Valero Energy Corporation operates as an independent petroleum refining and ethanol producing company in the United States, Canada, the United Kingdom, Ireland, and internationally. The company is involved in oil and gas refining, marketing, and bulk selling activities. It produces conventional and premium gasolines, diesel fuels and other distillates.
This past week, Valero Energy Corp. beat analysts’ expectations in the third quarter, reporting a profit of $609 million, or $1.48 per share. It was a better-than-expected quarter despite making $250 million less in profit than the company reported during the same period last year, when the company reported $856 million in profit, or $2.01 per share.
Valero also makes ethanol. Ethanol is made from corn and almost 50% of corn crop in the US is used to make ethanol. However, this past Spring into Summer the Midwest was hit with massive flooding, which lead to record slow planting season for corn. The end result was corn prices were high, which is an input cost for Valero, which lead to low margins.
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.
The crack spread is the one parameter that determines a refiner’s earnings. The crack spread entails the cost of the raw material input, oil and what the finished product, gasoline, diesel, and jet fuel can be sold for.
Since there are 42 gallons of oil in a barrel, you can multiply this ratio by 42 to get the actual profit margin per unit. At today’s ratio of .0295, multiplying by 42 gives us 1.24. That means a profit margin of 24% for every gallon of crude oil refined into gasoline.
But during the earnings call, Valero forecasted favorable market conditions for the current quarter, based on improved gasoline and distillate cracks from the lower levels and sour crude weakness resulting from the IMO low-sulfur fuel oil mandate, which goes into effect on January 1, 2020. And this is why Valero broke out after consolidating for the past 10 months.
Thus, the chart suggests there is room for price to run up to $108, which would represent another 9% increase in price.
This post is my personal opinion. I’m not a financial advisor, this isn’t financial advise. Do your own research before making investment decisions.