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US Refiners Poised to Beat Q3 Estimates on Strong Product Margins, TPH Energy Says

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TPH Energy Research expects US independent refiners to deliver stronger-than-expected Q3 earnings as gasoline and diesel margins remain robust, it said in a Tuesday note.

TPH raised its average Q3 earnings per share estimate for the sector to $5.83 from $4.97, above the consensus forecast of $5.22 per share.

TPH still expects earnings to remain below its Q2 estimate of $6.18 and the Street's $5.74.

TPH said refining margins have started the third quarter strongly, supported by an unusual seasonal increase in US gasoline margins.

TPH said its US gasoline margin indicator increased to $35 per barrel in Q3 from $28 per barrel in Q2, after adjusting for Renewable Volume Obligation costs and measuring against Brent crude.

US gasoline inventories have fallen to five-year lows and stand 6% below the five-year average, while gasoline yields have remained about 3 percentage points below normal over the past two weeks as refiners favored diesel production, the brokerage said.

Diesel margins also improved, with TPH's US futures indicator increasing to $49/bbl in Q3 from $48/bbl in Q2 despite the US-Iran peace agreement.

Low inventories, Russian refinery outages and a steeper global cost curve continued supporting diesel markets.

TPH said crude differentials have narrowed against Brent for several grades, including WTI-Cushing, Syncrude, Western Canadian Select at Hardisty, Western Canadian Select at Houston and Alaska North Slope, creating a modest headwind for refiners.

Company-specific indicators also strengthened early in the quarter, with Valero Energy (VLO) up $7.86/bbl from the prior quarter, Phillips 66 (PSX) up $5.71/bbl and Marathon Petroleum (MPC) up $4.08/bbl, according to TPH.

The firm said lower crude backwardation, wider octane spreads and cheaper tanker rates should improve capture rates. Backwardation indicates strong near-term demand or constrained spot supply, with futures prices trading below spot prices.

However, weaker jet fuel margins relative to diesel, flat crude prices and a roughly $2/bbl increase in Renewable Volume Obligation costs will offset some of those gains.

TPH expects Midwest ethanol margins to improve by about 3 cents per gallon from the Q2 on stronger co-product returns, while retail operations recover. Renewable diesel and polyethylene margins are expected to weaken.

Analysts forecast the largest earnings upside versus consensus for Valero Energy, HF Sinclair (DINO) and Par Pacific Holdings (PARR), while maintaining estimates below consensus for PBF Energy (PBF) and CVR Energy (CVI).

TPH expects refiners to increase shareholder distributions in Q3 after limiting returns in Q2 because of market volatility.

The firm forecasts an average total capital return yield of 9% in Q3, up from 5% in Q2, led by Marathon Petroleum, Valero Energy, Par Pacific Holdings, HF Sinclair and Delek US Holdings (DK).

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