income Approach Challenge
◼ Winning bidder paid ~ $1.9 billion
◼ Client bid ~ $1.3 billion for refinery – finished 2nd among bidders; 3rd was $1.2 billion
◼ Why the difference?
◼ Winning bid assumed conversion of refinery from light sweet crude oil to heavy Canadian feed ($3+ billion)
◼ Assuming discounted crude price generates margin for project, net present value would be $.5-$.7 billion higher
◼ Actual result – winning bidder didn’t do the crude conversion; overpaid for the assets
March 2019 38
Cost Approach challenges
◼ Fixed Asset Listing from an accounting system is often not equal to Reproduction Cost New
◼ Often companies capitalize expense items due to accounting policies (turnarounds, maintenance, etc.)
◼ Retired assets not consistently removed
◼ Obsolescence almost always understated
◼ Operating cost obsolescence can be determined from benchmark studies
◼ External/economic obsolescence is always present; often not included
◼ Future regulatory capital (10 ppm gasoline; flare gas recovery; new bunker fuel sulfur, methane from wells)
◼ More in-depth analysis or discussion can yield solid, factual evidence of obsolescence
◼ Needs support from operations at the facility
March 2019 39
Cost Approach example
◼ 40 year old gas plant was severely damaged from Hurricane Katrina
◼ Insurance policy dictated one part of plant (if not rebuilt) to be valued using cost approach
◼ A third party consultant for insured determined “depreciated replacement cost value” of 75% of RCN
◼ Based on extrapolating 4%+ sustaining capital spending over past 5 years to plant’s operating life
◼ Analysis overlooked
◼ 1. Spending was for emergency patching of one utility boiler and included no other maintenance capital
◼ 2. Plant was technically obsolete and last of its vintage in operation
◼ Final settled value was ~ 20% of RCN
March 2019 40
Lessons on Approaches to Value
◼ No one approach gives you the “correct” answer
◼ Buyers make bids based on discounted cash flow modeling
◼ Transaction price paid represents a fair market value data point
◼ Start the Cost approach with a good data basis, consider all forms of obsolescence exist
◼ All three approaches have strengths, weaknesses, but properly done, should yield similar values
◼ Most important – numbers are only 50% of the answer. The story behind the numbers are often more important.
March 2019 41
Questions and answers
42March 2019