uploads///Ref Margin

Understanding Valero’s Q3 Crack Indicators

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Valero’s refining margin

In this part of our series, we’ll analyze Valero Energy’s (VLO) refining margin indicators for 3Q17. Let’s start by examining Valero’s refining margin in the second quarter of 2017.

Valero saw an expansion in its gross refining margin by $0.07 per barrel YoY (or year-over-year) to $8.66 per barrel in 2Q17. However, its operating cost rose by $0.09 per barrel YoY in 2Q17. VLO’s net refining margin fell by $0.02 per barrel YoY to $3.49 per barrel in 2Q17. The net margin narrowed due to a steeper rise in VLO’s operating cost compared to the rise in its gross refining margin year-over-year in 2Q17.

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Valero’s (VLO) peers have noted a mixed trend, year-over-year, in their refining margins in 2Q17. Phillips 66’s (PSX) global refining margin rose by $1.3 per barrel or 18% YoY to $8.4 per barrel in 2Q17. However, Andeavor (ANDV) noted a fall in its refining margin by $6.3 per barrel YoY to $9.5 per barrel in 2Q17. Also, Marathon Petroleum’s (MPC) gross refining margin contracted by $1.4 per barrel YoY to $11.3 per barrel in 2Q17.

Valero’s third-quarter crack indicators

Valero publishes crack indicators for the areas where its refineries operate. Valero broadly operates in four zones: namely, the US West Coast (or USWC), the US Mid-Continent (or Midcon), the US Gulf Coast (or USGC), and the North Atlantic.

All four regions have seen increases in their average regional cracks in 3Q17 compared to 3Q16. Midcon saw the largest rise in 3Q17 over 3Q16. The Midcon crack rose by $5.4 per barrel over 3Q16 to $18.5 per barrel in 3Q17. Also, the USGC crack rose by $3.5 per barrel YoY to $19.0 per barrel in 3Q17. Plus, USWC and North Atlantic cracks have widened by $5.0 per barrel each over 3Q16 to $21.1 per barrel and $16.9 per barrel in 3Q17.

So, a year-over-year rise in crack indicators across all four areas implies a likely surge in Valero’s refining margin in 3Q17 over 3Q16. Also, quarter-over-quarter, all four zones have seen a rise in their indicators in 3Q17. However, RINs (renewable identification numbers) expenses should continue to dent Valero’s earnings growth in 3Q17.

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