Oil refiner Valero Energy Corp. (NYSE: VLO) reported third quarter 2013 earnings before markets opened Tuesday morning. The results were no better than good enough, but the company is looking forward to better days.

Earnings per share (EPS) totaled $0.57 on net income of $312 million and revenues of $36.13 billion. In the same period a year ago, adjusted EPS came in at $1.90 on net income of $674 million and revenues of $34.73 billion. The consensus estimates called for third-quarter EPS of $0.41 on revenues of $29.76 billion.

Operating income in the 2013 third quarter totaled $532 million, down sharply from $1.3 billion in the same period a year ago. The company attributed the steep drop to lower refining throughput margins caused by lower gasoline and diesel margins and lower crude oil discounts. Throughput volumes were higher this year, up an average of 172,000 barrels a day.

Here’s the better news, according to the company’s CEO:

Fourth quarter 2013 gasoline margins have started out seasonally weak, but distillate margins continue to be strong. Fortunately for Valero, U.S. and Canadian light sweet crude oil discounts relative to Brent have been improving versus the third quarter, particularly for WTI in the U.S. Mid-Continent and LLS on the U.S. Gulf Coast. Discounts for medium and heavy sour crudes on the U.S. Gulf Coast have also improved compared to the third quarter. Valero has substantial capability to process these discounted crude oils, which provide cost advantages versus many of our global competitors.

Valero’s margins are improving because of increased crude oil production, primarily in North Dakota and Texas. There is so much crude being produced that Valero and other refiners can pretty much tell producers how much the refinery are willing to pay for the crude and the refiners get that price. Remember, since 1975 no U.S. crude can be exported.

What can be exported are refined products like gasoline and diesel fuel. Valero’s third-quarter margin on diesel fuel less the cost of Brent crude on the Gulf Coast was $16.86 a barrel. In the mid-Continent the spread less the cost of WTI crude was $22.86 a barrel on diesel fuel. The mid-Continent spread against WTI for conventional gasoline was $14.46 a barrel. These are considerably less than the year-ago spreads, but still quite healthy. If these spreads are widening, then refiners should be looking forward to a good fourth quarter regardless of how the third quarter turns out.

Phillips 66 (NYSE: PSX) reports earnings Wednesday morning and the consensus estimates call for EPS of $0.94 on revenues of $37.26 billion. Both numbers are significantly below the year-ago totals. We expect to hear something similar to Valero’s statement on improving spreads.

Marathon Petroleum Corp. (NYSE: MPC) reports earnings Thursday morning and is expected to post EPS of $0.61 on revenues of $21.37 billion. Full-year EPS estimates have been cut by more than $2 a share for Marathon, largely due to narrower throughput margins. Look carefully at anything Marathon has to say about fourth-quarter margins.

Tesoro Corp. (NYSE: TSO) is scheduled to report earnings on November 6th. The consensus estimate calls for EPS of $0.50 on revenues of $8.33 billion. Tesoro is primarily a West Coast refiner though it does own plants in North Dakota and Utah. Just three months ago the third quarter EPS estimate was $1.88. That may be too high, but given the company’s advantageous locations, $0.50 seems too low. In the third quarter of 2012 Tesoro posted EPS of $2.05.

HollyFrontier Corp. (NYSE: HFC) is also set to report earnings on November 6th. Consensus estimates call for EPS of $0.65 on revenues of $4.5 billion. HollyFrontier profited most from the wide differentials between Brent and WTI crudes last year and the spread narrowed by more than $8 a barrel in the second quarter. As with the other refiners, EPS estimates are about half what they were three months ago.

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