Valero Beats Zacks Estimates - Analyst Blog

Valero Energy Corporation (VLO) posted fourth quarter earnings from continuing operations of 40 cents per share (excluding non-recurring items), well above the Zacks Consensus Estimate of 35 cents. It also reversed last year's loss from continuing operations of 23 cents.

Results were mainly attributable to an improved refining margins environment and better feedstock discounts. Full year 2010 earnings were $1.62 per share, compared with a loss from continuing operations of 50 cents per share last year.

Total revenue in the quarter increased more than 23% year over year to $22.2 billion, inching past the Zacks Consensus Estimate of $21.2 billion.

Throughput Volumes

During the quarter, throughput volumes were 2.19 million barrels per day, up approximately 10.0% year over year. By feedstock composition, sweet crude, medium/light sour crude and heavy sour crude accounted for 32%, 16% and 22%, respectively, of the total. The remaining volumes came from acidic sweet crude, residuals, blend-stocks and other feedstock.

The Gulf Coast accounted for approximately 60% of the total volume. The Mid-Continent, Northeast and West Coast regions accounted for 19%, 10% and 11%, respectively.

Throughput Margins

Companywide, throughput margins jumped more than 48% year over year in the reported quarter to $7.30 per barrel, owing to higher margins for diesel and gasoline, associated with better discounts for heavy-sour feedstock. Margins increased significantly across all regions except in the Northeast.

Average throughput margin realized was $7.78 per barrel in the Gulf Coast (up from $4.83 per barrel in the year-earlier period), $6.62 per barrel in the Mid-Continent (up from $4.69), 6.65 per barrel in the Northeast (down from $6.91)and $6.42 per barrel in the West Coast (up from $3.90).

Total operating cost per barrel was $5.19 during the quarter, down about 5% from the year-earlier quarter. Refining operating expenses per barrel decreased more than 6% year over year to $3.64. The unit depreciation and amortization expenses decreased about 3% to $1.55 per barrel from the year-ago quarter.

Capital Expenditure & Balance Sheet

Fourth-quarter capital spending totaled $629 million, of which $125 million was for turnarounds and catalyst expenditures. Full-year 2010 capex was $2.3 billion. For the year 2011, Valero expects capital expenditure to increase to around $2.9 billion, as it will try to speed up economic growth projects mainly in the first half of 2011.

At the end of the quarter, the company had cash and cash equivalents of approximately $3.3 billion.

Outlook

The company remains enthusiastic for 2011 based on better refining margins on products and wider discounts. Valero is consistently reviewing its refining portfolio, and upgrading the asset base by selling refinery assets that do not fit the business mix. We appreciate the company's cost-saving initiatives that are running ahead of schedule.

Although we remain optimistic on the company's business for the coming quarters on the back of improving U.S. and global economies, we expect refining margins to remain constrained due to an abundance of spare refining capacity in the U.S., Western Europe and Japan. Being the largest independent refiner in the country, Valero remains particularly exposed to this unfavorable macro backdrop.

Additionally, the company faces major competition from its peers such as BP Plc (BP), Chevron Corp. (CVX) and ExxonMobil Corp. (XOM).

We maintain our long-term Neutral recommendation for the company. Valero holds a Zacks #3 Rank, which is equivalent to a short-term ‘Hold' rating.

 
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