Valero Energy Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim financial statements are unaudited.
Business context and reporting period
Valero operates Refining, Renewable Diesel, and Ethanol segments. Management said strong worldwide demand for petroleum-based transportation fuels and constrained supply continued to support strong refining margins, though margins were below the unusually high levels of 2022.
Financial and operating metrics
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $34.5 billion | $51.6 billion | $70.9 billion | $90.2 billion |
| Operating income | $2.76 billion | $6.22 billion | $6.80 billion | $7.60 billion |
| Net income attributable to Valero stockholders | $1.94 billion | $4.69 billion | $5.01 billion | $5.60 billion |
| Diluted earnings per share | $5.40 | $11.57 | $13.74 | $13.74 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $4.68 billion | $6.43 billion |
- Margins and segments: Q2 Refining segment margin, a non-GAAP measure, was $4.22 billion, down $3.87 billion year over year. Renewable Diesel margin was $603 million, up $365 million; Ethanol margin was $275 million, up $9 million. First-half margins were $10.12 billion, $952 million, and $464 million, respectively.
- Cash flow and capital allocation: First-half investing cash outflow was $1.08 billion; financing cash outflow was $3.52 billion. Valero reported $982 million of capital investments and returned $3.14 billion to stockholders through share repurchases and dividends. Cash increased by $213 million.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $5.08 billion and total debt and finance lease obligations were $11.32 billion, including $1.19 billion current. Total liquidity was $10.14 billion; this excludes $344 million of cash held by consolidated VIEs for their use. Total equity was $27.99 billion.
- Dividends and repurchases: First-half common dividends paid were $746 million. The board declared a $1.02-per-share quarterly dividend in July. Valero repurchased $2.39 billion of stock in the first half and had $2.5 billion available under its then-current repurchase authorization at June 30.
Material changes versus comparable periods
- Q2 revenue fell $17.1 billion and stockholder net income fell $2.75 billion year over year, primarily reflecting lower petroleum product prices and weaker refining margins. First-half revenue declined $19.2 billion and stockholder net income declined $587 million.
- Q2 Refining operating income declined $3.78 billion. Lower distillate and gasoline margins reduced refining results, partly offset by higher crude oil discounts and lower operating expenses. First-half refining throughput averaged 2.95 million barrels per day, up from 2.88 million.
- Renewable Diesel operating income rose $288 million in Q2 and $344 million in the first half, supported by lower feedstock costs and higher volumes, including production from the DGD Port Arthur plant. Lower renewable diesel prices and higher plant costs partly offset the gains.
- Ethanol operating income increased $26 million in Q2 and $64 million in the first half, mainly due to lower corn and energy costs and higher production, partly offset by lower selling prices.
- First-half operating cash flow was down $1.75 billion year over year, reflecting lower earnings and a $1.73 billion unfavorable change in current assets and liabilities, compared with a $128 million use of cash in 2022.
Outlook, risks, contingencies, and unusual items
- For Q3 2023, management expected gasoline and diesel demand to follow seasonal patterns, jet fuel demand to continue recovering, and low U.S. and European light-product inventories to support refining utilization. It expected crude oil discounts to remain near current levels absent supply changes, renewable diesel margins to remain consistent with current levels, and ethanol demand to follow seasonal patterns. No quantified earnings or margin guidance was provided.
- Valero expected approximately $2.0 billion of 2023 capital investments attributable to Valero: about $1.5 billion for sustaining the business, with the balance for growth; over 40% of growth capital was allocated to low-carbon businesses. Management stated it expected sufficient operating funds and available credit to meet requirements.
- California regulation: SBx 1-2 took effect June 26, 2023. California had not yet established a maximum refining margin, penalties, or restrictions on refinery maintenance. Valero said potential penalties or limits or delays on maintenance could adversely affect California operations and could lead to a potentially material asset impairment or asset-retirement obligation.
- Other risks: Results are exposed to changes in commodity prices, refining and renewable-fuel margins, demand, feedstock availability and cost, regulatory requirements and compliance-credit prices, foreign exchange, operating disruptions, and geopolitical and economic conditions. The filing reported no material changes to the prior annual report’s risk factors.
- Contingency: The Benicia refinery received a May 2023 Notice of Violation from the Bay Area Air Quality Management District concerning a release from a pressure relief device; Valero said it was working with the agency to resolve it. No other material developments in previously reported legal proceedings were noted.
- Unusual/comparable-period items: Q2 and first-half 2022 results included a $104 million benefit related to EPA renewable volume obligation rule changes, a $23 million gain on sale of an ethanol plant, and a $20 million environmental reserve charge. First-half 2023 other income included an $11 million gain on early debt retirement; Valero retired $199 million of public debt.
Important facts for investors to verify
- Whether refining margins and throughput, especially distillate margins, remain resilient as market supply, demand, and crude discounts change.
- Whether renewable diesel profitability is sustained as feedstock costs, product prices, compliance-credit values, and DGD Port Arthur operations evolve.
- The effects and timing of California SBx 1-2 rulemaking, including any margin cap, penalties, or turnaround restrictions, and resulting impairment exposure.
- Cash-flow conversion and working-capital movements, alongside planned capital spending, debt reduction, dividends, and share repurchases.
- That management’s outlook is conditional, forward-looking, and not a quantified earnings forecast; actual results may differ materially.