Valero Set To Win In New Pricing Environment (VLO)

Valero Energy Corp. (NYSE: VLO) looks set to surge after the refinery giant posted earnings.  The company posted $1.86 EPS from continuing operations, which may have some questionable numbers because some other operations from the Krotz Springs refinery have not been presented as discontinued operations.  But on a net basis, the company posted $2.18 EPS. First Call estimates were only $1.54 EPS. 

The company’s gain in earnings was mainly due to higher margins fordistillate products in diesel and jet fuels.   Valero also said that adecrease in margins for gasoline was partially offset by the highermargins for distillate products.

Valero may also be entering the sweet spot in energy land.  If oilstays in a range of say $60 to $80 per barrel, or maybe even $60 to$100, it can sufficiently make its business model work.  When energygoes in a straight line from $60 to $100 and $100 to $140, or when oilgoes from $140 down to $80 in a straight line, it gets very hard formanagers to plan.  But a stable pricing environment will create stablemargins for the refining sector.

After a 70%+ sell-off and a forward P/E of roughly 4.0 to 5.0, youmight even think that Wall Street would have accepted anything.

Valero shares are up almost 12% at $16.85 pre-market.  Its 52-week trading range is $14.59 to $73.68.

Jon C. Ogg
October 28, 2008