Valero Jumps Over Lowered Hurdles (VLO, BP, RDS, COP)

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Valero Energy Corp. (NYSE:VLO) has reported 2008 first quarter income of $261 million, or $0.48 EPS, compared with income of $1.1 billion and $1.77 EPS for the first quarter of 2007. After VLO’s March 24th earnings warning, analyst estimates had dropped to $0.29 EPS. Operating revenue for the quarter totaled $27.95 billion, well above estimates of $18.23 billion.

Valero attributed the drop to lower margins for refined products due to higher feedstock costs coupled with lower prices. According to the announcement, the cost for a barrel of WTI rose about $40/barrel, while the wholesale price of gasoline rose by only $34/barrel, a 59% drop in margin. Operating expenses also increased and refinery throughput decreased by about $138,000 b/d.

As we’ve already noted today, both BP plc (NYSE: BP) and Shell (NYSE: RDS) have reported big earnings and revenue increases for the first quarter of 2008. These increases did not come from the companies’ refining operations. Earnings in Shell’s Oil Products segment, which includes refining, are off 20% from a year ago; after adjusting for one-time gains and losses, BP’s refining segment earnings are off by 61%. Last week, ConocoPhillips (NYSE: COP) reported refining earnings were off by 54%. As with Valero, lower refining margin gets the blame.

And there’s no question that refining margins are lower than in the past two years. But look at VLO’s west coast operations as an example of what’s happening. West coast crude is virtually all from Alaska’s North Slope. VLO reported a cost of $96.62/b for crude and a margin of $7.89/b. That’s about 8.2%, which is historically the average margin for refining operations. The fat profits of the past two years have raised expectations for refining margins. This quarter brings a dose of reality.

The company’s stock is trading up about 1.4% at $53.70 before market open this morning; its 52-week trading range is $44.94 to $78.68.

Paul Ausick
April 29, 2008