Valero Energy Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. Valero operates refining, ethanol, and midstream businesses; effective January 1, 2017, it reported VLP as a separate segment, with prior-period segment results recast.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $22.254 billion | $19.584 billion | $44.026 billion | $35.298 billion |
| Operating income | $871 million | $1.231 billion | $1.408 billion | $2.060 billion |
| Net income attributable to Valero stockholders | $548 million | $814 million | $853 million | $1.309 billion |
| Diluted earnings per share | $1.23 | $1.73 | $1.90 | $2.78 |
| Operating cash flow | Not separately stated | Not separately stated | $2.785 billion | $2.959 billion |
Q2 refining operating income was $959 million, versus adjusted prior-year segment income of $902 million; ethanol operating income was $31 million, versus adjusted $49 million; and VLP operating income was $71 million, versus $52 million. Refining throughput averaged 3.019 million barrels per day, up 192,000 barrels per day year over year. Refining gross margin was $2.378 billion, or $8.66 per throughput barrel. Ethanol gross margin was $157 million, or $0.46 per gallon of production.
For the first half, Valero reported $1.1 billion of capital investments, including capital expenditures, turnaround and catalyst costs, and equity-method joint-venture investments. Cash dividends were $627 million and treasury-stock purchases were $660 million. Dividends per share were $0.70 in Q2, compared with $0.60 a year earlier.
Balance sheet and liquidity
At June 30, 2017, cash and temporary cash investments were $5.207 billion; current assets were $15.731 billion and current liabilities $7.683 billion. Debt and capital lease obligations totaled $8.487 billion, including $121 million current and $8.366 billion long-term. Total equity was $20.765 billion. Cash exceeded reported debt and capital lease obligations by approximately $3.280 billion, a simple comparison rather than a company-reported measure.
Operating cash flow was below the prior-year first-half level. The company cited $859 million of positive working-capital cash impact, including lower receivables and inventories, partly offset by lower accounts payable. Cash rose by $391 million over the six months. The Valero revolving credit facility had $2.850 billion available; VLP’s facility had $720 million available. The accounts-receivable facility’s actual availability was approximately $1.1 billion and its maturity was extended to July 2018 in July 2017.
Changes versus prior comparable periods
Reported Q2 operating income fell $360 million and stockholder net income fell $266 million year over year; first-half operating income declined $652 million and stockholder net income declined $456 million. Comparisons are materially affected by the 2016 noncash inventory valuation benefits: $454 million in Q2 and $747 million for the first half, partly offset by a $56 million Aruba Terminal impairment in 2016. Excluding those items, management reported Q2 2017 operating income of $871 million versus adjusted $833 million in Q2 2016, and first-half operating income of $1.408 billion versus adjusted $1.369 billion. Adjusted stockholder net income was $503 million in Q2 2016 and $786 million for first-half 2016; 2017 was $548 million and $853 million, respectively. These adjusted figures are non-GAAP measures.
Management attributed improved refining results on an adjusted basis to higher product margins and throughput, partly offset by narrower sour-crude discounts, higher biofuel-credit costs, increased VLP service charges, and higher operating costs. Ethanol results weakened in Q2 amid lower ethanol and co-product prices and higher expenses. VLP benefited from acquired terminal and crude-system assets.
Outlook, risks, and unusual items
- For Q3 2017, management expected product margins to be supported by strong domestic and export demand. Sour-crude discounts were expected to remain narrower than five-year averages; sweet-crude discounts were expected to widen slightly. Ethanol margins were expected to remain weak amid seasonally high domestic inventories.
- 2017 capital investments were expected to be approximately $2.7 billion: about $1.6 billion for stay-in-business spending and $1.1 billion for growth, including Diamond Pipeline. Valero expected to contribute a further $111 million to the pipeline in the remainder of 2017; completion was expected in December 2017.
- Biofuel-credit compliance costs were $255 million in Q2 2017 and $401 million for the first half, versus $173 million and $334 million, respectively, in 2016. Credit-price volatility and environmental regulation remain material business risks.
- Valero disclosed a reasonably possible additional environmental loss of $0–$200 million above its recorded accrual for Illinois cleanup and remediation matters. It also reported outstanding alleged air-quality violations at its Benicia facilities; management said adverse outcomes in the disclosed environmental enforcement proceedings were not expected to materially affect financial position, results, or liquidity.
- In January 2017, the company recognized approximately $490 million of capital-lease assets and obligations for refinery storage tanks under initial 10-year terms with successive automatic 10-year renewals. In July, it entered long-term agreements for use of three planned refined-products terminals in Mexico, with options to acquire a 50% interest in each.
- Management said liquidity sources were sufficient for ongoing needs, but future financing availability and terms were not assured. Valero had $2.7 billion of cash held by international subsidiaries and stated that repatriating earnings could result in taxes and deferred tax expense.
Important facts for investors to verify
- Assess refining earnings against the unusually large 2016 inventory valuation benefit and Aruba impairment; compare reported and non-GAAP adjusted results.
- Track refining margins, throughput, sour-crude discounts, energy costs, and biofuel-credit prices against management’s Q3 commentary.
- Monitor ethanol inventory levels, co-product demand, and segment profitability, as management expected weak margins.
- Review cash conversion and working-capital movements, capital spending, buybacks, dividends, and progress and costs for Diamond Pipeline.
- Follow the Illinois remediation exposure, Benicia enforcement matters, credit-facility availability, and the effect of environmental compliance requirements.