Valero Energy Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Valero operates refining and ethanol businesses. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $19,649 | $22,579 | $54,947 | $69,027 |
| Operating income | $892 | $2,139 | $2,952 | $5,712 |
| Net income attributable to Valero stockholders | $613 | $1,377 | $1,922 | $3,692 |
| Diluted EPS | $1.33 | $2.79 | $4.12 | $7.30 |
| Cash provided by operations | Not presented for quarter | Not presented for quarter | $3,822 | $5,124 |
- Revenue declined 13% in Q3 and 20% for the first nine months, primarily as lower refined-product prices were accompanied by lower crude feedstock costs.
- Refining operating income fell $1,305 in Q3 and $2,817 for the nine-month period. Management attributed the decline mainly to weaker gasoline and distillate margins and narrower crude-oil discounts versus Brent. Q3 refining throughput margin was $9.07 per barrel, down from $14.38; nine-month margin was $8.65, down from $13.52.
- Ethanol operating income improved to $106 in Q3 from $35, mainly on lower corn costs; nine-month operating income was $214 versus $155.
- Nine-month reported results included a $747 noncash inventory valuation benefit and a $56 Aruba asset impairment charge. Management’s adjusted nine-month net income was $1,357, compared with $3,692 in 2015; this non-GAAP measure excludes those items and the $42 Aruba-related tax benefit.
- At September 30, cash and temporary investments were $5,949, versus $4,114 at year-end 2015. Current assets were $16,878 and current liabilities $8,224.
- Total debt and capital lease obligations were $8,952, including $1,064 current and $7,888 long-term, compared with $7,335 at year-end 2015. The company had no borrowings on its $3 billion revolver and reported $2,947 of availability. The VLP revolver had $524 outstanding and $226 available.
- Nine-month investing cash use was $1,384, including $912 capital expenditures and $474 turnaround and catalyst costs. Financing cash use was $579; Valero repurchased $1,167 of stock and paid $840 in common dividends. Cash increased by $1,835 during the period.
- Quarterly dividends were $0.60 per share, up from $0.40 a year earlier. A further $2.5 billion share-purchase authorization was approved in September, with no expiration date.
Outlook, developments, and risks
- Management said refining margins were fairly stable in Q3 but trending lower early in Q4. It expected seasonal gasoline-demand patterns to weaken gasoline margins, heating-oil demand to support distillate margins, crude discounts to remain wide, and ethanol margins to decline seasonally. Lower refined-product prices could also reduce inventory carrying values.
- Valero completed the Aruba disposition effective October 1, 2016, transferring assets and settling related obligations. It reported no significant net cash impact. The company had recorded a $56 impairment and a $42 tax benefit in connection with the transaction.
- For 2016, management expected approximately $2.4 billion of capital investments, including $1.5 billion for stay-in-business needs and $900 million for growth. The estimate excludes potential strategic acquisitions.
- In October, Valero agreed to storage-tank capital leases expected to add approximately $490 million in assets and obligations, subject to regulatory permitting. It also redeemed notes with stated values of $778 million and $213 million at premiums.
- Biofuel-credit costs rose to $198 in Q3 from $94 and to $532 for nine months from $283, reflecting higher RIN prices and expected market shortages. Valero warns that RIN availability, pricing, or compliance difficulties could adversely affect results and cash flows.
- Environmental remediation at the Hartford, Illinois matters could produce a loss of $0–$200 in excess of the amount accrued. Other disclosed matters include environmental proceedings and ongoing IRS audits; management did not expect the described tax audits to have a material effect.
- Management cited risks including volatile refining and ethanol margins, feedstock and product prices, regulatory and environmental costs, weather, outages, credit ratings, and foreign-exchange movements. Debt ratings were investment grade with stable outlooks at Moody’s, S&P, and Fitch.
Important facts for investors to verify
- Whether refining margins and crude-oil discounts stabilize or continue to pressure earnings, especially in Q4.
- The sustainability of cash generation after adjusting for the $747 noncash inventory benefit and favorable working-capital movements.
- RIN pricing and availability, and the extent to which compliance costs can be passed through to customers.
- Execution and funding of the stated 2016 capital-investment program, the Diamond Pipeline project, and the newly agreed capital leases.
- Final outcomes and accrued amounts for environmental matters, IRS audits, and the Aruba disposition.
- Future debt, buyback, and dividend decisions; the filing reports substantial cash and revolver availability, but also increased debt and planned capital needs.