Valero Energy Corporation — Form 10-Q Summary
Business context and reporting period
Valero is a U.S.-based refiner and ethanol producer. This unaudited filing covers the quarter and six months ended June 30, 2016, with comparisons to the corresponding 2015 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $19,584 | $25,118 | $35,298 | $46,448 |
| Operating income | $1,231 | $2,078 | $2,060 | $3,573 |
| Net income attributable to Valero stockholders | $814 | $1,351 | $1,309 | $2,315 |
| Diluted EPS | $1.73 | $2.66 | $2.78 | $4.52 |
| Adjusted net income attributable to stockholders (non-GAAP) | $503 | $1,351 | $786 | $2,315 |
| Adjusted diluted EPS (non-GAAP) | $1.07 | $2.66 | $1.67 | $4.52 |
- Lower refined-product prices and crude feedstock costs drove revenue and cost-of-sales declines. Weaker refining margins were the main source of lower earnings: Q2 refining adjusted operating income fell $1.2 billion to $954; six-month results fell $2.2 billion to $1.649 billion.
- Refining throughput margin was $8.93 per barrel in Q2 versus $13.71 a year earlier, and $8.44 for the first half versus $13.07. Ethanol adjusted operating income was $49 in Q2 and $58 for the first half, versus $108 and $120, respectively.
- Reported results included noncash inventory valuation benefits of $454 in Q2 and $747 for the first half, and a $56 Aruba Terminal impairment charge. Management’s non-GAAP adjusted results exclude these items and their related tax effect where applicable.
- Cash from operations was $2,959 for the first half, down from $3,762. Investing cash outflow was $931; financing cash outflow was $1,237. Cash increased $811 to $4,925.
- At June 30, cash was $4,925; current assets were $16,180 and current liabilities $8,652. Debt and capital lease obligations totaled $7,510, including $864 current and $6,646 long-term. Valero’s $3 billion revolver had $2,947 available and no borrowings; VLP’s separate revolver had $436 available.
- First-half capital expenditures were $610, with $325 in deferred turnaround and catalyst costs. Dividends were $0.60 per share in Q2; the board declared another $0.60 quarterly dividend in July. Treasury-stock purchases totaled $665 in the first half.
Material changes versus the prior comparable period
- Q2 revenue fell 22% and six-month revenue fell 24%. Stockholder net income declined $537 in Q2 and $1,006 in the first half; adjusted net income declined $848 and $1.529 billion, respectively.
- Management attributed weaker refining results primarily to lower gasoline and distillate margins and narrower discounts on light sweet crude relative to Brent. Higher RIN costs also weighed on results: compliance costs were $173 in Q2 and $334 for the first half, compared with $56 and $189.
- Ethanol results weakened because of lower co-product prices and, for Q2, higher corn prices. Refining throughput increased to 2.827 million barrels per day in Q2 and 2.853 million for the first half, from 2.808 million and 2.759 million, respectively.
- Cash from operations decreased year over year, while cash rose partly because of working-capital inflows and lower investment and financing outflows. The first-half working-capital contribution was $1.130 billion.
Outlook, commentary, and risks
- Management expected energy markets and margins to remain volatile through the rest of 2016. For Q3, it expected gasoline margins to decline seasonally as the summer driving season ended and inventories remained high, distillate margins to improve, and ethanol margins to improve slightly with lower expected corn prices.
- Management expected medium and heavy sour crude discounts to remain wide amid oversupply and fuel-oil weakness; sweet crude discounts were expected to remain narrow. Lower refined-product prices could reduce inventory carrying values.
- For 2016, Valero expected approximately $2.6 billion in capital investments: $1.6 billion for stay-in-business projects and $1.0 billion for growth, including Diamond Pipeline. The pipeline was expected to be completed in 2017, subject to regulatory approvals.
- Aruba’s government had reached agreements with a third party to lease and restart the refinery and operate the terminal. Valero considered transfer of the assets to the government more likely than not, but negotiations continued and any resolution required Aruba Parliament approval.
- Environmental cleanup matters in Illinois could result in losses of $0–$200 million above the recorded accrual. The filing also describes ongoing tax audits, environmental enforcement matters, and ordinary-course litigation; management said the disclosed enforcement proceedings were not expected to materially affect financial position, results, or liquidity.
- Valero identified RIN price and availability, environmental regulation, commodity prices and margins, operational disruptions, and credit-rating changes among significant risks. The filing states that the company’s senior unsecured debt ratings were investment grade with stable outlooks at the reporting date.
Important facts for investors to verify
- Whether refining and ethanol margins recover as projected, and how market prices and crude differentials evolve.
- How much of reported earnings and operating cash flow reflects the inventory valuation benefit and working-capital movements rather than recurring operating performance.
- The cost and availability of RINs and other environmental credits, including the impact of future regulatory requirements.
- The outcome and financial implications of the Aruba negotiations and Illinois environmental matters.
- Actual 2016 capital investment, Diamond Pipeline spending and approvals, and the sustainability of dividends and share repurchases.