Valero Reports Strong Third Quarter

This morning Valero, the largest refiner in the US, reported strong third quarter results and gave positive guidance for both the fourth quarter, and for 2006.

Valero's net income of $1.3 billion, or $4.37 per share was driven by improving refining margins, and a wide spread between sour crude and light sweet crude and positive results from the recently completed Premcor acquisition. Valero is one of the leading refiners of sour crude in the United Sates, 47% of Valero's 3 million barrels a day of refining capacity is used for sour crude.

For 2006 Valero reported that they plan on increasing refining capacity by 100,000 barrels per day, but noted that capacity creep will not be able to keep up with increasing demand for refined products if the economy stays strong. While the outlook for pricing appears to be robust, Valero's costs are driven in part by the price of natural gas.

Valero indicated that for 2006 futures are continuing to indicate strong refining margins. Valero feels confident enough that prices and margins will stay high. This quarter Valero's results were negatively impacted by their hedging operations, to their positive outlook on prices and spreads, they are not actively trying to hedge prices for 2006.

In a related announcement, Valero CEO Bill Greehey will step down, to be replaced by Bill Klesse, who is currently Valero's COO. Greehey will remain Chairman.

Since the question of a "wind fall profit tax" is still a hot topic it is worth noting that management discussed the poor returns Valero earned when oil prices were low and spreads were tight. It is also worth noting that Greehey was able to build Valero to its current size because nobody wanted to own refineries when they were not making money, one of the key factors leading to our current high gasoline prices. Through the first nine months of 2005 Valero has already paid over $1.22 billion in taxes.

Timothy Burger
timothyb(at)timothyburger.com