Valero Energy Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; filed August 6, 2015. Valero operates refining and ethanol businesses. Results are unaudited. Comparisons are with the same 2014 periods.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $25.118B | $34.914B | $46.448B | $68.577B |
| Operating income | $2.078B | $1.085B | $3.573B | $2.436B |
| Net income attributable to Valero | $1.351B | $588M | $2.315B | $1.416B |
| Diluted EPS from continuing operations | $2.66 | $1.22 | $4.52 | $2.77 |
- Drivers and margins: Q2 refining operating income increased $1.082B to $2.161B. Refining throughput margin rose to $13.71 per barrel from $9.84, supported by stronger gasoline and other product margins, higher throughput, and lower natural-gas costs; narrower sour-crude discounts partly offset gains. Throughput averaged 2.808 million barrels per day, up 87,000 year over year.
- Ethanol operating income fell $79M to $108M in Q2; gross margin declined to $0.64 per gallon from $1.04 as ethanol and co-product prices weakened. For the first half, ethanol operating income fell $310M to $120M.
- Revenue declined mainly because refined-product prices were lower; cost of sales also fell, reflecting lower crude feedstock costs. First-half refining operating income increased $1.443B to $3.802B.
- Quarterly dividends were $0.40 per share, versus $0.25 a year earlier. First-half dividends totaled $0.80 per share.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $3.762B, versus $1.378B in 2014. The increase reflected higher earnings and a $1.6B favorable year-over-year working-capital effect; working-capital changes contributed $615M in 2015 versus a $1.024B use of cash in 2014.
- Investing cash outflow was $1.214B, including $828M of capital expenditures and $400M of turnaround and catalyst costs. Financing cash outflow was $432M, including $992M of treasury-stock purchases and $409M of dividends. Cash increased $2.075B to $5.764B.
- At June 30, cash was $5.764B; current assets were $18.492B and current liabilities $9.865B. Debt and capital lease obligations totaled $7.349B, compared with $6.386B at year-end 2014. The company issued $1.25B of senior notes and repaid $475M of notes and debentures during the half.
- Valero reported no borrowings on its $3B revolving credit facility and was in compliance with its covenants. VLP, a consolidated subsidiary, had $200M outstanding on its separate revolver at June 30 and repaid $25M on July 1. Valero’s ratings were investment grade with stable outlooks, as reported by the company.
Changes, outlook and risks
- Management said energy markets and margins were volatile and expected continued volatility. For Q3 2015, it anticipated seasonal declines in gasoline margins and possible wider crude discounts during fall refinery maintenance; ethanol margins were expected to remain depressed while gasoline prices stayed low. Biofuel-credit prices were expected to remain volatile, and lower crude and product prices could reduce inventory carrying values.
- For 2015, Valero expected approximately $1.95B in capital expenditures and $700M in deferred turnaround and catalyst costs. These are spending estimates, not earnings guidance.
- The board authorized an additional $2.5B share-repurchase authorization in July 2015; $567M remained under the prior authorization at quarter-end. Valero repurchased $992M of shares during the first half.
- Environmental rules, including biofuel blending and greenhouse-gas programs, expose the company to compliance costs and credit-price volatility. The company estimated a reasonably possible additional loss of $0–$200M beyond its accrual for certain Illinois cleanup matters. It reported ongoing federal tax audits and environmental enforcement notices at the Benicia facility; management did not expect the reported proceedings to materially affect its financial position, results or liquidity.
- The 2014 comparison includes Aruba Refinery discontinued-operation losses of $63M for Q2 and $64M for the first half; there were no such losses in 2015. Valero had abandoned the refinery in May 2014 but continued operating associated terminal assets.
Key facts for investors to verify
- Whether refining margins and crude differentials remained supportive after the strong first half, given management’s Q3 volatility expectations.
- Whether weaker ethanol margins persisted and how they affected segment earnings.
- The sustainability of operating cash flow, including the sizable favorable working-capital comparison, alongside planned investment, dividends and repurchases.
- Debt, liquidity and financing-facility developments, including the post-quarter changes to the receivables facility and letter-of-credit capacity.
- Developments in environmental remediation, regulatory compliance costs, and the ongoing tax audits.