Business context and reporting period
Valero Energy Corporation (NYSE: VLO) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. Its reportable businesses are Refining, Renewable Diesel, and Ethanol. Amounts below are in U.S. dollars; financial statement figures are in billions unless noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $44.454 | $29.520 | $134.637 | $78.074 |
| Operating income | $3.792 | $0.693 | $11.395 | $0.536 |
| Net income attributable to Valero stockholders | $2.817 | $0.463 | $8.415 | $(0.079) |
| Diluted EPS | $7.19 | $1.13 | $20.93 | $(0.20) |
- Q3’s improvement was driven chiefly by higher refining margins, particularly for diesel and gasoline. The company cited recovery in transportation-fuel demand alongside constrained product supply. Refining segment operating income was $3.810 billion, versus $835 million a year earlier.
- For the first nine months, Refining operating income was $11.473 billion versus $592 million. Renewable Diesel operating income was $513 million versus $559 million, as higher feedstock costs and unfavorable derivatives offset higher prices and sales volumes. Ethanol operating income was $103 million versus a $1 million loss.
- Disclosed non-GAAP segment margins: Refining was $5.900 billion in Q3 and $17.200 billion for the nine months, versus $2.655 billion and $6.235 billion, respectively, in 2021. These measures exclude specified expenses and adjustments and are not GAAP measures.
- Net cash provided by operating activities was $8.478 billion for the nine months, versus $3.405 billion. Working capital changes used $1.617 billion, compared with a $1.630 billion source in 2021.
- Investing activities used $2.070 billion; financing activities used $6.269 billion. The company reported $2.098 billion of total capital investments and $1.721 billion attributable to Valero (a company-defined non-GAAP measure).
- At September 30, cash and equivalents were $3.969 billion; total debt and finance lease obligations were $11.576 billion, down from $13.870 billion at December 31, 2021. Current assets were $22.696 billion and current liabilities $17.237 billion. Reported liquidity was $8.647 billion, including $3.729 billion of cash available to Valero and $4.918 billion of available committed-facility capacity; consolidated VIE cash is excluded from that liquidity figure.
Material changes and unusual items
- Revenue rose substantially year over year, primarily due to higher petroleum-product prices; higher crude oil and other feedstock costs also increased cost of sales.
- Valero returned $4.0 billion to stockholders during the first nine months through $2.8 billion of share repurchases and $1.2 billion of dividends. It reduced debt by approximately $2.3 billion over the period.
- Q3 included a $26 million gain associated with early debt retirement; the nine-month period included a net $24 million charge from debt retirements. An EPA rule change produced a $104 million benefit in the first nine months related primarily to 2020 renewable-fuel quotas. Sale of the Jefferson, Wisconsin ethanol plant generated a $23 million gain.
- Foreign-currency translation contributed to a $1.035 billion other comprehensive loss for the nine-month period; this was not an income-statement operating loss.
Outlook, risks, and contingencies
- Management gave qualitative, not numerical, fourth-quarter 2022 expectations: gasoline and diesel demand were near pre-pandemic levels and expected to follow seasonal patterns; jet-fuel demand was improving but remained below pre-pandemic levels. Low U.S. light-product inventories were expected to support refining utilization, crude discounts were expected near then-current levels absent supply changes, renewable diesel margins were expected to remain near current levels, and ethanol demand was expected to be seasonal.
- Management said supply-and-demand uncertainty remained. Results are exposed to crude and product prices, feedstock and energy costs, refining margins, commodity and foreign-exchange movements, renewable-fuel compliance-credit prices, and operating disruptions. The filing also identifies Russia-Ukraine conflict effects, inflation, COVID-19, regulatory changes, environmental obligations, and project execution as risks.
- Valero said it expected sufficient operating funds and facility availability to meet requirements over the next 12 months and the foreseeable future, while noting that future financing availability and terms cannot be assured. It expected 2022 capital investments attributable to Valero of $2.0 billion; approximately 60% was for sustaining the business and 40% for growth, with about half of growth investment allocated to lower-carbon businesses.
- On October 26, 2022, after quarter-end, the Board authorized an additional $2.5 billion share-repurchase program and declared a $0.98-per-share dividend payable in December. The company reported no new legal proceedings or material developments in previously reported proceedings, and no material changes to its stated risk factors.
Important facts for investors to verify
- Whether unusually strong refining margins and constrained product supply persist, and how seasonal demand affects utilization and earnings.
- Whether renewable diesel profitability improves as feedstock costs and derivative impacts change; note the substantial expansion-related increase in sales volumes and operating costs.
- Future compliance-credit costs and the effects of changes to renewable-fuel mandates, tax credits, or other low-carbon-fuel policies.
- Cash conversion and liquidity trends, including working-capital swings, capital-investment requirements, debt repayment, and the pace of repurchases and dividends.
- The filing’s non-GAAP margin and adjusted-income reconciliations, and the post-quarter timing and execution of the additional repurchase authorization.