A Surprising Winner From the Natural Gas Boom: Chesapeake Energy Corporation (CHK), EXCO Resources Inc (XCO)

Besides illustrating the highly cyclical nature of the refining business, these results also reinforce some very positive developments for the sector as a whole. First and foremost is the aforementioned wide gap between domestic and global crude oil prices. Another major positive development for U.S.-based refiners has been high demand for refined product, especially from Latin America, which has provided a big boost to exports.

And last, but not least, has been the beneficial effect of low natural gas prices. Now let’s take a closer look at this factor.

How low natural gas prices help refining companies
While there are a host of factors impacting refiners’ margins, the biggest component of a refiner’s variable operating costs is the fuel it uses to produce hydrogen and power its refining facilities. Over recent years, demand for processing ultra-low-sulfur fuels has risen rapidly, which has boosted the demand for fuel and hydrogen.

Obviously, refiners that are more energy-intensive have benefited more than others. For instance, cracking and coking refineries, which convert heavy crude into light petroleum products such as gasoline, jet fuel, and diesel, tend to spend more on energy costs.

And between these two types of refining facilities, coking refineries tend to be the most energy intensive, demanding more than two and a half times the energy to refine a barrel of crude compared to the average cracking refinery. Hence, they have been the biggest beneficiaries of low natural gas prices among refiners.

The massive drop in natural gas prices, from roughly $9 per mcf in 2008 to as low as $2 per mcf in 2011, translated into massive cost savings for both these types of refineries. Over this time period, the average cracking refinery realized savings of $0.55 per barrel in processing costs, while the typical coking refinery realized cost savings of almost $1.50 per barrel.