Valero Energy Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; financial statements are unaudited. Valero operates refining, retail and ethanol businesses. The 2012 results include Meraux and Pembroke, acquired in the second half of 2011.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $34.662B | $31.293B | $69.829B | $57.601B |
| Operating income | $1.361B | $1.290B | $1.117B | $1.534B |
| Net income attributable to Valero stockholders | $831M | $744M | $399M | $842M |
| Diluted EPS from continuing operations | $1.50 | $1.30 | $0.72 | $1.48 |
- Q2: Revenue increased 11%; operating income rose $71M and attributable income increased $86M. Refining operating income rose $111M and retail rose $37M, partly offset by a $59M ethanol decline.
- Refining throughput margin was $10.63 per barrel versus $11.41 a year earlier, while throughput volumes increased 15% to 2.658 million barrels per day. Lower Gulf Coast product margins and narrower sour-crude discounts weighed on per-barrel margins.
- First half: Revenue increased 21%, but operating income fell $417M and attributable income declined $443M. Results included a $611M impairment charge, principally $595M for Aruba. Excluding the $611M impairment in 2012 and the $542M derivative loss in 2011, refining operating income still declined $215M, according to management.
- Ethanol operating income fell to $5M in Q2 from $64M and to $14M for the half from $108M, reflecting weak margins amid surplus U.S. supply. Retail operating income improved to $172M in Q2 and $212M for the half; U.S. retail gains were partly offset by weaker Canadian fuel margins.
- Cash flow and investment: First-half operating cash flow was $2.994B, versus $2.954B. Capital expenditures were $1.420B and turnaround/catalyst costs were $264M. Cash increased $271M to $1.295B.
- Debt and liquidity: At June 30, cash was $1.295B; current debt and capital lease obligations were $582M and long-term debt and leases were $6.460B. The $3B revolving facility had no borrowings outstanding; the covenant debt-to-capitalization ratio was 26%, versus a 60% maximum. The receivables facility had $100M outstanding at period-end.
- Current assets were $14.033B and current liabilities $10.798B. The board raised the quarterly dividend from $0.15 to $0.175 per share in July. Valero repurchased $147M of stock during the first half.
Material changes, outlook and risks
- Aruba operations were suspended in March after sustained cash-flow difficulties. Valero recorded a $595M impairment based on a $350M non-binding purchase indication, plus working capital. Negotiations continued, but no definitive sale agreement existed; further impairment could result if a sale does not occur.
- Management expects volatile energy markets and margins. It cautioned that completion of crude-oil pipeline and logistics projects could narrow the WTI discount to Brent and reduce margins for refiners processing WTI-priced crude. Sour-crude discounts had narrowed materially; stronger gasoline and distillate margins partly offset that pressure in the first half.
- Management expected ethanol margins to remain depressed in Q3, partly because drought-driven higher corn prices, and reported temporary suspensions at two ethanol plants and reduced utilization at others.
- 2012 expected capital investments were approximately $3.1B, including about $100M for environmental projects, plus $530M of turnaround and catalyst costs. Management said it believed funds from operations and available credit could support ongoing requirements.
- In July, the board authorized Valero to pursue separation of its retail business and was reviewing possible transactions, including a tax-efficient distribution; no transaction was finalized in the filing.
- Risks include changing commodity spreads and product margins, refinery outages, environmental and greenhouse-gas regulation, and the outcome of IRS audits covering 2002–2009. Management warned that an adverse IRS outcome could reclassify deferred tax liabilities as current and harm liquidity. The filing also discusses cybersecurity exposure and potential added costs from derivatives regulation.
Important facts for investors to verify
- Whether the proposed Aruba sale closes, its final price and working-capital terms, and whether further impairment is required.
- Whether crude differentials, product margins and pipeline capacity changes support or pressure refining profitability; also track utilization and operating performance at Meraux and Pembroke.
- Whether weak ethanol economics and elevated corn costs persist, and the effect of plant suspensions on segment results.
- Progress and terms of any retail separation, alongside execution of the stated 2012 capital and turnaround spending plans.
- Developments in IRS audits, environmental permitting and emissions rules, and credit ratings; Standard & Poor’s rating was BBB with a negative outlook, while Moody’s and Fitch were stable.