Valero Energy Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Amounts are in U.S. dollars. Valero operates refining, ethanol, and renewable diesel businesses.
Financial performance
- Revenue: $24.263 billion, down 8.2% from $26.439 billion, primarily reflecting lower refined-product prices.
- Profit: Operating income was $308 million versus $801 million; net income was $167 million versus $582 million. Net income attributable to Valero stockholders was $141 million, or $0.34 per diluted share, versus $469 million, or $1.09 per diluted share.
- Adjusted operating income: $310 million versus $693 million, a non-GAAP measure. The company attributed the decline primarily to weaker refining results.
- Segment results: Refining adjusted operating income was $481 million, down $330 million; refining margin was $2.055 billion, down $228 million, and margin per throughput barrel was $7.97 versus $8.65. Ethanol operating income was $3 million versus $45 million. Renewable diesel adjusted operating income rose to $49 million from $35 million; sales averaged 790,000 gallons per day versus 371,000.
- Cash flow and investment: Operating cash flow was $877 million versus $138 million. Investing cash outflow was $747 million, including $444 million of capital expenditures, $219 million of turnaround and catalyst costs, and $63 million of joint-venture investments. Financing cash outflow was $378 million. Cash declined $205 million to $2.777 billion.
- Margins and drivers: Refining results were pressured by lower gasoline margins and throughput, partly offset by wider crude discounts, stronger distillate margins, and lower biofuel-credit costs. Biofuel-credit costs were $91 million versus $206 million. Ethanol faced lower selling prices and higher corn prices.
- Debt and liquidity: Debt and finance lease obligations totaled $10.116 billion, including $1.110 billion current. Cash and cash equivalents were $2.777 billion; reported total liquidity was $8.024 billion, including $5.354 billion of available borrowing capacity. Valero’s $4 billion revolving facility was amended in March, extending maturity to 2024; no borrowings were outstanding on it at quarter-end.
Material changes and unusual items
- Valero completed its acquisition of the publicly held Valero Energy Partners LP units on January 10 for $950 million in cash. VLP became an indirect wholly owned subsidiary; the transaction was accounted for as an equity transaction, with no gain or loss recognized.
- Q1 2018 results included a $170 million pretax 2017 blender’s tax credit and a $52 million environmental reserve adjustment. These items make reported year-over-year comparisons less like-for-like; Valero’s adjusted net income was $141 million versus $431 million.
- Valero adopted the new lease accounting standard on January 1, recognizing $1.3 billion of operating-lease right-of-use assets and lease liabilities. The filing says adoption did not affect results of operations or liquidity.
- In Q1, Valero issued $1 billion of 4.00% senior notes due 2029. In April, it used proceeds to redeem $871 million of 6.125% notes due 2020; the $21 million early-redemption fee was expected to be recorded in Q2 other income expense.
- The board declared a $0.90-per-share quarterly dividend on April 30, payable June 4, 2019. Q1 common dividends paid totaled $375 million.
Outlook, risks, and contingencies
- For Q2 2019, management expected gasoline margins to improve with summer driving demand, distillate margins to remain near current levels, and renewable diesel margins to remain consistent. Ethanol margins were expected to improve with stronger domestic gasoline demand.
- Management expected medium- and heavy-sour crude discounts to remain weaker than five-year averages; sweet crude differentials and inland crude prices faced supply, pipeline-capacity, and volatility factors.
- Valero expected approximately $2.5 billion of capital investments in each of 2019 and 2020, with roughly 60% for sustaining capital and 40% for growth strategies.
- Key risks include refining and product-margin volatility; crude and feedstock supply and prices; biofuel-credit and emissions-credit costs; operational disruptions, severe weather, and project delays or cost overruns; regulatory and environmental requirements; foreign exchange; and litigation. Management cautioned that forward-looking statements are not guarantees.
- Environmental proceedings included proposed penalties of $242,840 relating to a Benicia refinery incident, $1.3 million relating to a Corpus Christi asphalt-plant water-backflow incident, and $167,550 relating to Corpus Christi refinery inspection and permit matters. The company was working to resolve these matters.
- The IRS settled audits of 2010 and 2011 returns; Valero said it would receive a $320 million refund plus interest. Audits for 2012–2015 remained ongoing, and management did not expect their ultimate settlement to be material.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Senior unsecured debt ratings were investment grade with stable outlooks at Moody’s, S&P, and Fitch.
Investor facts to verify
- Whether refining margins recovered as anticipated and how crude differentials, throughput, and product prices evolved after Q1.
- The sustainability of operating cash flow, working-capital movements, and the planned $2.5 billion annual capital-investment level.
- Post-merger debt, liquidity, and the effects of the April 2019 note redemption and expected tax refund.
- Progress and economics of renewable diesel expansion, and whether higher sales volumes translate into durable earnings.
- Outcomes and any reserve or cash impacts from environmental matters, tax audits, and other disclosed contingencies.