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What Does Valero’s Refining Margin Indicator for 1Q16 Suggest?

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Valero’s refining margin

In this part, we will examine Valero Energy Corporation’s (VLO) refining margin indicators for 1Q16. Let’s begin by analyzing Valero’s refining margin trend until 4Q15.

In 4Q15, Valero Energy (VLO) noted a fall in gross margin to $10.90 per barrel compared to $11.20 per barrel in 4Q14. With its operating costs remaining stable, the fall in gross margin led to a marginal decline in the net refining margin by $0.20 per barrel over 4Q14 to $5.60 per barrel in 4Q15.

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Valero’s (VLO) peers Western Refining (WNR), HollyFrontier (HFC), and Delek US Holdings’ El Dorado refinery (DK) saw their respective gross margins fall by $12.30, $0.90, and $2.90 per barrel over 4Q14 to $9.80, $9.90, and $4.60 per barrel in 4Q15. The PowerShares Dynamic Large Cap Value ETF (PWV) has ~11% exposure to energy sector stocks.

The PowerShares Dynamic Large Cap Value ETF (PWV) has ~11% exposure to energy sector stocks.

VLO’s refining margin indicators for 1Q16

Valero Energy’s (VLO) publishes regional crack indicators where its refineries operate. The four areas where Valero operates its refineries are the US Gulf Coast (or USGC), US Mid-Continent (or Midcon), US West Coast (or USWC), and the North Atlantic.

Valero’s USWC crack indicator fell to $15.30 per barrel in 1Q16 from $19.60 per barrel in 4Q15 and $21.00 per barrel in 1Q15. Similarly, USGC’s and Midcon’s margins fell, sequentially as well as yearly, in 1Q16.

However, the company’s North Atlantic margin fell on a sequential basis but rose on a yearly basis. The North Atlantic margin stood at $11.20 per barrel compared to $11.80 per barrel in 4Q15 and $9.40 per barrel in 1Q16.

With the exception of North Atlantic, these areas witnessed a drop in their regional crack indicators in 1Q16, sequentially as well as yearly. This points toward the likely decline in Valero’s (VLO) refining margins in 1Q16.

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