Valero Energy Rises Despite Low Spreads

| About: Valero Energy (VLO)


Shares of Valero Energy climbed back up in recent weeks.

The Brent/WTI spread has remained low, but this hasn't curbed the rally in shares.

The company keeps its investors happy with higher dividends and buybacks.

Shares of Valero Energy (NYSE:VLO) rallied in the past few weeks despite the rise in oil prices, low Brent-to-WTI spreads, and the expected fall in refinery activity in the coming months. In its recent earnings report, the company showed more strong growth in profits, mostly due to higher gasoline margins. Valero also increased its dividend payout, continues buying back its shares, and plans to complete the Corpus Christi crude unit during this quarter and the Houston unit in the first half of next year.

Keeping Profits High

During the third quarter, Valero reported a net profit of $2.79 per share - above market estimates - as it slightly increased its throughput volume by 0.3% year on year. Even though its throughput in the Gulf Coast - which accounts for 55% of its total volume - declined in the past quarter, it was offset by higher volume in other regions. And in all regions, as you can see in the following chart, the operating income per barrel expanded in the past quarter (mostly in the North Atlantic and West Coast):

Source: Valero

The higher volume, along with better profit margins, helped boost the company's earnings in the past quarter. But the company's recent stock rally is likely to be more related to the latest developments in the oil market. The recent rise in oil prices and fall in the spreads between Brent and other crude oils - including WTI, LLS and Maya - reduced Valero's profitability. And the EIA still anticipates Brent/WTI to remain low next year. Nonetheless, this shift was offset by the rise in gasoline crack spreads. Earlier this year, crack spreads were very high. Since then, however, spreads have contracted (seasonal change), which also pushed VLO back down.

Source: Quandl and Google Finance

Over the past few weeks, the spreads started to climb back up again, and this may have helped boost the price of VLO. The company expects to see "good seasonal demand for [its] products in the fourth quarter." But keep in mind that the EIA expects oil inputs to refineries to decline by 4.4% sequentially and 1% year on year in the fourth quarter. This could also suggest lower volumes for Valero in the last quarter of the year.

In terms of ethanol, operating income dropped to only $35 million in the third quarter - an 83% plunge from Q3 2015 mostly due to lower prices. The silver lining for this segment is that prices have started to climb back up again in recent months. Prices are still lower than their levels back in 2014, but if this recent trend persists, it could increase the operating profits from this segment.

Paying Back Investors

Valero Energy has increased its dividend by $0.10 to $0.50 per share; this brings the annual yield to 2.8%. The company also bought back 17.2 million shares for $1.1 billion in the past quarter, for a total of $2.7 billion in dividends and shares bought back in the past three quarters.

The latest comeback by Valero is despite the fall in oil margins and the expected drop in U.S. refinery volume in the coming months. But the recent rise in crack spreads and rally in ethanol prices could keep boosting the stock, and the company keeps paying back its investors with higher dividends and by buying back shares. (For more, please see "Is This Oil Company Recovering?").

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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