Oil refineryThe shrinking differential between the price of West Texas Intermediate (WTI) and Brent crude gets the lion's share of the blame for last night's announcement from Valero Corp. (NYSE: VLO) that net income for the second quarter will fall in the range of $0.80 to $0.90 per share. That is a drop of more than 30% from the consensus estimate of $1.27 a share.

In its announcement, Valero recited a litany of troubles:

The second quarter 2013 refining segment earnings are estimated to decrease versus the second quarter of 2012, primarily due to significantly lower discounts for heavy sour crude oil, higher natural gas costs, higher costs to comply with the Renewable Fuels Standard, and turnaround and maintenance activity at the Quebec City, McKee, Meraux, and Port Arthur refineries.

As the spread between WTI and Brent shrinks, the price for heavy, sour crude is not discounted as heavily and that forces Valero to pay more for the stinkier stuff. Because the heavy crude is more costly to refine, the company's cost for fuel (natural gas) also rises.

Valero is also being hit by the rising price for renewable energy credits, known as Renewable Identification Numbers or (RINs), which soared from a few pennies to near $1 earlier this year, and have now topped $1 again. We discussed this issue earlier this year, but the short version is that demand for RINs has been inflated as the federal mandate for ethanol production now exceeds the projected demand. This forces refiners to buy more RINs than they need.

Archer Daniels Midland Co. (NYSE: ADM) and Valero are the two largest publicly traded ethanol producers in the United States and both will be hurt by the ethanol glut. Other refiners also are likely to see costs rise due both to the RIN issue and the closing differential between WTI and Brent.

Shares of Valero are trading down 3.6% in the premarket this morning at $33.36 in a 52-week range of $23.63 to $48.97.


Filed under: Energy (Business) Tagged: ADM, VLO

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