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Will Valero’s Refining Margin Fall in Q4?

Maitali Ramkumar - Author

Nov. 23 2018, Updated 2:49 p.m. ET

Valero’s refining crack indicators

Valero Energy (VLO), an American downstream company, earns most of its income from its Refining segment. Refining margins are the primary determinant of a company’s refining earnings, so an evaluation of Valero’s crack indicators could point us in the direction of the company’s refining margin in the current quarter.

Valero announces crack indicators by operating region. These regions are the US Gulf Coast (or USGC), the US Midcontinent, the US West Coast (or USWC), and the North Atlantic.

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How are Valero’s refining crack indicators trending?

Valero’s crack indicators have fallen YoY (year-over-year) in two of its four operating regions in the current quarter. The USGC crack indicator has fallen the most in the quarter so far. The USWC crack indicator has fallen $6.2 per barrel YoY to $10.4 per barrel. Similarly, the North Atlantic crack indicator has fallen $4.9 YoY to $8.6 per barrel in the quarter.

USGC and North Atlantic are vital operating regions for the company. In the third quarter, USGC processed 59% of the company’s total throughput, and the North Atlantic processed 16%. Thus, the regions accounted for a combined 75% of the company’s total throughput in the third quarter. The falls in the crack indicators in these regions point toward a likely YoY fall in the company’s refining margin in the fourth quarter. This weaker outlook is also affecting Valero stock, which is down 31% in the fourth quarter so far.

Valero’s peer HollyFrontier’s (HFC) refining index has put up a mixed trend in the current quarter, with rises in two of its four operating regions. In the next article, we’ll evaluate Valero’s oil spreads in the fourth quarter.


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