What happened
Shares of Valero Energy Corporation (VLO 0.86%) fell a hefty 21% in February according to data from S&P Global Market Intelligence. That left the shares down a painful 29% through the first two months of 2020. The S&P 500 Index, for comparison, fell around 8% over that span, with most of the decline occurring at the tail end of February when COVID-19 concerns started to take center stage. Although connected in some ways, Valero's issues today aren't all related to the outbreak.
So what
Valero Energy is one the largest refiners in North America. On the surface, low energy prices should be a good thing, because it means key feedstocks can be had on the cheap. That's definitely been true, since COVID-19 concerns have driven the price of oil and natural gas sharply lower. That, however, wasn't a trend confined to February. Energy industry investors have been pushing oil and gas prices lower since the coronavirus news started to pick up at the start of the year.
Image source: Getty Images.
The problem for Valero is that the cost of oil is only one piece of the equation. Its financial results are largely driven by the difference between its costs and the prices for which it can sell the refined products it creates. When the company released its fourth-quarter 2019 earnings in late January, the news wasn't great. Although margins improved in the company's West Coast operations, they declined 5% in its larger East Coast business. However, the year-over-year margin decline in the fourth quarter was nearly 29%. Obviously, things were getting worse, not better.
Investors have reacted as you would expect, pushing the shares of Valero lower. Notably, fears over the COVID-19 outbreak could make this situation even worse if a virus-led recession leads to a drop in demand for refined products. If that happens, margins could further tighten.
Now what
Valero was profitable in 2019, earning $5.84 per share. It was also profitable in the fourth quarter, with earnings of $2.58 per share. This is not a company that's in dire financial straits. That said, there is a great deal of upheaval in the energy space today and that's not likely to go away anytime soon. In fact, if current trends are any indication, more negative news about COVID-19 is likely in the days to come. Investors should continue to expect more volatility here.
