July 27, 2018 / 2:05 PM / a year ago

UPDATE 3-Phillips 66's profit beats on higher refining margins

(Adds industry details, analyst and CEO comments, updates share price)

By Laharee Chatterjee

July 27 (Reuters) - U.S. independent oil refiner Phillips 66's quarterly profit topped analysts' estimates on Friday as cheaper crude prices boosted refining margins by more than 45 percent.

The company's shares rose 2.4 percent to $118.76 in afternoon trading on Friday.

Like its rivals Valero Energy Corp and Marathon Petroleum Corp, Phillips 66 processes heavy crude from countries including Venezuela and Canada into diesel, gasoline, jet fuel and other products. But booming U.S. shale production has forced refiners to retrofit the distillation process to handle more of the very light crude from the oilfields of Texas and North Dakota.

"With roughly one-third of their crude slate being light crude, I would suspect Phillips 66 benefited significantly during the quarter as did the other refiners," said Jennifer Rowland, an energy analyst at Edward Jones.

Phillips 66 said earnings from refining, its biggest business, increased to $910 million in the second quarter from $224 million a year earlier.

On Thursday, Valero and Marathon Petroleum also topped Wall Street profit estimates as greater processing of cheap, light crude from West Texas boosted margins.

The spread between U.S light crude and Brent crude has widened this year with a rise U.S. oil production, which lowered WTI prices, while Brent crude has climbed on Middle East tensions and OPEC supply cuts.

U.S. crude production has been rising to record high levels since late last year, hitting a record 11 million barrels per day this month.

The widening of the Brent–WTI spread, larger discounts on U.S. inland crudes and improved heavy crude differentials all contributed to increased realized margins, Phillips 66 said.

"We expect Western Canadian Select discounts to be attractive for at least the next 18 months and potentially longer," Chief Executive Officer Greg Garland said on a post- earnings report call, adding that the refiner has no major turnaround overhauls planned at its nine refineries in the third quarter of 2018. Prices for Canadian crude have also dropped against benchmark oil as a surge in production has led to transportation bottlenecks.

Realized refining margin was $12.28 per barrel compared with $8.44 per barrel a year earlier, the company said in a statement. The refiner's utilization rate, which is defined as the percentage of the total equipment or refinery involved in processing crude, reached 100 percent.

Chief Financial Officer Kevin Mitchell said in a call with Wall Street analysts that capital expenditure for the rest of the year will be between $2 billion and $3 billion.

Earnings from the company's midstream business also doubled to $202 million while profit at its chemicals business, which manufactures and markets petrochemicals and plastics, rose nearly 34 percent.

The Houston, Texas-based company said its adjusted earnings rose to $1.32 billion, or $2.80 per share, in the three months ended June 30, from $569 million, or $1.09 per share, a year earlier.

Analysts on average had expected a profit of $2.19, according to Thomson Reuters I/B/E/S. (Reporting by Laharee Chatterjee in Bengaluru; Editing by Sai Sachin Ravikumar and Jonathan Oatis)

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