Leading North American independent refiner and marketer of petroleum products, Valero Energy Corporation (VLO) is set to report third-quarter 2014 results on Nov 4. Let’s see how things are shaping up prior to the announcement.
In the last quarter, the company’s earnings of $1.22 per share beat the Zacks Consensus Estimate of $1.19. The quarterly results were aided by higher refining throughput volumes. The bottom line also improved from the year-ago quarter level of 90 cents.
Why a Likely Positive Surprise?
Our proven model shows that Valero Energy is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +3.31%. This is a meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Valero Energy has a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. On the other hand, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Valero Energy’s Zacks Rank #3 and +3.31% ESP makes us confident of an earnings beat.
Growth Factors this Past Quarter
Valero Energy is likely to benefit from weak crude oil prices that prevailed in the July–September period. With the company being a buyer of oil, its third-quarter profitability is likely to have bettered on a fall in the input cost. More importantly, Valero is best positioned to profit from increased refining margins mainly on account of its strategic refinery structure that enables it to use cheaper oil for over one-half of its needs.
Moreover, Valero Energy has been able to sell refined products at profitable prices. The difference between the low input cost and high-end product price has enabled the company to book substantial profits. Demand for refined products was also strong throughout the quarter, thus improving sales.
However, being the largest independent refiner in the country, Valero remains exposed to the Brent-WTI spread, which has narrowed considerably in the past few months. Refiners in the U.S. generally face uncertainty regarding future regulations pertaining to greenhouse gas emissions and the potential for higher requirement of biofuels. Other threats include government regulations, weather conditions, crude oil and natural gas prices as well as renewable fuel prices. These can result in increased costs, reduced growth and fines or other sanctions.
Other Stocks to Consider
Here are some other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Murphy USA Inc. (MUSA) has an Earnings ESP of +20.51% and holds a Zacks Rank #1.
Cobalt International Energy Inc. (CIE) has an Earnings ESP of +11.11% and holds a Zacks Rank #1.
Delek Logistics Partners L.P. (DKL) has an Earnings ESP of +5.56% and holds a Zacks Rank #1.
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