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Valero Energy (VLO) Down 11.1% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Valero Energy (VLO). Shares have lost about 11.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Valero Energy due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Valero Beats Earnings and Revenue Estimates in Q2

Valero Energyposted second-quarter 2019 income of $1.51 per share, beating the Zacks Consensus Estimate of $1.37. However, quarterly earnings decreased from the year-ago figure of $2.15 per share.

Total revenues fell from $31,015 million in the prior-year period to $28,933 million in the quarter under review. However, the top line surpassed the Zacks Consensus Estimate of $26,655 million.

The better-than-expected results can be attributed to rebound in gasoline cracks in all regions served by the company and the expansion of the Diamond Green Diesel plant. However, this was partially offset by narrower discounts for medium and heavy sour crude oils, relative to Brent Crude benchmark and higher corn prices.

Segmental Performance

Operating income from the Refining segment plunged to $1,037 million from $1,440 million in the year-ago quarter due to narrower discounts for medium and heavy sour crude oils, relative to the Brent Crude benchmark. However, the figure beat the Zacks Consensus Estimate of $965 million on the back of rebound in gasoline cracks in all regions served. Notably, the company set a new record of processing more than 190,000 barrels per day of Canadian heavy crude oil during the reported quarter.

In the Ethanol segment, the company reported operating income of $7 million, lower than $43 million in the year-ago quarter. Moreover, the reported figure missed the Zacks Consensus Estimate of $32.4 million. The downside was caused by higher corn prices.

The company created a new segment during the first quarter, namely Renewable Diesel, which incorporated the operations of a consolidated joint venture, Diamond Green Diesel. Gross operating income from the segment was $77 million, comparing favorably with $30 million in the year-ago period. The increase was attributed to the expansion of the Diamond Green Diesel plant, which occurred in third-quarter 2018.

General and administrative expenses in the Corporate and other segment totaled $199 million compared with the prior-year level of $248 million.

Throughput Volumes

During the quarter, refining throughput volumes were approximately 3 million barrels per day (BPD), up 70,000 BPD from the prior-year quarter. Refinery throughput capacity utilization in the reported quarter was 94%.

By feedstock composition, sweet crude, medium/light sour crude and heavy sour crude accounted for 52.2%, 8.7% and 14.1%, respectively. The remaining volumes came from residuals, other feedstock, and blendstocks and others. The Gulf Coast contributed approximately 59.9% to total throughput volume. The Mid-Continent, North Atlantic and West Coast regions accounted for 15.6%, 16.6% and 7.9%, respectively.

Throughput Margins

Refining margin per barrel of throughput decreased to $9.56 from the year-ago level of $11.12. Refining operating expense per barrel was $3.80 compared with $3.75 in the year-ago quarter. Depreciation and amortization expenses increased to $1.92 a barrel from $1.83 in the prior-year quarter.

Share Repurchase

Valero returned $588 million to its shareholders, of which $212 million was used to repurchase around 2.6 million shares of its common stock and award shareholders with dividends worth $376 million.

Capital Expenditure & Balance Sheet

Second-quarter capital expenditure totaled $740 million, of which $514 million was allotted for sustaining the business.

At the end of the quarter, the company had cash and cash equivalents of $2 billion, and debt of $9.5 billion. Its debt-to-capitalization ratio was 26%.

Outlook

Valero expects capital expenditure for 2019 and 2020 to be $2.5 billion each. Around 40% of the budget will be used in growth projects. The company’s Central Texas pipelines and terminals are projected to be completed in third-quarter 2019. The Pasadena terminal, and St. Charles alkylation and Pembroke cogeneration units are expected to come online in 2020. Moreover, the company’s Diamond Green Diesel expansion and Port Arthur Coker projects are scheduled to be completed in 2021 and 2022, respectively.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, Valero Energy has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Valero Energy has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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