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Valero Energy Corporation Message Board

  • p_fortyseven p_fortyseven Jan 25, 2014 8:25 AM Flag

    Rising Nat Gas Prices

    Anyone care to rationalize what the impact of rising natural gas prices will have on Valero's cash flow and gross margins? It uses 700,000 MCF of nat gas a day. Assuming it runs refineries everyday at 90% utilization, then its annual nat gas costs at $4/mcf are just over $919,800,000 ($4/mcf is the price it shows in its investor reports). At $5/mcf, its nat gas costs are $1.15 billion (using assumptions). So for each dollar increase in nat gas, VLO spends an extra $230 million. Most of VLO's increase in operating expenses in Q3 was attributed to higher nat gas prices, according to its Q3 report. The trend appears to be toward continuing higher prices - despite all the US fracking - as 2012 prices for VLO averaged $2.50/million BTU and in 2013 $3.66/million BTU.

    Anyone know what VLO's annual hedges are at?

    Sentiment: Strong Sell

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    • P_Forty... I think this is a good post and a legitimate concern for Valero. After all, low natural gas prices along with discounted crude has made a moat for it in the world market.

      But, having said that, I don't think it is as material as one would think (assuming a $1 increase in MCF from a year ago). And, I think the great thing is high natural gas prices we are having will encourage more natural gas drilling and utility companies (including DUK in my area) will switch from nat gas to coal. Coal will keep a lid on nat gas prices in long term. Short term with the cold weather, yes we will see these nat gas spikes.

      So, let's DRILL down on this. So lets assume your numbers are correct and they look pretty good to me. So, and extra expense of $230,000,000 million per year in natural gas prices. Take out taxes at 35% and profits are lost by about $150,000,000 per year. So, based on earnings per share of about 550,000,000 shares, you get a lost of earnings per share of only 27 cents per share or less than 7 cents per share per quarter. Not insignificant but not material in my view. Ethanol or RINS have impacts that have the ability to erase this minor charge.

      We may hear in the conference call Wednesday about the higher natural gas prices.

      Good luck and thanks for posting.

      Lock and load.


    • can answer your own question by doing some math on the total bbls that vlo processed in that quarter and dividing that by 42 gals/ bbl. quick math indicates the increase you have stated would increase the cost by a penny / gallon since fuel is around 35% -40% of operating costs..... Total Operating costs are about $4.50 / bbl ......35% are energy costs so $1.50 / bbl .......or 4 cents per gallon...... 20% increase is a penny a gallon. In the grand scheme of the business this will not adversely effect the bottom line.

      As I said......VLO signs staggered long term contracts I doubt the recent moves in NG prices will impact 2014 earnings in a significant way.


    • Vlo has long term contracts on NG ...... They are not exposed to the variables in the spot market.......your electric utility does the same . These contracts are for a given period of time and are staggered . This is how they " hedge" .

      NG prices are still at historical lows for refiners and are significantly below foreign competitors . Many foreign refiners do not have access to NG and use fuel oil or refinery off gases ( propane/ butane) to run their furnaces.

      Net effect of recent increases on margins is negligible .


    • Good point....this will crush their margins..............thats why crack spreads are different in different regions of the country....excellent

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