Valero Energy Corp. (NYSE: VLO) did manage to beat earnings, at least if you consider a two-penny beat versus a wide loss after a warning as a beat.  The refiner’s loss came to -$0.48 EPS versus the Thomson Reuters figure of -$0.50 EPS.   The company had already warned that it was going to lose money, and things seem like they will remain tough for the refining giant.

The company said that the decline in operating income was mostly as a result of lower diesel and jet fuel margins, as well as from lower sour crude oil differentials versus the same quarter last year because key supplies of lower quality crude oils have come off the market.

Valero also called this “a very challenging environment for sour crude oil refiners.”

As far as the demand picture, Valero said that the global economic downturn has sharply reduced demand for refined products, and that is at the same time as when new refining capacity is coming online in the rest of the world.

This is a problem for ahead… global product inventories are high and refining margins are depressed.

Valeros does expect that product demand, sour crude oil production, and refining margins will improve, after the global economy improves.

The mid-July shutdown of the Aruba refinery was completed because of very poor margins, and Valero will review the margin outlook in September to decide whether to restart the plant or whether it will keep it off-line. By that time, it feels it will have a decision from the arbitration panel on the turnover tax arbitration.

Elsewhere, the company will continue to monitor its other refineries for situations where it will slow or shut down specific units or entire plants.

The long and short of this sounds like the weatherman took over.  Pain today, 80% chance of pain tomorrow.  Valero shares are down 3% at $18.17 in pre-market trading.  The 52-week trading range is $13.94 to $36.22.

JON C. OGG
JULY 28, 2009

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