Valero Energy Corporation (VLO Quick QuoteVLO - Free Report) is a premier oil refining company and has witnessed upward earnings estimate revisions for the March quarter of 2025 over the past seven days.

What’s Favoring VLO?

Valero, currently carrying a Zacks Rank #3 (Hold), is a best-in-class oil refiner involved in the production of fuels and products that can meet the demands of modern life. Its refineries are located across the United States, Canada and the U.K. A total of 15 petroleum refineries, wherein Valero has ownership interests, have a combined throughput capacity of 3.2 million barrels per day. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.     

In its fourth-quarter transcript, the company mentioned that beyond 2025, structural supply constraints in the refining sector are expected to continue supporting margins. Several refineries have announced shutdowns or conversions to renewable fuel production, reducing traditional refining capacity. At the same time, new refinery projects remain limited, meaning the global market will have fewer facilities capable of meeting growing fuel demand. This tightening of supply-demand balances suggests that refining margins could remain elevated in the long term, benefiting companies with efficient, well-positioned refining assets.

Moreover, Valero maintained a robust balance sheet and strong liquidity position at the end of the fourth quarter of 2024, with $4.7 billion in cash and equivalents and a manageable net debt-to-capitalization ratio of 17%, which is net of cash and cash equivalents. This solid financial standing provides the company with ample flexibility to navigate market fluctuations, fund strategic investments, and sustain shareholder returns. Additionally, Valero had $5.3 billion in available liquidity (excluding cash), further strengthening its ability to manage operational needs, pursue growth opportunities, and withstand potential economic uncertainties.

Risks to VLO’s Business

However, Valero's renewable diesel business faces some uncertainty due to changes in government incentives. Previously, the 45Z tax credit provided a flat $1 per gallon subsidy, but now it’s based on carbon intensity, meaning the credit amount depends on how environmentally friendly the fuel is. This change could reduce profit margins, especially for renewable diesel made from non-waste oil sources like soybean or canola oil.

Additionally, the biofuel market is experiencing disruptions, as imports have stopped under the new policy, creating uncertainty about supply and pricing. It may take time for the industry to adjust to these changes and for new incentives to stabilize, which could impact Valero’s earnings from renewable diesel in the short term.

Moreover, as a premium refiner, the firm’s input costs are highly fluctuating, given the volatile pricing scenario of crude oil. Some other companies that have refining businesses and are likely to get exposed to volatility in oil prices are Marathon Petroleum Corp. (MPC Quick QuoteMPC - Free Report) , Phillips 66 (PSX Quick QuotePSX - Free Report) and Exxon Mobil Corporation (XOM Quick QuoteXOM - Free Report) .

Marathon Petroleum, with its extensive refining operations, manages the largest refining system in the United States.

PSX boasts a diversified business model, with substantial involvement in refining midstream, chemicals and marketing & specialties. Across all its operations, Phillips 66 maintains a strong presence in terms of safety, profitability, scale and competitive advantages.

ExxonMobil also has a strong presence in the global refining business, with approximately 5 million barrels per day of distillation capacity across its 21 refineries.