Will Valero’s Ethanol Earnings Drop in Q2?



Valero’s ethanol earnings in the first quarter

Valero Energy’s (VLO) crack indicator has fallen in its prime operating region of the US Gulf Coast in the second quarter. Plus, four of five vital oil spreads have narrowed in the quarter, pointing to a likely lower refining margin for the company in the second quarter. Now, let’s examine how Valero’s ethanol earnings could fare in the second quarter.

Before proceeding with the outlook, let’s look at Valero’s ethanol earnings in the first quarter of 2019. Valero’s operating income from the Ethanol segment fell from $45 million in the first quarter of 2018 to $3 million in the first quarter of 2019 due to a fall in ethanol prices.

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The Ethanol segment’s gross margin contracted from $0.47 per gallon in the first quarter of 2018 to $0.40 per gallon in the first quarter of 2019. However, Valero’s ethanol production rose from 4.113 million gallons per day in the first quarter of 2018 to 4.217 million gallons per day in the first quarter of 2019. The company’s ethanol capacity stands at 1.73 billion gallons per year from its 14 plants.

Valero’s ethanol earnings outlook for the second quarter

In the second quarter of 2019, Valero’s Ethanol segment’s margin is likely to contract YoY (year-over-year). In the second quarter so far, ethanol’s price has fallen 6.6% YoY, whereas corn’s cost has fallen 6.5% YoY. Thus, the company’s Ethanol segment’s margin could narrow, as ethanol’s price has fallen more than the cost of corn. This is also reflected in Valero’s ethanol crack indicator, which has plunged by 6.8% YoY to $0.38 per gallon so far in the second quarter of 2019.

Peer comparison

Like Valero, peers Marathon Petroleum (MPC) and Phillips 66 (PSX) have earnings that are generated by segments other than their core refining segments. Marathon Petroleum’s Midstream and Retail segments contribute to its overall earnings. Phillips 66’s Midstream, Chemicals, and Marketing segments contribute to its earnings.


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