Valero Energy Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Valero is a petroleum refiner and ethanol producer; it completed the separation of its retail business in May 2013, so Q1 2014 has no retail segment results. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $33.663 billion | $33.474 billion |
| Operating income | $1.350 billion | $1.061 billion |
| Net income attributable to Valero stockholders | $828 million | $654 million |
| Diluted EPS | $1.54 | $1.18 |
| Operating cash flow | $244 million | $1.549 billion |
| Capital expenditures and turnaround/catalyst costs | $517 million | $864 million |
| Cash and temporary cash investments | $3.647 billion | $4.292 billion at Dec. 31, 2013 |
| Debt and capital lease obligations | $6.564 billion | $6.564 billion at Dec. 31, 2013 |
| Total equity | $20.408 billion | $19.946 billion at Dec. 31, 2013 |
- Refining operating income was $1.279 billion, up $67 million year over year. Throughput was 2.701 million barrels per day versus 2.566 million; throughput margin was $10.90 per barrel versus $10.59.
- Ethanol operating income rose to $243 million from $14 million. Gross margin increased to $1.38 per gallon from $0.42, and production rose to 3.095 million gallons per day from 2.712 million.
- Operating cash flow fell sharply, mainly because current assets and liabilities used $1.088 billion of cash, versus providing $255 million in Q1 2013. Inventory growth was a major use of cash. Cash declined $645 million during the quarter.
- Valero repurchased $226 million of stock and paid $133 million in common dividends. The quarterly dividend was $0.25 per share, versus $0.20 a year earlier.
- Cash exceeded reported debt and lease obligations by approximately $3.0 billion; this simple comparison does not account for restrictions on subsidiary cash. VLP cash is consolidated but available only for VLP obligations.
Material changes versus Q1 2013
- Net income attributable to Valero stockholders increased $174 million, primarily reflecting a $229 million improvement in ethanol operating income and a $67 million increase in refining income. The absence of the former retail segment reduced the year-over-year comparison by $42 million.
- Refining results benefited from wider discounts on certain light sweet and sour crude oils and higher throughput, partly offset by weaker gasoline and distillate margins, narrower WTI-to-Brent discounts in the Mid-Continent, and less favorable discounts on other feedstocks. Refining operating expenses rose $97 million, including higher energy costs.
- Ethanol results benefited from lower corn prices and higher ethanol prices; management attributed the margin improvement largely to those factors. Severe winter weather increased natural gas costs in both refining and ethanol operations.
- Interest and debt expense increased $17 million, mainly because less interest was capitalized as major projects were completed. Weighted-average diluted shares declined to 536 million from 556 million.
Outlook, risks and contingencies
- Management forecast approximately $3.0 billion in 2014 capital investments, including about $700 million for deferred turnaround and catalyst costs; acquisitions are excluded.
- Management said gasoline margins had improved in early Q2 as the summer driving season approached, while crude-oil discounts were mixed and expected to remain volatile. It expected lower average ethanol margins for the remainder of 2014 than in Q1 as weather-related supply disruptions eased.
- Valero expected higher 2014 cash income-tax payments than in recent years, partly because accelerated depreciation deductions were not generally extended beyond 2013. It stated that operating cash and cash on hand should be sufficient to meet payments.
- Environmental cleanup matters involving the Hartford, Illinois, site could result in losses of $0–$200 million above the amount accrued. The filing notes uncertainty in cleanup scope and allocation among responsible parties.
- Uncertain tax-position liabilities, including related penalties and interest, totaled $433 million at March 31, 2014; $236 million was classified as current. The company expected to settle certain IRS audits within 12 months and believed settlements would not exceed recorded liabilities.
- Key business risks include volatile refining and ethanol margins, commodity and biofuel-credit prices, operational outages, severe weather, environmental and regulatory requirements, litigation, foreign exchange, and access to financing. The filing reported no material change in previously disclosed risk factors.
- Valero had no borrowings under its main revolving credit facilities at quarter-end. Its revolving facility covenant allowed a maximum debt-to-capitalization ratio of 60%; the reported ratio was 14%. A $200 million senior-note repayment occurred in April 2014.
Most important facts for investors to verify
- Whether the Q1 earnings improvement—especially the unusually strong ethanol contribution—persists given management’s expectation of lower ethanol margins later in 2014.
- Whether operating cash flow recovers from the working-capital-driven decline and supports planned capital investment, repurchases, dividends, and higher tax payments.
- How crude differentials and regional gasoline and distillate margins evolve, particularly in the Mid-Continent and Gulf Coast regions.
- The eventual cost and timing of Hartford environmental remediation and the outcome of IRS audits and other regulatory proceedings.
- The effect of the retail separation on year-over-year comparisons, and the availability of cash held by international subsidiaries and VLP.