1. PETROLEUM REFINERY MARGINS: Operational and Financial Strategies by Stephen M. Haik EMBA 762: Corporate Risk Management A. B. Freeman School of Business Tulane University Confidential

2. Unique opportunity in Futures Markets Futures Markets prices imply refinery margins 85% above experience and expectations Ensures Net Income well above forecasts. Lock-In? Confidential

3. Petroleum Refinery Margins Gross Margin =Price of Gasoline (Heating Oil) – Cost of Crude Oil Projected Operating Margins based on spot price forecasts for gasoline and crude Using futures - Lock in prices in the futures markets for buying crude and selling gasoline and heating oil in tandem. Called the CRACK SPREAD Confidential

4. Financial Margins 10-7:3 (10 barrels of crude vs. 7 gasoline & 3 heating oil) Futures prices, all prices in dollars per barrel Historical Dec SpotFutures +Gasoline (dollars/barrel*7)= $26.5 $33.4 +Heating Oil (dollars/barrel*3)= $24.9 $34.7 -Crude Oil (dollars/barrel*10)= $22.7 $28.8 Implied Refinery Margin= $3.4 $5.0 Confidential

6. Financial Vs. Operational Margin NYMEX Offers $6.94/bbl average margin for April – December 2003 or next 9 months $6.94/bbl monthly average refinery margin has been exceeded only 2 times in past 85 months (1996-2002) Actual refinery margins average $3.35/bbl historically Naïve projection (for planning) – Refinery margins expected to remain around $3.75/bbl, April – December 2003 Confidential

7. Profitability Implications 50% of Rated Crude Capacity Allows the Opportunity to make $103 MM over expectations for the remainder of 2003 80% of Rated Crude Capacity Allows The Opportunity for $166 MM Over Corporate Estimates for the remainder of 2003 Confidential

8. Scenario Analysis 1) Crude and Product prices change in tandem (i.e. margins unchanged) CrudeProductsMargin Time 0 $36 $42 $6 Time X $46 $52 $6 Value+$10-$10 $0 Spot margins $10/bbl, Lock in margins $10/bbl, LOSS/GAIN = $0/bbl Total Margin: $6/bbl refinery margins + $0/bbl from futures contracts = $6/bbl 2) Crude prices decrease more that product prices (i.e. margins widen) CrudeProductsMargin Time 0$36 $42 $6 Time X $30 $40 $10 Value-$6 +$2 -$4 Spot margins: $10/bbl, Lock in margins: $6/bbl account, LOSS = $4/bbl Mark-to-market cash flows will need to be met Total Margin: $10/bbl refinery margins - $4/bbl from futures account = $6/bbl Confidential

9. RISKS Actual margins may widen: –Profits less than what they would have been (still higher than historical experience) –Cash flow risk from marking-to-market Must process no less than the quantity of crude/products traded to enjoy the $6.94/bbl locked in margins (else it is speculative) Futures transaction requires monitoring. For example, do not use crude contracts during future’s expiration month as seller can force delivery Confidential

10. SHOULD WE HEDGE? Volatility in the oil markets makes margins volatile. Shareholders know the exposure and factor it in their investment strategies. However, periods of low profits can be expensive. Reduce investment opportunities or increase bankruptcy costs. More importantly, do we know something that could lead us to believe that we can convert periods of low profitability to periods of high(er) profitability. Should we act on this belief and hedge strategically? Confidential

11. Summary Purchasing crude and selling gasoline and heating oil futures in equal volumes secure the refinery margins Oil market volatility is hedged by trading a balanced account of refinery feeds and products Unique opportunity for securing profitability above projected and historical levels using futures strategy Risks are manageable $100 million above current earnings projections Confidential