Valero Energy Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial statements are unaudited. Valero operates Refining, Renewable Diesel, and Ethanol segments.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $38.4 billion | $44.5 billion | $109.4 billion | $134.6 billion |
| Operating income | $3.50 billion | $3.79 billion | $10.31 billion | $11.40 billion |
| Net income attributable to Valero stockholders | $2.62 billion | $2.82 billion | $7.63 billion | $8.42 billion |
| Diluted earnings per share | $7.49 | $7.19 | $21.21 | $20.93 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $7.99 billion | $8.48 billion |
Q3 revenue declined $6.05 billion year over year, primarily as petroleum product prices fell; lower crude and feedstock costs partly offset the revenue decline. Operating income fell $289 million. For the first nine months, revenue fell $25.29 billion and operating income fell $1.09 billion. Despite lower attributable earnings, EPS increased, supported by a lower weighted-average share count following repurchases.
Segments and margins
- Refining: Q3 operating income was $3.45 billion, down $365 million; refining margin was $5.41 billion, down $486 million. Lower distillate margins were the main pressure, partly offset by higher gasoline margins, wider feedstock discounts, and lower operating expenses. Nine-month operating income was $9.93 billion, down $1.54 billion.
- Renewable Diesel: Q3 operating income was $123 million, down $89 million; margin was $262 million, down $52 million. Lower renewable diesel prices outweighed lower feedstock costs and higher volumes. Nine-month operating income rose to $768 million from $513 million.
- Ethanol: Q3 operating income was $197 million, versus $1 million a year earlier, mainly reflecting lower corn costs, higher production, and lower operating expenses. Nine-month operating income was $363 million, versus $103 million.
Segment margins are company-defined non-GAAP measures; they should be considered alongside GAAP results.
Cash flow, balance sheet, and capital allocation
- Nine-month operating cash flow was $7.99 billion. Working-capital changes used $1.70 billion of cash. Investing activities used $1.38 billion; reported capital investments were $1.38 billion, or $1.25 billion attributable to Valero under its non-GAAP definition.
- Cash and cash equivalents were $5.83 billion at September 30, 2023, up $969 million from year-end 2022. Management reported total liquidity of $11.01 billion, including $5.40 billion of available committed capacity and $5.61 billion of cash excluding cash restricted to consolidated VIEs.
- Debt and finance lease obligations totaled $11.44 billion, including $1.33 billion current and $10.11 billion long term. Debt excluding finance leases had a reported carrying amount of $9.15 billion. The company retired $199 million of public debt during the first nine months.
- Valero returned $5.29 billion to stockholders in the first nine months: $4.18 billion of treasury-share purchases and $1.11 billion of dividends. It had $649 million remaining under its February 2023 repurchase authorization at quarter-end and announced an additional $2.5 billion authorization in September.
- Management expected approximately $2.0 billion of 2023 capital investments attributable to Valero, including approximately $1.5 billion for sustaining the business; about 40% of the balance was allocated to low-carbon growth strategies.
Outlook, risks, and unusual items
- The filing gives qualitative, not numeric, Q4 2023 outlook. Management cited demand returning to pre-pandemic levels for gasoline and diesel, improving jet demand, and below-historical light-product inventories as factors supporting refinery utilization. It expected renewable diesel margins to remain near current levels and ethanol demand to follow seasonal patterns.
- Management noted uncertainty in global supply and demand, geopolitical developments and crude-market volatility. Crude discounts had recently widened, but Middle East conflict could increase volatility and affect discounts.
- California’s SBx 1-2 creates potential exposure to a maximum refining-margin penalty, expanded reporting requirements, and possible regulation of refinery turnaround and maintenance. Rules and impacts were not yet determined; adverse effects could lead to a material impairment or asset-retirement obligation. Similar measures are being considered elsewhere.
- A fire at DGD’s St. Charles plant caused unplanned downtime in Q3, partly offsetting increased volumes from the Port Arthur plant. Renewable and low-carbon fuel credit costs were $1.2 billion for the first nine months, versus $984 million a year earlier.
- Navigator cancelled its proposed Mid-Continent carbon capture pipeline project in October 2023. Valero said it may have project-related rights and obligations but did not expect its obligation to be material.
- Valero disclosed Benicia Refinery environmental notices of violation for which it reasonably believes penalties may exceed $1 million; discussions with the regulator were ongoing and outcomes were uncertain. The filing reports no material changes to previously disclosed risk factors.
- Other sensitivities include refining and renewable-fuel margins, commodity and compliance-credit prices, regulation, operational disruptions, foreign exchange, and access to capital markets. Management stated it believed available funds and facilities were sufficient for foreseeable requirements.
Investor facts to verify
- Whether refining margins and distillate economics remain supportive, given the year-over-year decline in segment results.
- Developments in California SBx 1-2 rulemaking, including potential margin penalties and maintenance restrictions.
- DGD St. Charles recovery and the operating contribution and costs of the Port Arthur expansion.
- Renewable-fuel credit obligations and the sensitivity of renewable diesel earnings to product prices, feedstock costs, and policy incentives.
- Execution of the stated 2023 capital-investment plan and share repurchase authorizations, alongside cash generation and debt reduction.
- Outcomes of the Benicia environmental proceedings and any costs or obligations related to the cancelled Navigator project.