Valero Energy Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparison is with the corresponding 2010 periods. Valero operates refining, retail, and ethanol businesses. Figures below are in U.S. dollars; financial statement amounts are in billions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $33.713 | $21.015 | $91.314 | $60.069 |
| Operating income | $1.979 | $0.590 | $3.513 | $1.498 |
| Income from continuing operations attributable to Valero stockholders | $1.203 | $0.303 | $2.052 | $0.743 |
| Diluted EPS, continuing operations | $2.11 | $0.53 | $3.59 | $1.31 |
| Operating cash flow | Not presented quarterly | $4.328 | $2.622 |
- Q3 operating margin was approximately 5.9% versus 2.8% a year earlier; nine-month operating margin was approximately 3.8% versus 2.5%.
- Refining operating income was $1.947 billion in Q3 and $3.476 billion for nine months. Refining throughput margin was $13.24 per barrel in Q3 versus $8.13; nine-month margin was $10.80 versus $7.97, including a $542 million derivative loss that reduced the nine-month margin by about $0.85 per barrel.
- Retail operating income was $97 million in Q3 and $298 million for nine months. Ethanol operating income was $107 million and $215 million, respectively.
- At September 30, cash was $2.829 billion, total debt and capital lease obligations were $7.648 billion, and equity was $16.670 billion. Cash was down from $3.334 billion and debt was down from $8.337 billion at December 31, 2010. No amounts were borrowed under the revolving credit facilities; the revolving facility had $2.4 billion of capacity and $74 million of letters of credit outstanding. The revolver covenant debt-to-capitalization ratio was 22%, below its 60% maximum.
- Nine-month investing cash use was $3.821 billion, including $1.584 billion of capital expenditures, $501 million of turnaround and catalyst costs, and the $1.675 billion Pembroke acquisition. Financing cash use was $1.002 billion, including $270 million of share purchases and $85 million of dividends. Cash declined by $505 million over the period.
Material changes versus prior year
- Revenue rose 60% in Q3 and 52% for nine months, reflecting higher refined-product prices and refining throughput. Q3 results included Pembroke from its August 1 acquisition and higher Aruba throughput following its January 2011 restart.
- Q3 operating income increased $1.389 billion; nine-month operating income increased $2.015 billion. Refining drove most of the improvement, supported by wider product margins, discounted Mid-Continent WTI crude relative to waterborne crude, and wider sour-crude discounts.
- The $542 million pretax loss on forward refined-product sales was realized in Q1 2011; Valero reported it reduced nine-month continuing earnings after tax by $352 million, or $0.62 per share.
- Valero acquired Pembroke Refinery and associated U.K. and Ireland marketing/logistics assets for an adjusted purchase price of $1.675 billion. Pembroke contributed $3.028 billion of revenue and $19 million of continuing income in the reported period. On October 1, after quarter-end, Valero acquired the Meraux Refinery and related logistics assets for an initial $586 million, funded from cash; an estimated $40 million inventory adjustment was expected to reduce the price.
Outlook, risks, and unusual items
- Valero forecast 2011 capital investments of $3.2 billion: $2.5 billion in capital expenditures, including $250 million for environmental projects, and $650 million for turnaround and catalyst costs. This is capital-spending guidance, not earnings guidance.
- Management said energy markets and margins remained volatile and expected volatility in the near to medium term. It cited improved refining margins, notably from crude differentials, as a key earnings driver.
- Aruba, with a $950 million carrying value, was not impaired at September 30. Its recent shutdown, negative cash flows after restart, sensitivity to sour-crude differentials, and review of strategic alternatives—including a possible sale—could lead to a material impairment if outlook assumptions weaken or a sale is pursued.
- Environmental risks include greenhouse-gas regulation, California’s LCFS and forthcoming cap-and-trade requirements, and uncertainty over Texas permitting. Valero said resulting costs or operating restrictions could be material, but it could not estimate the effects of the Texas permitting developments.
- Commodity, foreign-exchange, demand, supply, outage, regulatory, and credit-market risks may affect results. Valero disclosed a $17 million fourth-quarter 2011 loss on foreign-currency contracts that matured by October 28. The filing reported no material changes to the risk factors in its 2010 Form 10-K.
- Management reported effective disclosure controls. It said ordinary-course litigation reserves were not material. A proposed $192,663 TCEQ penalty concerning alleged Three Rivers air violations remained under discussion; a separate McKee matter was settled in Q3.
Most important facts for investors to verify
- Whether refining earnings and margins are sustainable if WTI, sour-crude, and product differentials narrow.
- The impact and accounting treatment of the $542 million realized derivative loss, and the exposure from ongoing commodity positions.
- Final purchase-price settlements and integration results for Pembroke and Meraux, including the Meraux inventory adjustment.
- Aruba’s operating outlook, strategic review, and potential impairment exposure.
- Actual spending against the $3.2 billion capital-investment plan and the eventual cost of environmental and permitting requirements.