Stellar 3Q by Valero

Valero Energy Corporation ( VLO - Analyst Report ) has posted third quarter 2011 earnings from continuing operations of $2.11 per share, striding past the Zacks Consensus Estimate of $1.74 and showing an improvement from last year's earnings from continuing operations of 53 cents. The year-over-year improvement can be traced back to favorable refining margins and highest refinery utilization since the third quarter of 2007.

Total revenue in the quarter shot up more than 60% year over year to $33,713 million, and outpaced the Zacks Consensus Estimate of $26,129 million.

Throughput Volumes

During the quarter, throughput volumes were 2.59 million barrels per day, up 17.7% year over year. By feedstock composition, sweet crude, medium/light sour crude and heavy sour crude accounted for 29%, 18% and 21%, respectively, of the total. The remaining volumes came from residuals, blend-stocks and other feedstock.

The Gulf Coast accounted for approximately 59% of the total volume. The Mid-Continent, Northeast and West Coast regions accounted for 15%, 15% and 11%, respectively.

Throughput Margins

Company-wide throughput margins jumped $5.11 per barrel year over year in the reported quarter, owing to higher margins for diesel and jet fuel, associated with better discounts for heavy-sour feedstock and heavy discounts in the light-sweet crude oils in the Mid-Continent. Margins increased significantly across all regions but for the Northeast.

Average throughput margin realized was $13.08 per barrel in the Gulf Coast (up from $8.34 per barrel in the year-earlier period), $22.27 per barrel in the Mid-Continent (up from $8.06), $5.46 per barrel in the Northeast (down from $6.04) and $11.96 per barrel in the West Coast (up from $8.66).

Total operating cost per barrel was $5.08 during the quarter, down 2.5% from the year-earlier quarter. Refining operating expenses per barrel decreased to $3.65 from the year-ago level of $3.71. Unit depreciation and amortization expenses also dropped nearly 5% to $1.43 per barrel from the year-ago quarter.

Capital Expenditure & Balance Sheet

Third quarter capital spending totaled $684 million, of which $69 million was for turnarounds and catalyst expenditures. At the end of the quarter, the company had cash and temporary cash investments of approximately $2.8 billion. Valero also rewarded shareholders $28 million in dividends and paid $268 million to purchase its shares.

Our Take

We remain upbeat on Valero for the remainder of 2011 and the next year and foresee attractive opportunities that will position it uniquely among refiners to grow earnings and cash flow per share for years to come. We also appreciate Valero’s endeavor of consistently review its refining portfolio, and upgrade its asset base by selling or acquiring refinery properties that do not fit the business mix. Recently, the company acquired the Meraux refinery from Murphy Oil Corporation ( MUR - Analyst Report ) and related logistics assets for $586 million in cash, which included approximately $261 million for a preliminary estimate of inventories and other assets.

Again, Valero remains optimistic on the on-going economic growth projects. These include hydrogen plants at Memphis and McKee as well as other growth projects, which are scheduled for completion in 2012, including the hydrocrackers at St. Charles and Port Arthur, the Montreal products pipeline, and the Diamond Green Diesel joint venture.

The company holds a Zacks #2 Rank, which translates to a short-term Buy rating. We are maintaining our long-term Outperform recommendation on Valero.