Valero Energy Corp. (VLO) reported a first quarter EPS loss of -$0.20, compared with an EPS profit in the same period a year ago of $0.59. Revenues for the 2010 first quarter were $19.6 billion, up 47% from a year ago. Unfortunately for Valero, cost of sales were also up — almost 62%. BP plc (BP), which also reported earnings today, saw refining and marketing earnings fall nearly 34%, but BP fell back on a huge increase in crude revenues to post a fine profit. Later this week major integrated companies Royal Dutch Shell (RDSA), Exxon Mobil Corp. (XOM), Conoco Phillips Corp. (COP), and Chevron Corp. (CVX) will report earnings, as will refiners Hess Corp. (HES), Sunoco, Inc. (SUN), and Tesoro Corp. (TSO).
The big difference-maker between a profit and a loss in the refining business is the price of crude oil. In the first quarter of 2009, spot prices for WTI ranged from $39.09-$47.94. In the first three months of 2010, WTI spot prices ranged from $76.39-$81.20. Refining margins get hammered in this situation, and today we’re seeing the first glimpse of the hammering.
An extended shutdown of Valero’s Aruba refinery was the chief culprit in lowering production for the company by 254,000 b/d. The company estimated that maintenance downtime it lost about $0.24/share in profits. That’s not good, but neither should it be unexpected as the refineries enter a traditional turnaround period.
Valero did say that it believes the second quarter will improve as larger discounts for sour crude are available and that margins are improving on virtually all of its refined products. The company’s chairman/CEO noted that Valero “expect[s] to be profitable in April as well as the entire second quarter.”
As soon as those words are out, he warns that “margins are likely to be constrained” even though demand is likely to improve as the global economy improves. Which is it?
Refiners can’t pass along all their crude cost increases to consumers for fear that consumers will just stop buying their products. Before the recession took hold in 2008, gasoline prices rose steadily from $3/gallon to $4/gallon. At about $3.50/gallon, demand started to fall off. Given the weak state of the economic recovery, gas prices have been flirting with $3/gallon for a while, but haven’t really burst past that barrier yet.
If gasoline prices rise much above $3/gallon, consumers could step on the brakes more quickly than they did 18 months ago. In other years this might have served to lower crude prices enough so that both consumers could once again afford to buy gasoline and refiners could make a profit.
Now, however, any crude that the developed countries of North America and Europe don’t buy gets sucked up by the growing economies of Asia, particularly China. US refiners are really caught in a squeeze when that happens.
Valero appears to believe that such a squeeze is not going to occur, but at the same time the company is acknowledging the danger. Valero shares are less than 1% below their opening price this morning, likely because the bad news is already out for them. Some of the other integrated oil companies and refiners are off more than 2% because the bad news is still to come.