Valero’s Q3 Earnings Crush Wall Street’s Estimates

Valero Energy’s (VLO) earnings and revenue surpassed Wall Street analysts’ estimates in the third quarter. Its EPS of $1.48 topped analysts’ estimate of $1.35 by about 10% in the quarter. Its revenue of $27.2 billion also beat analysts’ estimate by 13%. However, Valero’s earnings fell 26% YoY (year-over-year) in the quarter.

Valero stock closed 0.3% lower on October 23. Today VLO could see the positive impact of its earnings beat.

Valero’s Q3 Earnings Crush Wall Street’s Estimates

Valero’s earnings review

In the third quarter, Valero’s net income, attributable to its shareholders, fell 29% YoY to $609 million due to a fall in its operating earnings.

Valero’s operating earnings fell in its Refining and Ethanol segments in the third quarter. While its Refining earnings declined 24% YoY to $1.1 billion, its Ethanol segment reported an operating loss of $43 million. Valero’s Refining earnings fell due to falls in its refining margin and throughput.

The company’s refining margin contracted from $10.4 per barrel in the third quarter of 2018 to $10.0 per barrel in the third quarter of 2019. Also, its throughputs fell from 3.10 MMbpd (million barrels per day) to 2.95 MMbpd. Higher corn prices also affected its Ethanol earnings in the quarter.

However, Valero’s Renewable Diesel earnings switched from a loss in the third quarter last year to a profit of $65 million this year. The turnaround in its profitability was the result of its nearly doubling its renewable diesel sales volumes to 638,000 gallons per day in the quarter. The expansion of the Diamond Green Diesel plant drove this volume growth. Better results from the segment supported Valero’s earnings.

Refining margin fall affected Valero’s earnings

While Valero’s gross refining margin contracted $0.4 per barrel YoY, its operating costs rose $0.5 per barrel YoY in the third quarter. The contraction in its gross margin and the rise in its costs affected its net refining margin, which contracted $1.0 per barrel YoY in the quarter.

Valero’s Q3 Earnings Crush Wall Street’s Estimates

Spreads and crack impacted Valero’s refining margin

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 refining earnings. The Brent-WTI, Brent-LLS (Louisiana Light Sweet), Brent-ANS (Alaskan North Sweet), Brent-Maya, and Brent-ASCI (Argus Sour Crude Index) spreads narrowed YoY in the third quarter.

The Brent-ANS spread fell from $0.4 per barrel in the third quarter of 2018 to -$0.9 per barrel in the third quarter of 2019. The Brent-Maya spread also narrowed from $9.7 per barrel to $5.4 per barrel. Similarly, the Brent-ASCI spread fell from $5.1 per barrel in the third quarter of 2018 to $3.2 per barrel in the third quarter of 2019. The most important of all, Brent-WTI, fell from $6.2 per barrel in the third quarter of 2018 to $5.6 per barrel in the third quarter of 2019.

Further, in the third quarter, gasoline cracks declined in the US Gulf Coast, US Midcontinent, and North Atlantic. However, the crack rose in the US West Coast. Diesel cracks also put up a mixed trend.

Peer comparison

Analysts expect Marathon Petroleum’s (MPC) and Phillips 66’s (PSX) EPS to fall 13% YoY and 16% YoY, respectively, in the third quarter. They also expect PBF Energy’s (PBF) and Delek US Holdings’ (DK) EPS to fall 44% YoY and 66% YoY, respectively. Analysts expect HollyFrontier’s (HFC) EPS to fall 28% YoY in the third quarter.

To learn more about investment options in the refining sector, read Valero or Marathon Petroleum: Which Is a Better Buy?