As the economics of transporting crude oil by rail in the U.S. become less compelling, New Jersey-based PBF Energy (PBF) and its master limited partnership PBF Logistics (PBFX) may be feeling a pinch.
PBF Logistics was spun off from PBF Energy in May 2014 to be a "fee-based, growth-oriented" MLP with a focus on owning and operating refined petroleum products, as well as transportation and storage facilities.
Since the spin off, the cost of crude oil delivered by rail is $40.25 per barrel compared with a cost of $34 per barrel for imported crude, according to a recent report written by Sandy Fielden of RBN Energy, an analytics and consulting firm focused on energy. (Fielden estimates the cost of transporting crude by rail is $14 per barrel.) In 2011 and 2012, transporting crude by rail was more cost effective than importing, Fielden said.
Now the dynamic is changing.
"The lower spreads reduce the incentive to move crude from inland basins to coastal refineries by rail because the latter is a more expensive transport option compared to pipelines," Fielden wrote, noting that there has been a 30% decline in crude transported by rail in 2015.
Given the challenging economics, refiners are put in a position of deciding whether they want to import cheaper crude or transport by rail. One reason why the drop-off in crude hasn't been higher than 30% is due in part to the "take or pay" contracts between negotiated between transporters and refiners. Even if they don't transport product, they must still pay a terminal fee.
"In the case of East Coast crude by rail, that means refiners deciding whether to continue shipping by rail at a loss or just pay the terminals fees and import cheaper crudes to meet their feedstock needs," Fielden wrote.
When PBF Logistics was spun off from PBF Energy, it was contracted to move 85,000 barrels of light crude a day by rail at a cost of $2 a barrel. According to RBN Energy data obtained from Genscape, a provider of market data in the energy sector, PBF Logistics has been moving 23,000 barrels a day since July 2015. Because the nature of the contract is "take or pay," PBF Energy is eating about $125,000 a day in costs while it imports crude, Fiedlen said.
Over the last year, shares of PBF Logistics are down 18% while shares of PBF Energy are flat. So far, PBF Energy may be able to handle the additonal costs but should troubles persist, that arrangement may no longer work. As such, it puts pressure on PBF Logistics to diversify its revenue amid challenges to its crude-by-rail business.
To be sure, in February, the MLP announced plans to acquire four terminals from a Plains All American Pipeline (PAA) affiliate for $100 million, which would be financed through a mix of cash, PBF Energy's credit facility and the sale of units to PBF Energy. During an earnings call with analysts, PBF Logistics' management did not provide specifics on the nature of the contracts or the credit quality of the new terminals' customers.
The incentive for importing crude may be there for PBF Energy, despite the fees it must pay. The outlook for PBF Logistics becomes challenging, however, as it seeks to grow in a challenging market. It may be able to collect fees now, but if the spread between imports and rail transports remains, its future becomes less clear.
