Operating income in the first quarter rose nearly 35% to $1.09 billion which the company attributed to “higher refining throughput volumes and wider discounts relative to Brent crude oil for sour and certain North American light crude oils.” Valero’s oil refining income rose by $161 million and income from the ethanol segment nearly doubled from $95 million in the second quarter a year ago to $187 million.
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The reason for Valero’s strong results boils down to this single comment by the company’s CEO: “We increased North American crude oil consumption at our Quebec City refinery to 83 percent in the second quarter of 2014 from 8 percent in the second quarter of 2013….” Cheaper North American crude, delivered mostly by rail, has replaced foreign crude supplies and Valero’s margins are showing it. By the end of the year, the reversal of Enbridge’s Line 9B pipeline will increase the percentage of North American crude processed at Quebec to 100%.
The company did not offer guidance in its earnings release, but consensus estimates call for third-quarter EPS of $1.45 on revenues of $31.09 billion. For 2014, EPS is forecast at $5.62 on revenues of $125.07 billion.
Income from ethanol production rose on higher gross margins driven by lower corn costs and low industry inventories at the beginning of the second quarter. Valero said it would have made more except for rail congestion in the Midwest. The company acquired another ethanol plant in the first quarter of this year and expects to have it in operation in the third quarter. Ethanol revenues and profits are likely to remain strong for the rest of the year.
The company’s Valero Energy Partners L.P. (NYSE: VLP), which came public last December, purchased $154 million in assets from Valero in the second quarter. Valero Partners’ common units went public at $23 per common unit and closed at $45.90 Tuesday night.
Shares of Valero traded up 0.9% in Wednesday’s premarket to $50.30, in a 52-week range of $33.20 to $59.69. The consensus target price for the shares was around $61.90 before the report.
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