Tags: Valero | volatile | energy | VLO

Valero Profits Despite Volatile Energy Market

By    |   Friday, 16 Dec 2011 05:02 PM

Energy refiner and retailer Valero (VLO) has recovered from a couple of years of very tight profit margins. Now the company is managing profits and production to maintain results in a volatile energy market.

Valero owns and operates 16 petroleum refineries in the United States, Canada and the U.K. and 10 ethanol plants in the United States. The company's retail operations sell fuels through almost 7,000 branded outlets, of which about 1,300 are owned by Valero.

Operating profits are generated by the sale of refined petroleum products, ethanol sales and retail fuel sales. The retail and ethanol and retail sales produce about $100 million each quarter of operating income. Refining produces the bulk of operating income but this source fluctuates significantly from quarter to quarter.

For the first nine months of 2011, Valero reported net income of $3.59 per share, almost three times the $1.31 earned for the first three quarters of 2010. The third quarter net income of $1.2 billion or $2.11 per share was the highest quarterly result since 2007.

For the full year 2011, the company is forecast to earn $4.71 per share, compared to earnings of $1.61 in 2010. The consensus estimate for 2012 is $4.04. However, the individual estimates from different analysts range from $2.42 up to $5.44 per share.

Profitable niches

Valero's profitability is dependent on the level of refining margins the company can generate over the cost of crude oil. One way to increase those margins is to refine types of crude oil which are selling at a discount to the benchmark grades of crude.

Many times, crude oils with similar properties sell as significant discounts to the widely followed West Texas Intermediate price. In 2010, the company processed 86 different crude oils in their efforts to maximize refining profits.

For the 2011 fourth quarter, Valero tripled the regular dividend to 15 cents from 5 cents per share. A company press release indicates that this will be the dividend rate going forward. The higher dividend puts the stock yield in the 2 percent to 3 percent range, allowing investors to earn an income while waiting for the energy price cycle to turn positive.

Recently, the analysts at The Benchmark Company downgraded Valero to hold from buy. At about the same time the RBC Capital Markets analysts made a slight reduction in their rating to outperform from top pick.

The company reports next on Jan. 31.

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Energy refiner and retailer Valero (VLO) has recovered from a couple of years of very tight profit margins. Now the company is managing profits and production to maintain results in a volatile energy market. Valero owns and operates 16 petroleum refineries in the United...
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2011-02-16
Friday, 16 Dec 2011 05:02 PM
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