Valero Energy Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Valero operates refining, renewable diesel, and ethanol businesses. Results reflect the early effects of COVID-19 disruptions and sharply lower oil and product prices; management cautions that the quarter does not fully capture their impact.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $22.102 billion | $24.263 billion |
| Operating income (loss) | $(2.277) billion | $308 million |
| Net income (loss) attributable to Valero shareholders | $(1.851) billion; $(4.54) per diluted share | $141 million; $0.34 per diluted share |
| Adjusted operating income (non-GAAP) | $267 million | $387 million |
| Cash from operating activities | $(49) million | $877 million |
| Cash and cash equivalents | $1.515 billion | $2.583 billion at Dec. 31, 2019 |
| Total liquidity at quarter-end | $6.342 billion | $7.8 billion at Dec. 31, 2019 |
| Debt and finance lease obligations | $11.460 billion | $9.672 billion at Dec. 31, 2019 |
Amounts are in U.S. dollars. Q1 revenue declined about 9% year over year. The reported operating loss included a $2.542 billion lower-of-cost-or-market inventory charge ($2.0 billion after tax); excluding specified items, adjusted operating income fell $120 million. The tax benefit was $616 million, including $110 million related to an expected NOL carryback under the CARES Act.
Operating cash flow was pressured by a $1.1 billion adverse change in working capital, which management attributed largely to rapidly falling prices and related timing of sales receipts and feedstock payments. Investing cash outflow was $757 million; financing cash outflow was $195 million. Valero paid $401 million in dividends and spent $147 million on treasury-stock purchases during the quarter.
Segments and changes from the prior period
- Refining: Segment operating loss was $2.087 billion, including a $2.414 billion inventory adjustment. Adjusted operating income was $329 million versus $486 million; refining margin was $1.860 billion versus $2.060 billion. Lower crude discounts and weaker distillate margins more than offset stronger gasoline margins early in the quarter. Throughput averaged 2.824 million barrels per day versus 2.865 million.
- Renewable diesel: Operating income was $198 million versus $49 million; adjusted operating income was $198 million versus $121 million. Margin increased to $229 million from $151 million, supported by hedging results and higher sales volumes.
- Ethanol: Segment operating loss was $197 million, including a $128 million inventory adjustment. Adjusted operating loss was $69 million versus adjusted income of $3 million. Margin fell to $62 million from $151 million amid higher corn costs and lower ethanol prices.
Refined petroleum product prices weakened sharply late in March: Gulf Coast gasoline fell 74% during Q1 and diesel fell 52%, according to the filing. Eight ethanol plants were temporarily idled, production at the remaining six was reduced, and Valero cut refinery runs, idled some gasoline-making units, and reduced jet fuel production.
Outlook, risks, and notable items
- Management expected weak gasoline, jet fuel, and diesel prices and margins to persist into Q2 until demand recovered; ethanol margins were also expected to remain weak. Renewable diesel margins could decline modestly. Sour crude discounts were expected to narrow slightly. The filing provides no specific earnings or revenue guidance.
- Valero deferred about $400 million of planned 2020 refining and ethanol capital investments and revised expected 2020 capital investments to approximately $2.1 billion, while stating it would continue required safety, environmental, and regulatory spending.
- After quarter-end, Valero entered an $875 million 364-day revolving credit facility and issued $1.5 billion of notes: $850 million at 2.700% due 2023 and $650 million at 2.850% due 2025. It also repaid $400 million under its receivables facility by April 29; reported available capacity there was then $512 million.
- Valero suspended stock repurchases under its program after mid-March, deferred approximately $100 million of first-quarter income and indirect tax payments, and was reconsidering up to $100 million of discretionary U.S. pension contributions.
- Principal uncertainties include the duration and economic effects of COVID-19, product demand and refining margins, crude-oil supply and prices, working-capital volatility, access to financing, credit ratings, environmental regulation, and commodity, currency, and biofuel-credit price movements. Management said it could not predict the pandemic’s ultimate business impact or the pace of economic recovery.
- The $1.4 billion finance-lease asset and liability recognized for the MVP Pasadena terminaling agreement was a notable noncash item. Management reported no impairment of the evaluated ethanol plants or goodwill at March 31, 2020.
Investor verification priorities
- Track demand recovery, refinery utilization, product cracks, crude discounts, and the duration of plant idling against management’s Q2 expectations.
- Reconcile reported losses with the inventory valuation charge and monitor whether inventory values recover or require further adjustments.
- Verify liquidity after the April financing actions, receivables-facility capacity changes, and subsequent operating cash flows; note that quarter-end liquidity excludes $192 million held by VIEs and unavailable for general use.
- Monitor debt and lease obligations, dividend sustainability, deferred taxes, and the planned level of 2020 capital investments.
- Assess segment trends, particularly refining and ethanol margins and renewable diesel’s contribution, while recognizing that adjusted results are non-GAAP measures.