Valero posts loss for ethanol segment, expects improved margins

By Erin Voegele | November 02, 2012

Valero Energy Corp. has released its latest quarterly financial results. While the company’s ethanol segment continues to struggle with high margins, Valero’s management seems confident that margins will continue to improve.

Overall, Valero posted a net income of $674 million, or $1.21 per share, for the third quarter of 2012. That is a decrease over the $1.2 million net income, or $2.11 per share, reported for the same quarter last year.

Regarding Valero’s ethanol operations, the company reported an income of $76 million, a reduction over the $103 posted for the same period in 2011. Operating income for the segment measured -$73 for the quarter.

During the quarter, Valero produced approximately 2.38 million gallons of ethanol per day, a reduction over the 3.27 million per day production level during the third quarter of 2011. Overall, the company generated an operating loss of 33 cents for gallon this quarter. During the same period last year, Valero posted a 35 cent operating income for each gallon produced.

According to Mike Ciskowski, Valero chief financial officer, the operating loss for the ethanol segment is attributed primarily to lower gross margins. High corn prices and excess ethanol inventories squeezed the margins to very low levels, he said during a call to discuss the quarterly results.

During the call, members of Valero’s senior management team noted that the company’s ethanol segment is operating at approximately two-thirds capacity, producing approximately 2.4 million gallons a day. Valero’s ethanol plants are capable of producing at levels of 3.6 million gallons per day.

Members of the team also discussed high current inventories, measuring approximately 17.3 million barrels. That is 1.5 million more than were in inventory during the same period of last year. Valero has recently been able to draw from those large reserves. As Brazil increases its ethanol blend level to 25 percent, Brazilian ethanol entering the U.S. marketplace should decrease, helping to improve economics for U.S. producers.

In addition, corn prices have begun to stabilize after months of high volatility. According to Valero’s management team, corn is now running approximately $7.40 per bushel.

According to Valero, margins are currently good at five of its plants. Two others are idled, and three are running at part capacity. While the two idle facilities are currently capable of quick startup, with winter approaching, the company will likely have to decide if the facilities will restart operations or remain idle for the winter season.