Valero Energy Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018. Unaudited interim results; amounts are in U.S. dollars. Valero operates refining, ethanol, and midstream businesses, including 15 refineries and 11 ethanol plants.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $30.849 billion | $23.562 billion | $88.303 billion | $67.588 billion |
| Operating income | $1.219 billion | $1.332 billion | $3.273 billion | $2.720 billion |
| Net income attributable to Valero | $856 million | $841 million | $2.170 billion | $1.694 billion |
| Diluted earnings per share | $2.01 | $1.91 | $5.05 | $3.80 |
| Operating cash flow | Not stated separately | Not stated separately | $2.693 billion | $3.822 billion |
Q3 adjusted operating income, a non-GAAP measure, was $1.229 billion versus $1.376 billion. Nine-month adjusted operating income was $3.252 billion versus $2.764 billion; adjusted net income attributable to Valero was $2.215 billion versus $1.694 billion. The company cautions that these measures are not substitutes for GAAP results.
- Refining: Q3 adjusted operating income fell $121 million to $1.339 billion as weaker product margins outweighed better feedstock discounts and higher throughput. Throughput rose to 3.100 million barrels per day from 2.893 million; adjusted income per barrel fell to $4.69 from $5.48. For the first nine months, adjusted operating income rose $464 million to $3.509 billion, supported by stronger distillate margins, crude discounts, lower biofuel-credit costs, and higher throughput.
- Ethanol: Q3 operating income declined to $21 million from $82 million, primarily on lower ethanol prices; nine-month income fell to $109 million from $135 million.
- VLP: Q3 operating income rose to $90 million from $69 million, and nine-month income to $257 million from $212 million, mainly reflecting acquired pipeline and terminal assets.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $2.693 billion, down from $3.822 billion. Working capital used $1.174 billion, versus a $544 million source in 2017, principally due to higher receivables and inventories.
- Investing cash outflow was $2.768 billion, including capital expenditures of $1.168 billion, turnaround and catalyst costs of $661 million, and $466 million for the Peru acquisition. Financing cash outflow was $2.181 billion, including $1.081 billion of share repurchases and $1.031 billion of dividends.
- Cash and equivalents were $3.551 billion at September 30, down from $5.850 billion at year-end 2017. Total reported debt and capital lease obligations were $9.076 billion, including $199 million current and $8.877 billion long-term.
- Management reported total liquidity of $7.619 billion, including $3.324 billion cash available to the company (excluding $227 million held by VIEs) and $4.295 billion of available borrowing capacity. The $3.0 billion Valero revolver had no borrowings and $2.940 billion availability.
- Valero issued $750 million of 4.35% notes due 2028 and redeemed $787 million of 9.375% notes due 2019, incurring a $37 million early-redemption fee. Management expected 2018 capital investments of approximately $2.7 billion.
Changes, outlook, and notable items
- Q3 revenue increased substantially, largely reflecting higher refined-product prices, but operating income declined as cost of sales rose and refining margins weakened. Net income nevertheless increased modestly, chiefly because Q3 income tax expense fell $102 million; the effective tax rate declined to 24% from 30%.
- Nine-month earnings improved with higher operating income and the lower U.S. statutory tax rate. Results included a $170 million biodiesel blender’s tax credit for 2017 blending activity, of which $90 million was attributable to Valero stockholders and $80 million to noncontrolling interests. Other identified items included $108 million of environmental reserve adjustments, $14 million of Texas City refinery fire expenses, and a $38 million debt-redemption charge.
- For Q4, management expected gasoline margins and ethanol margins to decline with seasonal or weaker demand, while distillate margins were expected to remain supported by domestic and export demand. It expected sour-crude discounts to remain weaker than historical averages; sweet-crude discounts were expected to widen, with inland discounts supported by production growth and pipeline constraints. No specific earnings guidance was provided.
- After quarter-end, Valero agreed to acquire three ethanol plants for $300 million plus approximately $28 million of working capital, and agreed to acquire VLP’s publicly held units for $42.25 per unit, an aggregate transaction value of approximately $950 million, subject to customary closing conditions.
- Environmental cleanup and regulatory obligations remain risks. Valero assumed liability for full cleanup of its closed Hartford, Illinois refinery site; it recorded an adjustment that management said was not material, while actual costs could vary significantly. Biofuel-credit costs were $431 million for nine months, down from $631 million a year earlier.
- Valero said its ratings were investment grade with stable outlooks and that it believed available funds and credit facilities were sufficient for ongoing needs. It cautioned that future financing availability and terms are not assured. Management also expected lease accounting changes in 2019 to materially increase recognized lease assets and liabilities, but not materially affect results or liquidity.
Most important facts for investors to verify
- Whether refining and ethanol margins followed management’s Q4 expectations, particularly gasoline, distillate, and inland crude discounts.
- How much of the operating-cash-flow decline was temporary working-capital timing and whether cash generation supports planned investment, dividends, and repurchases.
- Final costs and timing for the Green Plains plant acquisition and VLP merger, including the merger’s effect on noncontrolling interests and financing needs.
- Final accounting for Tax Reform and the uncertain cost and timing of environmental remediation, especially at the closed Hartford site.
- The impact of commodity-price volatility, biofuel-credit requirements, refinery interruptions, and pipeline constraints on margins and liquidity.