VALERO ENERGY CORP annual report, FY2022

Valero Energy Corporation (NYSE: VLO) — 2022 Form 10-K

Business context and reporting period

Annual report for the fiscal year ended December 31, 2022; comparisons below are primarily with 2021. Valero manufactures and markets petroleum-based and low-carbon liquid fuels and petrochemical products. Its segments are Refining, Renewable Diesel (Diamond Green Diesel, or DGD), and Ethanol. The company operated 15 petroleum refineries with approximately 3.15 million barrels per day of throughput capacity, two DGD renewable diesel plants with combined capacity of approximately 1.2 billion gallons per year, and 12 ethanol plants with approximately 1.6 billion gallons per year of capacity.

Financial and operating highlights

Year-end liquidity was $10.1 billion, including $5.4 billion of available capacity under committed facilities and the accounts receivable sales facility. Debt was $9.2 billion, and total debt and finance lease obligations were $11.6 billion. Valero reduced debt by approximately $2.7 billion during 2022. The current ratio was approximately 1.38, based on reported current assets of $24.1 billion and current liabilities of $17.5 billion.

Refining was the primary earnings driver: segment operating income was $15.8 billion, versus $1.9 billion in 2021. Refining margin increased to $23.5 billion from $9.2 billion, reflecting stronger gasoline and especially diesel margins, plus higher throughput. Renewable Diesel operating income was $774 million, up from $709 million; higher sales volumes and prices were partly offset by sharply higher feedstock costs and derivative losses. Ethanol operating income declined to $110 million from $473 million, mainly due to higher corn and operating costs.

Material changes versus 2021

• Revenue increased $62.4 billion and operating income increased $13.6 billion. Management attributed the improvement chiefly to recovery in global fuel demand amid constrained petroleum-product supply, which supported higher refining margins.
• Refining throughput averaged 2.953 million barrels per day, up from 2.787 million. Renewable diesel sales rose to 2.175 million gallons per day from 1.014 million, following the St. Charles expansion and Port Arthur plant startup.
• Operating cash flow more than doubled, but working capital was a $1.6 billion use of cash in 2022, versus a $2.2 billion source in 2021.
• Valero returned $6.1 billion to stockholders through $4.6 billion of share repurchases and $1.6 billion of dividends. It repurchased approximately 38.0 million shares during the year.

Outlook, risks, contingencies, and unusual items

Management’s first-quarter 2023 commentary was qualitative, not formal earnings guidance. It expected gasoline and diesel demand to track typical seasonal patterns near pre-pandemic levels, jet fuel demand to continue recovering but remain below pre-pandemic levels, and low U.S. and European light-product inventories to support refining utilization. It expected crude discounts to remain near then-current levels absent supply changes and renewable diesel margins to remain near current levels.

Expected 2023 capital investments were $2.02 billion, including $1.595 billion for sustaining projects and $425 million for growth projects. In January 2023, DGD approved a $315 million sustainable aviation fuel project, expected to be completed in 2025. A carbon-capture pipeline serving eight ethanol plants was expected to begin service in late 2024; timing, costs, tax-credit eligibility, and returns remain subject to execution and regulatory conditions.

• Market and operating exposure: margins depend on volatile product prices, crude and other feedstock costs, and regional differentials. The company also cited risks from energy costs and availability, supply and logistics disruptions, severe weather, outages, and geopolitical events, including the Russia-Ukraine conflict.
• Regulation and low-carbon markets: compliance-credit prices and changing renewable-fuel rules can affect costs and low-carbon margins. Canada’s Clean Fuel Regulations were scheduled to apply beginning July 1, 2023. Competition for waste feedstocks could pressure renewable diesel economics.
• Climate transition and environmental matters: policy changes, declining petroleum demand, permitting requirements, environmental compliance costs, and climate-related litigation or disclosure obligations could affect results. Valero reported several environmental enforcement matters involving the Benicia, Port Arthur, and Corpus Christi East refineries and said it was working to resolve them; it believed an adverse decision in any one or more would not materially affect financial condition, results, or liquidity.
• Unusual items: 2022 included a $61 million impairment of the Lakota ethanol plant, a $23 million gain on the sale of the Jefferson ethanol plant, a $58 million pension settlement charge, and a $104 million benefit from revised RFS volume standards. The Lakota impairment followed weaker demand for higher-grade ethanol.
• Tax and capital allocation: the Inflation Reduction Act introduced a corporate alternative minimum tax and a 1% excise tax on certain share repurchases, generally effective in 2023 or later, alongside low-carbon fuel incentives. The board approved an additional $2.5 billion repurchase authorization in February 2023; repurchases are discretionary. The board declared a $1.02-per-share quarterly dividend in January 2023.

The company reported $10.1 billion of contractual purchase obligations, including $20.8 billion due within one year; most are market-priced or indexed. KPMG issued unqualified opinions on the financial statements and internal controls. The auditor identified assessment of $284 million in gross unrecognized tax benefits as a critical audit matter.

Important facts for investors to verify

• Whether unusually strong 2022 refining margins and constrained supply persist, and how earnings respond if margins normalize.
• Whether the new DGD Port Arthur capacity achieves expected utilization and profitability, given feedstock costs and credit-price volatility.
• Progress, capital requirements, timing, and expected economics for the sustainable aviation fuel and ethanol carbon-capture projects.
• Debt and lease obligations, available liquidity, foreign-held cash and repatriation costs, and the pace of discretionary repurchases and dividends.
• Developments in the disclosed environmental proceedings, tax audits and unrecognized tax benefits, and renewable-fuel regulations and compliance-credit markets.