Strategic Re-Rating in the Refining Sector: Valero's Upside vs. Phillips 66's Downside

The refining sector in 2025 is undergoing a strategic re-rating driven by divergent trajectories in heavy crude oil dynamics and operational restructuring. As global crude supply surpluses and geopolitical risks reshape the landscape, two industry giants—Valero Energy and Phillips 66—stand at opposite ends of the value spectrum. This analysis examines how heavy crude discounts and refinery closures are amplifying Valero’s competitive advantages while exposing Phillips 66 to structural headwinds.

Valero’s Strategic Resurgence: Leveraging Heavy Crude Discounts

Valero Energy has emerged as a beneficiary of the narrowing heavy crude differentials, particularly in the U.S. Gulf Coast, where its advanced coking infrastructure and low-cost feedstock access create a structural edge. According to a report by AInvest, Western Canadian Select (WCS) differentials narrowed to $15/bbl below Brent by Q2 2025, driven by the Trans Mountain Expansion Project’s improved export capacity [1]. This has allowed Valero to secure discounted heavy crude at a time when OPEC+’s 2.1 mb/d production increase has created a global surplus but left regional heavy crude markets resilient [1].

Bank of America analysts project that a $1.50/bbl widening in heavy crude discounts could boost Valero’s EBITDA by over 10% in 2026, offsetting anticipated declines in refining margins [1]. This resilience is underpinned by Valero’s disciplined capital allocation, including a 9% annual return to shareholders through dividends and buybacks, and its low leverage profile [5]. The company’s Gulf Coast refineries, optimized for heavy crude processing, have also capitalized on tight diesel markets, with the 3-2-1 crack spread showing early signs of growth in 2025 [4].

Phillips 66’s Downside: Refinery Closures and Renewable Fuel Challenges

In contrast, Phillips 66 faces a more precarious outlook. The phased closure of its Los Angeles-area refinery by Q4 2025—removing 17% of California’s refining capacity—has triggered significant financial and operational risks. As stated by AInvest, the closure will force California to rely on imported fuels, increasing transportation costs and geopolitical exposure while eliminating 600 permanent jobs and 300 contract positions [2]. The company’s Renewable Fuels segment, which produces renewable diesel and sustainable aviation fuel, reported a $116 million pre-tax loss in Q3 2025, despite federal incentives like the Inflation Reduction Act’s 30% Investment Tax Credit [2].

While Phillips 66’s refining division achieved 98% utilization in Q2 2025, driven by strong diesel demand and minimal turnaround activity, the company plans to reduce refining utilization in Q3 due to the LA refinery wind-down and Bayway refinery outages [2]. Bank of America downgraded Phillips 66 to Neutral in 2025, citing weaker prospects for its natural gas liquids and chemicals businesses, alongside a 3% decline in midstream adjusted earnings compared to 2024 [3]. Activist investors are now pushing for asset sales to refocus on core refining operations, adding to operational complexity [3].

Comparative Analysis: Margins, Margins, and Margins

The disparity in refining margins between Valero and Phillips 66 underscores their divergent strategic positions. In Q2 2025, Valero’s refining margin stood at $17.58/bbl, outperforming Phillips 66’s $12.35/bbl [1]. This gap reflects Valero’s ability to leverage Gulf Coast infrastructure and coking capabilities in tight diesel markets, while Phillips 66 grapples with the LA refinery closure and midstream underperformance.

Geopolitical risks further amplify this divergence. Potential Trump-era sanctions on Russian crude—removing 2–3 mb/d of discounted supply—could disproportionately impact Phillips 66, which lacks the integrated midstream-refining systems of Valero and Marathon [1]. Meanwhile, Valero’s strategic investments in heavy crude processing and low-cost feedstock access position it to absorb supply shocks and maintain margin stability [5].

Conclusion: Investment Implications

For investors, the refining sector’s 2025 re-rating highlights a clear asymmetry: Valero’s upside is anchored in structural advantages, while Phillips 66’s downside is compounded by operational and regulatory risks. Valero’s disciplined capital allocation, exposure to heavy crude discounts, and Gulf Coast dominance make it a compelling long-term play. Conversely, Phillips 66’s reliance on volatile midstream earnings, renewable fuel losses, and the LA refinery closure present significant headwinds.

As the sector navigates a post-OPEC+ rebalancing and evolving ESG mandates, the strategic re-rating of Valero versus Phillips 66 underscores the importance of operational flexibility and feedstock optimization in a high-uncertainty environment.

**Source:[1] Heavy Crude's Resurgence and Refiner Margins in 2025, [https://www.ainvest.com/news/heavy-crude-resurgence-refiner-margins-2025-strategic-positioning-rebalancing-market-2508/][2] Phillips 66's LA Refinery Closure and Its Impact on Energy Markets, [https://www.ainvest.com/news/phillips-66-la-refinery-closure-impact-energy-market-dynamics-2508/][3] Phillips 66 Profits Beat Estimates Due to Higher Refining Margins, [https://energynews.oedigital.com/oil-refineries/2025/07/25/phillips-66-profits-beat-estimates-due-to-higher-refining-margins][4] The Resurgence of Heavy Crude and the Refining Sector's Margin Expansion, [https://www.ainvest.com/news/resurgence-heavy-crude-refining-sector-margin-expansion-strategic-opportunities-2025-2508/][5] Valero Energy's Strategic Resurgence in a Shifting Oil Landscape, [https://www.ainvest.com/news/valero-energy-strategic-resurgence-shifting-oil-landscape-2505/]