Valero: Oil Refiner’s Profits Cracking

by Brad Zigler

San Antonio-based oil refiner Valero Energy (NYSE: VLO) dropped some bad news on the energy sector when it announced that first-quarter profit nosedived 77%.Higher crude oil and other feedstock costs were blamed for the deterioration in the company's profit margin.

Duh.

This should come as no surprise to readers of HardAssetsInvestors.com. For weeks, we've been following the erosion in the "crack spread" (see our last look in "Squeezing Profits Out Of Oil.")

The crack spread is a futures market simulation of the oil refining cycle. Crude oil goes in (is purchased) to be distilled ("cracked") into products such as heating and gasoline, which are then sold. Subtract the cost of the input from the proceeds obtained through sales of the products and you have an approximation of a refiner's gross profit margin.

Since the beginning of the year, the refining margin, reflected in the interplay of NYMEX crude oil, heating oil and unleaded gasoline futures, has compressed from 10.4% to 8.7%.

Valero admitted this morning that its refined product margins fell as the cost of crude oil and other feedstocks outpaced output prices.

Valero said it earned $261 million, or 48 cents per share in the first quarter, compared with $1.14 billion, or $1.86 per share, a year ago. Well, really it was 36 cents, plus a 12 cent-per-share insurance payment. That was seen as good news given Street expectations. Analysts had been banking on EPS of only 29 cents.

Off-board trading of Valero shares was up by as much as 1.5% this morning ahead of the New York opening, but bids faded as second-quarter earnings were sized up in light of the most recent run-up in crude prices.

Valero shares eventually opened 37 cents, or 0.7%, lower on the NYSE while the iPath GSCI Oil exchange-traded note (NYSE Arca: OIL) began its trading day off $1.25, or 1.8%.

Valero's Cracking Creaking?

 

Comments

[EnergyFinancier]

To me, this suggests that the time has come to shift our focus to renewables. Despite the losses occurring everywhere else on the stock market, renewable energy companies continue to post gains. A number of investors and financiers have begun to notice, and even big oil companies such as BP and Chevron are beginning to capitalize on the renewables market. If you'd like to learn more about the current status and future prospects for renewable energy, I suggest you check out the Renewable Energy Finance Forum (REFF), held this June in New York City. REFF provides an opportunity for all affected stakeholders in the industry to network and share ideas on the future of renewable energy finance.

For more information, visit www.REFFWallStreet.com.

[NormanLepoff, M.D.]

Good article and comment.