Valero Energy Corporation Reports Third Quarter Earnings

SAN ANTONIO --(Business Wire)-- -- Valero Energy Corporation (NYSE: VLO) today reported third quarter 2008 income from continuing operations of $1.2 billion, or $2.18 per share, which compares to $848 million, or $1.34 per share, in the third quarter of 2007. The third quarter 2008 results include the company's pre-tax gain of $305 million on the sale of its Krotz Springs, Louisiana refinery to a subsidiary of Alon USA Energy, Inc., which was effective July 1, 2008. Excluding this gain, third quarter 2008 income from continuing operations was $982 million, or $1.86 per share. Due to long-term product supply agreements between Valero and Alon, the results of operations related to the Krotz Springs refinery have not been presented as discontinued operations.

Income from continuing operations for the nine months ended September 30, 2008, was $2.1 billion, or $4.02 per share, compared to $4.0 billion, or $6.66 per share, for the nine months ended September 30, 2007. Excluding the gain on the sale of the Krotz Springs refinery, income from continuing operations for the nine months ended September 30, 2008 was $2.0 billion, or $3.70 per share.

Third quarter 2008 operating income was $1.8 billion compared to $1.2 billion for the third quarter of 2007. Excluding the gain on the sale of the Krotz Springs refinery, the increase in operating income was mainly due to higher margins for distillate products, such as diesel and jet fuels. Partially offsetting the higher margins for distillate products was a decrease in margins for gasoline.

"As a result of our good earnings, our financial position has continued to improve," said Bill Klesse, Valero's Chairman of the Board and Chief Executive Officer. "At the end of the third quarter, our net debt-to-capitalization ratio was 15.8%, one of the lowest in company history. In early October, Moody's recognized our financial strength by raising our investment-grade credit rating from Baa3 to Baa2 with a stable outlook.

"Given the very uncertain economic environment, we have significantly reduced our capital spending. We estimate total capital spending for 2008 will be approximately $3.0 billion, down $800 million from our last update, and down $1.5 billion from our original budget of $4.5 billion. For 2009, we estimate capital spending will be $3.5 billion, also down $500 million from our previous guidance. We will continue to review our capital spending considering our opportunities and the economic outlook."

Regarding uses of cash in the third quarter of 2008, the company's capital spending was $749 million, of which $76 million was for turnaround expenditures. The company also used $78 million for dividend payments and spent $74 million to purchase 2 million shares of its common stock. In October, the company purchased an additional 8.3 million shares, taking the year-to-date total purchases to nearly 23 million shares, or more than 4% of shares outstanding at the beginning of this year.

"Looking at market fundamentals, a key item in the third quarter was the sharp drop in the price of crude oil, and this decline has obviously continued so far in the fourth quarter," said Klesse. "The price of WTI light sweet crude oil began the third quarter at approximately $140 per barrel, but recently closed below $65 per barrel. Although the fall in crude oil prices has not translated into higher margins for all of Valero's products, the lower crude oil prices have led to substantially lower retail pump prices, which is positive for consumers and demand for our products. The lower prices will also provide consumers a clearer view of the magnitude of the subsidies necessary to make alternative fuels competitive.

"Regarding third quarter product margins, conditions were very volatile. Low gasoline margins in July were followed by higher margins in August as production adjusted to demand. When the hurricanes hit the Gulf Coast and reduced refinery production, gasoline inventories fell to historically low levels, and margins responded, which increased average margins for the third quarter. In contrast to the volatile movement of gasoline margins, distillate margins remained very good throughout the third quarter as global supply and demand balances were tight. With winter approaching, we continue to expect excellent distillate margins even though worldwide economic activity is slowing."

Margins for many of the company's secondary products, such as asphalt, heavy fuel oil, petroleum coke, and petrochemical feedstocks, increased in the third quarter compared to the prior quarter as the cost of crude oil fell faster than the prices of those products. This favorable margin relationship continues as crude prices continue to fall.

"In our refining operations, the hurricanes certainly complicated matters," said Klesse. "We had four refineries shut down, but we were fortunate to avoid major damage from the hurricanes. We thank all of our employees for a dedicated and committed effort to return our refineries and most of our retail stores to normal operations as quickly as possible.

"Uncertainty in the financial markets and a pessimistic economic outlook have noticeably added to the inherent volatility in the refining industry. Valero's stock price, like those of nearly all companies in the energy sector, has been hit hard. Obviously, we feel that our stock price has been beaten down unfairly when you consider our balance sheet strength, cash position, operations, and continuing profitability. You can expect us to maintain our balanced approach by investing in growth projects, paying off debt, buying back stock, and increasing dividends, but clearly we intend to hold much more cash than in the past."

Valero's senior management will hold a conference call at 11 a.m. ET (10 a.m. CT) today to discuss this earnings release and provide an update on company operations. A live broadcast of the conference call will be available on the company's web site at www.valero.com.

Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 22,000 employees and 2007 revenues of more than $95 billion. The company owns and operates 16 refineries throughout the United States, Canada and the Caribbean with a combined throughput capacity of approximately 3.1 million barrels per day, making it the largest refiner in North America. Valero is also one of the nation's largest retail operators with approximately 5,800 retail and branded wholesale outlets in the United States, Canada and the Caribbean under various brand names including Valero, Diamond Shamrock, Shamrock, Ultramar, and Beacon. Please visit www.valero.com for more information.

Statements contained in this release that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words "believe," "expect," "should," "could," "estimates," and other similar expressions identify forward-looking statements. It is important to note that actual results could differ materially from those projected in such forward-looking statements. For more information concerning factors that could cause actual results to differ from those expressed or forecasted, see Valero's annual reports on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission and on Valero's website at www.valero.com.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
EARNINGS RELEASE
(Millions of Dollars, Except per Share, per Barrel, and per Gallon
Amounts)
(Unaudited)


Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------
2008 2007 2008 2007 (1)
------------- ------------ --------- --------
STATEMENT OF INCOME
DATA:
Operating Revenues (2) $ 35,960 $ 23,699 $100,545 $66,656
------------- ------------ --------- --------

Costs and Expenses:
Cost of Sales 32,506 20,810 91,848 55,630
Refining Operating
Expenses 1,179 1,036 3,426 2,955
Retail Selling
Expenses 201 190 579 561
General and
Administrative
Expenses 169 152 421 474
Depreciation and
Amortization
Expense 370 343 1,106 1,002
Gain on Sale of
Krotz Springs
Refinery (3) (305) - (305) -
------------- ------------ --------- --------
Total Costs and
Expenses 34,120 22,531 97,075 60,622
------------- ------------ --------- --------

Operating Income 1,840 1,168 3,470 6,034

Other Income, Net (4) 36 145 71 157

Interest and Debt
Expense:
Incurred (112) (148) (335) (347)
Capitalized 31 25 74 83
------------- ------------ --------- --------

Income from Continuing
Operations Before
Income Tax Expense 1,795 1,190 3,280 5,927

Income Tax Expense 643 342 1,133 1,929
------------- ------------ --------- --------

Income from Continuing
Operations 1,152 848 2,147 3,998

Income from
Discontinued
Operations, Net of
Income Taxes (1) - 426 - 669
------------- ------------ --------- --------

Net Income $ 1,152 $ 1,274 $ 2,147 $ 4,667
============= ============ ========= ========

Earnings per Common
Share:
Continuing
Operations $ 2.21 $ 1.54 $ 4.08 $ 7.00
Discontinued
Operations - 0.77 - 1.17
------------- ------------ --------- --------
Total $ 2.21 $ 2.31 $ 4.08 $ 8.17
============= ============ ========= ========

Weighted Average
Common Shares
Outstanding (in
millions) 522 551 526 571

Earnings per Common
Share - Assuming
Dilution:
Continuing
Operations (5) $ 2.18 $ 1.34 $ 4.02 $ 6.66
Discontinued
Operations - 0.75 - 1.14
------------- ------------ --------- --------
Total $ 2.18 $ 2.09 $ 4.02 $ 7.80
============= ============ ========= ========

Weighted Average
Common Shares
Outstanding-
Assuming Dilution
(in millions) 529 564 535 587

September 30, December 31,
2008 2007
------------- ------------
BALANCE SHEET DATA:
Cash and Temporary
Cash Investments $ 2,767 $ 2,464

Total Debt $ 6,475 $ 6,862

VALERO ENERGY CORPORATION AND SUBSIDIARIES
EARNINGS RELEASE
(Millions of Dollars, Except per Share, per Barrel, and per Gallon
Amounts)
(Unaudited)


Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007 (1)
---------- ------- -------- --------
Operating Income (Loss) by
Business Segment:
Refining $ 1,913 $1,259 $3,716 $6,362
---------- ------- -------- --------
Retail:
U.S. 81 54 120 115
Canada 26 20 86 68
---------- ------- -------- --------
Total Retail 107 74 206 183
---------- ------- -------- --------
Total Before Corporate 2,020 1,333 3,922 6,545
Corporate (180) (165) (452) (511)
---------- ------- -------- --------
Total $ 1,840 $1,168 $3,470 $6,034
========== ======= ======== ========

Depreciation and Amortization by
Business Segment:
Refining $ 331 $ 307 $ 998 $ 902
---------- ------- -------- --------
Retail:
U.S. 18 15 51 42
Canada 10 8 26 21
---------- ------- -------- --------
Total Retail 28 23 77 63
---------- ------- -------- --------
Total Before Corporate 359 330 1,075 965
Corporate 11 13 31 37
---------- ------- -------- --------
Total $ 370 $ 343 $1,106 $1,002
========== ======= ======== ========

Operating Highlights:
Refining:
Throughput Margin per Barrel $ 13.11 $ 9.94 $10.80 $13.39

Operating Costs per Barrel:
Refining Operating Expenses $ 4.96 $ 3.96 $ 4.72 $ 3.87
Depreciation and
Amortization 1.39 1.17 1.38 1.18
---------- ------- -------- --------
Total Operating Costs per
Barrel $ 6.35 $ 5.13 $ 6.10 $ 5.05
========== ======= ======== ========

Throughput Volumes (Mbbls per
Day):
Feedstocks:
Heavy Sour Crude 565 594 580 633
Medium/Light Sour Crude 670 663 680 643
Acidic Sweet Crude 75 79 76 83
Sweet Crude 578 760 622 728
Residuals 282 265 242 261
Other Feedstocks 136 181 141 161
---------- ------- -------- --------
Total Feedstocks 2,306 2,542 2,341 2,509
Blendstocks and Other 281 302 306 286
---------- ------- -------- --------
Total Throughput
Volumes 2,587 2,844 2,647 2,795
========== ======= ======== ========

Yields (Mbbls per Day):
Gasolines and
Blendstocks 1,136 1,324 1,197 1,283
Distillates 906 932 920 919
Petrochemicals 66 84 74 83
Other Products (6) 464 495 449 507
---------- ------- -------- --------
Total Yields 2,572 2,835 2,640 2,792
========== ======= ======== ========

VALERO ENERGY CORPORATION AND SUBSIDIARIES
EARNINGS RELEASE
(Millions of Dollars, Except per Share, per Barrel, and per Gallon
Amounts)
(Unaudited)


Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007
--------- -------- -------- --------
Refining Operating Highlights by
Region (7):
Gulf Coast:
Operating Income (3) $ 1,117 $ 763 $ 2,597 $ 3,781

Throughput Volumes (Mbbls per
Day) 1,324 1,527 1,399 1,532

Throughput Margin per Barrel $ 13.21 $10.49 $ 12.01 $ 13.80

Operating Costs per Barrel:
Refining Operating Expenses $ 5.17 $ 3.98 $ 4.73 $ 3.69
Depreciation and
Amortization 1.37 1.08 1.30 1.06
--------- -------- -------- --------
Total Operating Costs per
Barrel $ 6.54 $ 5.06 $ 6.03 $ 4.75
========= ======== ======== ========

Mid-Continent (1):
Operating Income $ 295 $ 233 $ 513 $ 807

Throughput Volumes (Mbbls per
Day) 426 445 426 391

Throughput Margin per Barrel $ 13.23 $10.35 $ 9.94 $ 13.10

Operating Costs per Barrel:
Refining Operating Expenses $ 4.42 $ 3.52 $ 4.25 $ 4.17
Depreciation and
Amortization 1.28 1.15 1.29 1.36
--------- -------- -------- --------
Total Operating Costs per
Barrel $ 5.70 $ 4.67 $ 5.54 $ 5.53
========= ======== ======== ========

Northeast:
Operating Income $ 387 $ 147 $ 357 $ 959

Throughput Volumes (Mbbls per
Day) 552 566 545 572

Throughput Margin per Barrel $ 13.53 $ 8.21 $ 8.50 $ 11.22

Operating Costs per Barrel:
Refining Operating Expenses $ 4.55 $ 4.11 $ 4.69 $ 3.83
Depreciation and
Amortization 1.36 1.27 1.42 1.25
--------- -------- -------- --------
Total Operating Costs per
Barrel $ 5.91 $ 5.38 $ 6.11 $ 5.08
========= ======== ======== ========

West Coast:
Operating Income $ 114 $ 116 $ 249 $ 815

Throughput Volumes (Mbbls per
Day) 285 306 277 300

Throughput Margin per Barrel $ 11.60 $ 9.82 $ 10.55 $ 15.84

Operating Costs per Barrel:
Refining Operating Expenses $ 5.55 $ 4.24 $ 5.51 $ 4.48
Depreciation and
Amortization 1.70 1.45 1.76 1.42
--------- -------- -------- --------
Total Operating Costs per
Barrel $ 7.25 $ 5.69 $ 7.27 $ 5.90
========= ======== ======== ========

VALERO ENERGY CORPORATION AND SUBSIDIARIES
EARNINGS RELEASE
(Millions of Dollars, Except per Share, per Barrel, and per Gallon
Amounts)
(Unaudited)


Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007
---------- ------- --------- -------
Retail - U.S.:
Company-Operated Fuel Sites
(Average) 984 956 961 959
Fuel Volumes (Gallons per Day
per Site) 4,946 5,068 4,997 5,019
Fuel Margin per Gallon $ 0.273 $0.197 $ 0.173 $0.174
Merchandise Sales $ 292 $ 272 $ 819 $ 774
Merchandise Margin (Percentage
of Sales) 29.8% 29.7% 30.0% 29.9%
Margin on Miscellaneous Sales $ 24 $ 26 $ 74 $ 75
Selling Expenses $ 134 $ 125 $ 375 $ 377

Retail - Canada:
Fuel Volumes (Thousand Gallons
per Day) 3,126 3,180 3,169 3,231
Fuel Margin per Gallon $ 0.261 $0.238 $ 0.278 $0.235
Merchandise Sales $ 56 $ 53 $ 156 $ 137
Merchandise Margin (Percentage
of Sales) 28.6% 26.9% 28.5% 28.1%
Margin on Miscellaneous Sales $ 10 $ 9 $ 29 $ 27
Selling Expenses $ 67 $ 65 $ 204 $ 184

Average Market Reference Prices
and Differentials
(Dollars per Barrel):
Feedstocks (at U.S. Gulf
Coast, except as Noted):
West Texas Intermediate (WTI)
Crude Oil $ 117.83 $75.48 $ 113.25 $66.12
WTI Less Sour Crude Oil (8) $ 4.05 $ 3.00 $ 5.20 $ 4.00
WTI Less Mars Crude Oil $ 5.26 $ 5.93 $ 6.40 $ 4.52
WTI Less Alaska North Slope
(ANS)
Crude Oil (U.S. West Coast) $ 0.93 $(1.01) $ 0.81 $ 0.15
WTI Less Maya Crude Oil $ 11.36 $12.42 $ 16.39 $11.55

Products:
U.S. Gulf Coast:
Conventional 87 Gasoline
Less WTI $ 12.13 $12.20 $ 7.66 $17.12
No. 2 Fuel Oil Less WTI $ 19.27 $10.82 $ 19.17 $11.86
Ultra-Low-Sulfur Diesel Less
WTI $ 23.91 $16.23 $ 24.38 $18.61
Propylene Less WTI $ 7.21 $ 8.75 $ (0.11) $13.88
U.S. Mid-Continent:
Conventional 87 Gasoline
Less WTI $ 8.62 $20.17 $ 6.49 $22.13
Low-Sulfur Diesel Less WTI $ 25.55 $22.41 $ 25.10 $22.78
U.S. Northeast:
Conventional 87 Gasoline
Less WTI $ 5.80 $11.72 $ 4.40 $16.63
No. 2 Fuel Oil Less WTI $ 19.86 $11.72 $ 20.85 $12.83
Lube Oils Less WTI $ 89.33 $43.81 $ 51.75 $53.62
U.S. West Coast:
CARBOB 87 Gasoline Less ANS $ 12.21 $14.22 $ 12.95 $27.18
CARB Diesel Less ANS $ 23.87 $17.86 $ 25.39 $23.52

VALERO ENERGY CORPORATION AND SUBSIDIARIES
EARNINGS RELEASE
(Millions of Dollars, Except per Share, per Barrel, and per Gallon
Amounts)
(Unaudited)


(1) Effective July 1, 2007, Valero Energy Corporation (Valero) sold
its Lima Refinery to Husky Refining Company, a wholly owned
subsidiary of Husky Energy Inc. The results of operations of the
Lima Refinery for the six months of 2007 prior to its sale are
reported as discontinued operations in the Statement of Income
Data, and all refining operating highlights, both consolidated
and for the Mid-Continent region, presented in this earnings
release exclude the Lima Refinery. The sale resulted in a pre-tax
gain of $827 million ($426 million after tax), which is included
in "Income from Discontinued Operations, Net of Income Taxes" in
the Statement of Income for the three and nine months ended
September 30, 2007.

(2) Includes excise taxes on sales by Valero's U.S. retail system of
$207 million and $207 million for the three months ended
September 30, 2008 and 2007, respectively, and $605 million and
$606 million for the nine months ended September 30, 2008 and
2007, respectively.

(3) Effective July 1, 2008, Valero sold its Krotz Springs Refinery to
Alon Refining Krotz Springs, Inc. (Alon), a subsidiary of Alon
USA Energy, Inc. The nature and significance of Valero's post-
closing participation in an offtake agreement with Alon
represents a continuation of activities with the Krotz Springs
Refinery for accounting purposes, and as such the results of
operations related to the Krotz Springs Refinery have not been
presented as discontinued operations in the Statement of Income
Data for any of the periods presented, and all refining operating
highlights, both consolidated and for the Gulf Coast region,
presented in this earnings release include the Krotz Springs
Refinery for all periods presented. The pre-tax gain of $305
million on the sale of the Krotz Springs Refinery is included in
the Gulf Coast operating income for the three and nine months
ended September 30, 2008.

(4) "Other Income, Net" for the three and nine months ended September
30, 2007 includes a $91 million pre-tax gain resulting from the
repayment of a loan by a foreign subsidiary.

(5) The calculation of earnings per common share assuming dilution for
the three and nine months ended September 30, 2007 includes the
effect of a $94 million deduction from net income representing
cash paid in the third quarter of 2007 in final settlement of an
accelerated share repurchase program entered into in the second
quarter of 2007.

(6) Primarily includes gas oils, No. 6 fuel oil, petroleum coke, and
asphalt.

(7) The regions reflected herein contain the following refineries:
Gulf Coast - Corpus Christi East, Corpus Christi West, Texas
City, Houston, Three Rivers, Krotz Springs (for periods prior to
its sale effective July 1, 2008), St. Charles, Aruba, and Port
Arthur Refineries; Mid-Continent - McKee, Ardmore, and Memphis
Refineries; Northeast - Quebec City, Paulsboro, and Delaware City
Refineries; and West Coast - Benicia and Wilmington Refineries.

(8) The market reference differential for sour crude oil is based on
50% Arab Medium and 50% Arab Light posted prices.

U.S. Gasoline Inventories Fall for Third Straight Week, Imports Below 1 Million Barrels

U.S. gasoline supplies fell last week for the third straight time as imports dropped below 1 million barrels per day and production dipped slightly, the Energy Department said Wednesday.

Stockpiles of the motor fuel fell by 5.7 million barrels, or nearly 3 percent, to 196.2 million barrels for the week ending Aug. 17, the Energy Department's Energy Information Administration said in its weekly report. Gasoline inventories were 6.5 percent below year-ago levels.

Imports of gasoline fell to an average of 927,000 barrels per day, down 286,000 barrels per day from a week earlier.

U.S. refineries lowered their production, running at 91.6 percent of their total production capacity on average, down 0.2 percentage points from the previous week. Crude oil inventories rose by 1.9 million barrels to 337.1 million barrels.

The report also showed that stocks of distillate fuel, which include diesel and heating oil, rose by 1.3 million barrels to 129 million barrels.

At the pump, gas prices rose less than a penny overnight to a national average of $2.78 a gallon for regular-grade gasoline, according to AAA and the Oil Price Information Service. Retail gas prices are down from a May 24 peak of $3.23 per gallon.

The price of light, sweet crude for October delivery fell 12 cents to $69.45 per barrel in Wednesday morning trading on the New York Mercantile Exchange

Mi comentario: Sube la demanda de gasolina, baja el porcentaje de capacidad de refino en uso y se reducen las importaciones... resultado: una caída récord de las reservas de gasolina!! Ya subirá el precio, ya...

Stricter U.S. refinery emission rules not needed: EPA

Health risks linked with toxic air pollution from crude oil refineries are "acceptably low" and don't justify tighter federal rules, the U.S. Environmental Protection Agency said on Thursday.

The EPA was required to review its policy on refinery pollutants by a settlement reached in 2006 with environmental groups like the Sierra Club, who had sued the agency in 2005 for missing a 2003 deadline for issuing its review.

In a policy statement, the EPA declined to update refinery emission rules it issued in 1995 because "the risks to human health and the environment are low enough that no further controls are warranted."

Environmental groups said the rules would put the 90 million Americans who live within 30 miles of an oil refinery at increased risk of cancer and other health hazards due to higher exposure to chemicals like naphthalene, toluene and hexane, which the EPA defines as "hazardous air pollutants."

The lifetime cancer risk from exposure to refinery emissions from the proposal - 70 per one million -- is 70 times higher than federal limits, according to the Natural Resources Defense Council.

"We will strongly oppose the Bush administration EPA's do-nothing approach to cancer-causing pollution from oil refineries and urge them to require clean-up measures that will protect the public," said John Walke, an attorney at the environmental group.

The Sierra Club said the EPA was ignoring improvements in emission-reduction equipment since the EPA issued its rules in 1995 to comply with the Clean Air Act.

"The scientific evidence shows that these standards are not protective of public health as required under the Clean Air Act," said Alice McKeown at the Sierra Club.

The EPA said the 1995 standards have reduced emissions from refineries nationwide by about 53,000 tons per year.

The rules were a subject of an August 2 meeting at the White House Office of Management and Budget, which included industry representatives from the American Petroleum Institute, American Chemistry Council and the National Petrochemical and Refiners Association.

"We appreciate the collaborative effort with the EPA to ensure that the risk information reviewed was accurate," said Bill Holbrook, a spokesman for the refinery group, which lobbies for big U.S. refiners like Valero Energy Corp.

EPA said it could still require reductions from storage vessels and wastewater treatment plants at refineries, which could reduce toxic air emissions at 153 facilities by up to 4,600 tons per year.

The agency action is the end result of a risk-analysis process the EPA must conduct on refinery emissions every eight years to comply with the Clean Air Act.

The EPA is still weighing separate but related rules proposed in April to expand pollution controls on the nation's aging oil refineries, forcing companies to install emission-reduction equipment if they build or expand.

The EPA has also issued rules governing the amount of cancer-causing benzene in gasoline.

Valero's Deep Discount

Shares of San Antonio, Texas-based Valero Energy have been battered over the past several weeks and days of trading, dropping more than 20% from their all-time high of $78.58 on July 10, and losing 10% since July 26.

Investors dumped Valero Energy on Wednesday as the stock tanked more than 5%, closing at $63.58 per share, or 6.6 times analysts' consensus forecast for 2007 earnings per share of $9.62.

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Ken Kam, founder and CEO of stock picking Web site Marketocracy.com and editor of the Marketocracy Marketscope newsletter, recommends buying shares of Valero Energy.

Valero is the largest North American refiner with the capacity to process approximately 3.1 million barrels of oil per day at its 17 refineries throughout the U.S., Canada and the Caribbean. It also operates about 5,800 retail and wholesale stores throughout the U.S. and Canada under names that include Valero, Diamond Shamrock, Shamrock, Ultramar and Beacon.

Kam is bullish on Valero both for fundamental reasons as well as the popularity of the stock among the most successful of the more than 60,000 portfolios he tracks on Marketocracy.com. Valero is the 11th biggest holding among the M100, Marketocracy's top 100 investors, and it is also one of nine stocks in Kam's "Best Ideas" portfolio.

"It has been more than a generation since anyone built a new refinery in the U.S.," says Kam. "Valero's ability to refine cheaper high sulfur or sour crude and its market-leading position among refiners suggests that this company should be trading at much higher multiples than the market currently assigns to it."

Indeed, Valero's P/E ratio of 6.6 times current year earnings is about one-third of the average P/E multiple for the S&P 500 Index. Furthermore, with analysts looking for 10.82% annualized growth over the next five years (compared with 114% annualized growth over the past five years) Valero has a slender price-to-earnings growth (PEG) ratio of 0.61. A PEG ratio of less than one suggests that investors are buying future growth at a discount.

On July 31, Valero reported earning $2.25 billion, or $3.89 a share, in the third quarter, beating expectations for $3.75 EPS. Earnings grew 30.5% from the second quarter of 2006, even though revenue dropped from $25.6 billion to $24.2 billion. Sales dropped primarily due to numerous refinery shutdowns for maintenance, which also constrained the supply of gasoline in the spring of this year.

Valero and other refiners make their money on the "crack spread"--or the difference between the cost of crude and the price of refined products. That spread had been especially wide in the second quarter, but that gap tightened considerably as oil hits new highs and refineries come back on line producing more gasoline.

One advantage that Valero enjoys over competitors is that it can process high-sulfur "sour" crude in its refineries. According to its quarterly report, during the second quarter, "Maya" heavy sour crude oil averaged $9.60 less per barrel than West Texas Intermediate, and the discount for "Mars" medium sour crude averaged $2.70 per barrel. The differential on Maya crude has since increased to nearly $10.40 per barrel.

Kam and his gurus are not alone in their ardor for Valero. On July 31, Standard and Poor's raised its 12-month target price to $78 from $58.

Valero posts record quarter profit; margins strong

Leading refiner Valero Energy Corp. (VLO) posted record quarterly earnings on Tuesday, topping Wall Street forecasts, on soaring refining margins fueled by high gasoline prices.

Those margins, which rose by 45 percent for Valero on the Gulf Coast, have benefited all refiners in the past several months as steady growth in demand, coupled with higher-than-normal refinery maintenance, led to higher gasoline prices and unprecedented profitability for the industry.

Valero's stock, however, weakened slightly.

"(Refinery margins) were at record highs of $35 per barrel on the Gulf Coast in the second quarter, now they're at $10, and that's why you're not seeing the market react to the earnings beat," said Roger Read, analyst at Natexis Bleichroeder in Houston.

The San Antonio-based company said second-quarter net income rose to $2.2 billion, or $3.89 per share, from $1.9 billion, or $2.98 a share, a year earlier.

That topped analysts' average forecast of $3.74 per share, according to data compiled by Reuters Estimates.

Revenue slipped to $24.2 billion from $25.6 billion.

The company said it will buy back an additional $2 billion in stock by year-end, completing a previously announced $6 billion share repurchase program.

Chief Executive and Chairman Bill Klesse said refinery margins were lifted by strong U.S. demand for gasoline and diesel, and higher-than-normal unplanned refinery downtime during the quarter.

"The environment for refining margins was terrific in the second quarter, and we continued to benefit from our complex, geographically diverse refining system," he said in a statement.

Valero, which climbed to the top position in U.S. refining by buying older plants and upgrading their production units, confirmed that it was in talks with Mexican state oil monopoly Pemex to build a new refinery in Panama.

However, Klesse said the company had not made a commitment to build a new plant and would not invest without assurances on future refining margins.

Valero Energy Posts Higher 2Q Profit

Valero Energy 2nd-Quarter Results Rise, Beat Street's Estimate on Improved Refining Margins

Strong demand for gasoline and diesel in the U.S. pushed Valero Energy Corp.'s second-quarter profit up more than 18 percent to an all-time high, as North America's largest refiner beat Wall Street expectations Tuesday.

Net income after paying preferred dividends grew to $2.25 billion, or $3.89 per share, up from $1.9 billion, or $2.98 per share, a year ago.

Revenue dipped to $24.20 billion from $25.59 billion in the prior-year period.

Analysts surveyed by Thomson Financial were looking for profit of $3.76 per share on average. Estimates typically exclude one-time items.

"Gasoline and diesel demand in the U.S. has been excellent, and growing worldwide demand has increased competition for refined products," said Bill Klesse, chairman and CEO. "On the supply side, the industry has suffered from higher than normal unplanned refinery downtime."

The company said production also has been affected by more complicated refinery operations, and by tightness in markets for skilled labor and equipment.

"These factors have contributed to the lowest inventory levels we've seen in years for gasoline and distillate on a days-of-supply basis," Klesse said.

Valero, which operates 17 refineries in the U.S., Canada and Aruba, also said it intends to buy back about $2 billion of its stock this year.

"Their earnings were very good. They exceeded expectations really due to the strong margin environment we had," said Ann Kohler, an energy analyst at Caris & Co.

Shares fell $2.06, or 3 percent, to $67.01 Tuesday.

"Margins today are significantly below where they were only two weeks ago," Fadel Gheit, senior energy analyst for Oppenheimer & Co., said in explaining the fall. "History is history, what happened yesterday doesn't matter today."

The San Antonio-based company also closed the sale of its Lima, Ohio, refinery after the second quarter ended and anticipates $1.8 billion in proceeds from the sale after taxes and expenses.

Valero said it is looking into a proposed refinery in Panama as an opportunity for growth in that market but emphasized that it is merely exploring the possibility.

The company said turnaround activity at its refineries will be light during the third quarter but will pick up during the final quarter, with maintenance at four of the company's refineries lasting from 30 to 45 days.

For the first six months of the year, Valero's net income was $3.39 billion, or $5.68 a share, versus $2.74 billion, or $4.29 a share, a year ago.

Gasoline Inventories Up

U.S. gasoline stockpiles rose by 800,000 barrels, or 0.4 percent, last week to 204.1 million barrels for the week ending July 20, the Energy Department's Energy Information Administration said in its weekly report. Inventories of the motor fuel were 3.6 percent below year-ago levels.

U.S. refineries ran at 92.5 percent of their total production capacity on average, up 0.9 percentage points from the previous week. Crude oil inventories dropped by 1.1 million barrels to 351 million barrels as refiners processed more oil to make gasoline.

The report also showed that stocks of distillate fuel, which include diesel and heating oil, rose by 1.5 million barrels to 123.7 million barrels.

The average national retail price of a gallon of regular gasoline fell about 1 overnight to $2.95 Wednesday , according to AAA and the Oil Price Information Service. Retail prices peaked at $3.23 a gallon in late May.

Mi comentario:
Ha vuelto a aumentar el % de capacidad de refino en uso hasta niveles ya muy altos (y difíciles de mejorar), resultando en un modesto incremento de las reservas de gasolina que no cubre ni la mitad de lo bajado el miércoles pasado.

Utilizado en:
Mente = Inversion, Psique = Especulacion

UBS Sees Challenges to Oil Refiners From Ethanol and Middle East, but Near-Term Looks Bright

Investment bank UBS AG started coverage of U.S. oil refiners, saying they face a favorable short-term outlook but could see their robust profit margins squeezed in the long run by competition from overseas refiners.

UBS analyst Mohan Mandrekar said in a note to clients Monday that margins at independent refiners, which make gasoline and other products from crude oil but do not have oil drilling operations, should remain healthy through 2009, amid growing gasoline demand and new environmental regulations that keep supplies down.

With tight environmental regulations on fuels, refiners will struggle to ramp up production, Mandrekar said. U.S. production has been at below-average levels all year due to refinery breakdowns and delayed maintenance.

Domestic refiners should also benefit, the report said, from delays in competition from overseas refiners in the Middle East and Asia, who are not expected to provide new capacity until around 2011.

Though corn-based ethanol production is rising and should top out at 10 percent of U.S. gasoline demand, Mandrekar said the push for ethanol consumption should not have a "meaningful impact" on gasoline demand because the country lacks a widespread distribution network for ethanol, and because ethanol contains about two-thirds as much energy per gallon than gasoline.

Mandrekar was most bullish about Valero Energy Corp., which he rated "Buy" with a 12-month price target of $95 per share, citing a $6 billion share buyback program and increased efficiencies. Mandrekar also expects Valero to sell at least one refinery.

The UBS analyst was bearish on Western Refining Inc., which got a "Reduce" rating and a price target of $55. Mandrekar said Western, the fourth-largest U.S. independent refinery, is "vulnerable to a decline in refining margins" and is overvalued by investors.

Mandrekar gave Frontier Oil Corp. a "Neutral" rating and set a price target of $51. Also receiving "Neutral" ratings were Holly Corp. ($80 price target), Sunoco Corp. ($80 price target) and Tesoro Corp. ($62 price target).

Gas and Oil Futures Rally on Surprise Inventory Report

Energy Department's Energy Information Administration said gasoline inventories dropped by 2.3 million barrels last week, countering analyst predictions of a 560,000-barrel increase.

"They weren't expecting that whatsoever," said Jack Hunter, an energy trader at FC Stone Group, in Kansas City.

In response, August gasoline rose 9.46 cents to settle at $2.1953 a gallon on the New York Mercantile Exchange. Light, sweet crude for August delivery gained $1.03 to settle at $75.05 a barrel on the Nymex, a front-month contract's first close over $75 since Aug. 9.

Prices also got a boost after the American Petroleum Institute said a record 388 million gallons of gasoline on average every day was consumed during the first half of the year, up 1.5 percent from last year, despite higher prices.

James Cordier, president of Liberty Trading Group in Tampa, Fla., called Wednesday's rally a "knee-jerk" reaction to the gasoline inventory number. He thinks the large investment funds that often sway commodities markets are looking much more closely at refinery utilization rates, which rose 0.8 percent to 91 percent. Analysts surveyed by Dow Jones Newswires, on average, had expected an 0.5 percent increase.

"That's the entire key to prices going forward," Cordier said.

Gas futures have fallen nearly 27 cents over the last five sessions, since last week's inventory report showed growth in both gas inventories and refinery utilization.

At the pump, meanwhile, retail gas prices fell another 0.9 cent overnight to a national average of $3.031 a gallon, according to AAA and the Oil Price Information Service. Retail prices, which typically lag the futures market, have fallen since the weekend after having been driven higher by Midwest refinery outages. Gas prices peaked at $3.227 a gallon in late May.

Brent crude futures for September rose $1.23 to settle at $76.76 on London's ICE Futures exchange.

Wednesday's report also showed crude oil inventories fell by 500,000 barrels in the week ended July 13, below analyst expectations for a 760,000-barrel decrease. Distillate stocks, which include heating oil and diesel fuel, fell by 200,000 barrels. Analysts had expected an increase of 780,000 barrels.

A big drop in imports and a decline in gasoline production were behind the shrinking gas inventories. Gasoline imports plummeted by 508,000 barrels a day to an average of 915,000 barrels a day last week. Gas production fell by 64,000 barrels to 9.2 million barrels a day.

Imports of crude oil grew by 350,000 barrels per day to an average of 10.4 million barrels a day.

Demand for gasoline, meanwhile, grew 1.3 percent over a year ago.

Gasoline futures also found support Wednesday when Valero Energy Corp. shut down a piece of gasoline production equipment after a malfunction, Hunter said. But Valero later said the equipment would be quickly returned to service, and that gasoline production will not be affected.

Crude oil has rallied in recent days despite the decline in gas futures. Analysts blame speculative buying, but concede that supply concerns are also a factor. An opposition group in Nigeria, Africa's largest oil producer and a key supplier to the U.S., is calling for the shutdown of an oil pipeline. And Japan may need to increase its use of oil to compensate for the loss of power from a nuclear plant shut down after Monday's earthquake.

Still, many analysts doubt the rally can continue. While gasoline futures were up Wednesday, they're still off sharply from a week ago.

"Everyone knows the funds are selling," said Hunter.

Utilizado en:
Mente = Inversion, Psique = Especulacion

Petroleras, la opción defensiva más barata

Ahora está lejos de los titulares. La rentabilidad media de la industria del gas y el petróleo es sólo del 4%, casi la mitad de lo que gana el Stoxx 600. Pero para Merrill Lynch, la apuesta por la industria petrolera está más que clara. 'Buscamos valores defensivos baratos, que cada vez son más difíciles de encontrar', explica Merrill Lynch. 'Si la historia sirve de guía, el sector petrolero está correlacionado negativamente con el apetito por el riesgo y lo hace bien cada vez que los inversores se ponen nerviosos', añade el banco. 'El petróleo es un lugar seguro donde esconderse en momentos de volatilidad', concluye el banco de inversión.

La cuestión es que hace tiempo que el mercado descuenta un escenario de desaceleración económica, pero la incertidumbre está en el grado del ajuste. Los inversores también están esperando un notable descenso en el ritmo de los beneficios empresariales, toda vez que el ratio de crecimiento de los resultados ha superado los dos dígitos durante varios años. En el momento que estos escenarios se materialicen, la volatilidad crecerá y los inversores buscarán refugio en algunos valores ajenos al ciclo económico.

Los sectores tradicionalmente defensivos son alimentación, servicios públicos (como eléctricas y empresas de gestión del agua), salud, bancos, seguros y consumo minorista. Merrill Lynch subraya que la industria del petróleo no sólo es poco cíclica, sino que además es una de los más baratas por valoración.

El PER (la relación entre el precio de las acciones y los beneficios esperados) del subíndice Stoxx de Petróleo y Gas arroja un promedio de 11,5 veces, por debajo de índices como el Stoxx 600 (15,95 veces), el Euro Stoxx 50 (13,8), el Cac de París (16,9), el Footsie de Londres (17), el Ibex (15,15) y el Dax (16,6).

El valor español más representativo del sector, Repsol, empezó el año con muchos problemas, pero en los dos últimos meses ha logrado una recuperación del 16,2%. Repsol está controlada por La Caixa, que entre participaciones directas e indirectas posee un 23% de la compañía, y por Sacyr, que tiene un 20%. Las especulaciones sobre lo que harán estas dos compañías con la petrolera es lo que está dando aire a la cotización, que ya está en positivo y gana en el año un 2,1%.

El empuje del barril

Un factor determinante en el caso del petróleo es la trayectoria del crudo, que ha cobrado un nuevo impulso. Tras un descenso en picado entre agosto y diciembre del año pasado. El crudo lleva una trayectoria ascendente ininterrumpida, que le ha hecho ganar más de un 38% desde los mínimos de enero.

En el caso del petróleo Brent, el crudo de referencia en Europa, no sólo ha vuelto ha superar los 70 dólares por primera vez desde agosto de 2006. Todas las perspectivas indican que la trayectoria alcista se agudizará. 'El mundo necesita más petróleo del que la OPEP tiene voluntad de suministrar, haciendo que cada vez sea más difícil evitar un nuevo resurgimiento del precio del petróleo este verano', confirma el Centro de Estudios Globales de la Energía.

La cotización de los futuros del petróleo, que sirve como indicio de lo que espera el mercado, está descontando precios superiores a los 70 dólares por barril hasta bien entrado el año 2008.

Claves de la industria

Barato. Merrill Lynch explica que el sector es el segundo más barato de Europa en cuestión de ratios de PER, dividendos y flujos libres de caja.

Defensivo. En los últimos 20 años el sector se ha comportado bien cuando el resto de la Bolsa iba mal.

Al alza. El crudo gana un 16% en el que es su sexto año consecutivo de subida.

De puente con la gasolina en máximos

Hoy es Memorial Day, un día de fiesta que oficiosamente marca el principio del verano. La previsión meteorológica es buena y muchos americanos harán lo mismo que en años anteriores: ir en coche a una playa, un parque temático o cualquier lugar donde disfrutar de un fin de semana de tres días. Otra previsión indica que este año el impacto de la escapada en el bolsillo va a ser muy memorable. ¿El culpable? La gasolina.

El precio no deja de subir. El jueves se llegó al récord histórico de 3,227 dólares el galón (3,78 litros). Desde marzo de 1981, los conductores de EE UU no habían pagado tanto por el combustible. Entonces, el galón costaba 1,42 dólares, que hoy, ajustados a la inflación, serían 3,29, según el Departamento de Energía.

De acuerdo con el Servicio de Información de Precios del Petróleo, el gasto diario en gasolina es de cerca de 1.250 millones actualmente, cuando en febrero era 800 millones.

De momento, la demanda de gasolina es un 2% mayor que en el mismo periodo del año pasado (¿alguien dijo que EE UU era adicto al petróleo?).

Lo que puede ocurrir es que estos precios sigan así durante meses, justo ahora que empieza la llamada 'temporada de conducción' y que dura todo el verano. La semana pasada las autoridades del Departamento de Energía dijeron que calculaban que junio no fuera muy distinto a mayo, porque el motivo por el que los precios se han disparado no va a cambiar rápidamente.

Y esta vez no es porque el petróleo esté irregularmente disparado o haya tensión en la oferta. La causa está en la propia gasolina.

EE UU importa, sobre todo en Europa, el 14% de la gasolina que consume, y estas compras están a la baja. Además, últimamente ha habido parones técnicos en las refinerías nacionales, por lo que los inventarios siguen bajando. La demanda es tan alta y la oferta tan ajustada, que los parones en una planta de Tejas y otra de Luisiana la semana pasada fueron suficientes para seguir alimentando el alza de precios en el surtidor.

Y no hay muchos planes de abrir nuevas refinerías. La política de potenciación del etanol (un biocombustible) por parte de la Casa Blanca ha disuadido a las empresas de refino a ampliar su capacidad, según The New York Times.

El problema es que todo esto impacta al consumidor americano, ese gran motor de la economía y las exportaciones europeas y asiáticas. Según las asociaciones de consumidores, el año pasado los hogares pagaron por combustible un 78% más que en 2001, cuando sus sueldos no han subido en semejante porcentaje. Y eso es un dinero que no se dedicará a otras compras. La subida del precio de la gasolina es inoportuna porque, justo ahora que los precios de las viviendas están pinchando, los consumidores se sienten más vulnerables.

Aunque los planes de este fin de semana hayan sido inamovibles, los comercios ya notan negativamente el precio de la gasolina en sus cuentas.

Gas Prices Hit a New Record at the Pump

Gasoline prices hit a new record at the pump on Monday, but gas futures prices fell on concerns that $3 gas will crimp demand. Oil prices, meanwhile, rose on reports of refinery problems in the U.S. and abroad.

The average national price of a gallon of gas hit $3.073 on Monday, up almost a penny from Sunday's also record-setting price, according to AAA and the Oil Price Information Service. Gasoline is now well above the previous record of $3.057, set on Sept. 5, 2005, soon after Hurricane Katrina.

"There was good news out of Nigeria after a lot of bad news," Flynn said. "They're pumping oil again."

But that good news was tempered by new reports of refinery outages, including a fire at a large Preem facility in Sweden, and a quickly resolved problem at a Valero Energy Corp. refinery in Texas last week.

"Any refinery problems anywhere on the globe now adds to concerns" that gasoline supplies won't be adequate to meet peak summer driving demand, Flynn said.

The summer driving season begins in two weeks, on Memorial Day weekend.

Soaring Gas Prices Already Near Highs, And It's Not The Top

Every spring, Americans enjoy baseball, hot dogs -- and soaring gasoline prices.

The average price of all grades of gasoline leapt above $3 a gallon last week, the Energy Department said, already near the record highs of the past two summers. Regular unleaded soared to $2.971. California regular is now more than $3.42.

With driving season fast approaching, energy experts are warning that gas prices have yet to find their peak. When they do, they will stubbornly hold that painful level throughout the summer. Supply will remain tight just as millions hit the road.

That assumes no big hurricanes or other major supply disruptions.

We seem to go through this exercise twice a year. In the months before peak winter heating-oil demand, stockpiles are always "too low," and only high prices will "get us through the winter." Sure enough, prices rise, consumers are careful about home and business heating, and imports surge.

Then the same happens ahead of Memorial Day, the traditional kickoff to the driving season.

This time, though, we may actually be in a bit of a jam.

Running On Empty

U.S. gasoline stockpiles, at 193.1 million barrels, have never been this low at this time of year. Stocks have plunged from an excess of the five-year average to 13 million barrels below it. They've fallen 34.1 million barrels in the past 12 weeks, according to DOE data.

There's no sign yet that prices have climbed high enough to cut usage. There is just a tad under 21 days of supply in U.S. inventory, said Eric Wittenauer, an energy futures analyst at A.G. Edwards. There should be at least 23.

That's odd. Refineries should have been building motor fuel supplies in that time period. But the industry hit a streak of very bad luck. A series of outages shut several key sites across the country.

"This is the worst spate of refinery problems I've ever seen," said John P. Kilduff, an energy analyst at Man Financial and veteran of the business. "Fires, operational issues, environmental issues, lightning strikes."

An Exxon Mobil (NYSE:XOM) refinery in Torrance, Calif., suffered a power outage in March after a possum got into a Southern California Edison substation, causing a "flash-over" and voltage fluctuation.

Gasoline Outpaces Crude

No wonder gasoline prices have been outpacing crude. Gasoline futures did fall 1.21 cents on Wednesday to $2.2326 a gallon as crude supplies continued to rise.

But since Jan. 21, gasoline has shot up 59% while crude has risen just 22%.

Or look at the crack spread, the refiner's profit margin from "cracking" a barrel of crude into gasoline. The crack is now above $30 a barrel. Kilduff is stunned. "It used to be under $10," he said.

That's been great news for refiners' bottom line. Valero (NYSE:VLO), Exxon and others posted strong profits on refining margins despite overall revenue declines.

Normally, many refineries shut for planned maintenance in late winter or early spring. These are huge mechanical operations with many heavily stressed moving parts. As with a New York City cab, you put off maintenance and minor repairs at your own risk.

But that's just what the industry did. With refining output in chronic shortage, these huge plants were under the gun to meet the never-ending fuel demand from U.S. consumers. That's how accidents happen.

"Since (hurricanes) Katrina and Rita, a lot of refiners had put off maintenance work, which always requires a shutdown," said Tom Bentz, senior energy analyst for BNP Paribas Commodity Futures in New York.

Any facility that wasn't ravaged by those killer storms was under huge pressure to keep up a dangerous pace. "Some of them still had to do maintenance after Katrina, but they were much briefer, less comprehensive than usual," Bentz said.

All these problems have pushed refineries' capacity use rate to just over 88%. "Normally, it would be at 93% to 95%," Kilduff said.

So if U.S. refiners can't do the job, why don't we do what we always do -- import? When the U.S. consumer reaches out for excess supply in a distant land, we always get it.

Not this time.

"Europe's economy is booming," Bentz said. "Normally they would send their excess to the U.S., about 10% of their output." But that new local demand will mean no excess for export.

What's more, Europe has had its own problems. A strike at the French port of Marseilles prevented European product from shipping out. The snarl backed up the pipeline until European refineries had to cut their output.

It seems like the fates have conspired to deliver an energy crunch. Even if Europe or Asia did have some fuel to spare, new environmental regs are working against smooth distribution. It's harder than ever to import refined product.

"(Refineries) are strained all the time, even more so now with mandates for ultra-low sulfur diesel and lower-sulfur-content gasoline," Kilduff said.

This makes importing tricky even in the best of times. "You have to be careful about mixing blends that don't meet these new standards. So there's less flexibility to cope with what should be minor upsets," Kilduff said.

Said Bentz: "You have to have just the right stuff at the right place at the right time."

So demand here and abroad is at record levels. The U.S. refinery picture is chaotic, and imports won't fill the gap. Is the situation hopeless?

Not quite.

"I do think they (U.S. refineries) will come around, and gasoline production will pick up ahead of the driving season," A.G. Edwards' Wittenauer said. "As far as relief at the pump, we're still gonna have tight supplies despite (higher) production."

Kilduff agreed on this crucial point. "We should see them clearing themselves," he said. "If we get capacity utilization back over 90%, then maybe we're in the process of getting past the worst of it."

Wittenauer is more upbeat about the import picture. He thinks the industry will figure out the new hurdles and find some fuel.

It already has started to happen, he said. "Imports were at 850,000 barrels a day in mid-March. Now they're over 1 million."

Implications of Valero's Refinery Sale on Capacity Valuation

Valero (NYSE: VLO) sold off one of their refineries yesterday to a Canadian buyer for $1.9+ billion, with the amount Valero receives being dedicated to buying back stock. Now, some background:

Valero originally purchased the refinery as part of the Premcor deal in 2005 - doing a bit of math, they paid an average of $10,120 for each barrel per day of refining capacity. The deal made yesterday was for $11,515 bpd in capacity, a 13.7% increase. I see that as a bit misleading though, because the Lima refinery sold yesterday can't process the same amount of heavy, sour crude grades as the other refineries, so in a way that 13% increase in $/bpd capacity understates the true value appreciation that refining capacity (especially the kind that can handle inferior grades) has seen.

This sale leads me to draw a few inferences: refining capacity is going to stay tight and petroleum byproducts are going to get a premium. While I’m undecided on peak oil, I’ve long agreed with the Saudi’s argument that high gas prices are due to a lack of refining capacity, not a lack of oil production. The trouble with oil production is that much of the new finds are the hard-to-process grades; this should keep the differential between light, sweet crude and heavy, sour crude wide enough to allow Valero to keep generating huge amounts of cash… cash that is being used for buybacks. Following the quarterly earnings announcement, Valero upped its buyback program by $4 billion to a total of $6 billion; one week later the company dedicates an additional $2 billion to that buyback. What does that imply? Valero executives think VLO is still cheap, even after the recent run. At the rate the company is buying back shares, it will only add to the upward pressure in VLO.

Further, the new buyer (Husky) is purchasing the facility to handle the fabled Canadian tar sands; and significant amounts of money will need to be spent to upgrade the facility to be able to handle those. It will be interesting to see the outlays Husky needs to make to add substantial heavy, sour crude process capacity - and that will also allow us to see what the market rate for a heavy, sour crude refinery is.

Here, I am specifically thinking about Frontier Oil (NYSE: FTO) and Tesoro (NYSE: TSO), both of which have heavy, sour crude refining abilities. Frontier is the pure-play here on non-ideal grades, and it shows from the premium valuation: FTO has an enterprise value/barrel per day refinery capacity (EV/BPD) of $22,160. Tesoro’s refining facilities are more mixed in terms of grades, and that company trades at a EV/BPD of $14,730. That amount ignores the non-refining assets the company has, namely the retail side of the business. As for Valero? After stripping out the sale of the Lima refinery and adding back the cash to be received, Valero trades for $14,245 EV/BPD - and like Tesoro, Valero also has retail sales channel.

Between the huge buybacks, seemingly low price-to refining capacity, and current record highs in the crack spread, I think VLO sees $80.

Oil Refiners' Production Lows, Profit Highs

Fires. Explosions. Lightning strikes. This is the new state of affairs for U.S. oil refiners, hobbled in recent months by an unprecedented plague of bad luck and operational setbacks from California to Delaware (see BusinessWeek.com, 4/26/07, "$4 Gas? Fat Chance"). Facilities of all sizes and age have been struck, leading to supply bottlenecks in various regions.

On May 2 the Energy Dept. reported that refineries are operating at only 88.3% of capacity, barely above the 20-year low notched last week. Not surprisingly, gasoline inventories dropped for the 12th week in a row—the first such three-month stretch since 1993. All that has set gasoline prices on a dramatic bull run, with refiners' stocks setting all-time highs and U.S. consumers facing average pump prices of $2.98.

Strained System

What's gone so wrong in refining?

"They're cursed," says Phil Flynn, an analyst with Alaron Trading in Chicago. "You can argue that the refineries are old and they're squeezing more blood from the turnip than ever, but that explanation doesn't cut it. Maybe Al Gore has cast a spell on the industry."

Conspiracy theories aside, a number of factors are preventing more supply from flowing into the U.S. market. The overall picture is a system under such strain that any outages or disruptions ricochet quickly into retail prices. Because of high costs and a lack of public support, refiners haven't built an entirely new plant since 1976. While they've been expanding existing plants, the industry isn't keeping pace with growing demand. Any additional stresses—hurricanes such as Katrina or the persistent power outages—curb output. Add to that a shortage of skilled workers and government rules mandating cleaner fuels, and the reasons behind scarce supplies emerge.

High Margins

But while production hiccups may be an operational curse, refinery shareholders are now pondering a different question: What's gone so right with refining?

The price difference between a barrel of crude and a barrel of refined gasoline are now the fattest the industry has ever seen. With May 2 closing prices on the New York Mercantile Exchange, refiners could fetch $93.37 per barrel of gasoline, amounting to a refining margin of $30 per barrel, according to calculations by both Chicago-based consulting firm Oil Analytics and Peter Beutel of Cameron Hanover Associates. That's 50% higher than last year, when margins at the time hit historic highs of $20 a barrel, according to Oil Analytics. "Refiners are making a bundle now," says Beutel.

The steep margins led to Valero's Apr. 26 announcement that first-quarter profits were $1.1 billion, up a stunning 30% over last year; Chevron (CVX) reported first-quarter earnings of $4.7 billion, up 18% from last year. ExxonMobil (XOM) saw a 10% jump in quarterly net income, at $9.3 billion—the company's best-ever first quarter. For integrated oil companies, the results are from one factor: high refining margins. The segment of Exxon's business that includes refining, for example, earned $1.9 billion for the quarter, up $641 million from the year before.

The profits led to all-time closing highs last week for the shares of the two biggest U.S. refiners, San Antonio-based Valero and its cross-town rival, Tesoro (TSO). The stocks of integrated players Marathon Oil (MRO), ExxonMobil, and Chevron also set 52-week highs last week on their robust profits.

Deliberate Shortage?

"It's true we're enjoying pretty good margins right now and pretty good profits," says Bill Day, a spokesman for Valero Energy (VLO). "But that's in spite of, not because of, the refinery outages. In this environment, with the supply-and-demand balance so tight, this is really when you want your refineries running full blast. That's why we get heartburn every time we hear of an outage. You really want everything running full capacity."

The reports of rich profits alongside higher pump prices have some groups crying foul. "Oil companies that have refused to increase refinery capacity enough to meet population took refineries out of service for longer [and]…refused to import gasoline to make up the difference," says Judy Dugan, research director of the Foundation for Taxpayer & Consumer Rights in Santa Monica, Calif. "Then they have the gall to behave as though gasoline prices are an act of fate, not the shortage that they created."

But industry representatives and analysts dispute the notion that the problems are manufactured. "Saying it's a deliberate shortage is ridiculous," says Charlie Drevna, executive vice-president of the National Petrochemicals & Refiners Assn. "Especially considering the margins right now, the last thing a refiner wants is to have a planned outage. You may want the other guy to have one, but you sure as heck don't want one." Says Lynn Westfall, Tesoro's chief economist: "It's the working of Economics 101. Any time supply goes down, margins go up."

Environmental Issues

Refiners say they aren't building new facilities because of the soaring costs of steel and concrete and because of "not in my backyard" opposition from communities. Another issue hindering both new construction and output at existing facilities is a shrinking pool of skilled refinery workers, analysts say.

From geologists to engineers to skilled offshore workers, the oil industry is having trouble sourcing labor, and the problem is now becoming acute in the refining business. With excess capacity and falling oil prices in the 1980s and 1990s, refineries cut staff as a wave of consolidation swept the industry. The oil business was considered a volatile, if not dying, industry and has not been a popular career choice for college students.

"The oil industry doesn't have the glamour or allure of industries like tech; it's considered a smokestack industry," says Craig Pirrong, professor of energy at the University of Houston. "Then there's the uncertainty of the future of carbon-emitting energies. That puts oil companies and refiners at a disadvantage in recruiting."

Good-Bye to $3

New regulations and quotas to produce new gasoline blends also stress refining. It's also likely that many refiners have not yet achieved full efficiencies as they integrate new processes, say analysts. Under new rules that took effect in November, 2006, refiners are required to produce low-sulfur gasoline for the retail market nationwide; California law mandates another formulation of cleaner-burning fuel. Differing regional requirements also make it harder to substitute gasoline from one geographic area to another in the case of an outage.

With high costs and fierce civic and environmental opposition, oil companies and refineries like Valero and Marathon are opting to expand existing plants instead of building new ones. But quenching the ever-growing thirst of U.S. consumers will mean more gasoline imports from Western Europe, the Caribbean, and South Korea. The U.S. currently imports about 13% of its gasoline.

If the troubles persist, gasoline prices are likely to creep well beyond $3 nationally. And that will turn the issue toward demand—how much will consumers agree to pay to drive this summer?

Get Sweet on These Sour-Crude Plays

In my most recent column, I discussed the crude barrel, the various grades and viscosities that are traded worldwide and, most significantly, the increasing influence of sour crude in the global oil market.

Interestingly, the rising importance of sour crude has been largely ignored. Because of this, we may be able to position ourselves in front of this trend and hopefully garner some profits from our foresight. So, as promised, here are a few ideas to share with you. If they get your motor running, write back with a few of your own.

Not only is the sour crude barrel gaining speed, the sweet crude barrel continues to get scarcer and consequently more expensive. To take advantage of this, we need to find companies that are ahead of the curve on this trend. In the U.S., one company alone stands out: Valero (VLO)

This company has consistently upgraded its facilities to be more flexible in accepting sour grades for its refineries. In the past three years, it has acquired sour crude crackers in Aruba and Louisiana. It acquired Premcor Industries in 2005, which was the leading sour crude refiner at the time.

Valero still has a value-player's low, single-digit multiple, and analysts measure it in a totally inappropriate, typical growth value way, which has far less meaning, considering the specific business model of refiners. Therefore, I view their applied valuations and targets for the stock as just plain wrong.

Right now, more than 60% of the crude that Valero uses is of the sour type. As the basis between sour and sweet widens, Valero's margins and profits will continue to improve and impress. I highlighted this stock in my March 12 column, and it has risen more than 20% since then. Even at the current level, though, this stock is still an attractive long-term play. However, you should consider building any position slowly.

Chart of the Day

Gasoline prices continue to surge as geopolitical tensions continue and suppliers struggle to keep up with demand. Over the last three months, the average US price for a gallon of unleaded has shot up over 80 cents per gallon and is once again near the psychological $3.00 per gallon level. It is also worth noting that, when adjusted for inflation, gasoline prices are not far off the inflation-adjusted peak of $3.29 that occurred back in 1981.

Notes:
- Which way are energy prices headed and what does it mean for interest rates and the stock market? Find out with the exclusive charts of Chart of the Day Plus.

Valero earnings beat Wall Street, ups buybacks

Leading U.S. refiner Valero Energy Corp. (VLO) posted higher-than-expected quarterly earnings on Thursday and raised its share buyback program this year to $6 billion from $2 billion.

Stronger refining margins lifted the San Antonio-based company's net income to $1.1 billion, or $1.86 per share, from $849 million or $1.32 a share, a year earlier.

On average, analysts had expected first-quarter earnings to be $1.80 per share, according to data compiled by Reuters Estimates.

Valero Chairman and Chief Executive Bill Klesse said at the company's annual meeting the first quarter results were the best in the company's history and come on top on a record year in 2006 for the San Antonio-based refiner.

"This year's shaping up so that it could be better than 2006," Klesse said.

As part of the expanded share repurchase program, Valero entered an accelerated share repurchase program with JP Morgan that includes an upfront payment $3 billion, Valero said.

Revenues in the quarter slipped to $19.7 billion from $20.9 billion a year ago.

Valero also said final bids to buy its Lima, Ohio, refinery were received late last week, and the company expects to announce a definitive agreement in the next few weeks.

Klesse declined to discuss the bids in detail beyond saying there were several bidders on the refinery and Valero could make an announcement within two weeks on the sale.

Klesse told reporters following the meeting that Valero will look at other refineries for possible sale after concluding the Lima agreement.

Valero has added a vice president to oversee process safety at the company's 18 North American refineries as a result of findings in the investigations of a deadly 2005 explosion at BP Plc.'s Texas City, Texas, refinery.

The company's 170,000 barrel per day (bpd) McKee refinery is Sunray, Texas, is expected to reach 150,000 bpd in output by the end of the second quarter after being shut for two months by a Feb. 16 fire.


Mi comentario: Problemas diversos en muchas refinerías (tanto de Valero como de otros) han reducido la oferta y han conseguido que los margenes de refino se situen en máximos. La empresa gana mucho, incluso a pesar de la caída de ingresos... o mejor dicho, precisamente gracias a dicha caída: venden menos, pero con un margen mucho mayor.

El comentario del presidente es muy positivo: creen que 2007 podría ser mejor que 2006!! Hay que recordar que no es eso lo que el mercado descuenta, pues en el 2006 se ganaron $8.64 por acción, y para este año la media de estimaciones está en $7.88, así que si acierta, la cotización todavía tendría bastante recorrido al alza.

s2

Valero Tops New 'Fortune' List of Nation's Best Big Employers

Fortune magazine - publisher of the annual "Fortune 500" and "100 Best Companies to Work For" lists - has ranked Valero No. 1 on its new "Best Big Companies to Work For" list. Posted on the magazine's Web site, the composite showcases the 37 companies that placed on both the Fortune 1000 and the 100 Best Companies lists. This year, Valero ranked No. 16 on Fortune's main list and ranked No. 22 among the 100 Best Companies to Work For. Valero is the only refining company to make the new list.

The Web site references Valero's participation in the OSHA-sponsored Voluntary Protection Program (VPP), which is a voluntary list of standards that promote workplace safety and health. Valero is the only refiner to commit all of its refineries to achieve certification through the Occupational Safety and Health Administration's VPP program. To date, 11 Valero refineries have achieved Star Site certification in VPP. Currently, only 23 out of 149 refineries in the U.S. have earned this prestigious designation, and Valero owns nearly half of those VPP sites.

ConocoPhillips sees costs delaying UAE refinery

Debido al fuerte incremento de los costes de construir nuevas refinerías, se están planteando aplazar o suspender la construcción de una ya planeada en los Emiratos Arabes Unidos; un fenómeno que está ocurriendo también por mas sitios.

High costs are likely to delay construction of a refinery planned for the United Arab Emirates and could lead ConocoPhillips to end its participation in the project, Chief Executive James Mulva said on Monday.

"The Fujairah refinery is very challenging on the cost side," Mulva told reporters at the Howard Weil Energy Conference.

"I think that is one that is certainly deferred into the future, and there is a question whether it will go forward, and if we will participate," he said.
Abu Dhabi's investment arm, IPIC, and ConocoPhillips last July announced plans to develop a 500,000 barrel-per-day refinery in Fujairah.

High project development costs previously forced ConocoPhillips to delay a planned upgrade of its Wilhelmshaven, Germany, refinery by at least a year.

Exxon Mobil in February dropped plans for a Qatari gas-to-liquids project, citing rising costs.