Yesterday, Valero Marketing and Supply Co., a subsidiary of oil refiner and marketer Valero Energy Corp. (VLO), won an aviation fuel supply contract worth up to $230.5 million from the U.S. Defense Logistics Agency. The Pentagon said that Valero will provide the fuel to the Defense Energy Support Center, which manages bulk fuel purchases on behalf of the U.S. Department of Defense. The contract, which ends on Oct 30, 2010, will require Valero to ship the fuel from its 170,000 barrel-per-day refinery in Benicia, California.  
 
We view this contract as a positive for Valero as this will bring much needed cash flows for the company in an otherwise gloomy economic environment. However, a combination of weak demand, excess production capacity, and narrowing crude quality spreads continue to weigh on Valero’s near-term margins, thereby squeezing its profits. Weighed down by these factors, the Texas-based marketer of petroleum products posted a second-quarter loss.
 
We see limited room for margin gains over the coming months, given the current gasoline and distillate inventory levels and the overall low utilization rate. Given these headwinds, we expect Valero to perform in-line with the market as well as the sector in the coming quarters. As such, we recommend a Neutral rating for Valero shares.
Read the full analyst report on “VLO”
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