Key Takeaways:
(P1 - Lede) Valero Energy Corp. plans to run its refineries at up to 95% of their 3 million barrel-per-day capacity in the second quarter, signaling sustained high fuel demand after first-quarter profits beat analyst estimates on the back of surging refining margins.
(P2 - Authority) "We believe the bear case on Valero overlooks the magnitude of global supply disruptions and the resulting impact of product shortages on the earnings power of what we view as a best-in-class refiner," UBS analysts said in a note following the announcement.
(P3 - Details) The San Antonio-based refiner reported an adjusted profit of $4.22 per share, easily surpassing the LSEG consensus estimate of $3.16. The outperformance was driven by the refining segment, which posted operating earnings of $1.8 billion, a sharp reversal from a $530 million loss a year earlier. Refining margin per barrel jumped to $14.90 from $9.78 year-over-year, as throughput volumes rose 3.6% to 2.9 million bpd.
(P4 - Nut Graf) The aggressive Q2 utilization forecast comes as the company expects tight global fuel supplies, which have been exacerbated by the conflict in the Middle East, to keep refining margins elevated for six to 12 months even after the Strait of Hormuz reopens. This outlook, shared by rival Phillips 66 which also posted a surprise profit, suggests continued strength for the refining sector amid a volatile geopolitical landscape.
Valero is finalizing the restart of its 380,000-bpd Port Arthur, Texas, refinery, which was shut down following a fire on a diesel hydrotreater on March 23. The company expects the facility to return to "fairly normalized" production rates by May 1 as the large crude distillation unit (CDU) comes back online.
However, the unit that was the source of the fire sustained "extensive damage," and Chief Operating Officer Gary Simmons confirmed there is no current timeline for its rebuild. An adjacent kerosene hydrotreater is expected to return to service by the third quarter. Simmons noted that the outages could "negatively impact capture rates some in the second quarter."
The company's Gulf Coast throughput is guided to 1.69-1.74 million b/d for the second quarter, reflecting the reduced rates at Port Arthur.
The company is also adjusting its production mix to capitalize on market dynamics, particularly in jet fuel. Simmons told analysts that global jet fuel supply is "incredibly short," prompting Valero to increase its jet production to over 30% of its total distillate output in March, up from a typical rate of 26%.
"We have a couple of refineries that don't make jet today that we are moving into jet production mode to try to increase jet yields even further as we go forward," Simmons said.
The strength was not limited to refining. Valero's renewable diesel segment swung to a $139 million profit from a $141 million loss a year ago, while its ethanol business saw income rise to $90 million from $20 million.
This article is for informational purposes only and does not constitute investment advice.
