Integrated Oil/Refiners:Potential Impacts of BTA

Impacts broadly negative for refiners。

As the post-election euphoria for US refiners surrounding potential tax cuts andRINs relief begins to fade, the increasingly topical Border Tax Adjustment (BTA)has forced investors to consider its impacts. While DB’s Washington officecurrently has the chance of passage as only 40%, and the impact would behighly complicated with far too many moving pieces to address withconfidence, the overall impact would be clearly negative for US refiners(positive US E&Ps), driving US crude price to a material premium, reversingrecent global advantages, while increasing domestic product prices andaccelerating demand destruction. E/W coast (PBF, TSO) likely most exposed.For refiners, export flexibility (MPC, PSX, VLO), segment diversification (PSX,MPC) and a domestic-wtd crude slate (HFC, DK) offer partial offsets to the BTA。

For refiners, the BTA would be a resounding negative for the group withproduct export flexibility (PSX, VLO, MPC), segment diversification (PSX, MPC),and a relatively domestic-weighted crude slate (DK, HFC) offering only partialoffsets and leaving the coastal refiners (PBF, TSO) relatively disadvantaged (yetagain). While the implications from a potential BTA are far-reaching - withmaterial visibility to remain elusive until market dynamics are observed realtime– the impact to refiners would be significant and negative: higherdomestic crude price, challenging global competitiveness, while also raisingdomestic product prices and accelerating demand destruction. Absent anincrease in domestic crude price, the implications from the BTA are likelymanageable for most of the group (excluding PBF/TSO) – with an ~1% increaseto product prices needed to maintain 2017 DB EPS estimates (11%/5% forPBF/TSO respectively). However, with domestic crude likely to trade towards atax-adjusted equilibrium with crude exports (domestic crude would trade at a25% premium, in theory, at a 20% tax rate), we estimate an increase in productpricing of 8%/14% needed to maintain profitability across the group assuminga 10%/20% increase in the pricing of domestic crude.

US E&Ps (OXY, PXD), Midstream/infrastructure the clear winners
US E&Ps would emerge as clear winners, with the price of domestic crudelikely to trade at a significant premium to global crude (or the ability to exportcrude tax-free). At least in the near-term, crude export capacity remainsconstrained only a year after the lifting of the crude export ban (exports stillonly represent ~3% of total crude supply (production + imports) in the US),offering significant opportunities for midstream companies to increase pipeline,processing, storage and export capacity in the Gulf Coast. We see PXD(exported 2 cargoes to Europe during 3Q) and OXY (recent commencement ofits Ingleside oil terminal) as relatively better positioned amongst the large-capE&P group, while PSX (nearly 1 million b/d of product and/or crude exportcapacity currently) is best positioned amongst US independent refiners.