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Valero Powers Forward

Earnings rise 59% from a year ago and match estimates.
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first-quarter earnings surged 59% from a year ago and the company spoke with typical effusion about the rest of the year.

Valero earned $849 million, or $1.32 a share, in the quarter, compared with $534 million, or 96 cents a share, a year ago. The profit in the latest quarter matched the average estimate compiled by Thomson First Call.

First-quarter operating revenue was $20.94 billion, up from $14.95 billion a year ago, as the company continued to reap enormous sums in its core business of refining crude into petroleum products like gasoline.

Valero's first-quarter operating income in refining was $1.5 billion, up from $900 million a year ago. "The significant increase in operating income was primarily due to stronger gasoline and distillate margins and higher throughput volumes due to the acquisition of Premcor Inc. in Sept. 2005," it said.

The company noted that its blowout results occurred despite major maintenance operations at refineries in Memphis, Aruba, Corpus Christi, Krotz Springs and Texas City. With only two big turnarounds scheduled for the second quarter, Valero said, the company's prospects are bright.

"Gulf Coast gasoline and diesel margins are at record levels for April," Valero said. "The forward curve is showing these record margins continuing through the summer. Sour crude oil discounts also remain terrific, with the heavy Maya crude oil discount averaging more than $14 per barrel for April and medium sour crude oils, such as Mars, averaging more than $6 per barrel discount.

"Given that 60% of our feedstocks are purchased at discounts to benchmark sweet crude oil prices, these discounts play a significant role in our earnings. With our leverage to these outstanding product margins and sour crude oil discounts, the second quarter is shaping up to be the highest earnings quarter in Valero's history.

"Looking at refining fundamentals for the rest of the year, we feel very confident that the refining environment will remain strong. The combination of growing refined product demand despite higher price levels globally and regulatory pressures on supply should support continued strength in refined product margins. Sour crude oil discounts should continue to be wide due to ample supplies of sour grades and higher demand for sweet crudes as refiners try to meet lower sulfur specifications and increase yields of high-value clean products," the company said.