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Valero Energy (NYSE: VLO ) , the nation's largest independent oil refiner, reported strong financial results that handily beat analyst expectations. The company's fourth-quarter earnings jumped 28%, fueled largely by the spinoff of its CST Brands unit, continued strength in refining, and exceptionally strong performance from its ethanol segment.
Highlights from the quarter
Valero reported a 28% rise in fourth-quarter net income, to $1.3 billion, or $2.38 per share. That was up from $1 billion, or $1.82 per share, a year earlier. Meanwhile, revenue came in at $34.43 billion, down 1% from $34.7 billion.
The company's refining segment continued to benefit from favorable crude oil discounts at most locations. However, the segment's operating income declined 12% from the year-earlier quarter, due mainly to an increase in operating expenses resulting from higher energy costs and a decrease in throughput margins due to lower gasoline and diesel margins.
Valero's ethanol segment, though, delivered some truly exceptional improvement thanks to record-high production volumes and a sharp improvement in gross margins per gallon as a result of lower corn prices and low ethanol inventories. The segment generated operating income of $269 million in the fourth quarter, up from just $12 million in the year-earlier period, and swung from an operating loss of $47 million for full-year 2012 to an operating profit of $491 million in full-year 2013.
Refined product exports were another bright spot for the company, with its gasoline exports surging 33% year over year to 133,000 barrels per day. In recent years, U.S. refiners with refining capacity along the Gulf Coast have significantly increased their exports of gasoline and diesel to Europe and Latin America, where demand for fuel is much higher due to limited local refining capacity.
For instance, Phillips 66 (NYSE: PSX ) boosted its refined product exports by 32% to 197,000 barrels per day during the fourth quarter, while Marathon Petroleum (NYSE: MPC ) more than doubled its exports to 298,000 barrels per day. Like Valero, both companies maintain significant refining capacity in the Gulf Coast region, positioning them well for continued export-led growth.
Valero's competitive advantages
Valero's strong fourth-quarter performance highlights the company's numerous advantages over its peers, including unparalleled size and scale and location-related edges stemming from significant refining capacity in the midcontinent and the Gulf Coast.
Over the past few years, the company's three midcontinent refineries -- Ardmore, McKee, and Memphis – have benefited heavily from their access to discounted inland crude, enjoying throughput margins as high as $20 per barrel of oil. With the Brent-West Texas Intermediate crude spread expected to remain above historical norms this year, this advantage is likely to continue.
Furthermore, Valero's Gulf Coast refineries are now extremely well positioned to benefit from the growing supply of discounted inland crudes to the region. Over the past few years, the company has increased throughput volumes of cheap oil from the nearby Eagle Ford shale at its Three Rivers and Corpus Christi refineries, resulting in higher margins due to lower transport costs.
With production from the Eagle Ford expected to continue growing at a rapid clip in the next few years, Valero plans to invest heavily to further boost light oil processing capacity at its Gulf Coast refineries. It is evaluating adding a 90,000 barrel-per-day topping unit at its Houston refinery and a 70,000 bpd topping unit at a refinery in Corpus Christi by late 2015.
Location, location, location
Valero's locational advantages should continue to be a major competitive strength for the company going forward. With growing volumes of inland crude expected to make their way to the Gulf Coast this year, Valero's refineries in the region could see even heavier discounts on light crude, while its midcontinent refineries should also continue to enjoy peer-leading margins. As such, investors can expect the company to continue returning a ton of cash to shareholders.
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