Could Valero’s Refining Margins Soar in 1Q17?



Valero’s refining margin indicators

Earlier in this series, we analyzed Tesoro’s (TSO) refining index and Marathon Petroleum’s (MPC) refining margin indicators for 1Q17. Now, we’ll analyze the refining margin indicators published by Valero Energy (VLO). These indicators point toward VLO’s likely margin trend in 1Q17.

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Refining cracks could fall in March 2017

Valero Energy (VLO) publishes regional crack indicators in the four regions where its refineries operate—the US Gulf Coast (or USGC), US Mid-Continent (or Midcon), US West Coast (or USWC), and North Atlantic.

Compared to February 2017, Valero’s crack indicators have fallen in three of its four areas to date in March 2017. The exception was USWC. The USGC crack indicator fell from $15.60 per barrel in February to $13.50 per barrel in March. Midcon and North Atlantic have put up similar performance numbers.

However, USWC rose from $16.40 per barrel in February to $17.40 per barrel in March. The fall in refining cracks in three of the four areas points toward a deteriorating margin environment for VLO in March 2017 compared to February 2017.

Valero’s refining margins could rise in 1Q17

Three of the four areas have witnessed a rise in average regional cracks in 1Q17 compared to 4Q16. Valero’s Midcon crack indicator rose to $11.90 per barrel in 1Q17 from $10.90 per barrel in 4Q16. Similarly, USWC and USGC indicators rose on a sequential basis.

However, North Atlantic cracks fell by $3.40 per barrel over 4Q16 to $10.70 per barrel in 1Q17. However, the fall in North Atlantic crack is likely to be offset by a rise in cracks in the other three zones. This points toward the likely rise in VLO’s refining margins in 1Q17 compared to 4Q16.

Similarly, on a yearly basis, cracks have risen except for the North Atlantic region. In 1Q17, a marginal fall of ~$0.30 per barrel over 1Q16 in North Atlantic crack is likely to be offset by a rise of $2.20, $2.50, and $0.50 per barrel in USGC, Midcon, and USWC cracks, respectively. This implies a likely rise in Valero’s refining margin in 1Q17 over 1Q16.

For exposure to refining and marketing sector stocks, investors can consider the iShares North American Natural Resources ETF (IGE). This ETF has ~7% exposure to the sector.

If you’e looking for exposure to mid-cap stocks, you can consider the SPDR S&P Midcap 400 ETF (MDY) (MID-INDEX). This ETF also has ~4% exposure to energy sector stocks, including refiners HollyFrontier (HFC) and Western Refining (WNR).

To understand the refining industry better, please read An Investor’s Guide to the Refining Industry: All You Need to Know.

For a look at refining stocks’ latest market performance in March, please read How Are Top Refiners Performing Now?


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