Valero Energy Corporation — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2020. Valero operates refining, renewable diesel, and ethanol businesses. COVID-19 restrictions sharply reduced fuel demand and disrupted oil markets; demand and prices partially recovered late in the quarter, but renewed restrictions created downside uncertainty.
Financial highlights
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $10.397 billion | $28.933 billion | $32.499 billion | $53.196 billion |
| Operating income (loss) | $1.789 billion | $908 million | $(488) million | $1.216 billion |
| Net income (loss) attributable to Valero stockholders | $1.253 billion | $612 million | $(598) million | $753 million |
| Diluted EPS | $3.07 | $1.47 | $(1.48) | $1.80 |
| Operating cash flow | Not separately provided | Not separately provided | $687 million | $2.394 billion |
- Q2 earnings require context: reported operating income included a $2.248 billion benefit from reversing most of the first-quarter inventory write-down. Excluding the inventory adjustment and other specified items, adjusted operating income was a $456 million loss, versus $982 million of adjusted operating income a year earlier.
- Six-month adjusted results: adjusted operating loss was $189 million, compared with adjusted operating income of $1.369 billion in the first half of 2019. The first-half GAAP results included a net $294 million inventory valuation charge.
- Segment trends: Q2 refining adjusted operating loss was $383 million, versus $1.042 billion income a year earlier; refining margin fell to $1.078 billion from $2.586 billion. Renewable diesel adjusted operating income was $129 million, down from $145 million. Ethanol adjusted operating loss was $20 million versus $8 million income. Lower product margins and reduced throughput or production were key pressures.
- Balance sheet and liquidity: cash and cash equivalents were $2.319 billion at June 30, versus $2.583 billion at year-end 2019. Total debt and finance lease obligations were $12.677 billion, including $587 million current. Total liquidity was $7.695 billion, including $5.723 billion of available committed borrowing capacity; this liquidity figure excludes $347 million of cash held by VIEs and available only to them.
- Cash and investment: operating cash flow was $687 million, investing cash outflow $1.339 billion, and financing cash inflow $435 million in the first half. Cash declined $264 million. Business investments were approximately $1.3 billion; dividends and treasury-share purchases returned approximately $948 million to stockholders.
- Margins and volumes: Q2 refining throughput averaged 2.321 million barrels per day, down 647,000 year over year. Ethanol production averaged 2.316 million gallons per day, down 2.217 million; renewable diesel sales averaged 795,000 gallons per day, up 26,000.
Material changes and management commentary
- Revenue fell sharply year over year, primarily reflecting lower refined-product prices and reduced demand. Refining adjusted results deteriorated as gasoline and distillate margins and throughput weakened; stronger crude discounts partly offset the pressure.
- Eight ethanol plants were temporarily idled, with output reduced at the remaining plants. By quarter-end, four idled plants had restarted and production was increasing. Valero also reduced crude runs and limited gasoline and jet-fuel production at certain refineries, then increased production as demand partially recovered.
- Valero issued $1.5 billion of senior notes in April 2020: $850 million at 2.700% due 2023 and $650 million at 2.850% due 2025. It also established an $875 million 364-day revolving facility; no borrowings were outstanding under it at June 30.
- Management deferred approximately $400 million of 2020 refining and ethanol capital investments and said it then expected approximately $2.1 billion of capital investments for 2020, while maintaining required safety, environmental, and regulatory spending. Share repurchases under the buyback program had paused after mid-March.
Outlook, risks, and contingencies
- Management expected adverse COVID-19 and oil-market impacts to continue in Q3 2020, while anticipating improvement in gasoline, jet-fuel, diesel, renewable diesel, and ethanol prices and margins. These were qualitative expectations, not quantified earnings guidance.
- The company said renewed or expanded restrictions could weaken the partial demand recovery. It also cited uncertainty around economic recovery, crude supply and demand, refining margins and utilization, commodity prices, feedstock costs, and storage capacity.
- Environmental rules and compliance-credit prices, litigation, operational disruptions, foreign-exchange movements, and access to financing were additional risks. Management reported no impairment of long-lived assets or $260 million of goodwill at June 30, despite adverse market conditions.
- Approximately $440 million of income and indirect tax payments had been deferred; about 40% was due in Q3 2020 and the remainder in 2021. Valero was reconsidering a discretionary pension contribution of up to $100 million.
- A TCEQ enforcement notice concerning a Corpus Christi West Refinery Title V deviation report investigation could result in penalties exceeding $100,000; Valero was working with the agency. The company stated that the matter was not expected to materially affect its financial position, results, or liquidity.
Most important facts for investors to verify
- Separate the $2.248 billion Q2 inventory-recovery benefit from underlying performance; review the reconciliation of GAAP and adjusted results.
- Track fuel demand, refining margins, refinery throughput, and the pace and durability of product-price recovery.
- Monitor liquidity and debt, including facility availability, deferred tax payments, and the distinction between company cash and VIE-restricted cash.
- Check whether announced capital deferrals, plant restarts, and expected Q3 margin improvements occurred; the filing provides expectations, not guaranteed outcomes.
- Review environmental and regulatory developments, pension funding decisions, and the effect of ongoing COVID-19 uncertainty on estimates and asset values.