Valero Energy Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Valero operates refining, renewable diesel, and ethanol businesses.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $15,809 | $27,249 | $48,308 | $80,445 |
| Operating income (loss) | $(621) | $881 | $(1,109) | $2,097 |
| Net income (loss) attributable to Valero stockholders | $(464) | $609 | $(1,062) | $1,362 |
| Diluted earnings (loss) per share | $(1.14) | $1.48 | $(2.62) | $3.28 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $852 | $3,823 |
- Margins by segment, Q3: Refining margin was $952, down from $2,719; renewable diesel margin was $217, up from $156; ethanol margin was $165, up from $101. These are company-defined non-GAAP measures.
- Margins by segment, nine months: Refining was $3,890 versus $7,365; renewable diesel was $607 versus $481; ethanol was $307 versus $414.
- Cash and liquidity: Cash and equivalents were $4,047 at quarter-end, versus $2,583 at December 31, 2019. Reported liquidity was $9.626 billion, including $3.809 billion of available company cash (excluding $238 million held by VIEs) and $5.817 billion of available borrowing capacity.
- Debt: Debt and finance lease obligations totaled $15.213 billion, including $636 million current and $14.577 billion long-term. Debt excluding finance leases had a carrying amount of $12.967 billion. The company issued $4.0 billion of senior notes in April and September.
- Cash uses and investment: Nine-month investing cash outflow was $1.852 billion; dividends paid were $1.2 billion. Capital investments attributable to Valero, a non-GAAP measure, were $1.507 billion.
Material changes versus prior periods
- Q3 revenue fell by $11.440 billion and operating income declined by $1.502 billion year over year. Management attributed the deterioration primarily to lower gasoline and distillate margins and reduced refining throughput amid pandemic-related demand weakness.
- Nine-month revenue fell by $32.137 billion and operating income declined by $3.206 billion. Refining adjusted operating income fell by $3.258 billion; renewable diesel adjusted operating income rose by $122 million, while ethanol adjusted operating income declined by $21 million.
- Refining throughput averaged 2.526 million barrels per day in Q3, down 428,000 barrels per day year over year. Renewable diesel sales volumes increased to 870,000 gallons per day; ethanol production averaged 3.800 million gallons per day, down 206,000.
- Operating cash flow decreased to $852 million from $3.823 billion. The company cited lower earnings and working-capital pressures; lower inventory levels provided cash, while changes in receivables and payables were adversely affected by lower product and crude prices.
- Long-term debt and finance lease obligations increased from $9.178 billion at year-end 2019 to $14.577 billion, reflecting debt issuance and lease activity. Interest and debt expense, net, rose to $410 million for the nine months from $335 million.
Outlook, commentary, and risks
- Management said product demand and prices had partially recovered from early-2020 lows, but remained below pre-pandemic levels. Most refineries continued operating at reduced rates; 11 of 14 ethanol plants had recently returned to full production.
- For Q4 2020, management expected gasoline, jet fuel, and diesel prices to improve as inventories normalized and demand recovered; sour crude discounts to improve; and renewable diesel and ethanol margins to remain near then-current levels. These expectations were subject to substantial uncertainty.
- COVID-19 resurgence and renewed restrictions could weaken the recovery. Other identified exposures include commodity prices and margins, crude and feedstock supply, environmental-credit costs and regulation, foreign exchange, operating disruptions, and access to financing.
- Valero reversed its $2.5 billion first-quarter lower-of-cost-or-market inventory reserve as market prices recovered, including a $313 million Q3 benefit. Separately, an expected LIFO inventory-layer liquidation increased cost of materials by $326 million in the nine-month period. These items materially affect comparisons of reported earnings.
- The CARES Act tax-loss carryback contributed tax benefits of $121 million in Q3 and $238 million for the nine-month period. Management also reported approximately $440 million of deferred income and indirect tax payments; remaining amounts were due in 2021 and 2022.
- Management expected approximately $2.0 billion of 2020 capital investments attributable to Valero, after deferring about $500 million of planned projects. The board declared a $0.98-per-share quarterly dividend payable in December 2020. Share repurchases under the program had been paused since mid-March.
- Senior unsecured debt ratings were investment grade but carried negative outlooks: Moody’s Baa2, S&P BBB, and Fitch BBB. Management stated that financing access and costs could be affected by downgrades.
- Environmental matters included a Three Rivers Refinery notice under review; two other disclosed enforcement matters were resolved or withdrawn, with penalties described as immaterial where applicable. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether fuel demand, refining margins, and refinery utilization recover as management expected, and how renewed pandemic restrictions affect results.
- The underlying earnings and cash-generation trend after separating the inventory reserve reversal, LIFO liquidation charge, tax benefits, and other adjustments.
- Debt maturities, interest costs, available credit capacity, and the effect of negative credit-rating outlooks on refinancing and liquidity.
- Whether the stated 2020 capital investment plan and dividend remain supportable if operating cash flow stays weak.
- Potential costs from environmental-credit obligations, regulatory requirements, and the Three Rivers enforcement matter.