Valero Energy Corp. (VLO) — the largest independent oil refiner in the U.S. — reported better-than-expected fourth-quarter results, reflecting lower operating costs. Loss per share, excluding one-time items, came in at 28 cents, significantly better than the Zacks Consensus Estimate of 45 cents.

In the year-ago period, the Texas-based marketer of petroleum products earned $1.53 per share. The main factors causing the year-over-year negative comparison were depressed refining margins and lower throughput on the back of weak fuel demand and high inventories. Revenue was up 5.8% from the year-ago period to $18.9 billion.

Throughput Volumes

Throughput volumes during the quarter were 2.12 million barrels per day, down nearly 15% year over year, primarily reflecting reduction in sour crude volumes.

By feedstock composition, heavy sour crude, medium/light sour crude and sweet crude accounted for 19%, 22% and 34% of the total, respectively. The remaining volumes came from residuals, blend-stocks and other feedstocks.

The Gulf Coast accounted for approximately 54% of total volumes. The Mid-continent, the Northeast and the West Coast regions accounted for 19%, 16% and 11% of the total, respectively.

Throughput Margins

Company-wide throughput margins decreased over 58% year-over-year to $4.63 per barrel, as all regions witnessed substantially reduced margins. Average throughput margin realized in the Gulf Coast was $4.83 per barrel (down almost 53% year-over-year), Mid-Continent was $4.69 per barrel (down more than 35%), Northeast was $4.36 per barrel (down more than 75%) and West Coast regions reached $3.90 per barrel (down approximately 67%), respectively.

Costs

Cash operating cost per barrel was $4.03 during the quarter, down from $4.19 in the year-ago period. However, the unit depreciation and amortization expenses increased to $1.59 per barrel from $1.32 per barrel in the fourth quarter of 2009.

Capital Expenditure & Balance Sheet

Fourth-quarter capital spending totaled $600 million, of which $114 million was for turnarounds. At the end of the quarter, the company had cash and cash equivalents of approximately $825 million and total debt of approximately $7.4 billion.

Dividend Cut

Valero announced a 67% reduction in its quarterly dividend to 5 cents per share (20 cents per share annualized). The new dividend is payable on March 17, to shareholders of record on February 17, 2010.

Company Initiatives

Given the weak refining margin environment, Valero has taken certain strategic actions to improve the company’s performance and competitiveness in a cost-effective manner. As part of this effort, during the most recent quarter, Valero shut down its Delaware City refinery.

Outlook

Given that the overall environment for refining margins is likely to remain poor, we have a bearish stance on oil refiners like Valero. The sharply lower refinery utilization (at just 78.4% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.

The recent rally in crude prices have added to refiners’ miseries by increasing the cost of oil they buy to make gas, jet fuel and other refined products. Being the largest independent refiner, Valero remains particularly exposed to this unfavorable macro backdrop. We see little reason for investors to own Valero and have an Underperform recommendation on the company.

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