Has Valero Already Seen Its Best Days?

On Tuesday, Valero (NYSE: VLO  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Refining stocks have done extremely well lately, with relatively cheap domestic crude fueling low input costs while high international prices for gasoline and other refined products widen crack spreads and boost profits for Valero and its peers. But how long can those good times continue? Let's take an early look at what's been happening with Valero over the past quarter and what we're likely to see in its quarterly report.

Stats on Valero

Analyst EPS Estimate	$0.98
Change From Year-Ago EPS	216%
Revenue Estimate	$30.41 billion
Change From Year-Ago Revenue	(13.5%)
Earnings Beats in Past 4 Quarters	4

Source: Yahoo! Finance.

Will Valero keep pressing higher this quarter?
Analysts have gotten even more optimistic on Valero's earnings recently, raising their earnings-per-share estimates by $0.17 for the first quarter and by $0.30 for the full 2013 year. Yet even though the stock has posted an 8% gain since late January, it has pulled back considerably in the past month from more substantial gains.

Valero has been able to cash in on extremely strong conditions in the market for refined energy products, especially gasoline. In large part, international demand is to blame for continued high gasoline prices in the U.S., with Venezuela having become a huge new player in importing gasoline. Competitors are taking advantage, with rival Phillips 66 (NYSE: PSX  ) having boosted its exports by half in the fourth quarter of 2012 in order to maximize its benefit from those favorable conditions. Still, Valero has a huge share of between 20% and 25% of all the U.S. petroleum products that get sent abroad.

Yet Valero and its peers have seen new challenges pop up recently. Price spreads between U.S. West Texas intermediate and European Brent crude oil have narrowed considerably in April, threatening those wide margins. That's especially bad news for HollyFrontier (NYSE: HFC  ) , Tesoro (NYSE: TSO  ) , and Valero, whose western-U.S. exposure has helped those companies benefit the most from cheap mid-continent crude supplies. Phillips 66's recent deal to transport U.S. crude by rail may look a lot less lucrative if spreads narrow further, and Valero and the rest of the industry will inevitably see profits shrink if the financial incentive to export gasoline gets smaller.

Valero could also feel a big hit from regulation. Ethanol credits that Valero and other refiners are required to obtain have soared in cost lately, raising fears that the mandate for higher ethanol use will lead to higher prices at the pump for consumers and a big decrease in gasoline consumption from refiners. Meanwhile, proposed new EPA regulations to reduce sulfur, nitrogen oxide, and benzene levels in gasoline would require massive capital investment from refiners in order to comply.

In Valero's quarterly report, watch for how the refiner addresses all of these challenges. After having earned so much for so long, any hint that Valero could have seen the end of its growth phase could add to the stock's recent troubles.

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