May 1, 2013 / 12:37 PM / 4 years ago

UPDATE 4-Phillips 66 sees Bakken crude priced to move to US coasts

5 Min Read

* Phillips 66 says narrowed Brent-WTI spread will not make Bakken uncompetitive

* Advantaged crude runs reached 68 pct in 1st qtr, up from 60 pct

* Refined product exports up

By Kristen Hays

May 1 (Reuters) - Independent refiner Phillips 66 expects North Dakota's Bakken crude oil to be competitively priced to move via rail to East and West coast markets despite a narrowing of the U.S. crude benchmark's price discount to London's Brent, an executive told analysts on Wednesday.

Crude from the Bakken shale oil play, as well as growing crude production in other U.S. regions, has been a profit boon for refiners because it trades cheaper than global crudes priced off Brent. However, that discount has narrowed, raising concerns that the cost advantage could shrink or even disappear.

Tim Taylor, executive vice president for commercial, marketing, transportation and business development for Phillips 66, said during a conference call after the company released first-quarter earnings that Bakken crude needs to get to those markets, and the market will price it to move.

West Texas Intermediate's discount to Brent slipped under $9 a barrel on Wednesday as Brent fell below $100 a barrel on concerns about economic growth in China and the United States. The U.S. demand outlook also weakened on the heels of a buildup in U.S. crude stocks.

U.S. crude benchmark West Texas Intermediate's discount to Brent surpassed $23 in February.

A discount that wide makes it profitable for refiners to spend the $12 to $16 a barrel it takes to move Bakken crude via rail to East and West coast refineries, as Phillips 66 does. The company aims to increase those shipments as well, having received 400 or 2,000 railcars ordered for 2013.

"Fundamentally, that crude needs to go that direction," Taylor said. "We believe Bakken crude will price to be competitive."

Taylor said later in an interview that the company expects the Brent-WTI spread would keep moving between the minimum transportation cost and a level that reflects the cost of other ways to move it, such as rail.

But U.S. production is projected to keep growing, and infrastructure to move it will come in chunks as it tries to catch up, he said.

"We expect to continue to see this differential move around over time, but there's still plenty of incentive for us to bring these advantaged crudes into our refining system at these levels," Taylor said.

Phillips 66 said quarterly earnings more than doubled on its use of Bakken and other cheaper U.S.- and Canadian-produced crude oil to make gasoline and other fuels.

The company, which operates or owns interests in 15 refineries and has a large chemical business, said 68 percent of the crude slate run at its U.S. plants had those price advantages, up from 60 percent a year ago.

In addition to Canada and the Bakken shale oil play, some of that crude also came from the Eagle Ford shale in Texas and the Mississippian Lime in Oklahoma and Kansas.

Chief Executive Greg Garland told analysts that the company will aim to run 100 percent cheaper North American crudes.

"I keep pressing it," Garland said. "It will take us a couple years."

He also said the company is examining various projects at refineries to allow them to run more cut-price light sweet crude produced in those U.S. plays. That could include converting underused units into condensate splitters or other projects that would cost $50 million or less.

Using that cheaper crude rather than importing from overseas helps refiners keep costs low and margins high. Phillips 66 said profit in its refining unit jumped to $922 million in the quarter from $393 million a year earlier.

Phillips 66 also increased refined products exports in the quarter and finished projects at refineries on the West and Gulf coasts to export more. In the first quarter, the company exported 150,000 barrels per day of diesel and gasoline, up from 61,000 bpd a year ago and 149,000 bpd in the fourth quarter last year.

The company now can export 320,000 barrels per day of motor fuels from U.S. refineries and expects to increase that to 370,000 bpd by year-end.

Garland said the strong results should help the company increase dividends and stock buybacks, which remain a "key component" of corporate strategy.

The Houston-based company said first-quarter earnings were $1.41 billion, or $2.23 per share.

Comparable profit for the year-earlier period was $636 million, or $1.00 per share. Phillips 66 was split off from ConocoPhillips in May 2012 and not independent in the first quarter of that year.

Excluding one-time items, the company earned $2.19 per share in the latest quarter. By that measure, analysts expected $1.89, according to Thomson Reuters I/B/E/S.

On Tuesday, Phillips 66's refining peers, Valero Energy Corp and Marathon Petroleum Corp, reported higher-than-expected profits, also helped by cheap domestic crude oil.

Phillips 66 shares closed down $1.28 at $59.67 on Wednesday.

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