Stock of the Day
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Valero Energy (VLO)
Valero Posts Loss as Gasoline Profit Margins Fall
Most consumers, when they think about gasoline, simply consider the price being charged at the gas pump. As the price rises, many people probably incorrectly assume that the extra money is just going into the pockets of the refineries. Taking a wider look at the situation, however, we would see that the demand for gasoline is unseasonably low right now, and that refineries might not be doing as well as we'd imagined. As just one example, Valero, the largest oil refining company in the United States, reported its earnings today, and Valero and its investors are probably just as frustrated with the current situation as anyone dealing with rising prices at the pump.
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Looking at the numbers alone, it's plain to see that things aren't going so smoothly for Valero. The fiscal second quarter is traditionally the best performing quarter for Valero; and this year, the company is reporting a net loss of $254 million, or a loss of 48 cents per share. Its profit was more than cut in half, falling 51% to $17.9 billion. Just one year ago, the company reported a net profit of $734 million ($1.37 per share). Until a couple of weeks ago, when Valero announced a forecast for this month of a 50 cent per share loss, analysts had been expecting a profit around 74 cents per share.
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However, Valero has come up with a number of explanations to shed light on the situation. First of all, while we have seen a moderate decline in standard gasoline, the demand for diesel has dropped significantly, in many cases causing the price for diesel to drop below the price of standard gasoline. Additionally, Valero has invested in equipment that has previously allowed them to focus on heavier grades of oil, because these produced the widest profit margins for the company. However, as the prices for the different grades have become almost equivalent, this has eliminated a great deal of profit potential for the company.
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This economic change was not out of the blue; Valero was expecting this, and has been doing everything they can to keep afloat. The company actually installed windmills to power one of their refineries. Furthermore, the company has shut down or suspended production at a couple of its other refineries, and is keeping a careful eye on the situation. And although the timing may seem questionable, Valero is not shying away from acquisitions at this time, in hopes that perhaps a smart acquisition could give them a profit boost as well. Valero recently acquired (at a cost of almost $500 million) some facilities to move into the ethanol market, and tried unsuccessfully to purchase a stake in a Dutch refinery, in an attempt to break into the European market.
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Although Valero certainly isn't giving up, both the company and analysts have expressed hesitancy that things will improve anytime soon, although the two parties are focusing on different reasons. Valero is concerned about a new emissions bill that is being proposed in the Senate this fall. Valero's CEO announced that he believes this bill will "raise the consumer price of gasoline and other fuels" and cause at least a million jobs to "disappear from our already weakened economy." Analysts, however, are mostly focusing on the numbers, and speculating that margins will continue to stay low, and that the third quarter could actually be worse for some of these companies than the second quarter was. It looks like now, after actually seeing these negative results from the refineries, the analysts and companies are more on the same page about the future of the industry, but the question still remains: will the refineries be able to overcome this?
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Profile |
Click here to view a detailed profile of Valero Energy.
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