Valero Energy Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Valero operates petroleum refineries and ethanol plants and has a renewable diesel business. Effective January 1, 2019, it began reporting renewable diesel separately and moved Valero Energy Partners’ logistics assets into refining following its January acquisition of the publicly held units.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $28.9bn | $31.0bn | $53.2bn | $57.5bn |
| Operating income | $908m | $1.253bn | $1.216bn | $2.054bn |
| Net income attributable to Valero stockholders | $612m | $845m | $753m | $1.314bn |
| Diluted EPS | $1.47 | $1.96 | $1.80 | $3.04 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.394bn | $2.197bn |
Q2 revenue fell 7% and stockholder net income fell 28% year over year. For the first half, revenue declined 7% and stockholder net income declined 43%. Management attributed the profit decline mainly to weaker refining results, including reduced discounts on crude and other feedstocks; lower product prices also reduced reported revenue.
- Refining: Q2 adjusted operating income was $1.038bn, down $423m. Refining margin was $9.56 per barrel of throughput versus $11.12; throughput averaged 2.968m barrels per day. For the first half, adjusted income was $1.519bn, down $753m, and margin was $8.78 per barrel versus $9.89.
- Ethanol: Q2 adjusted operating income was $8m versus $43m; first-half adjusted income was $11m versus $88m. Higher corn costs, weaker co-product prices, and higher operating costs weighed on results. Production volumes benefited from three plants acquired in late 2018.
- Renewable diesel: Q2 operating income was $77m versus $30m, reflecting higher sales volumes after the DGD plant expansion. First-half adjusted operating income was $126m versus $65m; higher volume was partly offset by hedge losses.
Balance sheet, liquidity and capital allocation
- At June 30, cash and cash equivalents were $2.033bn; total assets were $52.022bn and total equity was $21.837bn.
- Debt and finance lease obligations totaled $9.490bn, including $323m current and $9.167bn long-term. Valero issued $1bn of 4.00% notes due 2029 and used proceeds principally to redeem $850m of 6.125% notes, paying $871m including an early redemption premium.
- Reported total liquidity was $7.244bn, comprising $5.378bn available borrowing capacity and $1.866bn of cash available outside consolidated VIEs. The $167m of VIE cash was restricted to VIE use. The $4bn revolving credit facility had no borrowings outstanding.
- First-half investing cash outflow was $1.555bn; financing cash outflow was $1.825bn. Uses included $905m of capital expenditures, $471m of turnaround and catalyst costs, $751m of dividends, $248m of share repurchases, and $950m to acquire VLP public units. Cash decreased $949m during the period.
- Management expected approximately $2.5bn of capital investments in each of 2019 and 2020. The board declared a $0.90-per-share quarterly dividend in July 2019. $2.0bn remained under the share repurchase authorization at June 30.
Outlook, commentary and risks
- For Q3 2019, management expected distillate margins to improve ahead of the IMO 2020 lower-sulfur bunker fuel requirements; gasoline margins were expected to remain near current levels.
- Management expected medium and heavy sour crude discounts to improve, while sweet crude discounts were expected to narrow. Ethanol margins were expected to remain weak amid high corn prices; renewable diesel margins were expected to remain around current levels.
- First-half operating cash flow included a favorable $413m working-capital change, including a $348m tax refund related to the 2010–2011 federal tax audit. Management cited higher receivables as a partial offset. The 2012–2015 IRS audits remained ongoing; management did not expect their ultimate settlement to be material.
- Environmental compliance costs for biofuel and emissions credits were $158m in the first half, down from $337m a year earlier. Valero remains exposed to commodity, credit-price, foreign-exchange, operational, regulatory, and environmental risks.
- A Texas Attorney General lawsuit concerning alleged Clean Air Act violations at the Port Arthur refinery sought injunctive relief and penalties; Valero said it was working to resolve the allegations. The filing stated the reported environmental proceedings were not expected to materially affect financial position, results, or liquidity if decided adversely.
- Valero reported investment-grade senior unsecured ratings with stable outlooks from Moody’s, S&P, and Fitch, and said downgrades could increase financing costs or impair access to financing. It reported no material change to risk factors or internal control over financial reporting.
Most important facts to verify
- Whether refining margins and feedstock discounts improve as management anticipated, and how IMO 2020 affects realized margins.
- Whether ethanol profitability recovers despite corn prices and weak market margins, and whether DGD’s expanded capacity sustains renewable diesel earnings.
- The durability of operating cash flow after the working-capital benefit and tax refund, alongside planned capital investments, dividends, and repurchases.
- Debt, liquidity availability, and lease commitments—including the expected approximately $1.1bn lease asset and liability associated with the MVP Terminal agreement in 2020.
- Developments in the Port Arthur environmental litigation, outstanding IRS audits, and regulatory credit costs.