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One of the largest North American independent refiner and marketer of petroleum products, Valero Energy Corporation (VLO - Analyst Report) is set to report its second-quarter 2013 results on Jul 23. Let’s see how things are shaping up prior to the announcement.

In the last quarter, the company’s earnings of $1.18 per share beat the Zacks Consensus Estimate of $1.01 by 16.8%. The quarterly results were aided by higher refining throughput margins in each of the company’s regions, except the U.S. West Coast, along with lower refining operating expenses.

Growth Factors this Past Quarter

In the first quarter, Valero witnessed refining throughput volumes of approximately 2.57 million barrels per day, marginally up from the year-earlier level of 2.56 million barrels a day. This was primarily backed by major turnaround, maintenance and repair activity at refineries in Valero’s U.S. Gulf Coast region, including the Texas City, Corpus Christi and Port Arthur refineries; and at its Benicia and Wilmington refineries in the U.S. West Coast region.

By feedstock composition, sweet crude, medium/light sour crude and heavy sour crude accounted for 42%, 16% and 19%, respectively. The remaining volumes came from residuals, other feedstock as well as blendstocks and others. The Gulf Coast accounted for approximately 55% of the total volume. The Mid-Continent, North Atlantic and West Coast regions accounted for 17%, 19% and 9%, respectively.

Valero’s stable performance in the first quarter can be traced back to favorable refining margins and lower operating expenses.

More importantly, Valero is best positioned to profit from increased refining margins mainly on account of its strategic refinery structure that enables it to use cheaper oil for over one-half of its needs.

Valero recently spun off 80% stake of its retail arm – CST Brands Inc. (CST - Snapshot Report) – through a tax-advantaged distribution to shareholders, to unlock value on May 1, 2013. The spin-off of the company's retail arm generated an immediate net cash benefit of $500 million, after shelling out $220 million in taxes. We feel that the move would help the company to concentrate on its industry-specific strategies.

However, being the largest independent refiner in the country, Valero remains exposed to the ongoing tepid macro backdrop. Refiners in the U.S. generally face uncertainty regarding future regulations pertaining to greenhouse gas emissions and the potential for higher requirement of biofuels. Other threats include government regulations, weather conditions, crude oil and natural gas prices as well as renewable fuel prices. These can result in increased costs, reduced growth and fines or other sanctions.

Earnings Whispers?

Our proven model does not conclusively show that Valero is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive earnings Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here as you will see below.

Zacks ESP:  The earnings ESP for the stock is 0.00%.

Zacks Rank #3 (Hold): Valero’s Zacks Rank #3 (Hold) when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and 5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:  

Ferrellgas Partners LP (FGP - Analyst Report) with earnings ESP of +6.90% and a Zacks Rank #1 (Strong Buy).

W&T Offshore Inc. (WTI - Snapshot Report) with earnings ESP of +9.09% and a Zacks Rank #1 (Strong Buy).

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