Valero Energy’s numbers
Valero Energy (VLO) is scheduled to release its second-quarter results on July 25. Before we proceed with the second-quarter estimates, let’s recap the company’s performance in the first quarter compared to analysts’ estimates.
In the first quarter, Valero Energy’s revenues beat analysts’ consensus estimate by ~13%. The company’s adjusted EPS was $0.34, which beat analysts’ mean EPS estimate of $0.23 by ~48%. The company’s first-quarter EPS was 66% lower than its adjusted EPS in the first quarter of 2018.
Valero Energy’s adjusted net earnings attributable to its shareholders fell from $431 million in the first quarter of 2018 to $141 million in the first quarter due to a decline in its operating earnings. The company’s operating earnings fell across its business segments. Valero Energy’s refining, ethanol, and renewable diesel earnings fell 41%, 93%, and 75% YoY (year-over-year), respectively, in the first quarter. To learn more, read How Valero’s Segmental Earnings Trended in Q1.
What to expect in the second quarter
Analysts expect Valero Energy’s second-quarter EPS to be $1.85. The estimate is 14% lower than the company’s adjusted EPS in the second quarter of 2018. However, the estimate is 444% higher than the adjusted EPS in the first quarter. Valero Energy’s revenues are estimated to be $25.2 billion in the second quarter—19% lower than its revenues in the second quarter of 2018.
Analysts expect Phillips 66 (PSX) and Marathon Petroleum’s (MPC) EPS to fall 12% YoY and 36% YoY in the second quarter, respectively. PBF Energy (PBF) and Delek US Holdings’ (DK) earnings could also fall 27% and 8% YoY in the second quarter. However, Holly Frontier’s (HFC) EPS could rise from $1.45 in the second quarter of 2018 to $1.51 in the second quarter.
Valero Energy’s refining crack indicators and oil spreads have been weak YoY in its main operating areas in the second quarter. The impact of the weaker refining cracks and spreads on the company’s earnings might be partly offset by an expected decline in the RIN (renewable identification number) cost in the quarter.
Will Valero Energy’s refining earnings fall?
Valero Energy publishes refining crack indicators for the areas where it operates. Before we review Valero Energy’s crack indicators, we’ll discuss peers’ indicators.
Marathon Petroleum’s refining margin indicators show a mixed trend. While the company’s sweet and sour differentials narrowed 20% and 74% YoY, its blended crack expanded 17% YoY in the second quarter. However, Holly Frontier’s Midcon, Rockies, and Southwest refining indexes expanded 10%, 12%, and 4% YoY, respectively, which could boost its refining earnings.
Valero Energy’s crack indicators narrowed in two of its operating regions in the second quarter. In the US Gulf Coast region, the crack indicators narrowed the most by $2.20 per barrel YoY to $13.90. The area refined 58% of the company’s crude throughput in the first quarter. In the North Atlantic, which accounted for 17% of Valero Energy’s first-quarter throughput, the crack narrowed by $1.20 per barrel YoY.
The narrower cracks could impact Valero Energy’s second-quarter earnings—partly offset by its Midcon and US West Coast cracks expanding YoY by $1.30 and $3.90 per barrel. Valero Energy, which has been bearing compliance costs for some time, could also benefit from lower RIN prices. The company reported that ethanol RIN prices fell 46% YoY to an average of 16.6 cents per gallon in the second quarter. Biodiesel RIN prices fell 30% YoY to 37.5 cents per gallon.
In the second quarter, four out of the five spreads have narrowed YoY. The Brent-Maya spread has seen the largest contraction in the current quarter. The spread has narrowed by $6.3 per barrel YoY to $6.5 per barrel in the second quarter. The Brent-ANS (Alaskan North Slope), the Brent-LLS (Louisiana Light Sweet), and the Brent-ASCI (Argus Sour Crude Index) spreads have narrowed by $0.6 per barrel, $0.6 per barrel, and $2.2 per barrel YoY in the second quarter. The Brent-ANS spread impacts Valero Energy’s margin in the US West Coast region. The Brent-Maya, the Brent-ASCI, and the Brent-LLS spreads impact the company’s margin in the US Gulf Coast region.
Valero Energy uses different crude oils and feedstocks in its refineries. Crude oils like WTI, LLS, and ASCI can mainly be procured at a discount to Brent. The refined product prices are based on Brent. Refining discounted crude results in lower input costs, which leads to higher margins and earnings. In the second quarter, most of the discounts or spreads have fallen, which could have a negative impact on Valero Energy’s refining earnings.
However, the Brent-WTI spread has expanded by $1.5 per barrel YoY in the second quarter. The rise in the Brent-WTI spread could partially offset the negative impact of other narrowing oil spreads.
Expected ethanol earnings
In the second quarter, the Ethanol segment’s margin will likely narrow YoY. In the second quarter, the ethanol price has fallen 1.0% YoY, while the corn cost has risen 1.8% YoY. As a result, the ethanol crack indicator fell 9.0% YoY to $0.37 per gallon in the second quarter. The Ethanol segment’s gross margin was $0.40 per gallon in the first quarter—lower than $0.47 per gallon in the first quarter of 2018. However, Valero Energy’s ethanol production rose from 4113 thousand gallons per day in the first quarter of 2018 to 4217 thousand gallons per day in the first quarter.
Among the 19 analysts that rate Valero Energy, 16 or 84% recommended a “buy” or “strong buy,” while three recommended a “hold.” Delek US Holdings, HollyFrontier, and Phillips 66 have been rated as a “buy” by 47%, 18%, and 72% of the analysts, respectively. PBF Energy and Marathon Petroleum have been rated as a “buy” by 50% and 94% of the analysts, respectively.
In July, JPMorgan Chase cut its target price on Valero Energy from $98 to $96. In June, Cowen and Company lowered its target price on the stock from $112 to $103. Citigroup reduced its target price from $100 to $95. Valero Energy’s mean target price of $104 per share implies a 27% gain from the current level.
Valero Energy has more “buy” ratings due to its sound financials and growth activities, which hint towards a favorable long-term outlook.
In the first quarter, Valero Energy’s refining earnings fell 41% YoY to $479 million. Marathon Petroleum, HollyFrontier, and Phillips 66’s refining earnings also fell. Marathon Petroleum reported an operating loss of $334 million. Phillips 66 declared a pre-tax adjusted refining loss of $219. HollyFrontier’s refining adjusted EBITDA fell 4% to $193 million. The first quarter has been tough for refiners.
Despite the conditions, Valero Energy’s total debt-to-capital ratio was 32% in the first quarter. The company’s net debt-to-EBITDA ratio was 1.2x. Both of the debt ratios were below the industry average, which is a favorable scenario. Valero Energy had enough cash during the second quarter, which shows its financial flexibility and strength.
Valero Energy focuses on growth activities to increase its earnings. The company expects an incremental annual EBITDA of ~$1.2 billion–$1.5 billion by 2022. Analysts expect Valero Energy’s earnings to increase 66% next year.