Valero Misses Analysts’ Estimates on U.S. Gulf Coast Results

Valero Energy Corp. (VLO), the largest independent U.S. refiner, reported fourth-quarter earnings that fell short of analysts’ estimates because of lower profits from its U.S. Gulf Coast plants.

Net income was $45 million, or 8 cents a share, compared with a loss of $438 million, or 77 cents, a year earlier, San Antonio-based Valero said in a statement today. Excluding an inventory-related accounting gain, Valero reported a per-share loss that was 2 cents less than the average predicted in 13 analysts’ estimates compiled by Bloomberg.

“The fourth quarter clearly showed the volatility of the refining business,” Valero Chief Executive Officer Bill Klesse said in the statement.

The company bought crude linked to global prices and used U.S. oil futures contracts to protect against price swings. The so-called hedging strategy may have cost refiners including Valero, Marathon Petroleum Corp. and Tesoro Corp. $700 million in the quarter, according to a report from Simmons & Co. International Ltd.

Valero lost $200 million because of its hedging strategy in the fourth quarter, Chief Financial Officer Mike Ciskowski said today in a conference call with investors.

Changing Contracts

The company has limited its exposure to losses from this type of contract by avoiding the use of U.S.-based crude futures when it buys oil linked to global prices, Ciskowski said.

Refining profit margins that narrowed in the last three months of 2011 have improved this year, Klesse said. Refinery closures in Pennsylvania, the Caribbean and Europe will boost Valero’s earnings as prices increase when there is less supply of gasoline and diesel, Joe Gorder, Valero’s executive vice president, said on the call.

“What we’re seeing in our industry now with refinery closures and shutdowns and reduced run rates, I think we’re going to see strong demand plus you have growth in these markets,” Gorder said. “In addition to supply being constrained, you’re going to have higher demand and we’re going to be the beneficiaries of that.”

The union representing more than 30,000 U.S. refinery workers is in discussions on a new contract before the current one expires tonight.

Klesse said he’s optimistic the company will reach an agreement with union officials at its Memphis, Tennessee, and Port Arthur, Texas, refineries to avert a potential strike.

Valero will shut its Memphis refinery if workers decide to strike and will continue to operate in Port Arthur, Klesse said.

‘Continue to Negotiate’

“We continue to negotiate,” he said. “I have the expectation that we will have an agreement.”

Valero lost an average $1.62 for each barrel of oil refined on the Gulf Coast as the profit fell for converting oil into gasoline, diesel, jet fuel and other products. Valero’s margins on the Gulf Coast fell by more than half to $3.57 a barrel. Valero said operating expenses in that region rose to $3.77 a barrel from $3.50 a year earlier.

“The Gulf Coast is their largest unit regionally, so that it has a disproportionate impact,” said Mark Gilman, an analyst with Benchmark Co. LLC in New York, who rates Valero a ‘hold’ and doesn’t own shares.

Valero fell 1 percent to $24.05 at 1:08 p.m. in New York. Before today, the shares, which have 13 buy ratings, six holds and two sell recommendations from analysts, had risen 15 percent this year.

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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