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Valero Sees Shortfall

Margins are under pressure, and earnings for the third quarter will miss estimates.
Author:

Refiner

Valero Energy

(VLO) - Get Report

warned that its third-quarter profits will fall well short of analysts' estimates, echoing earlier comments from

Chevron

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and

Marathon Oil

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that margins are coming under pressure in the energy sector.

Earnings from continuing operations for the quarter, excluding special items, will likely be in the range of $1.30 to $1.40 a share, Valero said Wednesday. Analysts surveyed by Thomson Financial are calling for $1.91. Including items, continuing operations profits will probably be $1.25 to $1.35.

The company also expects to report third-quarter earnings from discontinued operations of approximately 75 cents a share related to the $827 million pretax gain on the sale of the Lima refinery.

Valero blamed the outlook on lower throughput margins, primarily stemming from substantially higher feedstock costs because of increased premiums for light sweet crude oils and narrower discounts for sour crude oils and other feedstocks. In total, higher feedstock expenses will probably reduce throughput margins by roughly $700 million in the third quarter compared with the same period last year.

Many of the company's products, such as asphalt, lube oils and petrochemical feedstocks, sold at much lower margins in the third quarter vs. last year, as prices for those products didn't increase as much as prices for crude oil.

In addition, refining margins in Valero's West Coast region were substantially lower than in the third quarter of 2006.

Additionally, the impact of Hurricane Humberto on the company's Port Arthur refinery, as well as operating issues at Valero's Port Arthur, St. Charles and Ardmore refineries during the quarter, will contribute to the lower margins. Also, the McKee refinery continued to operate slightly below capacity.

Shares of Valero fell 2.5% to $70.39.