Valero Energy (VLO) posted its second-quarter earnings results on July 25. Its EPS fell 30% YoY (year-over-year) to $1.5 in the second quarter. However, its earnings surpassed analysts’ estimate of $1.4 by about 10%. Its revenue of $28.9 billion also beat analysts’ estimate by 18%.
Valero’s earnings review
In the second quarter, Valero’s adjusted net income attributable to its shareholders fell 28% YoY to $612 million due to a fall in its operating earnings.
Valero’s operating earnings fell in its Refining and Ethanol segments by 28% YoY and 84% YoY, respectively, in the second quarter. Valero’s Refining earnings fell due to the 14% YoY contraction in its gross refining margin to $9.6 per barrel in the quarter. Higher corn prices also affected Valero’s Ethanol earnings in the quarter.
However, Valero’s Renewable Diesel earnings rose from $30 million in the second quarter of 2018 to $77 million in the second quarter of 2019. The rise was due to the near-doubling of renewable diesel sales volumes to 769,000 gallons per day in the second quarter. The expansion of the Diamond Green Diesel plant drove this volume growth.
Why did Valero’s refining margin contract?
While Valero’s gross refining margin contracted $1.6 per barrel YoY, its operating costs rose $0.1 per barrel YoY in the second quarter. The contraction in its gross margin and the rise in its costs affected its net refining margin, which contracted $1.7 per barrel YoY in the quarter.
Valero can utilize its midstream network to process cheaper crude oils. However, the fall in spreads between discounted (medium or heavy) crudes and Brent affected the company’s margin. The Brent-ANS (Alaskan North Sweet), Brent-LLS (Louisiana Light Sweet), Brent-ASCI (Argus Sour Crude Index), and Brent-Maya spreads narrowed YoY in the second quarter.
Spreads and cracks affect Valero’s earnings
The Brent-ANS spread fell from $0.8 per barrel in the second quarter of 2018 to $0.2 per barrel in the second quarter of 2019. The Brent-Maya spread also narrowed from $12.9 per barrel to $6.2 per barrel. Similarly, the Brent-ASCI spread fell from $5.6 per barrel in the second quarter of 2018 to $3.4 per barrel in the second quarter of 2019.
Further, in the second quarter, gasoline cracks declined in the US Gulf Coast and the North Atlantic. However, the cracks rose in the US West Coast and the US Midcontinent. Diesel cracks also put up a mixed trend.
Analysts expect Marathon Petroleum’s and Phillips 66’s EPS to fall 40% YoY and 2% YoY, respectively, in the second quarter. They also expect PBF Energy’s and Delek US Holdings’ EPS to fall 36% and 38%, respectively, YoY. However, analysts expect HollyFrontier’s EPS to rise 13% YoY in the second quarter.
To learn more on MPC’s earnings outlook, read Will MPC Outperform Peers in Q2?