Valero

[The Realist]

saw on MSNBC that a lot of oil executives are buying this heavy right now. 
The reason being that refineries such as Valero can not adjust their prices as quick to match oil prices so they get killed in the margins, however, in the long run, they can adjust prices back and so their profits go soaring again once this adjustment is made. 
CEO of Anadarko Petroleum James Hackett said it is very common way to people in the oil business to make quick money this way and that you do not buy this stock to hold it long term.  You rent it and get rid of it once the price of oil goes against this pattern.

What do you guys think?

[SultanofSwine]

I think I buy thier gas because it is American.

[Kevin Bacon]

I think I buy thier gas because it is American.

Valero buys theirs from Venezuela.

[SultanofSwine]

Valero refines thier own. Based in San Antonio

[Masshog]

Don't know about the fundamentals of the company, but the chart is falling like an anvil.  Let it make some sort of selling climax or bottom pattern before you buy... at least thats one of my rules. 

[Kevin Bacon]

Valero buys theirs from Venezuela.

I could be wrong.  I had heard it before.  This lawyer is standing behind it too. 
http://www.debbieschlussel.com/archives/2006/12/valero_citgo_ve.html

[The Realist]

Don't know about the fundamentals of the company, but the chart is falling like an anvil.  Let it make some sort of selling climax or bottom pattern before you buy... at least thats one of my rules. 

MSNBC described it as a function of the current market.  They can't adjust their prices as fast as oil companies do so their profits fall.  But once adjusted, their profits climb again quickly because they get the benefit of high prices.  They were making a note that a lot of oil executives bought the stock, possibly as a sign that they know Valero is about to start turning a big profit again after adjustment.

[Masshog]

No offense, but until a market or stock shows at least shows an ability to rally I don't even consider it.  Perception is always more important than reality. 

[Biggus Piggus]

Valero was a spinoff from Coastal States Gas, which is now known as El Paso Energy.  Valero was built with a series of acquisitions.  They bought refineries all over the country.  Their first entry into retail gas was the purchase of rights to 350 Exxon stations out here in the Bay Area.  In 2001, Valero bought the Diamond Shamrock brand and with it several thousand gas stations. 

Valero recently contracted with a gasoline wholesaler that supplies independent stations, among them some Citgo-branded locations.  Those Citgo locations are rebranding, and they are using Valero-refined gasoline.

Debbie Schlussel, by the way, was thoroughly destroyed for her wrong report on Valero, which is a Texas company with its own retail gas business--facts she sloppily overlooked.

[Biggus Piggus]

On the stock, Realist, how does MSNBC know that oil execs are buying Valero?  Curious about the connection.  If it is true, it means those execs believe oil prices have peaked for a while.

Yes, refining stocks have been murdered.  Valero has lost $15 billion of market capitalization so far this year.  Tesoro is down 56%, Alon 55%, Delek 51%, Western Refining 49%, Sunoco 46%, Frontier Oil 39%, Holly 25%.

Valero is an important company to the US economy due to its leading refinery market share & specialization in refining medium and heavy sour crude, which is much cheaper than light sweet.  About two-thirds of Valero's production is from discounted feedstocks.

Many refineries, to meet EPA requirements for lower sulfur content in gasoline, increased their reliance on light sweet crude rather than invest in desulfurization equipment.  Those refineries are doomed to eat the massive price increase in light sweet crude.

The US is not the only country with new, lower sulfur limits.  The EU, China and India are dialing in lower ppm's.  China/India standards are far below the West's, so they have much more to do.

Meanwhile, non-OPEC crude oil quality has been steadily declining, in terms of its sulfur content and specific gravity

What I notice about Valero is that the stock hasn't worked in the past when forward earnings expectations were less than the trailing earnings level.

Next 12 months for VLO right now = $4.80, LTM $4.61, if one moves the LTM ahead to Q3 (assuming Q2 estimate is right).

This doesn't mean estimates won't keep coming down.  Street doesn't see a positive Y/Y comparison until Q1 of next year.

Some numbers.  VLO's refining/marketing margin peaked in mid-2006, LTM average $13.43/bbl.  In 2002 that was $4.05.  What died was mainly the crack spread on light sweet crude refining, which had been about 40% of Valero's business.

Operating expenses were $3.65/bbl, up from $2.29/bbl in 2002.

That means refining op profit was $9.78, up from $1.76 in 2002.

Crude throughput averaged 2.9 million bbl/day, up from 1.6 million in 2002.  Average capacity utilization was 92%.

Retail gasoline sales don't make that big of a difference to Valero, but its realized profit margin on fuel sales is of interest.

LTM mid-2006, Valero averaged 19.7 cents profit per gallon of gasoline sold at retail.  That's the retail markup only, excluding the upstream margin.  It will rise with the price of oil, though not as much.

That profit compares with 13.5 cents in 2002.

As you see, from 2002 through mid-2006, Valero's growth and margin measures expanded in sensational fashion.  The stock went up almost sevenfold.

In Q1 08:

Refining gross margin down 30%
Direct operating expenses up 26% (natural gas and maintenance)
Refining op margin down 55%

Crude throughput down 10% Y/Y
Capacity utilization 83%

Realized retail fuel margin up 10% (on upstream price increase that was much larger)

Why was throughput down so much?  A small part was capacity (down 3% on divestitures).  Most of it was related to operating/equipment problems at three major refineries.  That's temporary.

Refining gross margin was down due to

Lower US gasoline demand
Higher US gasoline inventories
Addition of 150,000 bbl/day ethanol to nationwide gasoline production

Gasoline crack spread in Q1 08 was $4.46 and was around zero in March.  In Q2 08 the crack spread has been between $5-10, seasonally up but off a cliff compared with the huge spike of last summer.

Diesel is a great market right now, and refineries are trying to optimize diesel yields (which should reduce gasoline production).

Crack spread for diesel has been $25-35/bbl so far in Q2 08 (five-year average about $12).  Guess where the refinery investment is headed.

Natural gas is an input for refineries, and prices have been much higher than anticipated.

Market prices for residual petroleum products (fuel oil, asphalt, LPGs, propylene, lube) are not keeping up with crude oil prices, putting more pressure on refinery margins.

EVENTUALLY though Valero should be able to clean up on the large spread between prices of sour and sweet crude oil.  I bet the stock bounces upward pretty soon.

[Masshog]

Just please don't get your ideas from CNBC.   They are seldom good ones. 

[Oklahawg]

Biggus, aren't some of the refineries losing money?

I read that Valero's profits drop to $261M 1Q vs $1.1B in 2007.

[The Realist]

Biggus...they have to declare them in some types of reports.

They showed the purchases of about 7 oil executives.  These stocks were around 50k shares per person.  Here is an article detailing how oil executives are the most active share buyers in their industry because they know when and how the stocks are going to react to price variations.  They are making a killing off this it looks like.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1FXldluLD7Q&refer=home

[Biggus Piggus]

Biggus, aren't some of the refineries losing money?

I read that Valero's profits drop to $261M 1Q vs $1.1B in 2007.

They have to be, given that the crack spread on light sweet crude is next to nothing right now.  Most refineries can only handle low sulfur oil, which was their way of complying with the EPA's mandate to reduce sulfur content in fuels.  They optimized for the best quality oil and didn't put in sulfur removal equipment, which would have cost money.  Now they look stupid.

[Biggus Piggus]

Biggus...they have to declare them in some types of reports.

They showed the purchases of about 7 oil executives.  These stocks were around 50k shares per person.  Here is an article detailing how oil executives are the most active share buyers in their industry because they know when and how the stocks are going to react to price variations.  They are making a killing off this it looks like.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1FXldluLD7Q&refer=home

The story says "oil executives," but the first two guys they mention are nonexecutive members of the boards of Valero and Tesoro.  And the guy who said you want to own refineries when the oil price is going down hasn't paid much attention to history.

Looking at Valero, CEO William Klesse exercised options and sold 100,000 shares at $52 in March.  Irl Engelhardt bought his 10,300 shares at $49.  I'd say the CEO had better timing than the board member did.

I have to say, Mr. Engelhardt's bullish buy was the first such purchase since another board member, Robert Profusek, bought 2,000 shares at $59 in Feb. 2006, 500 more at $63 in May 2006.  Not a great move either.

Over the past three years, Valero insiders had 77 open market sales transactions (by members of company management and board members) and five open market purchases (by two independent board members).  The sales prices ranged from $52-77.  Watch Ruben Escobedo, another independent board member.  He sold at 41,000 shares at $77.  Eugene Edwards, head of corporate development, sold 47,000 shares at $76-77.  Gregory King, then company president, sold 113,000 shares at $75.50 in May 2007.  The CEO sold 140,000 shares at $73.59.  There's many more.  Insider stock was gushing out of this company a month or two before the stock peaked.

You could take it as a positive that the only stock being sold these days is related to option exercises.  Whoopee.  Doesn't appear anybody at Valero sees the stock as a bargain now that it's $43.

[BlackKnightHogFan]

They have to be, given that the crack spread on light sweet crude is next to nothing right now.  Most refineries can only handle low sulfur oil, which was their way of complying with the EPA's mandate to reduce sulfur content in fuels.  They optimized for the best quality oil and didn't put in sulfur removal equipment, which would have cost money.  Now they look stupid.

Not doubting you but isn't VLO the largest refiner of sour and acidic oil?

[Biggus Piggus]

Not doubting you but isn't VLO the largest refiner of sour and acidic oil?

Uh, that's what it said below.  And we already noted that Valero actually managed to make money in Q1 precisely because a majority of its refinery output comes from heavy/sour oil.  The ones losing money are the ones that have to buy light sweet and intermediate.

[BlackKnightHogFan]

Uh, that's what it said below.  And we already noted that Valero actually managed to make money in Q1 precisely because a majority of its refinery output comes from heavy/sour oil.  The ones losing money are the ones that have to buy light sweet and intermediate.

Oh sorry, I didn't follow your post.  I as an investor happen to like VLO.  That is not advice, just one I am thinking about owning, a contrarian play.