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Gas Driving Strong Quarter for Refiners

High profit margins are seen fuelling stronger-than-expected second quarter ...

High profit margins are seen fuelling stronger-than-expected second quarter earnings for U.S. refiners as gasoline-hungry summer drivers take to the road.

A tightness in gasoline refining capacity in tandem with low inventories and high crude feedstock prices has pushed pump prices to record highs, and increased refiners' second-quarter profits accordingly.

On Monday, Valero Energy Corp. said it expects to earn over $4 per share in the second quarter, up from the $3.25 to $3.75 per share it had initially forecast. For the year, Valero said expects to earn $10 per share.

``We weren't surprised about the $4. By April, they had captured $1.90 per share. While May was a little softer, they made over $3.50 easily for the first two months of the quarter,'' said John Meloy, Houston-based analyst with Simmons & Co. who said Simmons's estimate for Valero had topped $4.

According to the 13 analysts polled by market research firm, First Call/Thomson Financial, second quarter earnings per share ranged from $2.05 to $4.15, with the consensus being $3.24.

``Refined product margins and discounts for our key sour crude feedstocks have improved to record levels during the second quarter,'' said Bill Greehey, chairman and chief executive officer of Valero.

Last year, the San Antonio-based heavyweight earned 95 cents per share in the second quarter. In the first quarter this year, Valero earned $2.13 per share.

Sunoco, Inc., a major player in the northeastern gasoline refining, said on Monday second-quarter earnings would range from $1.75 to $2.25 per share, up from the $1.63 consensus estimate provide by market research firm, First Call/Thomson Financial.

Sunoco's chairman and chief executive officer, John Drosdick, said that first half earnings pace was significantly ahead of 2000 and it expected to generate in excess of $400 million in free cash flow for the year.

Valero, which will more than double in size upon completion of its purchase of fellow refiner, Ultramar Diamond Shamrock in a $4 billion cash-and-stock offering, continues with expansions plans.

On Monday, Valero said it signed a lease with purchase option with El Paso Corp. for its 115,000 barrel per day refinery with significant upgrade potential. The refinery is located in Corpus Christi, one mile from Valero's own plant along the Texas Gulf Coast.

Under the terms of the deal, Valero will pay $18.5 million in annual lease payments for the first two years as well as $105 million for inventories and working capital.

At the end of the second year, Valero will have the option to buy the refinery for $294 million.

Shares of Valero rose 5.52 percent of $2.47 to $47.20 in midday trade on the New York Stock Exchange while shares of Sunoco were up 4.11 percent or $1.62 to $41.05.