What's Next for Valero?

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Valero Energy's (NYSE: VLO  ) first-quarter loss doesn't come as a big surprise. The refining industry in the U.S. is still being shaken up as input costs soar while gasoline sales decline. Is there any hope of a turnaround? Right now, it's hard to say.

Disappointing as expected
The first quarter saw the company posting a net loss of $432 million, compared with a $98 million profit a year ago. While total revenue was up almost 34% to $35.1 billion, total costs and expenses grew 36% to $35.4 billion. The most notable item added to the expenditure list was the $611 million asset impairment, thanks to the suspension of operations at the Aruba refinery. The Caribbean refinery, which has a throughput (or refining) capacity of 235,000 barrels per day, hasn't been profitable even after operations were restarted in January.

Valero's quarterly filing says an interested party -- now revealed to be China's state-owned integrated oil and gas giant PetroChina (NYSE: PTR  ) , according to Reuters reports -- has been in talks with the refiner to acquire the Aruba refinery for $350 million. With the refinery's assets valued of $945 million, this meant an impairment loss of $595 million.

It seems the Aruba write-off is reflective of the overall state of refining operations for Valero. Excluding notional derivative losses, the refining segment's operating income plunged a whopping 40% to $492 million. Throughput margins per barrel fell 22% from last year.

Uncertain future
In addition, the Pembroke and Meraux refinery acquisitions are yet to turn profitable. These refineries added an increased operating expense of $93 million, but I believe they'll turn profitable over time. The U.K.-based Pembroke refinery did turn a profit in April, and management seems to be pretty bullish about it. However, given the looming economic crisis in Europe, I wouldn't want to be too bullish about its chances over the next few months.

Getting back to the U.S., it's possible that Valero's Gulf Coast refiners might see higher margins as the chances of obtaining crude oil at lower costs seem to be brightening. Enbridge's (NYSE: ENB  ) announcement to reverse the Seaway pipeline by May, along with Magellan Midstream Partners' decision to reverse the Longhorn pipeline, should be met with ready availability of light and medium crudes in the Gulf Coast.

Foolish bottom line
Still, it's too early to say when Valero as a whole will turn profitable consistently. Management seems pretty dedicated, so the refiner could definitely see brighter days sooner than later. Meanwhile, you can stay up to speed on the top news and analysis on Valero Energy by adding it to your free Watchlist.

As oil prices lower, Valero and other oil refiners will see increased margins. However, if you're bullish on crude oil prices or you want to hedge your energy investments, look no further: We have a solution for you. The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free.

Fool contributor Isac Simon owns no shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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10/21/2016 4:03 PM
VLO $55.76 Up +0.99 +1.81%
Valero Energy CAPS Rating: ****
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PetroChina CAPS Rating: ***