Valero Energy Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Valero operates refining, ethanol, and renewable diesel businesses; it reported 15 refineries and 14 ethanol plants. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $27.25B | $30.85B | $80.45B | $88.30B |
| Operating income | $881M | $1.22B | $2.10B | $3.27B |
| Net income attributable to Valero stockholders | $609M | $856M | $1.36B | $2.17B |
| Diluted earnings per share | $1.48 | $2.01 | $3.28 | $5.05 |
| Cash from operating activities | Not presented separately for the quarter | Not presented separately for the quarter | $3.82B | $2.69B |
Revenue fell year over year largely because refined-product prices were lower; lower crude and feedstock costs partly offset the revenue decline. Q3 adjusted operating income, a company-defined non-GAAP measure, was $891M versus $1.23B. For the first nine months, it was $2.11B versus $3.25B.
Segment performance
- Refining: Q3 adjusted operating income was $1.10B, down $337M; refining margin was $2.72B, or $9.99 per barrel of throughput, versus $2.97B and $10.42. Nine-month adjusted operating income was $2.62B versus $3.71B; margin was $7.35B versus $8.19B.
- Ethanol: Q3 operating loss was $43M versus income of $21M; margin was $101M versus $156M. Nine-month adjusted operating loss was $32M versus income of $109M.
- Renewable diesel: Q3 operating income was $65M versus a $5M loss; margin was $98M versus $20M. Nine-month adjusted operating income was $191M versus $60M, excluding the prior-year blender’s tax credit adjustment.
Margins and adjusted operating income are non-GAAP measures; the filing provides reconciliations.
Balance sheet, cash flow, and liquidity
- At September 30, cash and cash equivalents were $2.14B, total assets $51.23B, and total equity $21.59B. Cash was down from $2.98B at year-end 2018.
- Debt and finance lease obligations totaled $9.57B, including $402M current and $9.17B long-term, compared with $9.11B at December 31, 2018. The company reported $7.42B of total liquidity, including $5.38B of available borrowing capacity and $2.04B of cash excluding cash restricted to consolidated VIEs.
- Nine-month investing cash outflow was $2.19B and financing cash outflow was $2.47B; cash decreased $845M. Operating cash flow included a $728M positive working-capital contribution and a $348M tax refund, including interest, related to the 2010–2011 federal tax audit settlement.
- Valero paid $1.12B in common dividends and repurchased $555M of shares during the first nine months. The board declared a further $0.90-per-share quarterly dividend on October 30, 2019.
Material changes and unusual items
- Valero completed its acquisition of the publicly held Valero Energy Partners LP units on January 10, 2019 for $950M in cash. VLP became wholly owned; the transaction was accounted for as an equity transaction, with no gain or loss recognized.
- The company refinanced $871M of 6.125% notes due 2020, issuing $1.0B of 4.00% notes due 2029. A $22M early-redemption charge was included in nine-month other income, net.
- Valero adopted the new lease standard on January 1, 2019, recognizing $1.3B of operating-lease right-of-use assets and liabilities. Management said adoption did not affect results or liquidity. A further approximately $1.1B right-of-use asset and lease liability was expected in 2020 for the MVP Terminal agreement.
- Reporting segments changed in 2019: renewable diesel became a separate segment, and VLP logistics operations were included in refining; comparative segment data was recast.
Outlook, risks, and contingencies
- For Q4 2019, management expected distillate margins to improve seasonally and ahead of IMO 2020 low-sulfur marine-fuel requirements; gasoline margins were expected to decline seasonally. It expected sour-crude discounts to improve, ethanol margins to improve with anticipated lower corn prices, and renewable diesel margins to remain near current levels. These are expectations, not guarantees.
- Key exposures include refining and feedstock price differentials, product demand and margins, unplanned outages and severe weather, corn and renewable-fuel economics, biofuel and emissions-credit costs, regulation, foreign exchange, and capital-project execution. Compliance-program costs were $227M for the first nine months, down from $431M a year earlier.
- Environmental rules may require higher future spending. The filing reports ongoing IRS audits for 2012–2015; management did not expect their ultimate settlement to be material. It also reports continuing resolution work with the Bay Area Air Quality Management District concerning the Benicia refinery; the related Solano County matter and a separate Texas emissions matter were resolved in Q3. The company stated the reported proceedings were not expected to materially affect its financial position, results, or liquidity.
- Investment-grade ratings were reported as Moody’s Baa2, S&P BBB, and Fitch BBB, each with stable outlook. A downgrade below investment grade could increase financing costs or impair access to financing.
- The filing says there were no material changes to the risk factors in the 2018 Form 10-K. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether refining margins and crude/feedstock discounts improve as management anticipated, and how seasonal gasoline and distillate trends develop.
- Whether operating cash flow remains strong without the period’s working-capital benefit and tax refund.
- Progress and costs for the MVP Terminal and other capital investments, including the expected 2020 lease recognition.
- Exposure to biofuel-credit prices, environmental requirements, and pending regulatory or legal matters.
- Debt, liquidity, capital returns, and the sustainability of dividends and repurchases against refining-cycle conditions.