Valero Energy Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Valero operates refining, retail and ethanol businesses. Unless noted, dollar amounts are in millions.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $31,293 | $20,561 | $57,601 | $39,054 |
| Operating income | $1,290 | $904 | $1,534 | $908 |
| Income from continuing operations attributable to Valero stockholders | $745 | $520 | $849 | $440 |
| Diluted EPS from continuing operations | $1.30 | $0.92 | $1.48 | $0.78 |
| Operating cash flow | Not presented separately | Not presented separately | $2,954 | $1,770 |
Revenue rose 52% in Q2 and 47% year to date, primarily reflecting higher refined-product prices and greater refining throughput. Operating margin was approximately 4.1% in Q2 and 2.7% year to date, versus 4.4% and 2.3% in the respective 2010 periods. Refining drove the earnings improvement: Q2 segment operating income was $1,253, up $349; year-to-date it was $1,529, up $640. Refining throughput margin was $11.41 per barrel in Q2, versus $9.57, and $9.35 year to date, versus $7.89 as reported.
Retail operating income was $135 in Q2 and $201 year to date, up $26 and $21, respectively. Ethanol operating income was $64 and $108, up $29 and $16. Higher retail fuel margins supported retail results; improved ethanol margins and increased production supported Q2 ethanol results.
At June 30, cash and temporary investments were $4,107, versus $3,334 at year-end 2010. Current assets were $14,687 and current liabilities $10,231. Debt and capital lease obligations totaled $7,623, including $861 current, compared with $8,337 at year-end. The company reported no borrowings on its revolving facilities; its revolving credit agreement’s debt-to-capitalization ratio was 18%, against a 60% maximum. Six-month investing cash use was $1,494, including $969 of capital expenditures and $432 of turnaround and catalyst costs. Financing cash use was $729, including $718 of debt repayments and $57 of dividends.
Material changes and unusual items
- Six-month results included a $542 pretax ($352 after-tax, or $0.61 per share) loss on refined-product forward-sale commodity derivatives, realized in Q1. Management said excluding this loss, first-half company and refining operating income would each have been approximately $2.1 billion; refining improvement over 2010 would have been about $1.2 billion.
- Refining benefited from wider sour-crude discounts and stronger distillate margins, partly offset by higher operating costs. The Mid-Continent region showed particularly strong improvement; the Northeast refinery reported a Q2 operating loss of $17.
- In August 2011, after quarter-end, Valero acquired Chevron Limited, including the 270,000-barrel-per-day Pembroke Refinery and marketing/logistics assets in the UK and Ireland, for $1.8 billion cash. The purchase price included $1.1 billion for estimated working capital, subject to adjustment.
- Valero restarted its Aruba Refinery in January 2011. It found no impairment at June 30, but the refinery had negative operating cash flows after restart and a $953 million carrying value. In July, Valero resumed exploring strategic alternatives, including a possible sale; impairment could be material if expected sour-crude differentials do not improve as assumed.
Outlook, risks and contingencies
Management expected approximately $3.2 billion of 2011 capital investments: $2.5 billion in capital expenditures, including about $270 million for environmental projects, and $650 million for turnaround and catalyst costs. It noted significant financial-market volatility and expected energy markets and margins to remain volatile in the near to medium term. No earnings or margin guidance was provided.
Key risks include volatile crude and product margins, feedstock differentials, refinery outages, ethanol/corn economics and policy, foreign exchange, and environmental regulation. Valero warned that federal greenhouse-gas rules, California’s LCFS and cap-and-trade program, and uncertainty over Texas permitting could increase costs, capital needs or operating restrictions. A class-action fuel-temperature litigation matter remained pending, with Kansas trial scheduled for May 2012; no liability was recorded. The filing says other recorded litigation liabilities were not material. Senior debt ratings were investment grade as of August 9, 2011; Fitch’s outlook was negative, while S&P and Moody’s outlooks were stable.
Important facts for investors to verify
- How much of the earnings improvement is sustainable if crude differentials and product margins narrow, and what is the earnings impact of derivative positions?
- Whether Aruba’s operating performance and assumed sour-crude differentials support its $953 million carrying value, or lead to a sale or impairment.
- The final Pembroke acquisition working-capital adjustment, purchase accounting, integration costs and effect on cash, debt and future results.
- Execution and funding of the 2011 capital-investment plan, alongside refinery maintenance needs and environmental compliance spending.
- Developments in greenhouse-gas rules, Texas permits and fuel-temperature litigation, and any resulting costs or operating constraints.