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Independent Oil Refiners Face Hard Times in 2009 and Beyond

Valero Set To Win In New Pricing Environment (VLO)
Valero Energy Corp. (NYSE: VLO) looks set to surge after the refinery giant posted earnings. The company posted $1.86 EPS from continuing operations, which may have some questionable numbers because some other operations from the Krotz Springs refinery have not been presented as discontinued operations. But on a net basis, the company posted $2.18 EPS. First Call estimates were only $1.54 EPS.


The company's gain in earnings was mainly due to higher margins for distillate products in diesel and jet fuels. Valero also said that a decrease in margins for gasoline was partially offset by the higher margins for distillate products.

Valero may also be entering the sweet spot in energy land. If oil stays in a range of say $60 to $80 per barrel, or maybe even $60 to $100, it can sufficiently make its business model work. When energy goes in a straight line from $60 to $100 and $100 to $140, or when oil goes from $140 down to $80 in a straight line, it gets very hard for managers to plan. But a stable pricing environment will create stable margins for the refining sector.

After a 70%+ sell-off and a forward P/E of roughly 4.0 to 5.0, you might even think that Wall Street would have accepted anything.

Valero shares are up almost 12% at $16.85 pre-market. Its 52-week trading range is $14.59 to $73.68.

Jon C. Ogg
October 28, 2008