Please ensure Javascript is enabled for purposes of website accessibility

Will the Good Times Keep Rolling for Valero Energy Corporation?

By Arjun Sreekumar – Feb 4, 2014 at 11:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In addition to peer-leading margins at its midcontinent refineries, Valero’s Gulf Coast refineries are ideally positioned to benefit from the surge in inland oil production.

Valero Energy (VLO -1.17%), 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 (PSX -0.49%) boosted its refined product exports by 32% to 197,000 barrels per day during the fourth quarter, while Marathon Petroleum (MPC -1.34%) 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.

Arjun Sreekumar owns shares of Marathon Petroleum. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Valero Energy Stock Quote
Valero Energy
$133.62 (-1.17%) $-1.58
Phillips 66 Stock Quote
Phillips 66
$108.44 (-0.49%) $0.53
Marathon Petroleum Stock Quote
Marathon Petroleum
$121.81 (-1.34%) $-1.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.