Valero’s refining margin
Over past few quarters, the rise in GRMs (gross refining margins) has led to a steep upsurge in the earnings of refiners. In 3Q15, Valero noted a rise in its GRM by $2.6 per barrel to $14.4 per barrel, compared to what we saw in 3Q14. With operating costs remaining stable, this rise in GRM led to an increase in the company’s net refining margin by $2.4 per barrel to $8.8 per barrel. At the same time, Valero’s operating income from the refining segment rose by 37% over 3Q14 to $2.3 billion in 3Q15.
Meanwhile, Valero’s peers have also witnessed increases in GRMs. Marathon Petroleum Corporation (MPC), Tesoro Corporation (TSO), and Phillips 66 (PSX) saw their GRMs widen by $2.7, $5.6, and $3.1 per barrel over 3Q14 to $17.3, $20.5, and $14 per barrel in 3Q15. The Energy Select Sector SPDR Fund (XLE) has about 12% of combined exposure to VLO, MPC, TSO, and PSX.
Valero’s refining margin outlook for 4Q15
In 4Q15, Valero’s refining segment earnings, which are dependent on refining margins, are likely to be stressed. The key factors that affect Valero’s GRM include refined product cracks and the differential between sweet and sour crude oil price. To be sure, the higher the cracks, the better the GRM. Similarly, the wider the sweet-sour gap, the healthier the GRMs will be for Valero.
In 4Q15, gasoline cracks narrowed as a result of falling gasoline prices, and gas prices fell due to the huge pileup of gasoline stocks in the US in the fourth quarter of 2015. This is likely to weaken GRMs for refiners in 4Q15. Another point in case is the broader market refining margin indicator, the US Gulf Coast WTI (West Texas Intermediate) 321 crack, which fell in 4Q15. Notably, the crack spread that averaged $16 per barrel in 3Q15 plunged to $9 per barrel in 4Q15.
Continue to the next part of this series for a discussion of Valero’s capital expenditure and recent stock performance.