The refining industry has been under pressure for some time. It seems that rising prices were not a shoe-in for windfall profits at all. A rapid drop in oil prices was also not a recipe for windfall profits in refining. Valero Energy Corp. (NYSE: VLO) has been one of those energy patch companies which has fared rather poorly over the last two years since before the energy bubble popped in 2008. This morning’s earnings were feared by many over what the company might say and how the stock might react, particularly as it seems that the news-bias out of the company has been one of caution, pause, and contraction of late. But at some point enough is enough, and some longer-term investors may finally be starting to take a look after today’s results.
ConocoPhillips (NYSE: COP) recently showed how its refining operations were showing losses in some cases, and that was a drag against its exploration and production operations. Valero is not an integrated oil player and is now effectively considered a pure-play in the refining sector. Were the earnings great? No. Will most investors be glad that the dividend was chopped by two-thirds? No. But sometimes bad news is good news, or at least not as bad as it sounds.
Valero’s loss was $1.41 billion or -$2.51 EPS, although that compares to a year ago’s wider losses. if you exclude all the items, the operational result was -$0.28 EPS. Revenue rose by almost 6% to $18.87 billion. Thomson Reuters had estimates of -$0.49 EPS on revenue of $18.35 billion.
The company’s stance today was that 2009 may have marked a bottom for refining profitability. But also noted is too much inventory and spare refining capacity that will prevent margins from returning in the refining sector. Without giving guidance, the company noted that 2010 should be a profitable year due to cost cutting and due to shutting down its unprofitable operations. Output at the refining level fell by about 15%, yet margins per barrel were down a whopping 58%. It is hard for many to think that all oil companies along the entire supply-side of the equation have no pricing power, but that is the case.
Valero will save over $56 million a year by its dividend cut, which went to $0.05 from $0.15. After going back through the notes here, there is very little excitement here. There also seems no incredible hurry to catch an industry that is about to recover faster than ever. But for the stock to be down this little on a day where the market has been soft and when a new bias is out toward the downside on so-so reports, that has to offer investors at least some comfort.
In early 2008, Valero traded at $60.00. At $18 and some change after a 3% drop today, we have no aspirations of looking for a return of the $60 price. That is not our game, ever. But a drop of only 3% after earnings and after the negative news-bias has been in place for so long might be indicative that longer-term investors can finally start looking at this for an entrance.
A lot depends upon oil price stability for the refiners. They don’t have much pricing power, but if we see a range of $70 to $85 hold and if the end users of oil do not have to stomach wide price gyrations then the refiners might finally be at a point of stabilization.
There are risks of course, but the risks are different at $75 oil compared to $140 oil. Passing on new emissions and greenhouse gas costs will not be good for this sector, and that would force the refineries to immediately pass costs on to you and me. Restrictive and tight additional regulations that are not yet known also pose risks to Valero and to refineries. At $18.50, the $15.29 to $25.59 range of the last year (and the $60 price of old), at least starts to sound much better for those who can look longer-term in an industry that effectively has no new fossil-fuel refining competition coming online in the U.S. any time soon.
JON C. OGG
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