A Refiner on Fire

With so many analyst eyeballs on Valero (NYSE: VLO), it's remarkable that the refiner's results can still pack a surprise. But surprise they did, and the entire refining group caught fire. Just like Valero's Aruba refinery last week.

This is the magic of diminished expectations at work. Everyone anticipated that high crude costs would cramp Valero, Frontier Oil (NYSE: FTO), and Western Refining (NYSE: WNR) in the fourth quarter. Less obvious was the cushioning impact of deep discounts on lower-grade Maya and Mars crude stocks. Maya hails from south of the border, while Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) produces Mars in the Gulf of Mexico.

Thus, while Valero's throughput for the quarter was nothing to sing about, its throughput margin was resilient, falling only 7% sequentially in a very tough pricing environment. Most expenses were in line with guidance, though general and administrative charges came in a bit high, because of stock compensation and charitable giving. (Or just charitable giving, depending on your view of stock options.)

Cash operating expenses -- i.e. per-barrel operating costs before depreciation and amortization -- have been creeping up as well, but this is an issue for Tesoro (NYSE: TSO), Alon USA (NYSE: ALJ), or pretty much anyone else in this industry. Refinery turnarounds are a permanent part of this business, and management noted that work quality and productivity issues persist at these contractor-reliant upgrade and maintenance activities. The need to frequently clean and replace equipment is intensified by Valero's reliance on heavier crude that gunks up the works. (I'm pretty sure that's a technical term.)

Looking ahead, the Valero team expects "an excellent spring/summer gasoline season" and strong margins for diesel fuel. The latter stems partly from export demand, since ultra-low sulfur diesel is all the rage in other parts of the world. Despite domestic economic uncertainty, it's a given that the company will keep rationalizing its asset portfolio, all the while generating and returning copious cash to shareholders in the form of buybacks and dividends. Even if something catches fire along the way.