Valero Energy Corporation (NYSE: VLO) is the largest U.S. refiner in terms of throughput capacity. Valero Energy Corporation owns and operates 15 refineries located in the United States, Canada and Aruba that produce conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants and other refined products. The company also owns and operates a network of gasoline and retail stations located throughout the United States.
Like many U.S. refiners, Valero’s profits are determined by the refining margin, which is the price difference between purchased crude oil and refined products. As a result, Valero’s revenue and profitability are susceptible to changes in crude prices, refined prices, and consumer demand for refined products. Valero’s refining operations also benefit from using cheaper, lower-grade crude inputs. Approximately two-thirds (2/3) of Valero’s refining capacity can use heavy, sour crude. As a result, the price differential between light, sweet crude grades and heavy, sour crude grades, known as the sour crude discount, has a significant impact on the company’s refining margin.
Valero’s business operations are broken into three segments: Refining, Retail, and Ethanol. Because its largest segment is the company’s refining segment, its financial earnings are often dependent on the price of crude inputs and the overall profit derived from producing petro-products. For 2010, Valero generated $923 million in income from continuing operations. Valero reported a $273 million loss from continuing operations in the previous year. The year-over-year income improvement was partially due to the rise in global demand for refined products as the world economies rebounded from recession. In addition, both refining margins and crude discounts improved from their 2009 levels. Beginning in 2009, a company-specific initiative to reduce operating costs has also improved earnings.
For 2011, Valero management believes that global demand and margins have the potential of rising further. The company has a preliminary capital spending estimate of $2.9 billion for 2011. This estimate represents an increase from prior estimates due to the acceleration of economic growth projects to install new hydrocrackers at the Port Arthur and St. Charles refineries. The 2011 capital spending estimate also incorporates several major turnarounds in the first quarter and the early part of the second quarter, including significant reliability investments for a revamp of the St. Charles Refinery cat cracker and replacement of the Port Arthur Refinery coke drums.
Key Acquisitions, Joint Ventures, and Mergers (2011)
Key Divestitures and Asset Sales (2011)
Refining Segment (2010 Operating Income of $1.9 billion): Valero’s refining segment sells petroleum products that have been processed and extracted from crude oil and other feedstock. The company purchases crude oil, either through long term contracts or in the spot market, processes it, and sells its refined products to third parties or consumers at its retail stations. The company's assets include 14 petroleum refineries with a combined throughput capacity of approximately 2.6 million barrels per day.
2009 financial performance reflected Valero's efforts to combat costs amid lower demand and profit margins. Throughput margin per barrel in 2009 was $5.85, compared to $11.10 in 2008. In response to lower margins, Valero also cut throughput volumes by 8.2% in 2009 compared to 2008 levels. In an effort to cut production and raise money from sources other than refining, Valero sold two refineries, temporarily shut down two Texas refineries, and reduced gasoline production at its other refineries. The decline in production and refining margins was partially offset by a 15% reduction in costs. Overall, operating income decline from $995 million in 2008 to $105 million in 2009.
In addition to being the U.S.’s largest refiner in terms of throughput capacity, Valero also has the greatest number of refineries that can process crude oil with high sulfur content, known as "sour" crude oil. Because 65% of Valero’s production can use cheaper, lower quality forms of crude oil to produce high quality “light” petroleum products, its profits benefit from the price differences between sweet, light crude and heavy sour crude. As a result, the “sour crude oil differential” is significant to Valero’s profits because the company purchases sour crude at prices lower than sweet light crude, processes the cheaper crude into light refined products, and sells its products at the same prices as refiners that refine light crude. The price disparity between refined products and crude oil, known as the “refining margin,” is the primary determinant of U.S. refiner’s profitability. Because 65% of Valero’s refineries use sour crude as an alternative to light sweet crude, Valero can significantly lower its feedstock costs and increase its refining margin during times when the sour crude differential is large.
Over the course of 2010, Valero's refining operations began to differ compared to 2009 due to plant restarts and sales. In February 2010 and March 2010, Valero announced the resumption of a few of its refineries that had previously be stalled for repairs or due to unprofitably. Many of Valero's saving initiatives were accomplished through the shutdown and sale of non-core assets. The Delaware refinery was sold in the second quarter of 2010, and the Paulsboro refinery was sold in the final quarter of 2010.
In regards to annual earnings, Valero reported operating income from its refining segment of $1.9 billion versus $247 million in 2009. While operating cost per barrel increased almost 2% year-over-year in 2010, refining margin rose from $6.00 per barrel in 2009 to $7.80 per barrel in 2010. Throughout volumes also increased slightly on a year-over-year basis. The rise in throughput margins was primarily due to a rise in margins for diesel and gasoline as well as improved discounts for heavy-sour crude.
|Operating Income (in $ millions)||1,903||247||995|
|Throughput margin per barrel (in $)||7.80||6.00||11.10|
|Total throughput volumes (thousands barrels per day)||2,129||2,124||2,477|
Source: VLO 2010 10-K 
Retail Segment (2010 Operating Income: $346 million): Valero is among the largest retail operators in terms of retail stations with approximately 5,800 retail and branded wholesale outlets in the United States, Canada and the Caribbean. Although Valero’s retail stations sell goods other than gasoline and diesel, operating income and profitability are significantly determined by the price of conventional fuels sold to consumers. Compared to its 2009 levels, Valero sold more fuel and at higher margins in the U.S. Fuel volume per day per site was 5,086 gallons on average in 2010, compared to 4,983 on average for 2009. Fuel margins improved compared to 2009 levels at both the company's U.S. and Canadian stations. As a result, operating income rose from $293 million in 2009 to $346 million in 2010.
|Operating Income (in $ millions)||346||293||369|
|U.S. fuel margin per barrel (in $)||0.140||0.126||0.229|
|U.S. fuel volumes (gallons per day per site)||5,086||4,983||5,000|
Source: VLO 2010 10-K
Ethanol (2010 Operating Income of $209 million): Valero owns 10 ethanol plants with a combined production capacity of 1.1 billion gallons per year, and a 50-megawatt wind farm. Production rose significantly from 1.47 million gallons per day in 2009 to 3.02 million gallons per day in 2010. Amid lower product prices, Valero reported production margins of $0.55 per gallon in 2010 versus $0.65 per gallon in 2009. In 2010, operating costs per barrel rose $0.01 from 2009 levels. However, operating income in 2010 was $209 million compared to $165 million in 2009.
|Operating Income (in $ millions)||209||165||N/A|
|Production (thousand gallons per day)||3,021||1,479||N/A|
|Gross Margin per gallon (in $)||0.55||0.65||N/A|
Source: VLO 2010 10-K
In September 2010, Valero CEO said the company has the potential to grow with global demand despite sluggish growth in the U.S. Slow growth demand for refined petro-products in North America has depressed margins realized by U.S. refiners. On the other hand, fuel demand has began rising more favorably globally as emerging markets continue to use fuel to growth their economies. As a result, many refiners have adapted the strategy of reducing costs and boosting exports. Valero also expects sour-crude differentials to improve globally as Colombia and Venezuela increase production of sour crude amid stabilizing supplies. An increase in sour-crude differential has the potential of benefiting Valero because the company’s advanced refineries can handle the cheaper form of crude.
Valero’s ability to refine large quantities of heavy sour crude has the potential to increase refining margins and profits, especially when the price of light crude, like West Texas Intermediate sweet crude, rises. When the price of light crude began to rise to $140 per barrel in July 2008, the prices of refined products, such as gasoline, were not able to increase as quickly. For many independent refiners, the rapid increase in crude prices initially cut refining margins and reduced quarterly profits substantially. As a result, volatile changes in the prices of light sweet crude oils did not affect Valero's refining margins as much it did the Valero's competitors.
Valero’s refining margins are not as exposed to volatile changes in the prices of light sweet crude oils did as some of its competition. not affect Valero's refining margins as much it did the Valero's competitors.
However, Valero is exposed to the risk that falling crude prices have would reduced reduce the low-production-cost advantages of Valero's refineries. Declining consumption of refined products, which fell 6%in 2008, has not only reduced Valero's profits, but also reduced the production advantages Valero has over other U.S. refiners like Sunoco (SUN). Despite declining refining prices, Soleil Securities energy analyst Jacques Rousseau maintains that the price difference between sour and sweet crude has the potential to widen when the U.S. economy begins to recover and oil prices rise.
Valero’s ownership of 10 biofuel plants suggests that the company believes ethanol has the potential to be a profitable fuel when energy prices rise and that consumers demand more environmentally friendly forms of energy. As a producer of ethanol as well as a petroleum refiner, Valero will be able to profit from higher concentrations of ethanol in gasoline. Valero and Marathon Oil are the only two U.S. refiners that will not have to purchase ethanol from third parties in order to make gasoline.
Although the U.S. government raised the ceiling for the amount of ethanol that mixed into conventional gasoline, Valero and other refiners may be reluctant to sell gasoline blended with higher concentrations of ethanol. The EPA is expected to raise the ceiling from 10% to 15% ethanol, but refiners are not obligated to increase the amount of ethanol blended into their conventional gasoline. In fact, Valero is likely not to increase ethanol concentrations due to fears that it will be liable for any engine damage resulting from the higher levels of ethanol. Because the new ceiling does not include any liability protection, many refiners do not plan on increasing ethanol concentrations. While increased concentrations of ethanol would benefit Valero's ethanol business, which is the third largest in the U.S., the increase also reduces the amount of gasoline sold per gallon of fuel. As a result, the reluctancy of U.S. refiners to increase ethanol concentrations illustrates the limitations surrounding ethanol use as a fuel. Higher ethanol concentrations not only have the potential of hurting the refining businesses of U.S. refiners, but also may lead to engine damage.
With refineries located in Texas and Louisiana, about half of Valero's refining capacity is exposed to hurricanes and tropical storms occurring in the Gulf of Mexico. In the fall of 2008, BP (BP), Royal Dutch Shell (RDS'A), and Transocean (RIG) had to shut down refineries, oil rigs, and other operations on the Gulf coast in order to protect their workers and equipment from Hurricane Gustav. While Valero did not have to close any of its Gulf refineries during the storm, half of Valero's production capacity remains open to destruction from future hurricanes and other Gulf storms.
Oil Majors( Chevron Corporation (CVX) , Exxon Mobil (XOM), CONOCOPHILLIPS (COP), BP (BP)): The oil & gas majors are vertically integrated oil and gas companies that have exploration, production, refining, and marketing operations. In the refining segment, many of the oil & gas majors operate more cost-effectively than independent refiners like Valero because they do not have to purchase their crude oil supply from third parties. Not only do many of the majors have comparable refining capacity to Valero's, but many of them operate in the Texas and Lousiana, where Valero has more than half of its refineries.
Holly Corp. (HOC): Holy Corp. is a United States-based petroleum refiner. The Company operates two oil refiners and distributes its refined products in the Southwest and West United States. Holly Corp. also owns 900 miles of crude oil pipelines located in Texas and New Mexico. the Company transports asphalt and liquid petroleum gas(LPG) to wholesalers and LPG retailers.
Sunoco (SUN): Sunoco is U.S. petroleum company with refining, retail, chemical, coke, and logistics segments. As the second largest U.S. refiner in terms of capacity,the company has a refining capacity of approximately 1.3 million barrels per day, with operations spread across the Northeast and Mid-West. Unlike Valero Energy (VLO), a majority of Sunoco's refining feedstock comes from sweet crude oil.
Tesoro (TSO): Like Valero, Tesoro operates in two segments: refining and retail. As of December 31, 2008, Tesoro owns and operates 7 refineries with a total throughput capacity of 658,000 bpd. 93% of their operating income comes from their refining segment. In 2007, Tesoro made $21.9 billion in revenue from its refining and retail segments and $967 million in operating income.
|CONOCOPHILLIPS||ROYAL DUTCH SHELL||EXXONMOBIL||CHEVRON||BP||LUKOIL(1)||Eni S.p.A(1)||Total S.A.|
|Oil and Gas Liquids|
(Millions of barrels)
(Billions of cubic feet)
|Oil and Gas Liquids|
(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates
|SUNOCO||CHEVRON||VALERO||EXXON MOBIL||Royal Dutch Shell||SINOPEC||WESTERN REFINING||ConocoPhillips||BP||LUKOIL(1)||Eni S.p.A(1)||Total S.A.|
|Number of Refineries (including partial interests)||5||18||16||37||40||17||4||12||17||9||N/A||25|
|Number of Retail Gas Stations||7,785||25,000||5,800||10,516||45,000||29,279||153||8,340||22,600||6,287||6,441 (in Europe)||16,425|
(1) Latest data is for 2007