HF Sinclair saw profit from its lube and specialty products unit fall in the final three months of last year amid lower output, a seasonal slowdown in demand and higher costs.
Output fell partly in response to a seasonal drop in demand.
Lower US base oils prices during the fourth quarter added to the slowdown in demand as buyers waited for prices to bottom out.
HF Sinclair also focused on maximising output of high-value base oils products and cutting production of lower-value products.
At the same time, consumption of feedstock supplies based on a ‘first-in, first out’ (FIFO) accounting valuation boosted costs.
The lube and specialty products unit’s operating profit of $44.29mn in the fourth quarter fell by 17pc from year-earlier level of $53.53mn.
Profit was up from a $4.99mn loss in the third quarter, when FIFO cost pressures also impacted earnings.
The company expected those cost pressures to extend into the first three months of this year.
“But we believe the underlying business will still show strength,” HF Sinclair President and Chief Operating Officer Tim Go said in an earnings conference call.
“Seasonally, the first half of the year is always a bit better for lubes.”
The lube unit’s 4pc rise in sales in the fourth quarter lagged the 9pc increase in costs, reflecting the FIFO cost impact.
Sales still rose even as HF Sinclair’s lube and specialty products throughput fell by 15pc in the fourth quarter to the lowest in more than six years.
Sales got support from high US Group III base oils prices relative to feedstock costs. These helped to counter the weakness of Group I and Group II base oil margins during the fourth quarter.
Group III prices maintained their firm premium to feedstock costs through the first two months of this year.
HF Sinclair expected the strength of Group III base oils prices to provide continued support during the first three months of the year and likely for the second quarter.
The strength of Group III prices similarly supported strong profit and margins for other Group III base oils producers in markets like South Korea.
HF Sinclair’s fourth-quarter operating profit margin of 6.1pc from its lube unit fell from year-earlier levels of 7.6pc. It rose from a 0.6pc negative margin in the third quarter.