Valero Energy 3Q Profit Surges

Valero Energy Corp., the nation's largest independent oil refiner, on Tuesday posted an 86 percent rise in its third-quarter profit on higher sales, a one-time gain and roughly flat expenses.

After paying preferred dividends, net income surged to $1.6 billion, or $2.55 per share, for the July-September period from $858 million, or $1.47 per share, in the year-earlier quarter.

Valero noted that the recent quarter includes a $132 million pretax gain on the July sale of its 41 percent stake in Valero GP Holdings. Valero GP holds the general partner interest in energy pipeline operator Valero LP. The year-ago quarter includes a $621 million pretax charge related to last-in, first-out accounting.

Excluding those items, earnings totaled $1.5 billion, or $2.42 per share, compared with $1.3 billion, or $2.19 per share, in the 2005 third quarter. Analysts polled by Thomson Financial forecast earnings of $2.30 per share, excluding one-time items.

Operating revenue rose 4 percent to $24.32 billion from $23.28 billion a year ago. Total costs and expenses held roughly flat at $21.99 billion versus $21.97 billion a year earlier.

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"The strong sour crude oil discounts, coupled with more reliable plant operations and outstanding U.S. marketing margins, allowed us to capture more of the margin as compared to last quarter," said Chief Executive Bill Klesse, in a statement.

Margins came down slightly from the prior year, however, specifically in the West coast and mid-continent regions.

Its shares fell $1.06, or 2 percent, to $51.08 in afternoon trading on the New York Stock Exchange.

Fadel Gheit, senior energy analyst for Oppenheimer & Co., said the fall in Valero's share price Tuesday was likely tracking a drop in the price of crude.

Oil prices dropped below $58 a barrel Tuesday, extending a decline of more than $2 a barrel a day earlier as traders responded to mild weather on the East Coast and awaited fresh U.S. data that is expected to show rising inventories of crude.

"It is basically, the excessive speculation which really controlled the market over the last four years, has started to hold off a little bit," Gheit said. "The whole energy complex is full of speculation. If you take the speculation out, it will deflate prices significantly."

Gheit said stock prices for oil refiners like Valero were up in the morning, but came down with the price of oil.

"The price of a barrel dropped $20 in the last 10 weeks," he added. "Demand is softening, supplies are ample. There is no imminent threat to supply."

In the first nine months of the year, Valero earned $4.3 billion, or $6.83 per share, compared to $2.2 billion, or $3.96 per share, in the same period in 2005. Revenue rose to $72.04 billion from $56.27 billion a year ago.

The company said in a conference call Tuesday that this third quarter was the best in its history and largely attributed it to higher volumes.

The company also predicted a strong fourth quarter, saying that planned turnaround activity is moderate, with equipment modification and reliability upgrades at its Houston refinery due to be completed by late November. Turnaround activity is also happening at the St. Charles refinery.

The turnaround activity has reduced crude volume by an average of 275,000 barrels per day in October, the company said.

Valero plans to bring online by the end of the year an expansion at its Port Arthur refinery, increasing crude capacity there to 325,000 barrels per day, the company said Tuesday.

Analysts expect earnings per share of $1.42 in the fourth quarter and $8.05 per share for the full year.

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