If you're lying to your friends and stealing from your kids, you might just be addicted to crack. If you're cutting back production and reducing capital spending, well then you could have a crack spread problem.
Valero Energy (NYSE: VLO ) released fourth-quarter and year-end results this week and turned what could have been a solid quarter into a nightmare by taking a $4.1 billion goodwill impairment charge relating in part to assets acquired in Valero's 2006 acquisition of Premcor.
Excluding that 800-pound gorilla, Valero battled through weakening demand and tight gasoline crack spreads to actually beat earnings estimates by more than 50%. The adjusted net income of $732 million beat the prior year's result by 29%. With respect to operations, the company is to be commended for remaining profitable during such a tumultuous period.
Unfortunately, demand continues to deteriorate rapidly, prompting a spate of refinery closures by Valero and competitors Conoco Phillips (NYSE: COP ) and Tesoro (NYSE: TSO ) . All three companies are using this lull to perform maintenance operations, but the real impetus for the stoppages is to adapt to demand erosion and nudge crack spreads away from negative territory. Valero will halt gasoline production at its Corpus Christi East Plant, shut down the Texas City refinery for much of the first quarter, and may cut further if weakness persists. Already operating at 70%-75% of capacity, it's clear that number is headed lower still, and competitors are following suit.
Valero's cash position deteriorated notably during 2008 to less than $1 billion, but I still find Western Refining (NYSE: WNR ) 's debt burden more troubling on a comparative basis.
I continue to view Valero as one of the very best players in the refining space, but the operating environment has grown so severe that I caution Fools from entering the sector just now. While I feel a tinge of buyer's remorse over my purchase of Valero shares many moons ago, at least I may be in good company as Warren Buffett waits for Berkshire Hathaway's (NYSE: BRK-B ) Conoco Phillips stake to turn green. Over the long haul, Valero's strength lies in the quality of its core refining assets and its capacity to refine cheaper feedstocks of sour crude the way smaller competitors Holly (NYSE: HOC ) and Calumet Specialty Products (Nasdaq: CLMT ) are able to do. Valero remains a fine company, but refiners are presently better reserved for the most patient of Fools.