Vanishing operating margins and chronic overcapacity. No, not the airline industry. Think Europe's oil refineries. Pe-troplus, a Swiss refining company, is dangerously close to collapse .
Nine European refineries have closed since mid-2008 and 2.6m barrels a day of refining capacity has been removed from advanced economies since the global financial crisis, according to the International Energy Agency. Moreover, operating margins were negative in November. There could be more casualties ahead.
Petroplus is a marginal operator, lacking the scale and financial heft to modernise plant and wring greater efficiencies. Not surprisingly, perhaps, its near-death experience has been hastened by its creditors , which have frozen credit lines as the company struggles to meet even amended covenants. The credit freeze has forced it to begin shutting down three of its five refineries. With high fixed costs, it faces an immediate liquidity problem if credit lines are not restored.
The question is whether anything can be salvaged from the wreck for shareholders. Petroplus shares have collapsed by 90 per cent in a year, and by fully 99 per cent since their July 2007 high. Any remaining value depends on whether the refineries can be sold.
Closing down its capacity of 667,000 barrels a day permanently would ease the plight of other marginal operators. But political considerations could make that next to impossible. There are buyers for Europe's more efficient plants - Essar Energy paid Shell $350m in 2011 for the UK's Stanlow facility , for example. But only two Petroplus plants - one each in Germany and the UK - have the sort of capacity and margin potential to woo buyers.
Europe's refiners are too exposed to low-value fuel oil and petrol and not enough to high-margin products such as jet fuel and diesel. Unless overcapacity is addressed, that will not change. Petroplus is a timely warning to a complacent industry.
Source: http://www.ft.com/cms/s/3/48728056-3880-11e1-9ae1-00144feabdc0.html
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