Texas-based Valero Energy Corp. (VLO), the largest independent refiner and marketer of petroleum products in the U.S., plans to close a few loss-making units in its various refineries. This includes the coking and gasifying complex (which processes a type of heavy crude oil and petroleum coke) at its Delaware City refinery. The company will also indefinitely idle a gasoline-making FCC unit and a coker at its Corpus Christi refinery in Texas.

Valero seeks to close these units to save costs and to shift focus to higher-margin products. The company also plans to axe at least 150 employees and 100 contractual workers. Management said that these moves were necessary to improve the profitability of Valero’s refining system. This is the second time that Valero has closed operations to improve profitability. Last month, the company closed its Aruba refinery.

These initiatives bolster our weak outlook for near-term refinery margins and a growing list of medium- to long-term challenges. Weak demand for refined products and excess capacity, both in the U.S. and abroad, are expected to cap margin gains. These factors are likely to weigh on the fortunes of all refiners in general and Valero in particular.

Given these headwinds, we expect Valero to underperform broader equity markets in general and the oil and gas group in particular. We therefore maintain our Underperform recommendation for the stock.

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