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How Did Valero’s Refining Margins Shape Up in Its Latest Quarter?

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Dec. 4 2020, Updated 10:52 a.m. ET

VLO’s refining segment

In this part, we will evaluate the refining margin trend of Valero Energy (VLO). But before we proceed with the refining margins, let’s quickly look at Valero’s current refining capacity.

Valero Energy (VLO) operates through its 15 refineries, located in the US, Canada, and the UK. Valero’s total refining capacity is 3.0 MMbpd (million barrels per day), of which 1.7 MMbpd is located in the US Gulf Coast.

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Marathon Petroleum (MPC), Tesoro (TSO), and Phillips 66 (PSX) have 1.7 MMbpd, 0.85 MMbpd, and 2.2 MMbpd of total refining capacity, respectively. For refining sector stocks, you could consider the iShares US Energy ETF (IYE), which has ~9% exposure to the sector. IYE has MPC, VLO, TSO, and PSX in its portfolio.

Valero’s refining margin trend

In 4Q15, VLO noted a fall in GRM to $10.90 per barrel compared to $11.20 per barrel in 4Q14. With operating costs remaining stable, the fall in GRM led to a marginal decline in the net refining margin by $0.20 per barrel over 4Q14 to $5.60 per barrel in 4Q15. Adjusted operating income from the Refining segment fell by 3% over 4Q14 to $1,480 million in 4Q15.

The key factors that affect Valero’s GRM are refined product cracks, the differential between sweet and sour crude oil prices, and costs of other feedstock and blendstock.

In 4Q15, gasoline cracks have risen across VLO’s operating areas of the US Gulf Coast, the US Mid-Continent, North Atlantic, and the US West Coast compared to 4Q14. However, this is offset by a fall in diesel cracks in all the zones. To add to this, the Brent-WTI (West Texas Intermediate) as well as Brent-ANS (Alaska North Slope) oil spreads have narrowed in 4Q15 compared to 4Q14.

In this part, we have looked at VLO’s refining margin trend until 4Q15. In the next part, let us evaluate Valero’s likely refining margin going forward in 1Q16.

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