Valero Surges 11% ahead of Second-Quarter Earnings


Jul. 9 2019, Published 9:28 a.m. ET

Valero’s upcoming earnings

In this article, we’ll review Valero Energy’s (VLO) stock before its second-quarter results to be posted on July 25, 2019. We’ll also forecast the stock’s price range based on its current implied volatility. Plus, we’ll discuss Wall Street analysts’ expectation about Valero’s dividend payment in Q3 2019.

Valero is expected to post earnings on July 25. Analysts expect Valero Energy’s second-quarter earnings to fall 14% YoY to $1.85 per share. The company’s revenues are also estimated to fall by 19% YoY to $25.2 billion in the second quarter.

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Despite a weaker earnings outlook, Valero Energy stock has risen by 10.8% in the past month since June 5. In the same period, the SPDR S&P 500 ETF (SPY), which is a broader market indicator, has risen 6.4%. The rise in Valero Energy stock could be due to the improving refining crack conditions partly offset by rising RIN (renewable identification number) costs.

Oil prices increased during the same period. WTI, the benchmark crude oil, has risen 7.5% since June 5. The rise in oil prices usually increases refined product prices. If the increase in refined product prices is more than the oil price, then it widens cracks and vice versa.

While Valero Energy’s refining crack indicators fell year-over-year in the second quarter, the indexes rose sharply in the past month. The crack indicators in the US Gulf Coast rose from $12.9 per barrel in the week ending June 3, 2019, to $15.6 per barrel in the week ending June 24, 2019. Similarly, the North Atlantic crack indicator rose from $8.7 per barrel to $13.1 per barrel in the same period, while the West Coast indicator was flat. If this momentum continues in the third quarter, it could positively affect Valero’s refining earnings.

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However, the RIN prices rose in the past month. Ethanol RIN prices rose 88% from the week ending June 3 to 25.7 cents per gallon in the week ending June 24. During the same period, biodiesel RIN prices rose 24% to 44.0 cents per gallon, which could increase Valero’s RIN’s expense. In Q1 2019, Valero’s RINs cost stood at $91 million, around $115 million lower compared to Q1 2018.

Marathon Petroleum (MPC), Phillips 66 (PSX), and PBF Energy (PBF) have risen 13.2%, 15.1%, and 8.7%, respectively, in the past month. Also, HollyFrontier (HFC) and Delek US Holdings (DK) have risen by 15.5% and 19.8% in the same period.

Will Valero increase its dividend payment in Q3?

Valero Energy’s (VLO) dividend payments have been growing in the past few years. In the second quarter, Valero Energy paid a dividend of $0.90 per share, which represents 12.5% growth from the second quarter of 2018. The dividend was announced on April 30 and was paid on June 4.

Analysts forecast Valero Energy’s dividend payment per share to be stable sequentially at $0.90 per share in the third quarter. In 2017 and 2018, Valero Energy increased its dividend payment in the first quarter, which kept it steady for the rest of the quarters. In 2019, the company raised its payment in the first quarter. Analysts expect Valero to follow the trend and keep its dividend payment stable in the third quarter.

Currently, Valero Energy’s dividend yield is 4.4%. The yield has risen from 4.0% in the third quarter of 2017. The yield rose due to steeper growth of 28.6% in Valero Energy’s dividends than the rise of 6.3% in its stock price since the third quarter of 2017.

Valero’s dividend yield is the highest compared to its US peers. Phillips 66 (PSX), HollyFrontier (HFC), and Delek US Holdings’ (DK) current dividend yields are 3.7%, 2.9%, and 2.8%, respectively. Marathon Petroleum (MPC) and PBF Energy’s (PBF) yields are 3.9% and 4.1%, respectively.

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Valero Energy has distributed wealth to shareholders through dividends and share repurchases. In the first quarter, Valero paid $375 million in dividends, more than $345 million spent in the first quarter of 2018. Valero bought back $36 million worth of shares in the first quarter. Valero Energy also focuses on investing in growth activities along with higher shareholder returns. The company aims to create an integrated and growth-oriented downstream earnings model. To learn more, read Valero’s Earnings Are Poised to Rise with Its Growth Activities.

Plus, Valero is quite clear that it will maintain strict financial discipline. The company wouldn’t increase its debt to raise its share repurchases. In the first quarter earnings conference call, Valero’s chair, president, and CEO Joe Gorder said, “we’ve been pretty clear all along that we weren’t going to leverage the balance sheet to do share repurchases. I think that’s why you saw the repurchases slightly less in the first quarter, we used the adjusted free cash flow metric as our target and that’s how we’re going to live with.” He added, “So as cash flow picks up, I think you should expect that flywheel of share repurchase to increase also. But I wouldn’t tie the two directly together the debt to cap and the share repurchase quantity.”

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Valero Energy’s stock price forecast range until its Q2 earnings

Now, let’s discuss Valero Energy’s (VLO) stock price forecast range for 20 days before its earnings, scheduled on July 25. The forecast is based on the stock’s current implied volatility.

The implied volatility in Valero Energy has fallen from 33.1% on June 5 to the current level of 27.8%. Valero Energy’s stock price has risen by 10.8% during the same period. Thus, the stock price and implied volatility have moved inversely in the past month.

Valero Energy’s stock price range is estimated considering its implied volatility of 27.8%. The stock price range assumes a normal distribution of prices and a standard deviation of one, which suggests a probability of 68.2%. Valero Energy’s stock price could close between $87.2 per share and $76.5 per share in the coming 20 calendar days ending on July 25.

The implied volatility in Phillips 66 (PSX) and HollyFrontier (HFC) have fallen by 1.7 percentage points and 3.3 percentage points, respectively, since June 5 to the current 22.9% and 33.8%. The implied volatility in PBF Energy (PBF) has fallen by 0.8 percentage points since June 5 to the current level of 41.9%. Phillips 66 and Holly Frontier’s stock prices have risen by 15.1% and 15.5%, respectively, since June 5. Also, PBF stock has risen 8.7% during the same period. Thus, these stock prices and implied volatilities have moved in opposite directions in the past month.

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Implied volatilities in the SPDR S&P 500 ETF’s (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA), which closely resemble market indexes the S&P 500 Index and Dow Jones Industrial Average, respectively, have fallen. In the past month, implied volatility has fallen by 5.1 percentage points in SPY and by 4.9 percentage points in DIA. Currently, implied volatilities in SPY and DIA stand at 10.2% and 10.9%, respectively. SPY and DIA’s values have risen by 6.4% and 6.2%, respectively, in the same period.

Valero Energy’s short interest rises before its earnings

The short interest in Valero Energy (VLO) has risen from 1.3% of the outstanding shares on June 5 to the current level of 1.5%. Usually, an increase in the short interest implies a rise in the bearish sentiment for a stock. However, during the same period, Valero Energy stock has risen 10.8%.

The rise in the short interest in Valero Energy could be due to an anticipated fall in its earnings in the second quarter. Analysts expect Valero Energy’s earnings to fall 14% YoY to $1.85 per share in the second quarter. Valero Energy’s crack indicators fell in the second quarter in two of its four operating regions. In the US Gulf Coast region, it narrowed the most by 14% YoY to $13.9. The area refined 58% of the company’s crude throughput in Q1 2019. Similarly, in the North Atlantic, which accounted for 17% of Valero’s Q1 throughput, the crack narrowed by 9% YoY. The narrowing of these cracks could impact the company’s second-quarter earnings, partly offset by its Midcon and US West Coast cracks expanding YoY by 7% and 21%.

Further, in the second quarter, year-over-year, four out of five spreads have narrowed. Brent-Maya has seen the largest contraction in the current quarter. However, Valero has reported that ethanol RIN prices fell 46% YoY to an average of 16.6 cents per gallon in Q2 2019, and biodiesel RIN prices fell 30% YoY to 37.5 cents per gallon.

Short interest in Valero’s peers Marathon Petroleum (MPC) and Delek US Holdings (DK) have also risen by 0.11 and 1.07 percentage points, since June 5 to the current 1.9% and 7.6%, respectively. MPC and DK are estimated to post a 36% YoY and 8% YoY fall in earnings in the second quarter. However, short interest in HollyFrontier (HFC) has declined by 0.04 percentage points since June 5 to the current 3.6%. HFC’s EPS are expected to rise by 4% YoY in the second quarter. But stock prices of Marathon Petroleum, Delek, and HollyFrontier have increased by 13.2%, 19.8%, and 15.5%, respectively.


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