Valero Energy Corporation — Q1 2016 Form 10-Q
Business context and reporting period: Valero is a refining and ethanol company. This unaudited filing covers the three months ended March 31, 2016, compared with the same period in 2015.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $15.714 billion | $21.330 billion |
| Operating income | $829 million | $1.495 billion |
| Net income attributable to Valero shareholders | $495 million | $964 million |
| Diluted earnings per share | $1.05 | $1.87 |
| Operating cash flow | $640 million | $1.433 billion |
| Capital expenditures and turnaround/catalyst costs | $477 million | $698 million |
| Dividends per share | $0.60 | $0.40 |
- At March 31, 2016, cash and temporary cash investments were $3.778 billion; total debt and capital lease obligations were $7.335 billion, including $128 million current. Total assets were $44.259 billion and total equity was $21.495 billion.
- Valero had no borrowings under its $3.0 billion revolving credit facility and $2.947 billion of availability after letters of credit. The VLP revolver had $175 million outstanding and $575 million available. Availability under the receivables facility was reported as $974 million in the credit-facilities table; the filing also says actual availability was below its $1.4 billion capacity, at approximately $1.1 billion.
- Refining operating income was $958 million, including a $263 million inventory valuation benefit; ethanol operating income was $39 million, including a $30 million benefit. Excluding those benefits, segment operating income was $695 million for refining and $9 million for ethanol.
Material changes versus Q1 2015
- Revenue fell $5.616 billion, or 26%, largely reflecting lower refined-product prices and lower crude-feedstock costs.
- Operating income declined $666 million and shareholder net income fell $469 million. Management attributed the underlying refining deterioration primarily to weaker distillate and gasoline margins and narrower crude-oil discounts relative to Brent. Excluding the inventory benefit, operating income was $536 million, down $959 million year over year.
- Refining throughput increased to 2.879 million barrels per day from 2.710 million. Refining throughput margin declined to $7.96 per barrel from $12.39, while operating income per barrel fell to $2.65 from $6.73.
- Operating cash flow decreased $793 million. Cash used in working capital was $177 million in Q1 2016, versus a $57 million source in Q1 2015.
- Cash declined $336 million during the quarter. Valero spent $265 million on treasury stock and paid $282 million in common-stock dividends. In Q1 2015, the company had raised $1.446 billion from debt issuance and borrowings; it issued no debt in Q1 2016.
Outlook, risks, and unusual items
- Management expected continued energy-market and margin volatility through 2016. For Q2, it anticipated stronger gasoline margins as driving-season demand improved, volatile distillate margins, wide medium/heavy sour crude discounts, narrow sweet crude discounts, and improving ethanol margins. Lower refined-product prices could reduce inventory carrying values.
- Valero expected approximately $2.6 billion of 2016 capital investments: $1.6 billion for stay-in-business needs and $1.0 billion for growth. This excluded potential strategic acquisitions. The company expected to invest a further $170 million in 2016 in the Diamond Pipeline project, which was targeted for completion in 2017, subject to regulatory approvals.
- The $293 million inventory valuation benefit was noncash and reduced the period’s inventory reserve. It represented $212 million after tax, or $0.45 per diluted share, according to management.
- Environmental remediation at the Hartford, Illinois, matters could result in a loss of $0–$200 million above the recorded accrual. Valero said the range is uncertain and actual results may vary significantly. EPA and Texas environmental enforcement matters were also being addressed; the company did not expect the reported proceedings, if decided against it, to materially affect its financial position, results, or liquidity.
- Federal tax audits for 2008–2011 remained ongoing. Valero expected to settle the 2008 and 2009 audits within 12 months and believed settlement would be consistent with recorded uncertain-tax-position liabilities.
- Major risks include volatile refining and ethanol margins, crude and product supply and demand, operational outages, environmental and biofuel-credit costs, regulatory changes, litigation, and financing or credit-rating changes. Management said senior unsecured ratings were investment grade with stable outlooks and believed available liquidity and operating funds were sufficient for ongoing requirements.
Important facts for investors to verify
- Whether refining margins and crude-oil differentials recovered after Q1, and how subsequent results compare with management’s Q2 expectations.
- The sustainability of earnings after excluding the $293 million noncash inventory valuation benefit.
- Actual 2016 capital investment, Diamond Pipeline spending and approvals, and progress toward the $2.6 billion plan.
- Cash generation, working-capital movements, and availability or renewal of short-term financing facilities, including the receivables facility scheduled to mature in July 2016.
- Developments in the Hartford environmental matter, enforcement proceedings, and IRS audits, including any effect on accruals or cash requirements.