Valero Loss Bigger than Expected

Earlier today, Valero Energy Corp. (VLO - Analyst Report) -- the largest independent refiner in the U.S. -- reported a weaker-than-expected third-quarter 2009 loss, reflecting depressed refining margins and lower throughput on the back of weak fuel demand and high inventories. This was partially offset by lower operating costs. The loss per share, excluding one-time items, came in at 39 cents, well below the Zacks Consensus Estimate of 26 cents.

In the year-ago period, the Texas-based marketer of petroleum products earned $1.91 per share. Revenue was down 45.8% year-over-year to $19.5 billion. Operating loss for the quarter was $579 million ($162 million excluding one-time items), compared to operating income of $1.8 billion ($1.6 billion excluding one-time items) in the year-earlier quarter. The main factors causing the operating loss were lower diesel and jet fuel margins, coupled with smaller discounts on sour crude oil and other feedstocks.

Throughput Volumes

Throughput volumes during the quarter were 2.38 million barrels per day, down more than 8% year over year, primarily reflecting reduction in sour crude volumes.

By feedstock composition, heavy sour crude, medium/light sour crude and sweet crude accounted for 19%, 23% and 29% of the total, respectively. The remaining volumes came from residuals, blend-stocks and other feedstocks.

The Gulf Coast accounted for approximately 52% of total volumes. The Mid-continent, the Northeast and the West Coast regions accounted for 16%, 20% and 12% of the total, respectively.

Throughput Margins

Company-wide throughput margins decreased nearly 63% year-over-year to $4.86 per barrel, as all regions witnessed substantially reduced margins. Average throughput margin realized in the Gulf Coast, Mid-Continent, Northeast and West Coast regions were $4.66 per barrel (down almost 65% year-over-year), $5.38 per barrel (down more than 59%), $2.86 per barrel (down nearly 79%) and $8.51 per barrel (down approximately 27%), respectively.

Costs

Cash operating cost per barrel was $3.94 during the quarter, down from $4.78 in the year-ago period. However, the unit depreciation and amortization expenses increased to $1.58 per barrel from $1.39 per barrel in the third quarter of 2008.

Capital Expenditure & Balance Sheet

Third-quarter capital spending totaled $521 million, of which $52 million was for turnarounds. At the end of the quarter, the company had cash and cash equivalents of approximately $1.6 billion and total debt of approximately $7.4 billion.

Company Initiatives

Given the weak refining margin environment, Valero has taken certain strategic actions to improve the company’s performance and competitiveness in a cost-effective manner. As part of this effort, during the most recent quarter, Valero extended the shutdown of its Aruba refinery and streamlined operations at the Delaware City refinery.

Further, this month the company has begun a concentrated effort to reduce costs at its Paulsboro refinery. Management informed that it has been taking advantage of the company’s refining flexibility by shifting feedstocks and operating rates to maximize profitability.

Outlook

We believe that the overall environment for refining margins is likely to remain poor going into 2010. The sharply lower refinery utilization (at just 81.1% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.

The recent rally in crude prices have added to refiners’ miseries by increasing the cost of oil they buy to make gas, jet fuel and other refined products. Being the largest independent refiner, Valero remains particularly exposed to this unfavorable macro backdrop. We see little reason for investors to own Valero and have an Underperform recommendation on the company.

Read the full analyst report on VLO