Capacity Additions & Weak Demand Pressure Refiners in North America & EMEA

NEW YORK (Nov. 3, 2014) – According to a new report by Moody’s Investors Service, significant capacity additions in the Middle East, capacity creep in North America and moderate capacity additions in Latin America mean refiners in North America and Europe, the Middle East and Africa (EMEA) will not see their refining margins expand next year. Large-scale, export-oriented capacity additions in the Middle East will pressure smaller, less complex refineries—particularly in the euro area—and refinery closures will be necessary to balance markets. Moody's outlook for the North American and EMEA refining and marketing industry will remain stable in 2015 and into early 2016, the rating agency says in “Modest Global Demand for Fuel Struggles to Keep Pace with Capacity Additions Worldwide.” Moody's outlooks represent its expectations for fundamental business conditions in a given industry during the next 12 to 18 months. “Global demand for gasoline and distillate products will grow modestly through 2015, but demand from Organisation for Economic Co-operation and Development (OECD) countries will grow only marginally after dipping this year,” says Vice President – Senior Credit Officer Gretchen French. “Earnings will be flat with 2014 levels and may at times be volatile.” But North American refiners will keep their cost advantage over European peers next year due to beneficial crude sourcing and cheap natural gas, Moody’s says. North American refiners located closest to unconventional crude production, including Phillips 66, Marathon Petroleum and HollyFrontier, will see the most advantage. At the same time, proximity and access to refined product export infrastructure will increasingly benefit Valero Energy, Phillips 66 and Marathon along the Gulf Coast, as well as Tesoro's California refineries. Mergers and acquisitions (M&A) among refiners will increase during the next 12 to 18 months. Deals involving a number of large-scale refineries look likely, and the M&A market will remain strong for refiners with midstream master limited partnerships, which offer better growth opportunities than their refining parents. Moody’s is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets. Moody’s Corporation is the parent company of Moody's Investors Service, which provides credit ratings and research covering debt instruments and securities, and Moody’s Analytics, which offers software, advisory services and research for credit and economic analysis and financial risk management.