Valero Energy Corporation — Q1 2017 Form 10-Q
Business context and period. Valero is a refining, ethanol, and logistics company. This unaudited quarterly report covers the three months ended March 31, 2017, compared with the same quarter of 2016. Segment reporting was revised in 2017 to show VLP as a separate segment; prior-period segment data was recast.
Financial performance and position
- Revenue: $21.772 billion, up 38.6% from $15.714 billion. Management attributed the increase primarily to higher refined-product prices and crude feedstock costs.
- Profit: Operating income was $537 million, down from $829 million; net income attributable to Valero stockholders was $305 million, or $0.68 per diluted share, versus $495 million, or $1.05, a year earlier.
- Prior-period unusual item: Q1 2016 included a $293 million noncash inventory-valuation benefit. Excluding it, 2016 adjusted operating income was $536 million and adjusted net income was $283 million; Q1 2017 operating income was $1 million higher and net income attributable to stockholders was $22 million higher. These adjusted measures are non-GAAP.
- Margins and segments: Refining gross margin increased to $2.080 billion from $2.008 billion, while adjusted refining operating income edged down to $647 million from $652 million. Ethanol adjusted operating income rose to $22 million from $9 million. VLP operating income rose to $70 million from $43 million, mainly reflecting acquired assets and higher service volumes.
- Cash flow and investment: Operating cash flow was $988 million, versus $640 million. Cash used in investing activities was $714 million, including $279 million of capital expenditures, $245 million of turnaround and catalyst costs, $117 million of joint-venture investments, and $72 million for crude-system assets. Financing cash use was $652 million, including $314 million of share repurchases and $315 million of dividends.
- Liquidity and debt: Cash and temporary investments were $4.463 billion at quarter-end, down from $4.816 billion at year-end 2016. Current assets were $15.908 billion and current liabilities $7.899 billion. Debt and capital lease obligations totaled $8.489 billion, including $120 million current. Valero’s $3.0 billion revolver had no borrowings and $2.85 billion available; VLP’s $750 million revolver had $30 million outstanding and $720 million available.
- Equity returns: The quarterly dividend was $0.70 per share, up from $0.60 in Q1 2016. The company repurchased 4.5 million shares under its public programs during Q1 and had approximately $2.2 billion remaining under its current authorization.
Changes, outlook, and risks
- Management said Q2 2017 margins were expected to improve with typical seasonal demand. Gasoline margins were expected to strengthen with driving-season demand; distillate margins were expected to remain near current levels; and ethanol margins were expected to improve. Sour-crude discounts were expected to remain weaker than their five-year averages. These are expectations, not guarantees.
- Management forecast approximately $2.7 billion of 2017 capital investments: $1.6 billion for stay-in-business spending and $1.1 billion for growth, including the Diamond Pipeline. The 440-mile pipeline was expected to be completed in 2017; estimated total project cost was $925 million, and Valero had contributed $252 million.
- Refining throughput averaged 2.838 million barrels per day, down 41,000 barrels per day year over year. Higher distillate margins supported refining results, but higher operating costs, maintenance, and lower throughput weighed on performance. Ethanol results benefited from higher prices and production; asset write-offs raised depreciation expense.
- Environmental compliance remains a cost and price risk. Biofuel-credit compliance costs were $146 million, down from $161 million. The company disclosed a reasonably possible additional loss of $0–$200 million, beyond its recorded accrual, for specified Illinois environmental remediation matters. It also reported an EPA fuels Notice of Violation and outstanding Bay Area air-district matters; certain other enforcement matters were resolved.
- Other risks cited include volatile commodity and credit prices, refining margins and demand, outages or disasters, regulation and environmental costs, litigation, foreign exchange, and access to financing. A January 2017 storage-tank lease recognition added approximately $490 million of capital lease assets and obligations; the leases have initial 10-year terms with successive 10-year automatic renewals.
- Management stated that liquidity sources were sufficient for ongoing operating needs, but future financing availability and terms cannot be assured. Senior debt ratings were investment grade with stable outlooks at the reporting date.
Important facts for investors to verify
- Whether refining and ethanol margins, throughput, operating costs, and seasonal demand develop as management expected.
- Actual 2017 capital spending, Diamond Pipeline cost and timing, and returns from growth investments and acquired assets.
- Cash generation relative to dividends, repurchases, capital investment, and debt and lease obligations.
- Developments in Illinois remediation exposure, EPA and air-district proceedings, and environmental-credit costs.
- Whether commodity-price, regulatory, operating, and financing risks materially affect results; Q1 results are not necessarily indicative of full-year performance.