Cut to 1Q12 EPS - Other Headwinds (Retail, Maintenance,
Ethanol); Lowering 2012 Estimates.
Bottom-line: While we expect VLO to generate positive earnings
in 1Q12, we are cutting our 1Q EPS to flag some other issues - weak
retail margins, VLO specific refinery maintenance and weak ethanol
margins. With a potentially sluggish patch for the economy, refiner
shares could consolidate here. VLO's expansion in free cashflow is
a 2013 event, closer than it has been for a while, but still
several quarters away.
Lowering 1Q12 Earnings: A weaker expected performance across
refining (maintenance impacting capture rates), retail (weak
margins on rising crude prices) and ethanol leads to a reduction in
1Q12 EPS from $0.51/sh to $0.19/sh which compares to a $0.55/sh
consensus estimate. Our 2012 EPS estimate is also lowered to $3.31
from $4.00. As VLO exits from maintenance, then Q2 EPS should
improve, albeit there are still maintenance impacts in Q2 also.
Benchmarks bounced strongly vs 4Q, but realized margins won't
necessarily follow: Gulf Coast (LLS) cracks and LLS - MAYA spreads
have improved noticeably, yet the full impact will not be reflected
in 1Q earnings due to relatively heavy maintenance. With VLO now
using Brent based contracts for hedging long haul crude purposes (a
true hedge), VLO won't benefit from the widening WTI - LLS spread
like MPC either.
Weak Retail Margins and Ethanol: With rising crude prices (c70%
of pump prices), US retail margins have been under pressure in
1Q12, with benchmark margins falling to historically low levels. In
Ethanol, domestic oversupply, lower exports, weaker demand and
applied RIN carry-forward credits have all contributed to a weak
near term ethanol market.