Valero Exceeds Earnings Estimates After Oil Retreats

By Jordan Burke

Oct. 28 (Bloomberg) -- Valero Energy Corp., the largest U.S. refiner, posted a smaller decline in third-quarter earnings than analysts predicted after crude-oil costs retreated from an all-time high, easing a squeeze on profit margins.

Net income fell 9.6 percent to $1.15 billion from $1.27 billion a year earlier, San Antonio-based Valero said today in a statement. Earnings per share rose to $2.18 from $2.09 after buybacks reduced the number of shares outstanding. Per-share profit excluding a divestiture gain was $1.86, 35 cents higher than the average of 18 analyst estimates compiled by Bloomberg.


Crude-oil futures in New York touched a record high above $147 a barrel in July before plunging below $70 on concern slowing economies around the world will sap fuel demand. Valero said its average profit per barrel of oil processed jumped 32 percent to $13.11 as margins widened on products such as diesel and heating oil.

``You had very strong distillate margins,'' said Roger Read, an analyst at Natixis Bleichroeder Inc. in Houston who has a ``hold'' rating on Valero shares. ``The challenge for Valero and the refining sector is similar for everyone else. It's what is in front of you that looks more challenging than what's behind you.''

Valero jumped $1.79, or 12 percent, to $16.90 at 9:40 a.m. in New York Stock Exchange composite trading. Before today, the stock had plunged 78 percent this year.

Spending Cuts

Revenue climbed 52 percent to almost $36 billion, the company said. The sale in July of Valero's refinery in Krotz Springs, Louisiana, resulted in a pretax gain of $305 million. The 2007 results included a $426 million gain on the sale of the company's Lima, Ohio, plant.

Valero will cut capital spending to $3 billion this year from its latest estimate of $3.8 billion, Chief Executive Officer Bill Klesse said in the statement, citing ``the very uncertain economic environment.'' Capital spending next year will be $3.5 billion, he said, lower than a previous target of $4 billion.

Profit margins on distillate fuels were strong throughout the third quarter, and margins widened on such products as asphalt, petroleum coke and heavy fuel oil, Klesse said.

U.S. refiners have seen profit margins on gasoline narrow as demand slumps. Gasoline purchases in the U.S. were down 7.6 percent from a year earlier in the four weeks ended Oct. 17, according to MasterCard Inc.'s SpendingPlus report.

Ike and Gustav

Before last month, gasoline profit margins as indicated by futures prices closed below zero five times since at least 1989, and the lowest margin was a loss of $1.40 per barrel. The margin plunged to a record loss of $7.36 per barrel processed on Sept. 22 and closed below zero 14 times this month, according to data compiled by Bloomberg.

Hurricane Ike, which slammed the Gulf Coast on Sept. 13, idled three of Valero's Texas refineries for at least a week. Ike and Hurricane Gustav, which struck 12 days earlier, shut down about 20 percent of U.S. refining capacity and cut the nation's gasoline supplies to a 41-year low.

The company processed 2,306 barrels per day of oil and other feedstocks during the quarter, down 9.3 percent from a year earlier.

`Decent Result'

``This will be seen as a decent result, given the hurricane-related operating problems Valero experienced this quarter,'' Mark Flannery, an analyst at Credit Suisse in New York, said in a note to clients.

Valero benefits from a cost advantage over competitors because it has the largest U.S. capacity to process cheap grades of heavy, sour crude. Cheap oil grades, such as Mexican Maya, typically account for more than 70 percent of the crude refined by the company.

During the third quarter, Maya oil sold at an average discount of $11.58 a barrel to the benchmark West Texas Intermediate delivered in Cushing, Oklahoma. That compares with an average discount of $12.27 a year earlier.

Valero has 16 refineries from Quebec to Aruba, most along the U.S. Gulf Coast.

To contact the reporter on this story: Jordan Burke in New York at jburke29@bloomberg.net.