Valero's Margins Get Squeezed

Valero Energy Corp. (NYSE: VLO) reported third-quarter 2012 earnings this morning. The oil refiner and marketer posted adjusted diluted earnings per share (EPS) of $1.90 on revenues of $34.73 billion. In the same period a year ago, the company reported EPS of $2.11 on revenues of $33.71 billion. First-quarter results compare to the Thomson Reuters consensus estimates for EPS of $1.76 and $33.94 billion in revenues.

On a GAAP basis, the company posted EPS of $1.21. Valero took a noncash impairment charge of $341 million and severance expense of $41 million after taxes related to the company's switch-over of its Aruba refinery to a crude oil and refined products terminal.

The company's CEO said:

Looking at the fourth quarter, gasoline margins have narrowed significantly, but distillate margins and sour crude discounts remain wide. U.S. demand for refined products continues to be weak, reflecting high unemployment and high prices, but exports remain strong. As we approach winter, U.S. inventories of refined products look favorable.

For the full 2012 fiscal year, Valero has lowered its capital spending estimate from $3.6 billion to $3.5 billion and expects 2013 capex to total $2.5 billion. The consensus estimate for full-year EPS is $4.47 billion on revenues of $136.2 billion.

As with other ethanol producers, Valero lost money in its ethanol operations. The company reported an operating loss of $73 million in the third quarter, compared with a profit of $107 million in the same period a year ago. The company reduced its ethanol production due to the poor margins on the corn-based fuel.

Valero is pressing ahead with plans to spin off its retail operations. The company said that it has asked the Internal Revenue Service for a private-letter ruling on a tax-efficient distribution of its retail operations to current shareholders. The company expects to file a registration statement later this quarter with the SEC to kick off the separation, and it expects to have completed the spin-off no later than early in the second quarter of 2013.

The company suffered from margin pressure in the third quarter as margins in the Gulf Coast region narrowed and could not be offset by margin gains in the company's North Atlantic region.

The company's shares closed at $29.03 last Friday, in a 52-week range of $19.12 to $334.36. Equity markets are closed in the U.S. again today becausee of Hurricane Sandy. The consensus target price for the shares was around $39.10 before today's report.

Paul Ausick

Filed under: 24/7 Wall St. Wire, Commodities, Earnings, Oil & Gas Tagged: VLO