Glutted Crown Cuts Output

December 21, 1993|By Gary Cohn | Gary Cohn,Staff Writer

For consumers, it's clearly good news: Oil prices have fallen to a five-year low, and gasoline prices have dropped to the lowest point in seven years.

But for Crown Central Petroleum Corp., a Baltimore-based gasoline refiner and marketer, the drop in oil and gasoline prices is anything but good news.

The company, which hasn't shown an annual profit since 1990, said that it cut production at its largest refinery, in Pasadena, Texas, by 20 percent because of a severe decline in U.S. Gulf Coast refining margins. The margins are the difference between the selling price of a finished product, such as gasoline, and the cost of crude oil used to produce it.

The move, the company said, was to help deal with the problem of excess capacity and flat demand in the petroleum industry.

Crown, one of Baltimore's largest public corporations, owns and operates two refineries in Texas with a combined capacity of 150,000 barrels a day.

The company also owns about 400 gas stations and convenience stores in seven Mid-Atlantic and Southeastern states. In Maryland, Crown owns 100 gas stations, which under state law must be operated by independent dealers. About one-quarter of its refinery production goes to Crown gas stations, with the remainder sold to other buyers.

"We're just cutting back on production, because it's economically wise to do that until margins improve. It's a tactical decision," said Joseph M. Coale, director of corporate communications.

"It's just a simple case of supply and demand," he added. "There's just a high level of supply of product in the marketplace and a relatively flat demand. . . . Current margins are very, very narrow in the wholesale gasoline market, especially in the Gulf Coast, where the massive supply is located. That's the market Crown deals with, wholesale."

"It's logical and to be expected in this environment," said John H. Shaughnessy, an analyst with Hartford, Conn.-based Advest Group. "That's how you restore prices -- by reducing inventory."

Overall, Crown said its operating margin has declined about 10 percent this year compared with 1992, which was below that of 1991.

The company, which has 3,059 employees, has lost money for the past three years, primarily because of losses at its refineries. The company lost $6 million in 1991 and $5.5 million last year. In the first nine months of 1993, Crown lost $11.2 million on revenue of $1.3 billion.

On the American Stock Exchange yesterday, Crown's class A stock closed unchanged at $15.875 a share.

The oil industry has been in somewhat of a slump for several years, and many refiners have had financial difficulties.

Crude oil prices fell below $14 a barrel on the New York Mercantile Exchange Friday for the first time in five years.

Analysts said the cutback in production at Crown's Pasadena refinery, which went into effect Nov. 23, wasn't likely to have much impact on Crown's bottom line, and they generally agreed that the move made sense. About 94 percent of Crown's revenue is derived from its refining activities.

John B. Parry, an analyst with John S. Herold Inc. of Greenwich, Conn., said that Crown, in cutting back on production, is "probably making a prudent move given market circumstances."

Mr. Parry noted that Crown, as a small independent competing with oil industry giants, faced heavy competitive pressures.

Mr. Shaughnessy at Advest Group said Crown "is a pretty solid company that is well-positioned to participate in the long-term growth of the petroleum industry. But they could get beaten up here on an interim basis because refining spreads are so narrow."

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