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Why Is Valero Energy (VLO) Up 23.1% Since Last Earnings Report?

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A month has gone by since the last earnings report for Valero Energy (VLO - Free Report) . Shares have added about 23.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Valero Energy due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Valero Q3 Earnings Beat Estimates

Valero Energyreported third-quarter 2020 loss of $1.16 per share, narrower than the Zacks Consensus Estimate of a loss of $1.35. In the year-ago quarter, the company reported earnings of $1.55 per share.

Total revenues fell from $27,249 million in the prior-year period to $15,809 million. Moreover, the top line missed the Zacks Consensus Estimate of $18,821 million.

The narrower-than-expected loss can be attributed to a rise in renewable diesel sales volumes and lower corn prices in the Ethanol unit. Notably, Valero witnessed a demand recovery for diesel, gasoline and jet fuel in the third quarter. The positives were partially offset by lower refinery throughput volumes and ethanol production.

Segmental Performance

Operating loss at the Refining segment was reported at $629 million against a profit of $1,087 million in the year-ago quarter. Lower refinery throughput volumes amid the coronavirus pandemic affected the segment.

In the Ethanol segment, the company reported operating profit of $22 million versus $43 million loss in third-quarter 2019. The upside was led by higher margins stemming from lower corn prices. However, production volumes averaged 3.8 million gallons per day, down 206 thousand gallons from the year-ago quarter.

Operating income at the Renewable Diesel segment increased to $184 million from $65 million in the year-ago period on a rise in renewable diesel sales volumes. The segment sales averaged 870 thousand gallons per day, creating a new record, which marked a rise of 232 thousand gallons from the year-ago period.

Throughput Volumes

For the quarter, refining throughput volumes were 2,526 thousand barrels per day (Mbpd), down from the prior-year quarter’s 2,954 Mbpd.

In terms of feedstock composition, sweet crude, medium/light sour crude and heavy sour crude accounted for 49.6%, 13.7% and 12.6%, respectively, of its total volume. The remaining volumes came from residuals, other feedstock and blendstocks and others.

The Gulf Coast contributed approximately 57.3% to total throughput volume. Mid-Continent, North Atlantic and West Coast regions accounted for 16.5%, 16.2% and 10%, respectively, of the total throughput volume.

Throughput Margins

Refining margin per barrel of throughput decreased to $4.10 from the year-ago level of $10. Refining operating expense per barrel was $4.26 compared with $4.05 in the year-ago quarter. Depreciation and amortization expenses increased to $2.32 a barrel from $1.90 in the prior-year quarter. As such, adjusted refining operating loss was recorded at $2.48 per barrel of throughput against the year-ago profit of $4.05.

Capital Investment & Balance Sheet

Third-quarter capital investment totaled $517 million. Of the total amount, $205 million was allotted for sustaining the business. Through the September quarter, the leading independent refiner and marketer of petroleum products returned $399 million to stockholders as dividend payments.

At quarter-end, Valero had cash and cash equivalents of $4,047 million, significantly higher than the second-quarter level of $2,319 million. As of Jun 30, 2020, it had a total debt of $15,213 million compared with $12,677 million in the second quarter. Its debt to capitalization was 44.2%.

Guidance

The company expects capital investment for this year and the next year to be $2 billion each, marginally down from $2.1 billion announced earlier. Of the total, 60% will likely be used for business sustaining purpose and the rest will be utilized for growth projects. It expects the St. Charles Alkylation Unit to be completed in the fourth quarter. This will be used to transform low-value feedstocks into a premium alkylate product.

Moreover, Valero expects the Diamond Pipeline expansion and the Pembroke Cogen project to come online in the next year. The Port Arthur Coker project is scheduled to be completed in 2023.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -49.49% due to these changes.

VGM Scores

At this time, Valero Energy has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Valero Energy has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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