Valero Energy Corporation — Q3 2021 Form 10-Q
Business context and period. Valero operates refining, renewable diesel, and ethanol businesses. This unaudited filing covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $29.52 billion | $15.81 billion | $78.07 billion | $48.31 billion |
| Operating income (loss) | $693 million | $(621) million | $536 million | $(1.109) billion |
| Net income (loss) attributable to Valero shareholders | $463 million | $(464) million | $(79) million | $(1.062) billion |
| Diluted EPS | $1.13 | $(1.14) | $(0.20) | $(2.62) |
| Operating cash flow | Not separately provided for the quarter | $3.405 billion | $852 million |
- Q3 refining segment operating income was $835 million, versus a $629 million loss a year earlier; renewable diesel earned $108 million, while ethanol had a $44 million operating loss.
- For the first nine months, refining operating income was $592 million, renewable diesel $559 million, and ethanol had a $1 million operating loss. These are GAAP segment results.
- Cash and cash equivalents were $3.498 billion at September 30, up from $3.313 billion at year-end 2020. Total liquidity was reported as $8.498 billion, including $5.176 billion of available committed capacity; the liquidity cash figure excludes $176 million held by consolidated VIEs.
- Debt and finance lease obligations totaled $14.233 billion, including $1.162 billion current and $13.071 billion long-term. Valero redeemed $575 million of floating-rate notes in September and reported no parent-company debt issuance or credit-facility borrowings during the first nine months.
- Cash capital investments were $1.715 billion for the nine months; management’s non-GAAP capital investments attributable to Valero were $1.288 billion. Dividends paid were $1.201 billion.
Changes and drivers versus prior year
- Q3 recovery reflected higher refining margins and throughput as fuel demand and product prices improved. Management cited gasoline and diesel margins as the main contributors to the $1.3 billion increase in adjusted operating income.
- For the nine months, adjusted operating income was $653 million, compared with an adjusted operating loss of $742 million in 2020. The improvement was led by refining; higher biofuel-credit costs, weaker crude discounts, and Winter Storm Uri energy costs partly offset gains.
- Q3 revenue growth largely reflected higher refined-product prices and sales volumes; cost of sales also rose substantially with crude and feedstock prices. The 2020 comparison included a $313 million Q3 inventory-valuation benefit and a $326 million nine-month LIFO liquidation charge.
- Operating cash flow benefited from a $1.630 billion working-capital source and included receipt of a $962 million 2020 U.S. federal tax refund. Thus, the reported cash generation was not solely earnings-driven.
Outlook, risks and unusual items
- Management said gasoline and diesel demand had returned near pre-pandemic levels and expected typical seasonal patterns; jet-fuel demand was improving but remained below pre-pandemic levels. It expected sour-crude discounts to continue improving as OPEC production increased.
- Renewable diesel margins were expected to moderate from Q3 levels, potentially offset by higher volumes following the October startup of a DGD expansion adding 400 million gallons per year of capacity, to 690 million gallons annually. Ethanol margins were expected to improve with lower corn prices. These are expectations, not guarantees.
- Winter Storm Uri caused estimated excess energy costs of $579 million pre-tax ($467 million after tax) in February; Hurricane Ida disrupted Louisiana refinery and renewable-diesel operations and delayed restarts and shipments.
- Biofuel-credit compliance costs were $1.6 billion for the first nine months, versus $391 million a year earlier, reflecting increased RIN costs. Management identified credit prices, commodity prices, demand, COVID-19 developments, regulation, weather, and operational disruptions among material uncertainties.
- Valero permanently ceased operations at its Jefferson, Wisconsin ethanol plant in Q3 after concluding it was no longer strategic. Accelerated depreciation related to changes in estimated useful lives of ethanol plants was $48 million in 2021.
- Other notable items included a $62 million gain on the sale of a 24.99% interest in MVP, a $24 million share of a joint-venture pipeline project impairment, and a $64 million tax charge from enacted tax-rate changes. The board declared a $0.98-per-share dividend payable in December.
- A TCEQ enforcement notice concerning alleged Title V permit violations at the Bill Greehey East Refinery may result in penalties exceeding $300,000; the company said it was working to resolve the matter and did not expect a material effect if decided adversely. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether refining margins, throughput, and fuel demand sustain the Q3 recovery, particularly given jet-fuel demand remained below pre-pandemic levels.
- How much reported operating cash flow depended on working-capital movements and the one-time $962 million tax refund.
- Whether elevated RIN and other compliance-credit costs, feedstock prices, and energy costs continue to pressure margins.
- Whether the DGD expansion achieves planned production and offsets expected moderation in renewable diesel margins.
- The status of the TCEQ proceeding, the GO Zone Bonds’ June 2022 mandatory tender and planned remarketing or refinancing, and any further material pandemic or weather impacts.