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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Independent Refiners Face Existential Threat

Carl Icahn is sounding the alarm about a rising threat that he believes could bankrupt independent refiners en masse. Icahn is concerned about the surge in government ethanol blending credits and the impact that the increase in supply will have on companies like CVR Energy. Icahn holds an 82% stake in that firm.

EPA mandates to blend biofuels like ethanol and biodiesel have risen sharply helping to put pressure on firms like Valero and PBF Energy. Gas stations can generate RIN credits by selling renewable fuel blended into gasoline to consumers. Refiners without retail gas stations will likely have to pay $1.8B in 2016 for Renewable Identification Numbers (RINs) since they can’t generate the credits as competitors that do own gas stations can. The price of RINs has varied over time from anywhere between as little as $0.05 a gallon to as much as around $1.50 per gallon or more.

"The RIN market will cause a number of refinery bankruptcies…The domino effect of this will be that ‘big’ oil will sop up the bankrupt refineries, causing an oligopoly resulting in skyrocketing gasoline prices." Icahn wrote in an Aug. 9 letter to Environmental Protection Agency administrators Gina McCarthy and Janet McCabe according to Bloomberg. Pointing out that independent refiners appear to be being penalized for something they cannot control, Icahn is holding out hope that Donald Trump will become President of the United States and stop the EPA regulations.

The RIN situation is being exacerbated by independent trading of the credits. As speculators have entered the market, demand for the credits has risen which in turn has pushed up prices. RINs can be shorted or bought, and Icahn alleges that independent refiners are being squeezed by retail gas station companies selling the RINs they generate to investment banks who in turn can hold them until prices rise and independent refiners are forced to buy the credit to meet legal mandates. Related: How Artificial Intelligence Could Help Transform The Oil Industry

It’s unclear if there really is collusion in the RIN market as Icahn alleges, but there is little doubt that trading in RINs by third parties does occur. Refiners have been complaining about the surge of speculation from parties like Vitol for years. Vitol, the world’s largest trader of oil, has reportedly done very well with RIN trading over time.

Icahn is a very sophisticated investor of course, and there is little doubt that he is using his personal clout and name to bring attention to an issue on the side that will benefit firms he owns or holds large stakes in. Nonetheless, the RIN market is clearly facing some stresses in large part because consumers are simply not using as much in the way of renewable fuels as expected.

The result of this increasing RIN cost is to make retail gas station ownership more valuable. That in turn should boost the valuation in private transactions for small chains of gas stations as well as publicly owned chains like Casey’s and Murphy USA. Marathon Petroleum which owns the Hess gas station chain also stands to benefit.

By Michael McDonald for Oilprice.com

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Leave a comment
  • Mchentrp on August 22 2016 said:
    Somehow Mr Icahn stands to gain...you betcha.

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