VALERO ENERGY CORP quarterly report, Q1 FY2021

Business context and reporting period

Valero Energy Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2021, with comparisons to the first quarter of 2020. Its reportable segments are refining, renewable diesel, and ethanol. Results remained affected by the COVID-19 recovery and were materially impacted by Winter Storm Uri.

Financial results and position

Cash used in investing activities was $580 million, including $582 million of capital investments. Cash used in financing activities was $439 million, including $400 million of dividends. Cash declined by $1.059 billion during the quarter. Valero reported total liquidity of approximately $7.967 billion at quarter-end: $2.044 billion of cash excluding cash held by variable-interest entities and $5.923 billion of available borrowing capacity.

Segment performance

• Refining: operating loss of $592 million and adjusted operating loss of $554 million, versus adjusted operating income of $329 million a year earlier. Refining margin was $1.450 billion versus $1.860 billion; throughput fell to 2.410 million barrels per day from 2.824 million.
• Renewable diesel: operating income rose to $203 million from $198 million. Segment margin increased to $244 million from $229 million.
• Ethanol: operating loss was $56 million, compared with $197 million; adjusted operating loss was $56 million versus $69 million. Segment margin increased to $121 million from $62 million.

Material changes versus the prior comparable period

Reported operating loss improved by $1.611 billion year over year, but the comparison is substantially affected by the $2.542 billion lower-of-cost-or-market inventory charge recorded in Q1 2020 and none in Q1 2021. On Valero’s non-GAAP adjusted basis, results worsened by $895 million, from $267 million of income to a $628 million loss. Management attributed the decline primarily to refining weakness and Winter Storm Uri costs.

Revenue declined $1.296 billion, primarily due to lower refined-product sales volumes. Refining adjusted results were pressured by lower distillate margins, reduced throughput, higher biofuel-credit costs, and lower feedstock discounts, partly offset by stronger gasoline margins. Renewable diesel benefited from higher selling prices, while ethanol benefited from higher ethanol and co-product prices.

Outlook, management commentary, risks, and unusual items

• Winter Storm Uri caused estimated excess energy costs of $579 million before tax ($467 million after tax): $525 million in refining and $54 million in ethanol. Management described the event as isolated to Q1 2021.
• Management said gasoline and diesel demand and prices had approached pre-pandemic levels by March; jet fuel recovery was slower. For Q2, Valero expected gasoline, jet fuel, and diesel prices to continue improving; sour crude discounts to improve; renewable diesel margins to remain near current levels; and ethanol margins to improve with domestic consumption. These are expectations, not quantified earnings guidance.
• Valero expected approximately $2.0 billion of 2021 capital investments attributable to Valero, a non-GAAP measure. The estimate included $200 million of investments deferred in 2020 and excluded potential strategic acquisitions. About 60% was for sustaining the business and 40% for growth, with over half of growth investment allocated to renewable diesel expansion.
• The company cited continuing uncertainty over COVID-19, vaccination and restrictions, fuel demand, product and feedstock prices, operating disruptions, weather, and environmental and biofuel-credit regulations. Costs of biofuel-credit compliance were $360 million in Q1 2021 versus $112 million a year earlier.
• The 364-day revolving credit facility, with $875 million of availability at March 31, matured on April 12, 2021 and was not renewed. Valero said it believed available funds and facilities were sufficient for ongoing needs, while noting that future financing availability and terms were not assured.
• After quarter-end, Valero sold a 24.99% interest in MVP Terminalling for $270 million on April 19, retaining a 25.01% interest. The board declared a $0.98-per-share quarterly dividend payable June 8, 2021.
• Two environmental enforcement matters concerning the Benicia refinery could result in penalties above $300,000; the company said it was working with the relevant agencies and did not expect the proceedings to materially affect its financial position, results, or liquidity if decided against it.

Most important facts for investors to verify

• How quickly refining throughput and jet-fuel demand recover, and whether improving gasoline and diesel conditions persist.
• The extent to which Q1 losses reflect exceptional storm costs versus ongoing refining margins, and the sustainability of segment results.
• Whether liquidity remains adequate after the $875 million facility matured without renewal, and how cash use, debt maturities, and capital spending develop.
• Whether the approximately $2.0 billion 2021 capital-investment outlook and $0.98 quarterly dividend remain supportable under operating and market conditions.
• Exposure to volatile RIN and other environmental-credit costs, regulatory changes, and the unresolved Benicia proceedings.