Valero Energy Loses Money

Valero Energy (VLO - Analyst Report) guided towards a $0.50 per share loss in the second quarter of 2009 due to a very weak operating environment and longer than expected downtime at two of its refineries.

We had downgraded Valero shares to Sell on May 26 to reflect the challenging macro backdrop for refiners. The guided $0.50 per share loss for the second quarter would compare to earnings of $1.37 per share in the second quarter of 2008. We also have a Sell rating on Tesoro (TSO - Analyst Report).

Valero’s results were adversely affected by extended downtime at its Delaware City and McKee refineries, very weak refining margins, and narrow crude quality spreads. Crude quality spreads refer to the discount at which lower quality grades of crude oil trade relative to higher quality crudes, such as the U.S. benchmark, West Texas Intermediate (WTI). Capable refiners, such as Valero, would use lower priced crudes to make useful refined products, such as gasoline, which would pad their margins.

Not all refiners are configured to convert such low-priced crudes into useful refined products. But with the discounts shrinking, Valero can no longer enjoy that advantage. As an example of the discount, the spread between WTI and Maya (a heavy/sour Mexican crude) averaged $3.56 per barrel in the second quarter of 2009, a drop from roughly $21 a barrel in the second quarter of 2008.

Valero also announced plans for to raise capital through a 40 million-share common stock offering. The stock issuance would follow the company’s $1 billion debt offering in March.

The company has been fairly active on the acquisitions front lately, having acquired 7 ethanol plants from the bankrupt VeraSun Energy (VSUNQ - Analyst Report) for $477 million and Dow Chemical’s (DOW - Analyst Report) 45% interest in a Netherlands refinery for $600 million.