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Valero Beats on Strong Margins

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Valero Energy Corporation (VLO - Free Report) posted adjusted fourth quarter 2012 income of $1.88 per share, beating the Zacks Consensus Estimate of $1.17 by 60.7%.

The quarterly earnings compare favorably with the year-ago adjusted loss of 21 cents per share. This bolstered performance was attributable to higher refining throughput margins in each of the company’s regions along with lower refining operating expenses.

Total revenue in the quarter increased marginally (by 0.1%) year over year to $34,695.0 million from $34,673.0 million and outpaced the Zacks Consensus Estimate of $31,539 million.

Full-year 2012 adjusted earnings came in at $5.59 a share, surpassing our expectation of $4.90 and increasing 39.8% from the year-ago level of $4.00. Full-year revenues also increased 10.5% year over year to $139,250 million and outperformed the Zacks Consensus Estimate of $132,883 million.

Throughput Volumes

During the quarter, refining throughput volumes were approximately 2.64 million barrels per day, down from the year-earlier level of 2.71 million barrels a day. This primarily stemmed from the lack of throughput volume at the Aruba refinery. This unit was shut down in the first quarter of 2012.

By feedstock composition: sweet crude, medium/light sour crude and heavy sour crude accounted for 34%, 21% and 19%, respectively. The remaining volumes came from acidic sweet crude, residuals and other feedstock.

The Gulf Coast accounted for approximately 60% of the total volume. The Mid-Continent, North Atlantic and West Coast regions accounted for 18%, 12% and 10%, respectively.

Throughput Margins

Company-wide throughput margins increased considerably to $12.27 per barrel from the year-ago level of $5.46 per barrel. The increase was buoyed by the increase in discounts for medium sour, heavy sour and domestic light crude oils.

Average throughput margin realized was $11.08 per barrel in the U.S. Gulf Coast (up from $3.57 per barrel in the year-earlier period), $19.75 per barrel in the U.S. Mid-Continent (up from $12.17), $10.48 per barrel in the North Atlantic (up from $5.63) and $8.58 per barrel in the U.S. West Coast (up from $5.01).

Total operating cost per barrel was $5.17 during the quarter, down 2.3% from the year-earlier figure of $5.29. Refining operating expenses per barrel were $3.73 versus $3.92 in the year-ago quarter. However, unit depreciation and amortization expenses were up 5.1% year over year at $1.44 per barrel.

Capital Expenditure & Balance Sheet

Fourth quarter capital expenditure totaled $942.0 million, including $140 million for turnarounds and catalyst expenditures. At the end of the quarter, the company had cash and temporary cash investments of $1.7 billion. Valero also rewarded shareholders $97 million through dividends.

Valero expects total capital spending for this year of around $2.5 billion, including approximately $200 million for the retail segment. This compares with the $3.4 billion spending level in 2012.

Our Take

We remain upbeat on Valero for 2013 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 -- CST Brands, Inc. (CST) -- 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 on the ongoing economic growth projects. The company considered its fourth quarter earnings per share as the most significant one since 2005 and is progressing on its important strategic goals. The company also replaced all imported light sweet crude oil used at its Gulf Coast and Memphis, Tennessee, refineries with cheaper North American crude oil during the quarter.

Moreover, a new hydrocracker unit at the Port Arthur refinery became operational in the quarter. St. Charles is expected to be fully operational in the second quarter of 2013. These projects position Valero to increase diesel production and diversify its market exposure.

The stock retains a Zacks Rank #2 (Buy). Other than Valero, the companies in the oil refining and marketing industry that are expected to perform well in the coming one to three months include CVR Energy, Inc. and Global Partners LP (GLP - Free Report) with a Zacks Rank #1 (Strong Buy) and Marathon Petroleum Corporation (MPC - Free Report) with a Zacks Rank #2 (Buy).

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