CERCLA 108(b) Economic Sector Profile: Petroleum and Coal Products Manufacturing

CERCLA 108(b) Economic Sector Profile: Petroleum and Coal

Products Manufacturing

INTRODUCTION

This document summarizes public data collection, research, and analyses conducted with respect
to the Petroleum and Coal Products Manufacturing Industry. This class of facilities is potentially
subject to regulation under Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) 108(b). Specifically, this document focuses on two subsectors of the
Petroleum and Coal Products Manufacturing Industry (North American Industry Classification
System (NAICS) 324)): Petroleum Refineries (NAICS 32411) and All Other Petroleum and Coal
Products Manufacturing (NAICS 324199). All Other Petroleum and Coal Products
Manufacturing encompasses coke oven products, petroleum briquettes, petroleum jelly, and
petroleum waxes (NAICS 324199). Note that based on historical environmental damage cases,
this analysis focuses only on petroleum refineries and coke production ovens.1

The analysis begins with a high-level industry profile providing insight into recent industry
trends, including the relative size of the industry and subsectors of interest. Subsequent sections
assess the two subsectors of interest individually. Specifically, the subsections provide an
industry profile, evaluate the potential universe of regulated entities, and discuss industry
financial health and default risk. For petroleum refineries, the industry default risk section also
incorporates a summary of historical bankruptcy cases and a section discussing environmental
liabilities under Chapter 11 of the Bankruptcy Code. A similar summary is not provided for coke
production ovens due to lack of data.

Generally, this analysis finds the sector in a relatively stable financial position with low default
risk. Firms in the industry maintain healthy credit scores and reasonable levels of debt relative to
assets. Forecasts predict stable market conditions in the coming years, resulting in price stability
and low risk. Despite a generally healthy financial outlook, intrinsic market volatility due to
exogenous factors (e.g., geopolitical unrest) and supply and demand shocks poses an ongoing
threat to stability. The industry experienced significant volatility in recent years, including a
substantial price decline in 2014, resulting in a spike in bankruptcies.

Firms in the subsectors of interest are often involved in additional industrial activities, such as oil
extraction and steel production. Even if firm activities do not transcend industry boundaries, both
subsectors of interest are dependent on other industries for inputs and sales. For example,
petroleum refineries depend on oil extraction for inputs and coke products (used in steel
production) depend on demand for steel products. To the extent possible, this analysis attempts

1 Additional subsectors within NAICS 324 include Asphalt Paving, Roofing, and Saturated Materials
Manufacturing (NAICS 324112), and Petroleum Lubricating Oil and Grease Manufacturing (NAICS 324191).
Neither of these NAICS 324 subsectors were included in this economic profile, due to the absence of significant
damage cases. The same is the case for all other types of petroleum and coal products manufacturing within NAICS
324199, except for coke oven production. A market profile of Asphalt Paving, Roofing, and Saturated Materials
Manufacturing (NAICS 32412) can be found in the docket (Asphalt Roofing and Processing Revised Industry
Profile, March 2001, EPA, Heller, Yang, & Depro under RTI Project 7647.002.131).

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to isolate subsector activity, though industry interdependency presents additional exogenous risk
factors.

Note that this report has been prepared primarily for purposes of gathering general information
on the financial make-up and health of the Petroleum and Coal Products Manufacturing Industry
and subsectors. It is not meant to provide an explicit forecast of the sector's financial and
operational performance nor draw conclusions from the data with respect to individual
companies operating in the sector.

PETROLEUM AND COAL PRODUCTS MANUFACTURING INDUSTRY PROFILE

The Petroleum and Coal Products Manufacturing Industry is a manufacturing industry which
encompasses petroleum and coal product manufacturing. The industry also includes asphalt
paving, roofing, and saturated material manufacturing, as well as petroleum lubricating oil and
grease manufacturing. In 2015, the Petroleum and Coal Products Manufacturing Industry
accounted for nine percent of US manufacturing's total value of sales and receipts but less than
one percent of employment.2

The petroleum refining industry3 covers one step in the process of converting raw materials into
useful petroleum products. Generally, the process can be summarized in three activity categories:
upstream, midstream, and downstream activities. Upstream activities include exploration and
production of crude oil, the key material used in petroleum refining. Midstream activities include
distributing and refining crude oil into useful petroleum products, such as gasoline, fuel oil,
diesel fuel, and propane. Lastly, downstream activities involve the retail sale and end use of
petroleum products.4 Some large companies, such as oil and gas giant ExxonMobil, are
integrated across all three activity categories. While the Petroleum and Coal Products
Manufacturing Industry only includes midstream refining activities, the interdependency of the
three categories results not entirely independent risk profiles of the corresponding industries. To
the extent possible, this analysis isolates and focuses on midstream activities.

In 2015, the two subsectors of interest, Petroleum Refineries and All Other Petroleum and Coal
Product Manufacturing, accounted for 18 percent of the 968 firms in NAICS 324 but 68 percent
of the 102,479 employees.5 Petroleum Refineries are characterized by higher levels of
employment per firm than All Other Petroleum and Coal Products Manufacturing; Petroleum
Refineries accounted for 10 percent of firms and 62 percent of employment while All Other

2 U.S. Census Bureau: American Factfinder. Annual Survey of Manufacturers. Accessed at
https://factfinder.census.gOv/faces/nav/i sf/pages/searchresults.xhtml?refresh=t#none.

3 Petroleum refining's interrelatedness with crude oil has led to the two terms being used interchangeably.
Technically, petroleum is a broader category that encompasses both crude oil and petroleum products. Despite this
distinction, this analysis uses both terms synonymously.

4 Penn State. The Process of Crude Oil Refining. Department of Energy and Mineral Engineering. Accessed at
https://www.e-education.psu.edu/eme801/node/470.

5 U.S. Census Bureau: American FactFinder. Annual Survey of Manufacturers. Accessed at
https://factfinder.census.gOv/faces/nav/i sf/pages/searchresults.xhtml?refresh=t#none.

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Petroleum and Coal Products Manufacturing accounted for eight percent of firms and three
percent of employment.6

As shown in Figure 1, the total value of shipments and receipts for services declined between
2012 and 2016 from over $851 billion to about $430 billion. Petroleum refineries accounted for
over 90 percent of the industry's total value of shipments and receipts for services every year
from 2012 through 2016, driving the decline. All Other Petroleum and Coal Products
Manufacturing value also fell during this time period, from $5.3 billion in 2012 to $3.1 billion in
2016.

Petroleum Refineries i i All Other Petroleum and Coal Products Manufacturing^^"324 Total

Source: U.S. Census Bureau7

Interestingly, industry employment largely remained stagnant, even growing slightly during the
same time period, from about 101,000 in 2012 to over 104,000 in 2016.8 The stagnation in
employment can be explained by the steady production of petroleum and crude oil from 2012
through 2016. As seen in Figure 2, the decline in the total value of shipments and receipts was
not the result of a decline in production; production remained steady while the total value
dropped.

6 U.S. Census Bureau: American FactFinder. 2015 County Business Patterns. Accessed at
https://factfinder.census.gOv/faces/nav/isf/pages/searcliresults.xhtinl7refreslFt#none.

7 U.S. Census Bureau: American FactFinder. Annual Survey of Manufacturers. Accessed at
https://factfinder.census.gOv/faces/nav/isf/pages/searcliresults.xhtml7refreslFt#none.

8 Ibid.

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Figure 2. Net Production of Crude Oil and Petroleum and Total Value of Shipments and
Receipts for Services

900

2012 2013 2014

^^¦Value of Shipments and Receipts

2015 2016

^¦Net Production

5.0
4.5
4.0
3.5
3.0

ro
CO

2.5 o

2.0 o

1.5
1.0
0.5
0.0

Sources: U.S. Census Bureau9 and U.S. Energy Information Administration (EIA)1'1

The decline in value is instead explained by declining oil prices in 2014 and 2015. Crude oil
prices remained relatively stable between 2011 and mid-2014, with the prices ranging between
approximately $88 and $130 per barrel for West Texas Intermediate (WTI) crude oil,11 a light,
sweet crude oil produced and refined in the United States often used as a benchmark. As seen in
Figure 3, by mid-2014 the price per barrel began to drop, descending to about $36 per barrel in
February of 2016. The main reason for this decline was decelerated growth in some of world's
largest economies such as China and Russia, resulting in lower oil demand. Contemporaneously,
the United States and Canada increased their extraction efforts, resulting in excess supply and
driving the price decline.12

9 Ibid.

111 U.S. Energy Information Administration (EIA). 2019. Petroleum & Other Liquids: U.S. refinery Net Production
of Crude Oil and Petroleum Products. Accessed at

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTRX NUS l&f=M.

11 West Texas Intermediate (WTI) crude oil is the underlying commodity of the New York Mercantile Exchange's

011 futures contracts. WTI is high quality oil that is easily refined. This analysis focuses on WTI prices because this
type of crude oil is produced, refined, and consumed in North America. Other important industry price benchmarks
include Brent and Dubai crude.

12 Depersio, Greg. 2019. Why did Oil Prices Drop so much in 2014? Investopedia. Accessed at
https://www.investopedia.com/ask/answers/030315/whY-did-oil-prices-drop-so-much-2014.asp.

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Figure 3. WTI Crude Oil Price Per Barrel, Inflation Adjusted

$180.00
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00

m-A

11 If UN

IV fY

\i \/\/

\i if w
w y

1 . \M

nwn

1995

2000

2005

2010

2015

MacroTrends 201913

While oil prices have remained relatively stable in recent years, geopolitical unrest yields
volatility risk. Specifically, the 2018 U.S. sanctions on oil imports from Iran and Venezuela's
political unrest and the subsequent drop in oil production threaten market stability. For example,
U.S. oil refiner Citgo, which is largely owned by Venezuela's government, is considering filing
for bankruptcy amid political unrest in the country.14 Ongoing unrest in the Middle East and
increased oil production in West Africa and Libya are also having a disruptive effect on the
global market.15

Generally, the industry is characterized by intrinsic volatility, posing an ongoing threat to
financial stability. Global geopolitical unrest and supply and demand shocks contribute to the
industry's price volatility. These extraneous and unpredictable factors inhibit long-term market
stability. Despite the volatility and risk in the market, this analysis finds that firms in the industry
remain financially secure and at low default risk in the foreseeable future; firms that emerged

13 MacroTrends. 2019. WTI Crude Oil Prices - Historical Chart. Accessed at
https://www.macrotrends.net/1369/crude-oil-price-liistorv-cliart.

14 Oil & Gas News. 2019. Citgo considers bankruptcy amid Venezuela disaster: report. Accessed at
http://www.kallanishenergv.com/2019/02/04/citgo-considers-bankruptcv-amid-venezuela-disaster-report/.

15 S&P Global Platts. N.d. Geopolitical Risks to Oil Markets- S&P Global Platts Issues Factbook and Infographic.
Accessed at https://www.spglobal.com/platts/en/about-platts/media-center/press-releases/2018/050318-geopolitical-
risks-to-oil-markets-issues-factbox-and-infograpliic.

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from the crash in oil prices benefitted from the price rebound. Analysts forecast stable prices in
the next few years.

The remainder of this document discusses the subsectors of interest, Petroleum Refineries and
All Other Petroleum and Coal Products Manufacturing, in more detail. Specifically, this analysis
provides an industry profile with general information about the size and structure of the industry,
an evaluation of the universe of potentially regulated entities within each subsection, and a
financial summary including an evaluation of financial risk. Financial discussion at the subsector
level relies on the following sources:

• Risk Management Association (RMA)16 reports that provide industry-level financial
outcomes and ratios by asset class for firms with less than $250 million in total assets,

• D&B Hoovers17 reports that provide firm-level financial statements for large, publicly
traded firms in each subsector, and

• Bizminer18 reports that estimate the financial performance of the average firm in the
industry.

RMA and D&B Hoovers provide financial statistics for different types of firms in the subsectors.
Specifically, RMA reports consider firms with up to $250 million in assets, excluding large firms
in the industry while D&B Hoovers considers large, publicly traded firms. Thus, the two reports
allow for comparative analysis of relatively large and small firms involved in petroleum refining
and coke production. On the other hand, Bizminer reports financial statistics for the average firm
in its sample, which includes firms throughout the United States and of all sales classes. Taken
together, these sources provide a more comprehensive analysis of the financial health and
stability of firms in the subsectors of interest.

The discussion of financial risk relies in part on the 2018 Cost of Capital Valuation Handbook.19
S&P's Research Insight database serves as the primary source for the handbook's company-level
data in its annual reports. The book provides estimates that measure each industry's relative
volatility. Specifically, the 2018 Cost of Capital Valuation Handbook provides Beta estimates,
financial indicators that estimate industry risk or volatility relative to the overall market. A Beta
value of one indicates that an industry's volatility is in line with the overall market. Values above
one indicate relatively more volatile industries and values below one show less volatility than the
general market. An evaluation of historical bankruptcies is provided for petroleum refineries but
not for coke ovens due to lack of data availability.20

16 RMA University (Risk Management Association). N.d. eStatement Studies: Industry Data. Accessed at
https://rmau.org/.

17 D&B Hoovers. N.d. Accessed at http://www.hoovers.com.

18 Bizminer. 2018. Industry Financial Reports. Accessed at https://www.bizminer.eom//mvreports.php.

19 The Cost of Capital Valuation Handbook's primary source for company-level data in its annual reports is S&P's
Research Insight database.

20 Information specific to coke production ovens is unavailable for two reasons: 1) coke production ovens are often
integrated into other industry activities such as steel or coke production and 2) analysis based on NAICS 324199
(All Other Petroleum and Coal Products Manufacturing) would incorporate firms that are not involved in coke
production due to the wide range of activities that firms included in the NAICS code participate in.

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PETROLEUM REFINERIES

Industry Profile

In 2018, refineries in the United States produced 4.5 billion barrels of crude oil and petroleum
products.21 Most petroleum outputs are used for transportation fuels, with motor gasoline alone
accounting for nearly half of total production.22 Other uses include inputs for chemical and
plastic production. Figure 4 displays common uses of petroleum and products that depend on
petroleum refining.

Figure 4. Common Uses of Petroleum

Petroleum in Common Products

-St-
ill

Consumer Fuels

¦ Gasoline

¦ Diesel

¦ Heating Oil

• Propane

¦ Kerosene

¦ Liquefied Petroleum Gas

¦ Natural Gas

Commercial and
Industrial Fuels

¦ Bunker Fuel

¦ Jet Fuel

¦ Petroleum Coke

¦ Fuel Oils and Distillates

Industrial Inputs

• Petrochemicals

¦ Sulfur

Infrastructure

¦ Asphalt

¦ Tar

Other

¦ Paraffin Wax

¦ Lubricants

Health and Beauty

• Cosmetics

¦ Shampoo/Soap

¦ Bandages

• Petroleum Jelly

• Vitamin Capsules

Electronics

• Computers

¦ Televisions

• Smartphones

Household

• Cleaning Products

¦ Trash Bags

• Candles

¦ Paint

• Roofing/insulation

• Carpet/Upholstery

Personal Items

¦ Clothes

¦ Glasses/Contacts

• Dentures

¦ Toys/Crayons

Note: This not an exhaustive list; oil is used as feedstock for thousands of consumer goods and
industrial processes.

) 2018 Carnegie Endowment for International Peace

Source: Gordon and Acharya 20182

21 U.S. Energy Information Administration (EIA). 2019. Petroleum & Other Liquids: U.S. refinery Net Production
of Cmde Oil and Petroleum Products. Accessed at

https: //www, eia. gov/dnav/pet/hist/LeafHandler. ashx?n=PET&s=MTTRX NUS 1 &f=M.

22 EIA. N.d. Oil: Crude and Petroleum Products: Basics. Accessed at

https://www.eia. go\7energvexplained/index.php?page=oil refining#tab 1.

23 Gordon. Deborah and Acharya, Madliav. 2018. Oil Shake-Up: Refining Transitions in a Low-Carbon Economy.
Carnegie Endowment for International Peace. Accessed at https://carnegieendowment.org/2018/04/Q3/oil-shake-up-
refining-transitions-in-low-carbon-economv-pub-75954.

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As discussed above, the petroleum industry has experienced volatile prices in recent years,
including a price decline from 2014 to 2016. Prices have stabilized since then and are predicted
to remain above $60 per barrel in 2019 (see Figure 5).

Figure 5. Crude Oil Price Forecast

Monthly crude oil spot prices {Jan 2014-Dec 2019}

dollars per barrel
120

eia

forecast

2014

2015

2016

2017

2018

2019

EIA 2018 24

The wholesale price of petroleum products tends to move with crude oil in the long run.
However, there may be short-term differences between wholesale petroleum product prices and
crude oil prices, called the crack spread.25 The crack spread is often used to estimate refining
margins, as it represents the difference between input costs and revenue. Refineries can compare
crack spreads of different petroleum products to determine the relative value of producing each
product.26 Further, refineries can buy and sell futures for crude oil and refined products to hedge
the risk of price volatility.

The next challenge the industry faces may be a supply crunch, as global oil demand grows and
new investment were stalled during the downturn.27 Since the price rebound in 2016, petroleum
companies have been adding refining capacity to keep up with market demand (see Figure 6 and
associated discussion below).

24 EIA. 2018. EIA expects Brent crude prices will average $68 per barrel in 2019. In comparison crude prices
averaged $71 per barrel in 2018. Accessed at https://www.eia. gov/todavinenergy/detail.php?id=36493.

25 EIA. 2011. An Introduction to Crack Spreads. Accessed at
https ://www. eia. gov/todayinenergy/detail.php?id= 1630.

26 EIA. N.d. What Drive Petroleum Product Prices? Accessed at
https://www.eia.gov/finance/markets/products/prices.php.

27 Biscardini, Giorgio; Morrison, Reid; Branson, David; and Del Maestro, Adrian. 2018. Oil and Gas Trends 2018-
19. Strategy& PwC. Accessed at https://www.strategvand.pwc.com/trend/2018-oil-gas.

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Potential Universe of Regulated Entities

In January 2018, there were a total of 135 operable (either operating or idle) petroleum refineries
in the United States.28 As seen in Figure 6, the number of operable petroleum refineries fell from
155 in 2000 to 135 in 2018. Total crude oil distillation capacity grew during the same time
period. The net growth results from more added capacity to existing refineries than lost capacity
from refinery closures.

Figure 6. Number of Operable Petroleum Refineries, 2000-2018

160	19

155

150

.3i 145

I—

(D
C
M—

(D
al

«.- 140

(D
_Q

E

-2 135

130

125

120



cnN _cO

~

/



'V 'V V 'V v
Number of Operating Refineries
Source: EIA 201829



&

csV

> _*vV

cnV





18.5

18

17.5

17

16.5

16

15.5

15

Number of Idle Refineries

V Ir I? 'v' 'V 'V
—Operable Crude Oil Distillation Capacity

Total operable atmospheric crude distillation capacity is concentrated in three states: Texas,
Louisiana, and California, with 31, 18, and 10 percent of total national capacity, respectively, in
2018.30 Figure 7 shows a map with the locations of petroleum refineries in the United States as

28	EIA. 2018. Frequently Asked Questions: When was the Last Refinery Built in the Under States? Accessed at
https://www.eia. gov/tools/faqs/faq.php?id=29&t=6.

29	EIA. 2018. Petroleum and Other Liquids: Number and Capacity of Petroleum Refineries. Accessed at
https://www.eia.gov/dnav/pet/pet pnp caul dcu nus a.htm.

311 EIA. 2018. Refinery Capacity Data by Individual Refinery as of January 1, 2018. Accessed at
https://www.eia.gov/petroleum/refinervcapacitv/.

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of 2017 by size (barrels per day)31. The map also displays Petroleum Administration for Defense
Districts (PADDs), regions of states aggregated for data collection purposes.32

Figure 7. Locations of U.S. Refineries by PADD and Size	

A Large: Over 75.0D0 EVD
Q Small: Under 75,COO B/D

AFPM 2017s

Four of the 95 companies that operated petroleum refineries in 2018 accounted for one-third of
operable atmospheric crude distillation capacity34:

•	Marathon Petroleum (10 percent),

•	ExxonMobil Refining and Supply (9 percent),

•	Phillips 66 (9 percent), and

•	Chevron USA (5 percent). 35

31	In January 2017, there were 141 operable refineries in the United States. As discussed above, there were 135 as of
January 2018.

32	PADDs were established to control fuel supply during World War II but continue to be used as a means of
organizing and tracking petroleum production and distribution across the United States.

33	AFPM (American Fuel and Petrochemical Manufacturers). 2017. AFMP United States Refining and Storage
Capacity Report.

34	Atmospheric crude oil distillation is the process of separating crude oil components at atmospheric pressure in
conditions of extreme heat.

35	Ibid.

10

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Financial Summary

As discussed above, three main data sources inform this section, each providing insight into
different aspects of the subsector's financial health: RMA36, D&B Hoovers37, and Bizminer.38
These sources provide financial ratios for their respective samples, which are summarized below.

RMA considers 31 firms with under $250 million in total assets in 2017. RMA divides its sample
into six groups by total asset size. Firms in the smallest three asset classes in RMA's sample
(encompassing all firms with less than $10 million in total assets) constitute only three percent of
the industry's total net sales as reported by RMA. The largest three asset classes in RMA's
sample, $10-$50 million, $50-$ 100 million and $100-$250 million, account for 28, 29, and 41
percent of the industry's total net sales as reported by RMA, respectively. This analysis considers
RMA reports from 2015 to 2018.

In contrast, D&B Hoovers summarizes financial statistics for the largest firms in the industry in
2016 through 2018. Specifically, Hoovers reports financial information for the four largest firms
(listed in the section above) that accounted for 33 percent of industry capacity during 2017.39
These four firms hold billions of dollars in assets and are not included in RMA's sample.

Finally, Bizminer's financial report for NAICS 32411 provides information for the average firm
from 2013 to 2017. Bizminer reports encompass a broad range of firms, with petroleum
refineries in its sample ranging from $25 million to nearly $500 million in sales.

This section summarizes financial statistics between 2013 and 2018, as available. Crude oil
prices dropped drastically in 2014 and continued to fall through 2015. In 2016, prices recovered
and continued to increase through most of 2018 (see Figure 3). Financial data presented in this
section should be interpreted in this broader context.

In addition to summarizing income statement and balance sheet metrics, this analysis focuses on
two key financial ratios: the current ratio and the interest coverage ratio. The current ratio is a
liquidity and efficiency ratio that measures a firm's ability to pay its short-term liabilities with its
current assets. A current ratio above one usually indicates financial solvency.40 Coverage ratios
evaluate a company's ability to meet its financial obligations such as interest payments and
dividends. An interest coverage ratio below 1.5 indicates that a firm may have trouble making its
interest payments.41

In 2015, net sales for the 32 firms in RMA's sample were $8.2 billion while total assets equaled
$1.9 billion. The median current ratio was 1.5 while the median interest coverage ratio was 10.1.

36 RMA University (Risk Management Association). N.d. eStatement Studies: Industry Data. Accessed at
https://rmau.org/.

37 D&B Hoovers. N.d. Accessed at http://www.hoovers.com.

38 Bizminer. 2018. Industry Financial Report: NAICS 324110 Petroleum Refineries.

39 This analysis considers the largest firms in terms of capacity rather than total sales to isolate petroleum refining-
focused firms to the extent possible. According to the 2018 Cost of Capital Valuation Handbook, ExxonMobil,
Chevron, and Phillips 66 also generate the most sales in the industry.

40 Investopedia. 2019. Current Ratio Definition. Accessed at https://www.investopedia.eom/terms/c/currentratio.asp.

41 Investopedia. 2019. Interest Coverage Ratio Definition. Accessed at
https://www.investopedia.eom/terms/i/interestcoverageratio.asp.

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Between 2015 and 2017, net sales and total assets declined: in 2017, RMA reports that 31 firms
generated $4.2 billion in net sales and owned $1.6 billion in total assets. In 2017, the median
firm in RMA's report had a current ratio of 1.8 and a coverage ratio of 10.3. Despite the drop in
sales, the coverage and current ratios remained stable, suggesting that the default risk for firms in
RMA's sample remained relatively low.

D&B Hoovers provides financial reports on four of the largest petroleum refining companies
within the United States. These companies include Chevron, ExxonMobil, Marathon Petroleum,
and Phillips 66. As discussed above, these firms accounted for 33 percent of the industry's total
capacity.

Marathon Petroleum holds the highest total assets at $92 billion. Figure 8 illustrates the total
revenues and net income for these four companies. Of the four companies, ExxonMobil
generated the largest revenues in 2018, at $279 billion, increasing from $201 billion in 2016. In
total, revenue for the four firms ranged from $96 to $279 billion and amounted to over $646
billion in 2018, increasing from $458 billion in 2016. ExxonMobil also boasts the highest net
income compared to the three other firms with $21 billion in net income in 2018, up from $8
billion in 2016. Other firms also experienced income growth between 2016 and 2018, with total
net income increasing from $10 billion in 2016 to $44 billion in 2018. These figures demonstrate
the recent growth in revenue and net income among the top producers in the petroleum refining
industry.

Figure 8. Total Revenue and Net income of the Top Petroleum Refineries (Millions)

Firm

Metric

2018

2017

2016

Marathon
Petroleum

Total Revenue

$96,504

$74,733

$63,339

Net Income

$2,855

$3,497

$1,215

ExxonMobil

Total Revenue

$279,332

$237,162

$200,628

Net Income

$20,840

$19,710

$7,840

Phillips 66

Total Revenue

$111,461

$102,354

$84,279

Net Income

$5,595

$5,106

$1,555

Chevron USA

Total Revenue

$158,902

$134,674

$110,215

Net Income

$14,824

$9,195

$-497

Total

Total Revenue

$646,199

$548,923

$458,461

Net Income

$44,114

$37,508

$10,113

D&B Hoovers N.d.

Figure 9 shows the current ratios between 2016 and 2018 for the sample firms. Generally, the
firms maintained a current ratio above one, suggesting they are solvent and relatively healthy,
with the exception of ExxonMobil, which reported current ratios below one every year. Between
2016 and 2018, the current ratio for the firms ranged from 0.84 to 1.48.

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Figure 9. Current Ratios of the Top Petroleum Refineries (Millions)

Firm

2018

2017

2016

Marathon Petroleum

1.36

1.28

1.46

ExxonMobil

0.84

0.82

0.87

Phillips 66

1.48

1.42

1.34

Chevron USA

1.25

1.03

0.93

D&B Hoovers N.d.

Figure 10 illustrates the interest coverage ratios for the four firms between 2016 and 2018. In
2017 and 2018, all firms maintained healthy coverage ratios well above 1.5. In 2016, Chevron
had a coverage ratio of -9.75, but has since improved to a ratio of 28.51 in 2018. These ratios
point to a healthy financial position among the top firms in the market during the last three years.

Figure 10. Coverage Ratios of the Top Petroleum Refineries (Millions)

Firm

2018

2017

2016

Marathon Petroleum

5.83

6.35

4.39

ExxonMobil

41.41

32.07

18.59

Phillips 66

15.77

9.12

7.48

Chevron USA

28.51

31.04

-9.75

D&B Hoovers N.d.

In 2017, Bizminer suggests that revenue for the average firm in the petroleum refining industry
increased to $92.4 million from $85.5 million in 2015. In 2017, the current ratio was 1.91, which
decreased from 2.16 in 2015 but remained in a healthy range. The average coverage ratio within
Bizminer was 33.13. This estimate increased from 22.54 in 2015.

In 2017, the average modified Altman Z-Score was 4.36, indicating low default risk. The Z-score
is a credit-strength estimate that evaluates the firm's risk of default and likelihood of bankruptcy.
A higher Z-score is generally better and indicates low likelihood of default; a score above 2.9
generally indicates financial stability. The petroleum refining industry maintained Z-scores well
above this threshold between 2013 and 2017, indicating low default risk despite unfavorable
market conditions.

Overall, data from Bizminer, D&B Hoovers, and RMA suggest that firms in the petroleum
refining industry have a relatively healthy financial outlook. Though some firms struggled
following the price drop between 2014 and 2016, firms generally maintained healthy current and
interest coverage ratios and benefitted from the rebound in prices in 2016. RMA's reports
suggest that smaller firms (with under $250 million in total assets) struggled to recover from the
price decline relative to larger firms. This may be due to more diverse operations among larger
firms that mitigate price sensitivity.

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Industry Default Risk and Examples

Despite the healthy financial position that tends to prevail among petroleum refineries, the
industry is affected by price volatility. This section examines the industry's relative volatility and
summarizes bankruptcy cases in recent years. The discussion relies on a few main sources: 2018
U.S. Cost of Capital Valuation Handbook,42 a report from Houston law firm Haynes & Boone,43
and a report from the Deloitte Center for Energy Solutions.44

Of the 10 companies that the 2018 Cost of Capital Valuation Handbook analyzed in NAICS
32411 (Petroleum Refineries),45 Exxon Mobil, Chevron, and Phillips 66 are the largest in terms
of sales and total assets. The handbook provides Beta values for the median firm in its sample.
As discussed above, Beta values above one indicate relatively more volatility than the general
market while values below one show less volatility. The leveraged Beta value for the median
petroleum refining company was 1.21 in 2018, signifying more volatility relative to other
industries in the U.S. market.

Historically, the industry experienced economic and financial stability supported by price
stability between the early 1990s and the early 2000s. Between 2003 and June 2008, WTI prices
increased four-fold, from about $40 per barrel to over $160 per barrel. Following the economic
recession of 2008, global energy demand plummeted, and oil prices followed; by the beginning
of 2009, prices slid to $50 per barrel (see Figure 3).

Intrinsic market volatility has led to bankruptcies in the oil and gas industry. While bankruptcy
data is unavailable for companies solely operating petroleum refineries, as discussed above,
many companies that have refining operations are vertically integrated and include exploration
and production (E&P) activities as well. As a result, this analysis considers E&P bankruptcies.

Deloitte's analysis discusses bankruptcy cases from July 2014 to December 2015, focusing on
U.S. bankruptcies and covering the price downturn period. The sample of firms includes
companies that participate in E&P exclusively. Private, unlisted companies with assets of less
than $2 million and publicly listed companies with assets of less than $10 million are excluded
from Deloitte's sample. Alternatively, the Haynes & Boone report covers the refining industry
and includes North American bankruptcies from 2015 to 2018, incorporating the aftermath of the
crash and the subsequent price rebound.

Deloitte reports that worldwide, nearly 35 percent of E&P companies, or 175 firms, qualified as
high-risk of insolvency between July 2014 and December 2015. During this time, 35 E&P

42 Duff & Phelps. 2018. 2018 Valuation Handbook: U.S. Industry Cost of Capital. Duff & Phelps, LLC. Chicago, IL.
Print.

43 Haynes & Boone. 2018. Oil Patch Bankruptcy Monitor. Accessed at

http://www.haYnesboone.eom/~/media/files/attorneY%20publications/2016/energy bankruptcy monitor/oil patch b
ankruptcv 20160106.ashx.

44 Deloitte. N.d. The Crude Downturn for Exploration & Production Companies: One Situation, Diverse Responses.
Accessed at https://www2.deloitte.com/us/en/pages/energv-and-resources/articles/the-crude-downturn-for-
exploration-and-production-companies.html.

45 The reports analyze industries by Standard Industrial Classification (SIC) code rather than NAICS code; this
analysis considers SIC code 291, Petroleum Refining, which is equivalent to NAICS 32411.

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companies in Deloitte's sample, with almost $18 billion in cumulative debt, filed for bankruptcy
in the United States. As shown in Figure 11, many companies that filed for bankruptcy were
established firms that had been operating for more than a decade (having survived the Great
Recession which spanned from the late 2000s to early 2010s) and reported revenues greater than
$500 million.

Despite the frequency of bankruptcy cases during the downturn, more than 80 percent of the
companies that filed for bankruptcy in the United States during this time emerged from
bankruptcy and continue to operate without impairment of environmental obligations.46
Generally speaking, due to ongoing demand and anticipated shortfalls in production capacity,
such refineries have substantial incentive to reorganize so that they may continue to operate to
satisfy demand for the product.47 Generally, firms that restructure debt and emerge from Chapter
11 remain liable for environmental compliance obligations (see Environmental Liabilities Under
Chapter 11 Bankruptcy section for more information).

Figure 11. Breakdown of the 35 U.S. E&P Bankruptcies in 2014 and 2015 by Age (Years in
Business) and Size (Revenues)

US E&P bankruptcies

(Percentage of count by age)

>10 years
old

US E&P bankruptcies

(Percentage of count by size)

S100M-
S500M

Above
S500M

Below
$100M

Deloitte N.d.

The rate of E&P bankruptcies has decreased significantly since the price rebound, with 67
percent fewer filings in 2017 than 2016. FTaynes & Boone48 reported 114 bankruptcy filings in
2015 and 2016 in the United States and Canada. By early 2018, the total number of bankruptcies

46 Deloitte. N.d. The Crude Downturn for Exploration & Production Companies: One Situation Diverse Responses.
Accessed at https://www2.deloitte.com/us/en/pages/enerCT-and-resources/articles/the-crude-downturn-for-
exploration-and-production-companies.html.

4? Biscardini, Giorgio; Morrison, Reid; Branson David; and Del Maestro, Adrian. 2018. Oil and Gas Trends 2018-
19. Strategv& PwC. Accessed at https://www.strategYand.pwc.com/trend/2018-oil-gas.

48 Haynes & Boone. 2016. Oil Patch Bankruptcy Monitor. Accessed at

http://www.haYnesboone.eom/~/media/files/attornev%20publications/2016/energv bankruptcy monitor/oil patch b
ankruptcv 20160106.ashx.

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since 2015 had only increased by 30.49 Figure 12 shows the cumulative number of filings
between January 2015 and March 2018.

Figure 12. 2015-2018 Cumulative E&P Bankruptcy Filings in the United States and
Canada

Haynes & Boone 2018

Haynes & Boone also produce a bankruptcy report specific to midstream activities.50 This report
includes firms involved in gathering, transporting, processing, or storing oil or natural gas and
considers midstream-specific subsidiaries of integrated firms when applicable. According to the
report, there were 25 midstream bankruptcies between January 2015 and December 2018. All but
one bankruptcy occurred before March of 2018, when Haynes & Boone reported a total of 144
E&P bankruptcy filings (see above). Thus, about 17 percent of E&P bankruptcy filings in
Haynes & Boone's sample of 144 E&P bankruptcies came from firms involved in midstream
activities such a petroleum refining. However, according to U.S. Census data, midstream firms
only account for one percent of the total natural gas and petroleum extracting and refining
industry.51

Generally, petroleum refineries face high levels of market volatility and related default risk.
Bankruptcy rates increased significantly in the E&P industry following the 2014 and 2015 slide

49 Haynes & Boone. 2018. Oil Patch Bankruptcy Monitor. Accessed at http://www.havnesboone.com/-
/media/files/energy bankruptcy reports/2018/oil patch bankruptcy monitor 03312018.ashx?la=en&hash=802156
9995B94F8BF7B8573F30B1DF157CCDDF11.

511 Haynes & Boone. 2019. Midstream Report. Accessed at http://www.havnesboone.com/-

/media/files/energy bankruptcy reports/midstream report.ashx?la=en&hash=DD 1E04C3268F0B6E21C48E53160E
48399668F9EB.

51 U.S. Census Bureau: American FactFinder. 2015 County Business Patterns. Accessed at
https://factfinder.census.gOv/faces/nav/isf/pages/searcliresults.xhtml7refreslFt#none.

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in crude oil prices. However, the industry has largely recovered and faces a few years of
predicted stability according to current price forecasts. Furthermore, as discussed above, most
firms that filed for bankruptcy emerged and continue to operate.

Environmental Liabilities Under Chapter 11 Bankruptcy52

As discussed above, firms may file for bankruptcy protection under Chapter 11 of the
Bankruptcy Code. Generally, firms remain liable for environmental compliance obligations in
Chapter 11 debt restructuring. Sections 101(5) and 1141(d) of the Bankruptcy Code, 11 U.S.C.
sees. 101(5), 1141(d), only provide for a discharge of monetary rights to payment and not for
equitable remedies such as compliance obligations where the Government has not sought the
payment of money.53 Moreover, reorganized debtors that own contaminated or defective
property are liable to protect public health and safety like all owners and operators of property
regardless of the origin of the problem as no one is permitted to maintain a nuisance.54

Precedents set in bankruptcy court cases disallow pre-bankruptcy siphoning off environmental
liabilities from other company assets so as to render a company unable to comply with its
compliance obligations. For example, in the Tronox Inc. v. Kerr-McGee Corp case in New York,
the court found the separation of a successful energy business from a failing chemical company
fraudulent, as the division was intended to isolate valuable assets from critical liabilities.55
Another court case, Midlantic National Bank v. NJDEP, limited debtor's ability to abandon
contaminated property in any way that violates laws reasonably designed to protect the public
health or safety from identified hazards.56 At the same time, each bankruptcy proceeding is case-
and company-specific and decisions and outcomes may differ from those described above.

Finally, bankruptcy provisions ensure that companies in Chapter 11 are subject to the same
enforcement proceedings as non-debtor entities. These provisions require entities to comply with
applicable state and federal laws, including financial assurance requirements, while in debt
restructuring and enable governments to take enforcement action in case of noncompliance.57
Additionally, an enforcement action resulting in a fine for post-petition violations is generally
classified as an administrative expense.58

52 Note that this discussion is not specific to the Petroleum and Coal Products Manufacturing Industry but is broadly
applicable to all firms in the U.S. that may have environmental liabilities and be under Chapter 11 bankruptcy
protection. Also note that this brief overview does not constitute an exhaustive legal analysis of this complex issue.

53 United States v. Apex Oil Co., 579 F.3d 734 (7th Cir. 2009); In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir.
1993); In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991); In re Mark IV Indus., Inc., 438 B.R. 460 (Bankr.
S.D.N.Y. 2010), aff d, 459 B.R. 173 (S.D.N.Y. 2011).

54 In re CMC Heartland Partners, 966 F.2d 1143 (7th Cir. 1992); see Ohio v. Kovacs, 469 U.S. 274 (1985). 35 In re
Tronox Inc., 503 B.R. 239 (Bankr. S.D.N.Y. 2013)

55 In re Tronox Inc., 503 B.R. 239 (Bankr. S.D.N.Y. 2013).

56 Midlantic Nat'l Bank v. N.J. Dep't of Envtl. Prot., 474 U.S. 494 (1986)

57 See 11 U.S.C. sec 362(b)(4): 28 U.S.C. sec 959(b).

58 In re Munce's Superior Petroleum Products, Inc., 736 F.3d 567 (1st Cir. 2013)..

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ALL OTHER PETROLEUM AND COAL PRODUCTS MANUFACTURING: COKE
PRODUCTION OVENS

Industry Profile

Coke is a carbon-rich, solid byproduct of coal production and oil refining. Coke ovens process
raw coke to be used in iron and steel production. Generally, coke plants rely on two industries
for inputs: coal production and oil refining. After processing, iron and steel demand drive coke
sales.

Two analytic challenges limit a straightforward analysis of coke production ovens using
conventional data sources for purposes of this report. First, companies involved in coke
production and use, are diverse across industries. For example, firms involved in the coke market
include integrated steel firms, coal producers, coke merchants, other chemical manufacturing
companies, and more. Due to the complex nature of the coke production oven subsector, few
sources summarize coke production and use in isolation or comprehensively. As a result, this
analysis relies on data from the American Coke and Coal Chemicals Institute (ACCCI), whose
members account for over 95 percent of metallurgical coke production in the United States and
Canada.

Second, equally diverse companies are grouped in the NAICS 324199 subsector (All Other
Petroleum and Coal Products Manufacturing). Other companies in the subsector include a wood
fiber processing and nitrogen fertilizer manufacturer, research chemical and specialty film
manufacturers, and petroleum jelly and wax manufacturers.59 While all these fields rely on
petroleum and coal products, they face wide-ranging risk profiles.

Potential Universe of Regulated Entities

As discussed above, coke production and use are spread across multiple diverse industries. As
such, the potential universe of regulated entities is broad and diverse. An ACCCI listing as of
February 2016 reports 16 operating coke plants in the United States. Of the 16 plants, six are
owned and operated by integrated steel companies and the remaining 10 are independently
owned and operated merchant plants.60 As seen in Figure 13, coke plants are clustered in the
Northeast and Midwest, with most plants located in Ohio, Pennsylvania, Indiana, and Alabama.

59 NAICS Association. N.d. 324199: NAICS Code Description: All Other Petroleum and Coal Products
Manufacturing. Accessed at https://www.naics.co m/naics-code-description/?code=324199.

60 ACCCI. 2016. U.S. & Canada Coke Plants. Accessed at
http://accci.org/documents/CokePlantListing 080316.pdf.

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Figure 13. Location of Coke Production Ovens in the United States

Number of Coke Production Ovens

1 4

Source: ACCCI. 2016.

Financial Summary

This section relies on three sources: D&B Hoovers,61 RMA62, and Bizminer.63 These sources
provide financial ratios for their respective samples.

Many coke plants are owned and operated by companies with diverse operations. Specifically, a
large portion of coke production ovens are owned by integrated steel companies. Coke
production accounts for a small portion of these integrated companies' operations. As a result,
reporting financial statistics for integrated steel companies (often with international operations)
with coke production ovens would not provide insight into the financial stability of the U.S. coke
production industry. Thus, these firms are not considered in this analysis.

Most independently owned and operated merchant plants are small and do not appear in D&B
Hoovers database, which covers large, publicly-traded firms. The only exception is SunCoke
Energy Co., a publicly traded firm which operates five of the 16 operating plants in the United
States and produces approximately 6 million tons of coke each year in the United States and
Brazil.64

61 D&B Hoovers. N.d. Accessed at http://www.hoovers.com.

62 RMA University (Risk Management Association). N.d. eStatement Studies: Industry Data. Accessed at
https://rmau.org/.

63 Bizminer. 2018. Industry Financial Report: NAICS 324199 All Other Petroleum and Coal Products
Manufacturing.

64 SunCoke Energy. N.d. Out History. Accessed at http://www.suncokc.com/Eimlish/aboiit-iis/oiir-
historv/default. aspx.

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According to D&B Hoovers, SunCoke Energy generated $1.5 billion in total revenue in 2018, up
from $1.2 billion in 2016. SunCoke Energy's total assets exceeded $2 billion. The firm
maintained a healthy current ratio between 2016 and 2018, ranging from 1.43 to 1.50, indicating
sufficient liquidity to satisfy short-term obligations.

Alternatively, RMA and Bizminer provide statistics at the NAICS level. As discussed above, this
type of summary incorporates a diverse set of firms whose operations relate to petroleum and
coal manufacturing. As such, these statistics should be interpreted in this context.

RMA provides financial summaries for firms in NAICS 324199 with less than $250 million in
total assets for 2012, 2014 and 20 1 565, considering 26, 20, and 20 firms in its sample
respectively. In the three-year sample, the median firm in the subsector reported a current ratio of
1.4, 1.8, and 1.8 respectively, signifying sufficient liquidity to satisfy short-term liabilities. The
median interest coverage ratio over the same three years was 5.2, 7.8, and 9.4, also indicating an
increasingly healthy financial position.

Bizminer considers between 22 and 26 firms in its sample for years 2013 to 2017. In that time
period, business revenue for the average firm grew from $16.9 million to $18.8 million.
Consequently, net profit for the average firm grew over the same time period from around
$242,000 to around $432,000. However, both business revenue and net profit hit a low in 2016
with $16.2 million in revenue and around $151,000 in net profit. The average firm maintained a
healthy current ratio between 2013 and 2017, with the lowest ratio of 1.53 occurring in 2014 and
the highest of 1.60 in 2013.

Industry Default Risk

The 2018 Cost of Capital Valuation Handbook66 provides estimates of the relative volatility of
the NAICS 324199 subsector (All Other Petroleum and Coal Products Manufacturing).
Specifically, the book provides Beta estimates for NAICS 32419967 and includes SunCoke
Energy in its sample of six firms. In 2018, the handbook reports a leveraged Beta value for the
median firm in its sample of 1.45, indicating high volatility relative to the overall market.

While volatility remains high for the NAICS 324199 subsector, Bizminer reports the modified
Altman Z-score, a credit strength statistic, for its sample to range from 3.13 in 2013 to 3.76 in
2016. This relatively high score indicates a low likelihood of default.

There is one notable recent bankruptcy in the coke production industry: the October 15, 2018
bankruptcy of Tonawanda Coke Corporation.68 The company filed for chapter 11 bankruptcy
and as part of the proceedings the Tonawanda Coke plant in Tonawanda, NY was put up for

65 RMA does not provide a financial summary of NAICS 324199 for 2013.

66 Duff & Phelps. 2018. 2018 Valuation Handbook: U.S. Industry Cost of Capital. Duff & Phelps, LLC. Chicago, IL.
Print.

67 The reports analyze industries by Standard Industrial Classification (SIC) code rather than NAICS code; this
analysis considers SIC code 331, Steel Works, Blast Furnaces, and Rolling Finishing Mills. This SIC code is
broader than NAICS 324199, which is equivalent to SIC code 3312, and may therefore incorporate companies that
do not fall under the six-digit NAICS code.

68 New York Western Bankruptcy Court Case l:18-bk-12156

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auction. At present, EPA is conducting short term actions under Superfund at the site to remove
hazardous substances and assess the scope of contamination.69 While a developer has purchased
the site, at this time, it is unclear under what authority the cleanup will proceed and what parties
will bear the costs.

69 US EPA. "EPA Cleanup Activities Continue at Tonawanda Coke Facility" Community Update. February 2019.

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