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Shrabana Mukherjee

Valero???s Net Drops on Lower Margins

VLO TSO

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Valero Energy Corporation (VLO - Analyst Report) posted adjusted third quarter 2012 income of $1.90 per share, lower than the last year's earnings from continuing operations of $2.11. The year-over-year decrease is mainly due to lower throughput margins on the West Coast and U.S. Gulf Coast. However, the quarterly earnings beat the Zacks Consensus Estimate of $1.75.

Total revenue in the quarter increased 3.0% year over year to $34,726.0 million from $33,713.0 million and outpaced the Zacks Consensus Estimate of $31,343 million.

Throughput Volumes

During the quarter, refining throughput volumes were approximately 2.60 million barrels per day, up from the year-earlier level of 2.59 million barrels a day. By feedstock composition, sweet crude, medium/light sour crude and heavy sour crude accounted for 37%, 19% and 18%, respectively. The remaining volumes came from acidic sweet crude, residuals and other feedstock.

The Gulf Coast accounted for approximately 55% of the total volume. The Mid-Continent, North Atlantic and West Coast regions accounted for 17%, 17% and 11%, respectively.

Throughput Margins

Company-wide throughput margins decreased to $13.12 per barrel from the year-ago level of $13.24 per barrel.

Average throughput margin realized was $11.05 per barrel in the U.S. Gulf Coast (down from $13.08 per barrel in the year-earlier period), $22.07 per barrel in the U.S. Mid-Continent (down from $22.27), $13.25 per barrel in the North Atlantic (up considerably from $5.46) and $8.91 per barrel in the U.S. West Coast (down from $11.96).

Total operating cost per barrel was $5.17 during the quarter, up 1.8% from the year-earlier quarter. Refining operating expenses per barrel were $3.72 versus $3.65 in the year-ago quarter. Unit depreciation and amortization expenses were up 1.4% year over year to $1.45 per barrel.

Capital Expenditure & Balance Sheet

Third quarter capital expenditure totaled $784.0 million, including $75 million for turnarounds and catalyst expenditures. At the end of the quarter, the company had cash and temporary cash investments of $2,500 million. Valero also rewarded shareholders $97 million through dividends.

Valero has cut its spending level for the year to $3,500 million compared with its prior expectation of $3,600 million. For 2013, the company expects total capital spending to be approximately $2,500 million that includes approximately $200 million for the retail segment and some carryover from 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 as deemed right.

Recently, Valero announced its plan to separate its retail arm from the company, likely through a tax-advantaged distribution to shareholders, to unlock value. The company remains hopeful that the move would help it to concentrate on its industry-specific strategies.

Again, Valero remains optimistic about the ongoing economic growth projects. During the quarter, the company decided to reorganize the Aruba refinery into a crude oil and refined products terminal. Further, it expects the hydrocrackers at Port Arthur to become fully operational by the fourth quarter. The company also completed major reliability work at the Meraux refinery.

However, threats include lower U.S. demand for refined products, reflecting high unemployment as well as steep prices.

Again, being the largest independent refiner in the country, Valero remains particularly susceptible to the ongoing unfavorable macro backdrop. For example, in Europe, Valero remains exposed to the difficult economic environment and deceleration in the capacity rationalization process. Additionally, risks like natural disasters, unplanned plant disruptions and alterations in environmental regulations also remain our concerns.

Hence, we see the Valero stock performing in line with its peers like Tesoro Corporation (TSO - Analyst Report). The stock retains a Zacks #2 Rank (short-term Buy rating).

 

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