US refiners Marathon Petroleum, Phillips 66, and Valero Energy delivered their strongest collective performance since Russia's invasion of Ukraine in 2022, with combined second-quarter profits reaching $12.6 billion. According to reports from Reuters, this represents a dramatic improvement from the $2.9 billion combined profits recorded in the same period last year. The surge in earnings came as the Iran war disrupted global energy shipping and encouraged international buyers to pay higher prices to secure fuel supplies. Attacks on Russian oil refineries further tightened global fuel availability, lifting prices and margins even as consumers faced broader inflationary pressures. As Gabelli Funds portfolio manager Simon Wong noted, "To say that they made a lot of cash is an understatement."
The three major refiners returned $6.3 billion to shareholders through stock buybacks and dividends during the quarter, more than double the $2.6 billion returned in the same period a year earlier. As reported by Reuters, this represents the largest amount returned in more than two years. Phillips 66 board approved a $10 billion increase in its share repurchase authorization in July, while Valero authorized a new $5 billion buyback program, in addition to $2.5 billion remaining under an earlier authorization. HF Sinclair, a smaller rival, also increased its quarterly dividend by 5% during this period. According to TD Cowen analyst Jason Gabelman, "We think the buyback programs will continue to be pretty robust for Valero and Marathon," with the two refiners expected to repurchase about 20% of their market values between the third quarter and end of next year.
According to Reuters, tighter global fuel supplies have driven US gasoline and diesel crack spreads to exceptional levels. The ultra-low sulfur diesel futures crack spread reached a record $93.84 per barrel on August 10, while the US gasoline futures crack spread climbed to $60 per barrel on July 17, its highest level since April 2020. The US average gasoline price also moved above $4 per gallon at the end of March for the first time in more than three years, marking its sharpest monthly increase in decades. However, product margins have since eased from the stronger levels seen in the second quarter and early part of the current quarter, as noted by Marathon's chief commercial officer Rick Hessling during recent investor calls.
The strong earnings have fueled a sharp rally in refiner stocks, with Marathon Petroleum shares gaining about 110% year-to-date to around $342, Valero up more than 98%, and Phillips 66 rising about 75%. The S&P 500 energy sector has gained roughly 36% over the same period. According to TD Cowen estimates, Marathon and Valero are valued at approximately $91.3 billion and $90.1 billion respectively, while Phillips 66 is valued at around $81.2 billion. Analysts expect shareholder payouts to remain strong in the third quarter, with Phillips 66, which is placing greater emphasis on growth investments and debt reduction, expected to repurchase roughly 10% of its market value. Valero benefited from strong jet fuel margins in the second quarter but that support has been absent so far in the third quarter, though an arbitrage opportunity has reopened for jet fuel exports to Europe.
While refiners remain cautiously optimistic about the outlook, they face seasonal challenges in the second half of the year as gasoline demand typically eases after the summer driving season and the market transitions toward winter heating fuels. As reported by Reuters, refining executives were cautiously optimistic heading into the second half of the year. Marathon noted that fuel margins remained robust but had moderated from exceptionally strong levels recorded during the second quarter and early in the current quarter. Valero's chief operating officer Gary Simmons expects jet fuel margins to strengthen over the remainder of the quarter as refiners switch to winter diesel specifications, stating "I suspect we'll start to see jet strengthen as we move throughout the quarter." The combination of constrained global supplies, elevated fuel prices and continued capital returns could keep US refiners in a strong financial position, although the sustainability of current margins will depend heavily on the duration of geopolitical disruptions and global fuel demand.
