What Valero Needs to Soar in 2Q17

Valero’s refining margin indicators

Valero Energy (VLO) publishes area-wise crack indicators where its refineries operate. The four regions where Valero operates its refineries are in the USGC (US Gulf Coast), the US Midcon (US Mid-Continent), the USWC (US West Coast), and the North Atlantic.

Valero’s crack indicators have fallen in all of these areas in May 2017 (as of May 23) as compared to April 2017. The USGC crack indicator fell from $16.9 per barrel in April to $13.8 per barrel in May. Midcon, USWC, and North Atlantic fell by $1.7 per barrel, $1 per barrel, and $1 per barrel, respectively, from April levels.

What Valero Needs to Soar in 2Q17

The fall in refining cracks in all four of these areas points to a deteriorating margin environment for VLO in May 2017 as compared to April 2017.

Valero’s refining margins likely to rise in 2Q17 over 1Q17

For VLO, three of the four above regions have seen rises, however, in average regional cracks so far in 2Q17, as compared to 1Q17. VLO’s Midcon crack indicator, for example, rose from $12.4 per barrel in 1Q17 to $13.3 per barrel in 2Q17.

The USWC and North Atlantic indicators both rose on a sequential basis, while the USGC crack fell $0.3 per barrel from the 1Q17 level to $15.8 per barrel in 2Q17. Still, this fall in the USGC crack is likely to be offset by a rise in cracks in the other three zones, which indicates a likely rise in VLO’s refining overall margin in 2Q17 as compared to 1Q17.

A likely YoY fall

On a yearly basis, VLO’s cracks have fallen—except for in the Midcon region. In 2Q17, a rise of around $1.7 per barrel over 2Q16 in the Midcon crack is thus likely to be offset by a drop of $0.1, $0.7, and $0.9 per barrel in the USGC, USWC, and North Atlantic cracks, respectively. This implies a likely fall in Valero’s refining margin in 2Q17 over 2Q16.

For exposure to mid-cap stocks, you might consider the SPDR S&P MIDCAP 400 ETF (MDY) (MID-INDEX), which has ~3% exposure to energy sector stocks, including refiners HollyFrontier (HFC) and Western Refining (WNR).

For broader exposure to large US companies, you might consider the iShares Core S&P 500 ETF (IVV) and the SPDR Dow Jones Industrial Average ETF (DIA), both of which have ~6% exposure to energy sector stocks. IVV also has MPC, VLO, TSO, and PSX in its portfolio.

For more on the refining industry in general, check out Market Realist’s series An Investor’s Guide to the Refining Industry: All You Need to Know.