Valero ( VLO) blew past third-quarter estimates, ratcheted up fourth-quarter guidance and named a new CEO, saying longtime chief Bill Greehey would focus on his chairman's duties.

The San Antonio, Texas, energy giant made $1.28 billion, or $4.37 a share, for the quarter ended Sept. 30, up from the year-ago $431 million, or $1.57 a share. Revenue surged to $23.3 billion from $14.3 billion a year earlier. Analysts surveyed by Thomson First Call had been looking for a $4.23-a-share profit on revenue of $18.96 billion.

The third quarter 2005 results exclude a $621 million pre-tax LIFO charge to cost of goods sold, related to the difference between the fair market value of the inventories acquired from Premcor Inc. on September 1, 2005 and Valero's recorded amounts under LIFO accounting attributable to those inventories. Including this special non-cash item, net income for the third quarter of 2005 was $862 million, or $2.94 per share.

"This was a challenging quarter for Valero in so many ways given the hurricanes on the Gulf Coast and the addition of four new refineries to our system, but our employees did an outstanding job meeting these challenges," said Greehey, who will give way Jan. 1 as CEO in favor of operating chief Bill Klesse. "In particular, the efforts of our employees at the St. Charles and Port Arthur refineries were nothing short of heroic in restoring our operations in record time and helping their communities recover from these devastating storms.

"The impact of these hurricanes reflects what we've been saying for years -- that refining capacity has gotten tighter, not just in the U.S., but globally. Anytime there is a major disruption, margins are likely to spike. Just as they did shortly after Hurricanes Katrina and Rita, pump prices spiked up, but then came down. We believe that the impact of these hurricanes on pump prices will soon be behind us. As more refineries come back on-line, pump prices should continue to fall and that is good for both refined product demand and the economy," said Greehey.

"Looking at the remainder of the fourth quarter, the outlook is outstanding. Gulf Coast gasoline margins based on the forward curve for November and December are trading around $4.00 per barrel and heating oil margins are around $17.00 per barrel. As for sour crude discounts, they have continued to widen from what were already impressive levels. For example, Maya crude oil discounts are currently at around $15.00 per barrel and are expected to widen further, just as they did at the end of last year. And, the fourth quarter will be our first full quarter with the contribution of the Premcor assets. As we have begun to integrate these refineries into our system, we have been very impressed by the quality of the workforce as well as the assets. Despite the three-week outage at the Port Arthur refinery during October, we expect that the fourth quarter will demonstrate how strongly accretive to our earnings the acquisition will be going forward. Given all these positive factors, it's clear that the current First Call consensus estimate of $3.67 per share for the fourth quarter is significantly too low. In fact, we estimate that in October alone we will earn around $2.30 per share.

"With respect to next year, the industry is facing the implementation of the Tier II low-sulfur fuels standards, the removal of MTBE from the gasoline pool and the likelihood of low inventories headed into the year. The futures market is already reflecting these challenges and if you look at the forward curve, refined product margins for next year are currently trading at higher levels than they are for this year. So, when you consider the strong market fundamentals, a full-year contribution of the Premcor assets, and the additional 100,000 barrels per day of capacity coming on-line in our refining system next year from our strategic projects, you can see why we believe that 2006 will be another record-setting year for Valero," he said.

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