Phillips 66 reports sunny quarter, but clouds loom

Lower crude prices may be causing hand-wringing in the oil patch, but cheaper barrels of oil are providing some welcome relief to companies that make and sell gasoline and diesel.

Prices for oil fell faster than for transportation fuels in recent months, boosting the margins for refiners who profit from the gap between the two.

Houston-based refining, chemical and pipeline company Phillips 66 reported Wednesday that its third-quarter profit doubled from the same time last year, buoyed by the price difference between crude, which fell more than 20 percent since July, and gasoline, diesel and other products produced by the company's 15 refineries.

The company on Wednesday reported earnings of $1.2 billion, or $2.09 per share, during the three-month period ending Sept. 30. That's up from $535 million, or 87 cents per share, during the third quarter of 2013.

One of the nation's largest refiners, Phillips 66 has results that serve as a barometer of what's to come for other domestic refining companies including Marathon Petroleum, Tesoro and Valero, which will announce their profits in the coming days, said Jeff Dietert, refining analystat Simmons & Company International.

"I think we are going to see a number of the independent refiners post better-than-expected third quarter earnings," he said.

But that good fortune may not last.

"Gasoline prices are the lowest in years. We have oversupply. Margins are going to shrink and that's bad news for the refineries," said Fadel Gheit, senior oil analyst at Oppenheimer & Co. "That's why investors dumped the stocks."

Despite the upbeat earnings report Wednesday morning, Phillips 66 shares fell $1.14 to $76.39, joining a stock slump that also hit other refiners.

The domestic benchmark oil price rose 78 cents to $82.20.

The average retail price for regular gasoline dropped to $3.06 per gallon this week, the cheapest since December 2010, according to the U.S. Energy Information Administration.

The agency predicted the national average will fall below $3 in the coming weeks.

Crude oil is, by far, the largest operating expense for Phillips 66, which buys about 2 million barrels of oil per day. Rhe company says it could spend $80 billion or more a year on crude.

North American refineries have been enjoying a competitive advantage over their international counterparts because they've been able to access cheaper domestic crude unleashed in vast quantities by the U.S. production renaissance.

In its earnings report Wednesday, Phillips 66 told investors its biggest boost was in its refining sector, where net income soared to $558 million from a loss of $30 million during the same time last year.

"It's the perfect storm where everything that could go right went right," Gheit said. "It was exactly the opposite last year, when everything that could go wrong went wrong."

During the same period last year, refiners were squeezed by a narrow spread between crude prices and refined products as well as the escalating prices for credits many refiners buy to comply with a federal mandate to blend more ethanol into gasoline.

This year, the spread has widened and renewable fuel standard credits are cheaper, which positioned refiners for a healthy third quarter, Gheit said.

But beyond that, the picture is a little more shaky.

"The only consistent thing with refining is that it's unpredictable," he said.