Are Refining Stocks Safer After Valero? (VLO, TSO, FTO, WNR, HOC)

Valero Corp. (NYSE: VLO) shares are trading up almost 10% after the company posted earnings.  Valero has been what seems like habitually hampered with higher refining costs more than it has been a beneficiary of higher sell-through prices from high oil costs.  With shares trading up 9.5%to $60.10 and a 52-week trading range of $47.40 to $78.68, its shares are still down over 23% from year highs.  The company has retired nearly 120 million shares of stock since the end of 2005.

Valero’s operating income was barely half of last years Q4 report at $567 million versus $1.1 Billion, while the EPS report was $1.02 EPS versus $1.74 last year.  The prior year included a $196 million pre-tax gain on sale, otherwise the net would have compared to $954 million from operations and $1.53 EPS.  While they were down, these earnings were significantly above Wall Street expectations as First Call had a $0.64 EPS target for the quarter.  Revenues for the quarter were $28.66 Billion, up from $18.8 Billion in Q4 2007.

Some of our more pure-play stocks in refining are also up considerably today.  As you can see some are still considerably off of their highs:

• Tesoro Corp. (NYSE: TSO) shares are up some 7% at $41.10 today.  With a 52-week trading range of $34.00 to $65.98, its shares are still down more than 33% from the highs.
• Frontier Oil (NYSE: FTO) shares are up some 13% after Goldman Sachs added it to the Conviction Buy list.  With shares up 13.6% to $36.47 and a 52-week trading range of $26.71 to $49.13, its shares are still down over 25% from yearly highs.
• Western Refining (NYSE: WNR) shares are trading up after shares were upgraded from underperform to Neutral at Credit Suisse on Monday.  With shares up 10% to $22.30 and a 52-week trading rang, of $16.70 to $66.30, this stock is still down over 60% from its 52-week highs.
• Holly Corp. (NYSE: HOC) was also raised Monday from underperform to Neutral at Credit Suisse.  With shares up 6.4% to $49.40 and a 52-week trading range of $39.36 to $80.88, its shares are still down 38% from yearly highs.

Valero noted that refined product margins were lower because the cost of crude oil and other feedstocks increased more than product prices.  Margins for many of the company’s secondary products, such as asphalt, fuel oils, and petrochemical feedstocks, were also lower on raw materials and feedstock prices.  Valero also noted that margins for some of our secondary products, such as asphalt, fuel oils, and petrochemical feedstocks, are still weak.  But its continues to see wide discounts to WTI for the sour and heavy crude oils and other feedstocks that make up more than 60 percent of our throughput volumes. Valero also expects diesel margins to remain strong since inventories are well below the levels.

So it isn’t as though the pure-play refiners can count the all-clear sign being given.  But Wall Street was expecting much worse, and sometimes "things just not being as bad" is double-plus good.

Jon C. Ogg
January 29, 2008