Valero Loss Narrower Than Expected

Valero Energy Corporation (VLO - Analyst Report) has posted fourth quarter 2011 adjusted loss from continuing operations of 21 cents per share, narrower than the Zacks Consensus Estimate of a loss of 25 cents but was worse than last year's earnings from continuing operations of 32 cents. The year-over-year decline can be attributable to unfavorable refining margins, particularly in the Gulf Coast region.

For full year 2011, Valero delivered earnings from continuing operations of $3.69 per share, which soared 128% from the year-ago quarter. However, earnings from continuing operations failed to meet the Zacks Consensus Estimate of $3.52.

Total revenue in the quarter shot up more than 56% year over year to $34,673 million, and outpaced the Zacks Consensus Estimate of $32,666 million.

In 2011, total revenue surged 53% year over year to $125,987 million, and surpassed the Zacks Consensus Estimate of $120,657 million.

Throughput Volumes

During the quarter, throughput volumes were 2.71 million barrels per day, up 24% year over year. By feedstock composition, sweet crude, medium/light sour crude and heavy sour crude accounted for 33%, 19% and 17%, respectively. The remaining volumes came from residuals, blend-stocks and other feedstock.

The Gulf Coast accounted for approximately 57% of the total volume. The Mid-Continent, North Atlantic and West Coast regions accounted for 16%, 17% and 10%, respectively.

Throughput Margins

Company-wide throughput margins decreased $1.84 per barrel year over year in the reported quarter, due to poor margins for gasoline and petrochemical feedstocks as well as low discounts for medium and heavy sour feedstocks, Mars and Maya crude oils. Margins also decreased significantly across all regions, except the Mid Continent.

Average throughput margin realized was $3.57 per barrel in the Gulf Coast (down from $7.78 per barrel in the year-earlier period), $12.17 per barrel in the Mid-Continent (up from $6.62), $5.63 per barrel in the North Atlantic (down from $6.65) and $5.01 per barrel in the West Coast (down from $6.42).

Total operating cost per barrel was $5.29 during the quarter, up 2% from the year-earlier quarter. Refining operating expenses per barrel stood at $3.92 versus $3.64 in the year-ago quarter. Unit depreciation and amortization expenses dropped nearly 12% year over year to $1.37 per barrel.

Capital Expenditure & Balance Sheet

Fourth quarter capital spending totaled $899 million, including $128 million for turnarounds and catalyst expenditures. At the end of the quarter, the company had cash and temporary cash investments of $1000 million. Valero also rewarded shareholders $84 million in dividends and repurchased shares worth $79 million.

Outlook

Management expects 2012 to be a significant year with plans to replace the coker drums at St. Charles in April and completion of the major hydrocracker projects at Port Arthur and St. Charles by the later part of the year. Further, the company believes that the string of growth projects, recent acquisitions and operational improvement will be key drivers of free cash flow generation in 2012.

Our Take

We remain upbeat on Valero for 2012 as well as the next year and foresee attractive opportunities that will position it uniquely among refiners to grow earnings and cash flow per share going forward. We also appreciate Valero’s endeavor of consistently reviewing its refining portfolio, and upgrading its asset base by selling or acquiring refinery properties that do not fit into the business mix.

Again, Valero remains optimistic about 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 has a Zacks #3 Rank, which translates to a short-term Hold rating. We are maintaining our long-term Neutral recommendation on Valero. Valero faces competition from BP Plc (BP - Analyst Report).

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