Valero Energy Corporation — Form 10-Q Summary
Business context and reporting period. Valero is a refining, ethanol, and logistics company. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Segment reporting was reorganized in 2017 to show Valero Energy Partners LP (VLP) separately, with prior-period segment figures recast.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenues | $23.562 billion | $19.649 billion | $67.588 billion | $54.947 billion |
| Operating income | $1.338 billion | $892 million | $2.746 billion | $2.952 billion |
| Net income attributable to Valero stockholders | $841 million | $613 million | $1.694 billion | $1.922 billion |
| Diluted earnings per share | $1.91 | $1.33 | $3.80 | $4.12 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $3.822 billion | $3.822 billion |
- Q3 improvement: Revenue increased about 20% and operating income about 50% year over year. Management attributed the earnings improvement chiefly to stronger refining margins and higher throughput. Q3 refining throughput was 2.893 million barrels per day, versus 2.860 million.
- Refining: Q3 refining segment margin was $2.911 billion, up $617 million; adjusted refining operating income was $1.470 billion, up $536 million. Throughput margin was $10.94 per barrel versus $8.72. Stronger gasoline and distillate margins were partly offset by narrower discounts on sour crude and other feedstocks, higher operating costs, and increased biofuel-credit expense.
- Ethanol and VLP: Q3 ethanol operating income was $82 million versus $106 million, reflecting weaker margins, including higher corn costs. Adjusted VLP operating income was $72 million versus $56 million, supported by acquired logistics assets and higher volumes.
- Nine-month comparison: Revenue rose about 23%, while reported operating income and net income declined. Management’s adjusted operating income was $2.790 billion versus $2.261 billion. The comparison is affected by a $747 million noncash inventory-valuation benefit and a $56 million Aruba impairment recorded in 2016; these items are excluded from management’s adjusted comparison.
- Margins and costs: Nine-month refining segment margin was $7.369 billion versus $6.512 billion, while adjusted refining operating income rose to $3.076 billion from $2.488 billion. Ethanol adjusted operating income fell to $135 million from $164 million. Biofuel-credit costs were $631 million for the first nine months, up from $532 million.
- Balance sheet and liquidity: At September 30, cash and temporary cash investments were $5.176 billion, current assets $17.442 billion, and current liabilities $9.130 billion. Debt and capital lease obligations totaled $8.485 billion, implying approximate net debt of $3.309 billion. The main committed facilities showed $2.633 billion available under Valero’s revolver, $720 million under VLP’s revolver, and $1.2 billion under the receivables facility. Valero reported no significant debt activity during the first nine months.
- Cash uses and shareholder returns: Nine-month investing cash outflow was $1.740 billion, including $913 million in capital expenditures, $381 million in turnaround and catalyst costs, and $373 million in joint-venture investments. Financing cash outflow was $1.943 billion, including $951 million of treasury-share purchases and $936 million of dividends. Cash increased $360 million to $5.176 billion.
Material changes, outlook, and risks
- Q3 operating income included $44 million of Hurricane Harvey-related damage costs. Management reported Q3 adjusted operating income of $1.382 billion after excluding these costs.
- General and administrative expense rose $37 million in Q3, including $16 million related to terminating a proposed asset acquisition from Plains All American Pipeline and $11 million of higher employee costs. Nine-month expense also reflected higher legal and environmental reserves.
- For Q4 2017, management expected gasoline margins to decline with seasonal demand; distillate margins to remain supported by strong exports; sour crude discounts to remain weaker than their five-year averages; sweet crude discounts to widen with increased Permian supply; and ethanol margins to decline as domestic gasoline demand weakens. These are expectations, not quantified earnings guidance.
- Management estimated 2017 capital investments of approximately $2.7 billion, including $1.6 billion for stay-in-business spending and $1.1 billion for growth. Major projects include the Diamond Pipeline, the MVP Terminal, and central Texas pipeline and terminal projects.
- Environmental cleanup at the Hartford, Illinois, site could result in a loss of $0–$200 million above the amount accrued. Valero stated that the range is uncertain and actual costs could vary significantly. The filing also describes ongoing environmental and tax matters; management did not expect the cited tax audits or ordinary-course litigation to have a material effect.
- Principal operating and financial risks include volatile refining and feedstock margins, crude supply and differentials, demand and competition, refinery outages or severe weather, environmental rules and biofuel-credit prices, project delays or cost overruns, foreign-exchange movements, and potential credit-rating changes. Management said liquidity was sufficient for ongoing needs, but future financing availability and terms are not assured.
- Valero held $3.3 billion of cash at international subsidiaries; some could be returned to the U.S. without significant tax consequences, while the remainder could incur taxes. The company intended to reinvest foreign earnings indefinitely.
Important facts for investors to verify
- Whether refining margins, throughput, and sour-crude discounts develop as management expected for Q4, and how Harvey-related impacts evolve.
- The sustainability of earnings: distinguish reported results from management’s non-GAAP adjusted figures and account for the substantial 2016 inventory-valuation benefit and Aruba impairment.
- Actual 2017 capital investment, project funding and completion, and the effect of VLP acquisitions and intersegment charges.
- Biofuel-credit obligations and prices, environmental cleanup exposure at Hartford, and any changes in tax or litigation contingencies.
- Debt, lease obligations, facility availability, international cash accessibility, and continued dividends and share repurchases. The board declared a $0.70-per-share quarterly dividend in November 2017.