Valero Energy Corporation (NYSE: VLO) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Dollar amounts are in U.S. dollars.
Business context
Valero operates Refining, Renewable Diesel, and Ethanol segments. Management attributed the sharp improvement in results chiefly to recovering global demand for petroleum fuels alongside constrained supply, which lifted product prices and refining margins. The Russia-Ukraine conflict further disrupted trade flows and supply.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $51.641bn | $27.748bn | $90.183bn | $48.554bn |
| Operating income (loss) | $6.219bn | $509m | $7.603bn | $(157)m |
| Net income (loss) attributable to Valero stockholders | $4.693bn | $162m | $5.598bn | $(542)m |
| Diluted EPS | $11.57 | $0.39 | $13.74 | $(1.34) |
| Cash provided by operating activities | Not separately presented | Not separately presented | $6.433bn | $1.956bn |
Q2 adjusted operating income, a non-GAAP measure, was $6.127bn versus $602m; six-month adjusted operating income was $7.530bn versus $54m. Refining segment margin was $8.089bn in Q2 and $11.300bn for the first half, compared with $2.050bn and $3.580bn, respectively. Renewable Diesel margin was $238m in Q2 and $464m for the first half; Ethanol margin was $266m and $423m, respectively. Segment margins are non-GAAP measures and should be considered alongside GAAP results.
At June 30, 2022, cash and cash equivalents were $5.392bn, total assets $64.345bn, and total equity $22.733bn. Debt and finance lease obligations totaled $12.880bn, including $1.022bn current. Valero reported liquidity of $9.758bn, including $5.207bn of cash available to the parent and $4.551bn of available committed capacity; an additional $185m of cash was held by consolidated VIEs for their own use. Management said it expected sufficient funds for operating needs and commitments over the next 12 months and beyond.
First-half investing cash outflow was $1.460bn, including $1.496bn of capital investments. The company repurchased $1.892bn of stock and paid $800m in dividends during the period. Cash increased $1.270bn to $5.392bn.
Material changes versus the prior comparable period
- Revenue rose substantially, primarily reflecting higher petroleum-product prices. Refining operating income increased by $5.863bn in Q2 and $7.906bn for the first half year over year; higher gasoline and, especially, distillate margins and higher throughput drove the improvement.
- Refining throughput averaged 2.962 million barrels per day in Q2, up 127,000 barrels per day year over year; first-half throughput was 2.881 million barrels per day, up 257,000.
- Renewable Diesel operating income declined $96m in Q2 and $150m for the first half, mainly due to higher feedstock costs and unfavorable commodity-hedge effects, partly offset by higher sales volumes and prices. Q2 sales volumes rose to 2.182 million gallons per day from 923,000.
- Ethanol adjusted operating income fell $20m in Q2, as higher corn and operating costs and lower production offset improved selling prices. First-half adjusted operating income increased $38m, with higher ethanol and co-product prices partly offset by higher corn costs.
- Operating cash flow increased to $6.433bn from $1.956bn in the first half. Working capital used $128m of cash, compared with a $1.251bn source in the prior-year period.
- Valero reduced debt by $1.05bn during the first half. It issued $650m of 2052 notes and used proceeds and cash to retire approximately $1.4bn principal of notes; the transactions included a $50m early-retirement charge. It also acquired $300m of GO Zone bonds subject to mandatory tender.
Outlook, commentary, risks, and unusual items
- Management expected gasoline and diesel demand to be near pre-pandemic levels and to follow typical seasonal patterns in Q3 2022; jet fuel demand was improving slowly but remained below pre-pandemic levels. U.S. light-product inventories were below historical levels, which management said should support high refinery utilization.
- Management expected crude-oil discounts to remain near then-current levels absent supply or availability changes, Renewable Diesel margins to remain consistent with then-current levels, and ethanol demand to follow typical seasonal patterns. These are expectations, not quantified earnings guidance.
- Valero expected $2.0bn of 2022 capital investments attributable to the company; approximately 60% was designated for sustaining the business and 40% for growth, with approximately half of growth investment allocated to lower-carbon businesses.
- Management identified uncertainty around fuel supply and demand, volatile commodity prices, inflation, potential demand effects from high prices, COVID-19 developments, and the Russia-Ukraine conflict. Other disclosed risks include refinery or plant disruptions, feedstock and energy costs, regulatory and environmental requirements, compliance-credit prices, foreign exchange, and capital-market access.
- The EPA’s June 2022 Renewable Fuel Standard rule reduced 2020 quotas and set 2021 and 2022 quotas. Valero recognized a $104m benefit, primarily relating to the 2020 quota change. Renewable-fuel blending-credit compliance costs were $523m for the first half, versus $1.1bn a year earlier.
- Other notable items: a $23m gain included in depreciation and amortization following the sale of the permanently closed Jefferson, Wisconsin ethanol plant; a $20m environmental-reserve adjustment; and a $50m early-debt-retirement charge. The 2021 comparison included a $62m gain on the sale of a partial interest in MVP and $579m of estimated excess Winter Storm Uri energy costs.
- The board authorized a new share-repurchase program of up to $2.5bn on July 7, 2022, with no expiration date. A quarterly dividend of $0.98 per share was declared July 21, payable September 1, 2022. No material changes to previously disclosed risk factors or legal proceedings were reported; disclosure controls were reported effective.
Important facts for investors to verify
- How much of the exceptionally strong refining earnings and margins is sustainable if fuel supply, demand, or product-price spreads normalize.
- Whether higher crude, renewable feedstock, corn, energy, and compliance-credit costs, as well as commodity-hedge effects, continue to pressure Renewable Diesel and Ethanol profitability.
- How working-capital requirements and commodity-price volatility affect operating cash flow and accessible liquidity; distinguish parent-available cash from cash restricted to consolidated VIEs.
- Whether planned capital investments, debt reduction, dividends, and the new repurchase authorization remain consistent with cash generation and liquidity needs.
- The effects of the EPA quota changes, future blending requirements, environmental obligations, inflation, and geopolitical developments on costs, margins, and demand.