Worker Strikes Puts Pressure on Refining Stocks

You feel that? That’s the feeling of your wallet getting a bit lighter over the last few days.

valero refinery 630After enjoying falling gas prices for several months now, you’re now paying quite a bit more for your morning commute. Prices for unleaded have surged over this past weekend to their highest levels in nearly two months.

While the recent rise in crude oil can be attributed to some of that increase, the real reason could be a bit more sinister and longer lasting: There’s a huge worker strike going on.

And while that strike will cause you to pay more at the pump, it could have some nasty side-effects for the various refining stocks. Namely, earnings will be crimped if the strike continues much longer.

For investors, such a massive strike by the one of the largest unions in the oil & gas industry isn’t something to be taken lightly.

All About Safety

So what has caused gasoline prices to spike above $2 per gallon? In short: safety.

The United Steelworkers (USW) have organized the largest refinery strike in nearly 35 years. Targeting 9 different plants and more than 4,000 employees, the USW has cited worker safety as the main reason for the stoppage. Looking to hinder manipulation by refining operators on workers’ “fatigue standard,” USW said it had no choice but to announce a massive, nationwide outage.

That was five days ago, and it doesn’t look like the refinery workers will be going back their jobs anytime soon. In fact, it actually could get worse.

Reports have shown that both sides have balked at recent proposals. While Royal Dutch Shell plc (NYSE: RDS.A, NYSE: RDS.B) — who is representing the refineries in the negotiations — has agreed to some of the USW demands, items like significantly higher pay, lower out-of-pocket payments for workers’ healthcare and limiting the use outside contractors haven’t gone over so well. And while the dialogue is consisted “open” between the two parties, no talks have been scheduled since this past Monday.

In response, USW might expand the strikes further across the country.

The current nine facilities that are striking produce about 10% of the total amount of gasoline in the nation — about 1.82 million barrels of fuel per day. That’s a decent amount of fuel on its own. However, if the USW expands the strike to cover all 30,000 of its members across 65 different refineries, we’ll all be in trouble.

According to data compiled by Bloomberg, USW members are responsible for 64% of U.S. fuel production. Adding in other unions who are considering striking out of solidarity — such as the Teamsters and Operating Engineers — and you’re looking at more than 75% of our gasoline out of commission.

And while historically, refineries have operated just fine during periods of worker unrest and stoppages, this time could be different.

State regulators and inspectors have been quite critical of the various refining stocks’ contingency operating plans. In Kentucky and California, officials have scrutinized Tesoro Corporation’s (NYSE:TSO) and Marathon Petroleum Corporation’s (NYSE: MPC) plans to employ replacement workers at two facilities.

Citing two unexpected unit upsets as well as a few compliance issues since the strikes began, officials have hinted that they will put the kibosh on any operating plans that don’t meet safety standards.

Bad News For Refining Stocks

So far, the various refining stocks have brushed off the news of the strike. That’s because all of them are still operating just fine and are currently reporting blow-out earnings courtesy of lower oil prices. But some cracks are already beginning to show up in the sector.

For example, TSO has already been forced to shut down completely one of its facilities due the strike occurring during a period of scheduled maintenance. Shutting down a refinery is an insanely expensive undertaking and take weeks to start up again. The process can add millions of dollars’ worth of one-time charges to a company’s bottom line and turn a potential quarterly profit into a loss.

Incidentally, this is the time of year that most refining stocks shut down their facilities for maintenance and to begin switching over to “summer-grade” gasoline.

With that said, the growing USW strike during scheduled maintenance season could really start crimping things for refining stocks — especially when you consider inspectors aren’t too pleased with their contingency plans.

The worst part is that investors may not really be considering these effects on refining stocks. The last time there was a nationwide reefing strike, it lasted a whopping four months. That’s more than a quarter’s worth of time and enough to do some damage in the earnings department.

Bottom Line

As it stands, Tesoro, MPC and Shell currently have the most to lose as they are feeling the first effects of the strike. TSO is especially vulnerable as it has four of the nine plants currently on strike — representing a large percentage of its capacity. However, if and when the USW work stoppage spreads, others like Valero (NYSE:VLO) and even chemical firms like LyondellBasell Industries N.V. (NYSE:LYB) could be impacted negatively.

With that said, I’m not sure I’d be adding any new money to the refining stocks at this point — especially since they’re sitting on total returns of roughly 100% since 2012. Meanwhile, the fog surrounding the USW strike is pretty thick. And uncertainty doesn’t make for a healthy investing environment.

Until the USW gets a contract or the refiners report the real effects of the stoppage, refining stocks are holds.

As of this writing, Aaron Levitt held a position in MPC and the Vanguard Energy ETF (VDE), which holds TSO, VLO and MPC.

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