Valero’s Earnings Warning Looks Acceptable So Far (VLO, CVX)

Valero Energy Corp. (NYSE:VLO) said that tighter refining margins are going to cause the company to miss earnings expectations.  The new range of earnings expectations from the company is $1.30 to $1.40, well under the $1.91 estimate. 

These numbers are before a one-time gain related to a foreign subsidiary loan repayment or a payment for a stock repurchase program completed in July.  After items the new range is $1.25 to $1.35.  The company said that the lower throughput margins are primarily due to substantially higher feedstock costs resulting from increased premiums for light sweet crude oils and narrower discounts for sour crude oils and other feedstocks. In total, higher feedstock costs are expected to reduce the company’s throughput margins by approximately $700 million in the third quarter versus the same quarter of last year.  It also said that asphalt, lube oils, and petrochemical feedstocks, sold at much lower margins in the third quarter of 2007 than in the third quarter of 2006 as prices for those products did not increase as much as prices for crude oil.

There are still refineries operating under capacity as well.  The impact of Hurricane Humberto on the company’s Port Arthur refinery as well as operating issues at the company’s Port Arthur, St. Charles, and Ardmore refineries during the third quarter of 2007 are expected to contribute to lower throughput margins. The McKee refinery continued to operate slightly below capacity as the de-asphalting unit is expected to remain offline through the end of the year.

What is amazing here is that if you read the full release and took away the fact that this is an OIL COMPANY when oil is around $80.00 per barrel, you’d think you were reading about a chemical company that can’t pass on higher and higher costs.  That being the case, the fact that Valero is ‘only’ down 3% is probably a win. It definitely shows the climate for energy stocks is quite forgiving even on lower numbers.  Shares are trading down at $70.00 pre-market, down from a $72.19 close yesterday and still in the upper-half of its $47.66 to $78.68 trading range over the last 52-weeks.

Chevron Corp. (NYSE:CVX) is also only down 2.4% at $90.54, at the higher-end of its $63.00 to $95.50 52-week trading range, after its earnings warning on lower refining margins as well.  It’s still a buyer-bias by far in the energy patch if these companies aren’t hit harder than this on earnings warnings when energy prices are through the roof.

Jon C. Ogg
October 10, 2007

Jon Ogg produces the 24/7 Wall St. Special Situation Investing Newsletter; he does not own securities in the companies he covers.