| FRONTIER OIL CORP /NEW/ Item 1A Risk Factors Relating to Our Business Crude oil prices and refining margins significantly impact our cash flow and have fluctuated substantially in the past |
| Our cash flow from operations is primarily dependent upon producing and selling refined products at margins that are high enough to cover our fixed and variable expenses |
| In recent years, crude oil costs and crack spreads (the difference between refined product sales prices and crude oil prices) have fluctuated substantially |
| Factors that may affect crude oil costs and refined product prices include: · overall demand for crude oil and refined products; · general economic conditions; · the level of foreign and domestic production of crude oil and refined products; · the availability of imports of crude oil and refined products; · the marketing of alternative and competing fuels; · the extent of government regulation; · global market dynamics; · product pipeline capacity; · local market conditions; and · the level of operations of competing refineries |
| Crude oil supply contracts are generally short-term contracts with price terms that change as market prices change |
| Our crude oil requirements are supplied from sources that include: · major oil companies; · crude oil marketing companies; · large independent producers; and · smaller local producers |
| The price at which we can sell gasoline and other refined products is strongly influenced by the price of crude oil |
| Generally, an increase or decrease in the price of crude oil results in a corresponding increase or decrease in the price of gasoline and other refined products |
| However, if crude oil prices increase significantly, our operating margins would fall unless we could pass along these price increases to our customers |
| From time to time, we purchase forward crude oil supply contracts, enter into forward product agreements to hedge excess inventories and/or hedge our refined product margins |
| In addition, our Refineries maintain inventories of crude oil, intermediate products and refined products, the value of each being subject to fluctuations in market prices |
| Our inventories of crude oil, unfinished products and finished products are recorded at the lower of cost on a first-in, first-out (“FIFO”) basis or market prices |
| As a result, a rapid and significant increase or decrease in the market prices for crude oil or refined products could have a significant short-term impact on our earnings and cash flow |
| Our profitability is affected by crude oil differentials, which increased significantly in 2005 over 2004 levels |
| The light/heavy crude oil differential that we report is the average differential between the benchmark West Texas Intermediate (“WTI”) crude oil priced at Cushing, Oklahoma and the heavy crude oil priced delivered to our Cheyenne Refinery |
| The WTI/WTS (sweet/sour) crude oil differential is the average differential between benchmark WTI crude oil priced at Cushing, Oklahoma and West Texas sour crude oil priced at Midland, Texas |
| Our profitability at our Cheyenne Refinery is linked to the light/heavy crude oil differential, and our profitability at our El Dorado Refinery is linked to the WTI/WTS crude oil differential |
| Starting in March 2006, when we anticipate that our El Dorado Refinery will begin receiving heavy Canadian crude oil through the Spearhead Pipeline, its profitability will also benefit from the light/heavy crude oil differential |
| We prefer to refine heavy crude oil at the Cheyenne Refinery and sour crude oil at the El Dorado Refinery because they provide a higher refining margin than light or sweet crude oil does |
| Accordingly, any tightening of these crude oil differentials will reduce our profitability |
| The light/heavy crude oil differential averaged dlra15dtta32 per barrel in the year ended December 31, 2005, compared to dlra9dtta90 per barrel in the same period in 2004 |
| The WTI/WTS crude oil differential averaged dlra4dtta51 per barrel in the year ended December 31, 2005, compared to dlra3dtta74 per barrel in the same period in 2004 |
| Crude oil prices were historically high during 2005, which resulted in both attractive light/heavy crude oil differentials and WTI/WTS crude oil differentials |
| However, crude oil prices may not remain at current levels, and the crude oil differentials may decline in the future |
| External factors beyond our control can cause fluctuations in demand for our products, our prices and margins, which may negatively affect income and cash flow |
| External factors can also cause significant fluctuations in the demand for our products and volatility in the prices for our products and other operating costs and can magnify the impact of economic cycles on our business |
| Examples of external factors include: · general economic conditions; · competitor actions; · availability of raw materials; · international events and circumstances; and · governmental regulation in the United States and abroad, including changes in policies of the Organization of Petroleum Exporting Countries (“OPEC”) |
| Demand for our products is influenced by general economic conditions |
| For example, near record level refined product margins and crude oil differentials in 2001 declined substantially in 2002 |
| This decline was attributed to unusually high prices for oil, reduced market demand for refined products and greater imports of competitive products, all of which adversely affected our results of operations in 2002 |
| In 2003, refined product margins and crude oil differentials returned closer to historical average levels |
| However, the recurrence of weaker economic and market conditions in the future may have a negative impact on our business and financial results |
| We are dependent on others to supply us with substantial quantities of raw materials |
| Our business involves converting crude oil and other refinery charges into liquid fuels |
| We own no crude oil or natural gas reserves and depend on others to supply these feedstocks to our Refineries |
| We use large quantities of natural gas and electricity to provide heat and mechanical energy required by our process units |
| Disruption to our supply of crude oil, natural gas or electricity could have a material adverse effect on our operations |
| Our Refineries face operating hazards, and the potential limits on insurance coverage could expose us to significant liability costs |
| Our operations could be subject to significant interruption, and our profitability could be impacted if any of our Refineries experienced a major accident or fire, was damaged by severe weather or other natural disaster, or was otherwise forced to curtail its operations or shut down |
| If a pipeline became inoperative, crude oil would have to be supplied to our Refineries through an alternative pipeline or from additional tank trucks to the Refineries, which could hurt our business and profitability |
| In addition, a major accident, fire or other event could damage a Refinery or the environment or cause personal injuries |
| If either of our Refineries experiences a major accident or fire or other event or an interruption in supply or operations, our business could be materially adversely affected if the damage or liability exceeds the amounts of business interruption, property, terrorism and other insurance that we maintain against these risks |
| Our Refineries consist of many processing units, a number of which have been in operation for many years |
| One or more of the units may require additional unscheduled down time for unanticipated maintenance or repairs that are more frequent than our scheduled turnaround for such units |
| Scheduled and unscheduled maintenance could reduce our revenues during the period of time that our units are not operating |
| We face substantial competition from other refining and pipeline companies, and an increase in competition in the markets in which we sell refined product could adversely affect our sales and profitability |
| The refining industry is highly competitive |
| Many of our competitors are large, integrated, major or independent oil companies that, because of their more diverse operations, larger refineries and stronger capitalization, may be better positioned than we are to withstand volatile industry conditions, including shortages or excesses of crude oil or refined products or intense price competition at the wholesale level |
| Many of these competitors have financial and other resources substantially greater than ours |
| We are not engaged in the petroleum exploration and production business and therefore do not produce any of our crude oil feedstocks |
| We do not have a retail business and therefore are dependent upon others for outlets for our refined products |
| Certain of our competitors, however, obtain a portion of their feedstocks from company-owned production and have retail outlets |
| Competitors that have their own production or extensive retail outlets, with brand-name recognition, are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages |
| In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial and individual consumers |
| If we are unable to compete effectively with these competitors, both within and outside of our industry, there could be a material adverse effect on our business, financial condition and results of operations |
| Our operating results are seasonal and generally lower in the first and fourth quarters of the year |
| Demand for gasoline and asphalt products is generally higher during the summer months than during the winter months due to seasonal increases in highway traffic and road construction work |
| As a result, our operating results for the first and fourth calendar quarters are generally lower than those for the second and third quarters |
| Diesel demand has historically been more stable because two major east-west truck routes and two major railroads cross one of our principal marketing areas for our Cheyenne Refinery |
| However, reduced road construction and agricultural work during the winter months somewhat depresses demand for diesel in the winter months |
| Our operations involve environmental risks that may require us to make substantial capital expenditures to remain in compliance or that could give rise to material liabilities |
| Our results of operations may be affected by increased costs resulting from compliance with the extensive environmental laws to which our business is subject and from any possible contamination of our facilities as a result of accidental spills, discharges or other releases of petroleum or hazardous substances |
| Our operations are subject to extensive federal, state and local environmental and health and safety laws and regulations relating to the protection of the environment, including those governing the emission or discharge of pollutants into the air and water, product specifications and the generation, treatment, storage, transportation and disposal, or remediation of solid and hazardous waste and materials |
| Environmental laws and regulations that affect the operations, processes and margins for our refined products are extensive and have become progressively more stringent |
| Additional legislation or regulatory requirements or administrative policies could be imposed with respect to our products or activities |
| Compliance with more stringent laws or regulations or more vigorous enforcement policies of the regulatory agencies could adversely affect our financial position and results of operations and could require us to make substantial expenditures |
| Any noncompliance with these laws and regulations could subject us to material administrative, civil or criminal penalties or other liabilities |
| We are a defendant in a series of lawsuits alleging, among other things, that emissions from an oil field or the production facilities thereon at the campus of the Beverly Hills High School, which were owned and operated by one of our subsidiaries between 1985 and 1995, caused the plaintiffs to develop cancers or various health problems |
| We could be subject to liability if these lawsuits are resolved adversely to us and the amount of the liability exceeds both the loss mitigation insurance we have purchased and any coverage under insurance policies that were in effect at the time that the alleged incidents occurred |
| Our business is inherently subject to accidental spills, discharges or other releases of petroleum or hazardous substances |
| Past or future spills related to any of our operations, including our Refineries, pipelines or product terminals, could give rise to liability (including potential cleanup responsibility) to governmental entities or private parties under federal, state or local environmental laws, as well as under common law |
| This could involve contamination associated with facilities that we currently own or operate, facilities that we formerly owned or operated and facilities to which we sent wastes or by-product for treatment or disposal and other contamination |
| Accidental discharges could occur in the future, future action may be taken in connection with past discharges, governmental agencies may assess penalties against us in connection with past or future contamination and third parties may assert claims against us for damages allegedly arising out of any past or future contamination |
| The potential penalties and clean-up costs for past or future releases or spills, the failure of some prior owners of our facilities to complete their clean-up obligations, the liability to third parties for damage to their property, or the need to address newly-discovered information or conditions that may require a response could be significant, and the payment of these amounts could have a material adverse effect on our business, financial condition and results of operations |
| We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations |
| Our operations require numerous permits and authorizations under various laws and regulations, including environmental and health and safety laws and regulations |
| These authorizations and permits are subject to revocation, renewal or modification and can require operational changes, which may involve significant costs, to limit impacts or potential impacts on the environment and/or health and safety |
| A violation of these authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions and/or refinery shutdowns |
| In addition, major modifications of our operations could require modifications to our existing permits or expensive upgrades to our existing pollution control equipment, which could have a material adverse effect on our business, financial condition or results of operations |
| Hurricanes along the Gulf Coast could disrupt our supply of crude oil and our ability to complete capital improvement projects in a timely manner |
| In August and September of 2005, Hurricanes Katrina and Rita and related storm activity, such as windstorms, storm surges, floods and tornadoes, caused extensive and catastrophic physical damage in and to coastal and inland areas located in the Gulf Coast region of the United States (parts of Texas, Louisiana, Mississippi and Alabama) and certain other parts of the southeastern parts of the United States |
| Some of the materials we use for our capital projects are fabricated at facilities located along the Gulf Coast |
| Should other storms of this nature occur in the future, it is possible that the storms and their collateral effects could result in delays or cost increases for our planned capital projects |
| In addition, supplies of crude oil to our El Dorado Refinery are sometimes shipped from Gulf Coast production or terminaling facilities |
| This crude oil supply source would be potentially threatened in the event of future catastrophic damage |
| We may have labor relations difficulties with some of our employees represented by unions |
| Approximately 57 percent of our employees were covered by collective bargaining agreements at December 31, 2005 |
| We believe that our current relations with our employees are good |
| However, employees may conduct a strike at some time in the future, which may adversely affect our operations |
| See Item 1 “Business-Employees |
| ” Terrorist attacks and threats or actual war may negatively impact our business |
| Terrorist attacks in the United States and the war in Iraq, as well as events occurring in response to or in connection with them, including future terrorist attacks against US targets, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions affecting our suppliers or our customers, could adversely impact our operations |
| In addition, any terrorist attack could have an adverse impact on energy prices, including prices for our crude oil and refined products, and an adverse impact on the margins from our refining and marketing operations |
| As a result, there could be delays or losses in the delivery of supplies and raw materials to us, decreased sales of our products and extension of time for payment of accounts receivable from our customers |