Valero Earnings Signal Year-Ahead Issues for Refiners

Oil refiner Valero Energy Corp. (NYSE: VLO) reported fourth-quarter and full-year 2015 earnings before markets opened Thursday. Diluted earnings per share (EPS) totaled $1.79 in the quarter, compared with EPS a year ago of $1.83. Quarterly revenues totaled $18.78 billion, compared with revenues of $27.86 billion in the fourth quarter of 2014. The consensus estimates called for EPS of $1.45 on revenues of $16.75 billion.

For the full year, Valero posted EPS of $9.24 and revenues of $87.8 billion. That compared with EPS of $6.68 and revenues of $130.84 billion in 2014. Analysts were looking for EPS of $8.78 on revenues of $86.66 billion.

Valero raised its quarterly dividend by 20% last week, from $0.50 to $0.60 per share, payable on March 3 to shareholders of record as of February 9. In 2015, Valero returned $3.7 billion to stockholders, or 80% of adjusted net income from continuing operations attributable to Valero stockholders, consisting of $848 million in dividends and $2.8 billion in stock buybacks. The company is targeting a payout ratio of 75% of net income in 2016.

Operating income in Valero’s refining segment came in at $1.5 billion, essentially flat with the year-ago quarter. Throughput volume rose by 34,000 barrels a day year-over-year and refineries operated at 97% of capacity for the quarter.

Operating income in the company’s ethanol segment dropped year over year from $154 million to $37 million, mainly due to lower gross margin per gallon, which Valero attributed to a decline in ethanol prices relative to stable corn prices. Average ethanol production totaled 3.9 million gallons per day, up by 131,000 gallons compared with the year-ago quarter.
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The company did not offer earnings guidance in its press release, but consensus estimates call for first-quarter EPS of $1.39 on revenues of $18 billion. For the 2016 fiscal year, EPS is forecast at $7.72 on revenues of $74.62 billion.

In 2015, capital investment totaled $2.4 billion for turnarounds, catalyst, strategic and joint venture investments comprised of $1.4 billion for stay-in-business capital and $1.0 billion to advance Valero’s growth strategies. Approximately 40% of the 2015 growth capital spending was allocated to investments in logistics assets that support Valero’s operations and potential drop-down transactions to Valero Energy Partners L.P. (NYSE: VLP).

While crude prices remain low, Valero and other refiners should continue to earn solid profits, even though revenues are lower due to low gasoline prices. Year-over-year profit growth is not likely to rise much, however, as comparisons now begin with the first quarter of last year, when oil prices really settled in to their year-long tumble.

Shares of Valero closed down about 2.5% on Wednesday at $65.99, in a 52-week range of $51.18 to $73.88. In Thursday’s premarket session, shares traded up about 1.4% at $66.90. The consensus target price for the shares was $81.13 before the report.