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Will Valero’s Refining Earnings Fall in Q3?

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Valero Energy’s (VLO) refining earnings are the biggest factor in determining the company’s total profits. These earnings, in turn, are determined by Valero’s refining margins. So you can determine the direction of Valero’s refining earnings by reviewing its crack indicators and oil spreads, which directly affect the company’s margin.

Valero announces regional crack indicators for its four operating regions. These areas are the U.S Gulf Coast (or USGC), the U.S Mid-continent (or Midcon), the U.S West Coast (or USWC), and the North Atlantic. With Valero’s earnings due Thursday, here’s what to expect.

Valero’s refining earnings impacted by cracks

Valero’s crack indicators have shown mixed performance in Q3. While they’ve risen in the US West Coast, they’ve declined in the Midcon. Also, in the Gulf Coast and North Atlantic, they’ve stayed stable.

Valero’s crack indicator in the US West Coast has risen by $3.7 per barrel year-over-year to $19.1 per barrel in the third quarter. But its Midcon crack indicator has fallen by $0.9 per barrel year-over-year to $17.3 per barrel in the quarter. Also, the US Gulf Coast and North Atlantic, Valero’s crack indicator stood flat at $15.8 per barrel and $13.3 per barrel, respectively, in Q3.

The US Gulf Coast is the largest region, and it processes 60% of Valero’s throughput. The region saw a flat crack indicator in Q3. Also, USGC and the North Atlantic account for 77% of Valero’s combined throughput. In these areas, the company saw flat cracks in the third quarter.

Plus, the Midcon, which refines 16% of Valero’s throughput, saw a decline in its crack indicator. However, the US West Coast, which processes only 8% of Valero’s throughput, saw a rise.

So Valero’s refining earnings could fall marginally with a lower Midcon crack and flat USGC and North Atlantic cracks. Also, a higher US West Coast crack could slightly offset the fall in Valero’s refining earnings.

Oil spreads in the third quarter

Oil spreads play a crucial role in determining Valero’s refining earnings. The larger the spread, the better for Valero’s refining margin. In the third quarter, year-over-year, Valero’s vital oil spreads have narrowed.

Brent-Maya saw the most significant year-over-year contraction in Q3. The Brent-Maya spread has narrowed by $4.4 per barrel year-over-year to $5.4 per barrel in the quarter. The Brent-WTI, Brent-ANS, Brent-LLS, and Brent-ASCI spreads have also narrowed year-over-year in Q3.

Valero uses different crude oils and feedstocks in its refineries. Refiners can procure crude oils like WTI, LLS, and ASCI at a discount to Brent. However, they sell refined products with prices are based on Brent. So refining discounted crude results in lower input costs, ultimately leading to higher margins and earnings.

In the third quarter, most discounts or spreads have fallen. And that trend could hurt Valero’s refining earnings.

Oil spreads also impact peers’ refining margins. Delek US Holdings’ (DK) refining margin is affected by the Midland WTI-Cushing WTI spread. Plus, the WTI-WCS and WTI-Maya spreads affect Phillips 66’s (PSX) margins.

Peers’ refining earnings indicators

Valero’s peers Marathon Petroleum (MPC) and HollyFrontier’s (HFC) refining margin indicators have shown mixed trends in the third quarter.

Marathon Petroleum’s sweet differential and sour differential fell by 60% year-over-year and 69% year-over-year. But its blended crack stood flat year-over-year.

Meanwhile, HollyFrontier’s index values fell 9% year-over-year and 7% year-over-year in the Midcon and Rockies. They rose 19% year-over-year in the Southwest.

To learn about Valero’s refining margins last quarter, check out Valero’s Earnings Fall but Beat the Estimate.

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