Valero Energy Corp. (NYSE:VLO) reported more bad news this morning on the earnings front, even though the bad news isn’t as bad as many feared. Second quarter income from continuing operations totaled $734 million, down from $2.1 billion a year ago. EPS fell to $1.37, down from $3.57 on revenue of $36.64 billion. Analysts expected EPS of $1.33 on revenue of $34.93 billion.
Valero attributed the drop to lower margins, which resulted from highercosts for crude oil and other feedstocks that could not be passed alongto consumers. Operating expenses are also $148 million higher in the2008 second quarter, due to higher costs for electricity and naturalgas. Throughput was lower by about 48,000 b/d, as a result ofmaintenance and repairs at refineries in Aruba, Port Arthur, andDelaware City.
The company is tightening its belt, seeking buyers for its refinery inAruba as well as those in Ardmore, Oklahoma, and Memphis. Valero isalso reducing capital expenditures in this fiscal year by $700 millionfrom its original estimate. In another move to increase its margins,Valero increased distillate production by about 110,000 b/d whilekeeping gasoline production steady. The company has also increased itsdividend, and re-purchased nearly 15 million shares of its own stocksince the beginning of the fiscal year.
The press release also includes a whine about opening the U.S. outercontinental shelf and areas for more exploration. Bill Klesse, thecompany’s chairman and CEO put it this way, "We can manage industrychallenges, but unfortunately, reckless rhetoric in Washington, D.C.complicates our forward progress. Too many in Congress fail toappreciate our industry’s efficiencies, they won’t acknowledge theexcellent jobs we provide, they ignore the taxes we pay, and worst ofall, many in Congress are more interested in scoring populist politicalpoints than reducing energy costs. To not allow companies to look foroil and gas when there are huge potential reserves in the U.S. isirresponsible."
Get a grip Bill. Congress loves the oil business. Witness depletionallowances, tax breaks, etc. And, exploring the outer continental shelfwon’t produce any results for a decade, if at all. Valero is doing whatit can to provide shareholder value in a very bad market for refiners.But investors remain skeptical about refiners with $120+ oil.
The good news if you just recently bought shares is that the stock isactually trading up over 3% pre-market at $32.80. That is still downmore than 50% from highs and the 52-week trading range is $29.70 to$75.75.
Paul Ausick
July 29, 2008
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