Why Valero Stock Slumped on Q2 Earnings

• Valero Energy (VLO) stock fell 3.2% on July 25, its earnings release day.
• Valero stock was impacted by a 30% YoY fall in its earnings.
• Better-than-expected EPS and growth updates prevented a steep fall in Valero stock.

Valero stock performance was in line with the equity market and its peers on July 25. On the day, the SPDR S&P 500 ETF, which represents the S&P 500 Index, fell 0.5%. Valero’s peers HollyFrontier and Phillips 66 fell 0.4% and 0.8%, respectively, on July 25. Delek US Holdings and Marathon Petroleum fell 0.9% and 1.9%, respectively, on the same day.

However, WTI rose 0.3% on July 25. Read Higher US Oil Exports: Has Iran Paved the Way for oil price outlook.

Valero Energy expects to incur capex of $2.5 billion in 2019 and 2020, of which about $1 billion will be for growth projects. Valero Energy’s capex for the second quarter was $740 million. The company began its Houston alkylation project, which converts refinery olefins and isobutane to high-value alkylates. Plus, Valero Energy is on track to start Central Texas pipelines and terminals in Q3 2019.

Further, Valero’s other projects are progressing according to schedule. In 2020, Valero expects to begin projects like the St. Charles alkylation units, its Pasadena terminal, and Pembroke co-generation units. The company expects the Port Arthur Coker and Diamond Green Diesel expansion projects to be completed by 2022 and late 2021, respectively.

Valero stock reacted negatively to its earnings. Let’s estimate the Valero stock price range for the period ending August 2, 2019, based on its implied volatility.

Considering Valero’s implied volatility of 24.9% and assuming a normal distribution of prices and a standard deviation of one, Valero stock price could close between $86.5 and $80.4 per share in the eight days ending August 2.

A 28% YoY fall in operating earnings impacted Valero stock. The fall was due to lower Refining and Ethanol earnings.

In the second quarter, Valero Energy’s refining earnings fell 28% YoY to $1.0 billion due to the weaker refining margin partly offset by higher throughput. Valero Energy’s refining margin fell by $1.6 per barrel YoY to $9.6 per barrel in the second quarter. However, the company’s throughput rose from 2.89 MMbpd (million barrels per day) in Q2 2018 to 2.97 MMbpd in Q2 2019.

Further, Valero Energy’s operating income from the ethanol segment fell from $43 million in Q2 2018 to $7 million in Q2 2019 due to the rise in corn prices. The ethanol segment’s gross margin narrowed from $0.47 per gallon in Q2 2018 to $0.39 per gallon in Q2 2019. However, Valero Energy’s ethanol production rose from 4002 thousand gallons per day in Q2 2018 to 4,533 thousand gallons per day in Q2 2019.

Besides, Valero Energy’s renewable diesel’s operating earnings rose 157% to $77 million in the second quarter. The segment shows the activities of its joint venture with Diamond Green Diesel. The rise was due to higher volumes driven by the expansion of the plant in the third quarter of 2018.