Valero Energy Corporation (VLO) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Valero operates Refining, Renewable Diesel, and Ethanol segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $36,439 | $38,542 | Down $2,103 |
| Operating income | $4,043 | $1,384 | Up $2,659 |
| Net income attributable to Valero shareholders | $3,067 | $905 | Up $2,162 |
| Diluted earnings per share | $8.29 | $2.21 | Up $6.08 |
| Cash from operations | $3,170 | $588 | Up $2,582 |
Operating margin was approximately 11.1% of revenue, versus 3.6% in Q1 2022; net income attributable to Valero shareholders was approximately 8.4% of revenue, versus 2.3%. Revenue fell mainly because petroleum product prices were lower, but cost of sales declined more, primarily due to lower crude oil and other feedstock costs. Higher refining margins were the main earnings driver.
- Refining: Operating income was $4,057, up $2,606. Throughput averaged 2.930 million barrels per day, up 130,000. Higher diesel and gasoline margins, wider crude discounts, and greater throughput supported results.
- Renewable Diesel: Operating income was $205, up $56. Sales averaged 2.988 million gallons per day, up 1.250 million, primarily reflecting the Port Arthur plant’s late-2022 startup. Higher volumes were partly offset by lower renewable diesel prices and increased operating and depreciation costs.
- Ethanol: Operating income was $39, up $38. Higher co-product prices and production volumes more than offset lower ethanol prices.
Cash flow, balance sheet, and capital allocation
- Cash and cash equivalents were $5,521 at March 31, versus $4,862 at year-end 2022. Cash increased $659 during the quarter.
- Operating cash flow was $3,170. Investing activities used $549, including $524 of capital investments. Financing activities used $1,998.
- Working capital changes reduced operating cash flow by $534, primarily reflecting lower accounts payable; changes in receivables and inventory partly offset one another.
- Total reported liquidity was $10,804: $5,403 of available cash, excluding cash reserved for consolidated variable-interest entities, and $5,401 of available committed facility capacity.
- Debt and finance lease obligations totaled $11,431, including $1,258 current and $10,173 long-term. Debt excluding finance leases had a carrying amount of $9,037. Valero repaid about $199 of public debt and recorded an $11 net gain on its early retirement.
- Valero returned $1,830 to shareholders: $1,451 in share repurchases and $379 in dividends. The quarterly dividend was $1.02 per share. It purchased about 11.0 million shares and had $3.399 billion remaining under its repurchase authorizations at quarter-end.
- Capital investments attributable to Valero, a non-GAAP measure, were $467. Management expected approximately $2.0 billion for 2023, about $1.5 billion for sustaining investment, with the balance for growth; over 40% of growth investment was allocated to low-carbon businesses.
Outlook, risks, and notable items
- Management said strong global demand and constrained supply had supported refining margins. For Q2 2023, it expected gasoline and diesel demand to follow seasonal patterns, low U.S. and European light-product inventories to support high refinery utilization, crude discounts to remain near current levels absent supply changes, renewable diesel margins to remain consistent with current levels, and ethanol demand to follow seasonal patterns. These are expectations, not guarantees.
- California’s SBx 1-2, expected to take effect June 26, 2023, authorizes possible maximum refining-margin limits and penalties, expands detailed reporting, and may allow regulation of refinery turnaround and maintenance. Rules had not yet been established. Valero said adverse effects could be material and could lead to impairment of California assets or asset-retirement obligations. Other jurisdictions are considering similar measures.
- Compliance-credit costs under renewable and low-carbon fuel programs were $413, up from $302. Credit prices, commodity prices, foreign exchange, demand, supply, regulation, geopolitical events, operational disruptions, and project execution are among the risks identified.
- Valero reported no material changes to its previously disclosed risk factors. It resolved an EPA matter concerning the Benicia refinery through a consent agreement on March 30, 2023. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Interim results are unaudited and management cautioned that quarterly results are not necessarily indicative of full-year performance. Q1 2022 included a $50 net charge on early debt retirement, compared with an $11 gain in Q1 2023.
Key facts for investors to verify
- Whether refining margins, throughput, and product demand remain strong, and how crude differentials evolve.
- Final California SBx 1-2 rules, including any margin penalties or turnaround restrictions, and their possible effect on California operations and asset values.
- Renewable diesel profitability as the Port Arthur facility ramps up, including sales prices, feedstock costs, and compliance-credit economics.
- Progress against the 2023 capital-investment plan, liquidity needs, debt reduction, and the pace of discretionary share repurchases.
- Cash availability: $4.3 billion of cash was held by foreign subsidiaries, and some repatriation may incur taxes; consolidated VIE cash is restricted to those entities’ use.