Valero Energy Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; comparisons are with the corresponding 2014 periods. Valero operates refining and ethanol businesses and consolidates Valero Energy Partners LP (VLP).
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $22.579B | $34.408B | $69.027B | $102.985B |
| Operating income | $2.139B | $1.670B | $5.712B | $4.106B |
| Net income attributable to Valero stockholders | $1.377B | $1.059B | $3.692B | $2.475B |
| Diluted EPS, continuing operations | $2.79 | $2.00 | $7.30 | $4.76 |
| Operating margin, approximately | 9.5% | 4.9% | 8.3% | 4.0% |
Revenue fell substantially as refined-product prices and crude feedstock costs declined; cost of sales fell faster than revenue, lifting operating income. Refining drove the improvement: segment operating income rose to $2.295B in Q3 from $1.664B, and to $6.097B for nine months from $4.023B. Refining throughput margin increased to $14.38 per barrel in Q3 from $11.81, and to $13.52 for nine months from $10.86. Ethanol segment operating income declined to $35M in Q3 from $198M and to $155M for nine months from $628M, primarily reflecting lower ethanol prices and margins.
Cash flow and investment: Nine-month operating cash flow was $5.124B, compared with $3.244B. Investing cash outflow was $1.679B, including $1.186B of capital expenditures and $509M of turnaround and catalyst costs. Financing cash outflow was $1.727B. Cash increased $1.612B to $5.301B. Valero spent $2.071B on treasury-stock purchases and paid $608M in dividends.
Balance sheet and liquidity: At September 30, cash was $5.301B; current assets were $16.827B and current liabilities $8.289B. Debt and capital lease obligations totaled $7.381B, including $129M current and $7.252B long-term. The $3B parent revolver had no borrowings; Valero was in compliance with its covenants. The receivables sales facility had $100M outstanding and approximately $1.3B availability. VLP had $175M outstanding under its separate revolver; VLP creditors have no recourse against Valero.
Margins and other measures: Q3 refining operating income per barrel was $8.83, versus $6.43 a year earlier. Q3 ethanol gross margin was $0.47 per gallon, versus $1.00. Interest and debt expense rose to $112M in Q3 from $98M and to $326M for nine months from $296M, mainly reflecting 2015 debt issuance and VLP borrowings. The quarterly dividend was $0.40 per share; after quarter-end, the board declared $0.50 per share payable in December.
Material changes and transactions
- Q3 refining operating income increased $631M, chiefly on stronger gasoline and other refined-product margins; narrower crude-oil discounts and weaker distillate margins partly offset the gains. For nine months, higher gasoline margins and lower crude costs were major benefits, while narrowing crude discounts and a reduced natural-gas feedstock advantage were offsets.
- Ethanol operating income weakened sharply as lower ethanol prices outweighed lower corn costs and higher production. Q3 production increased to 3.853M gallons per day from 3.556M.
- In March, Valero issued $1.25B of senior notes: $600M at 3.65% due 2025 and $650M at 4.9% due 2045. It also made $475M of scheduled debt repayments. Total debt and lease obligations rose from $6.386B at year-end 2014 to $7.381B.
- Valero repurchased $2.071B of stock in the first nine months and completed its prior $3B authorization during Q3. A further $2.5B authorization was approved in July; about $2B remained available at quarter-end.
- Valero contributed its Houston and St. Charles terminal businesses to VLP in March for cash and partnership units. A Corpus Christi terminal contribution closed October 1, after quarter-end; it is eliminated in consolidation and was not expected to affect consolidated financial position or cash flows.
- The 2014 comparative period included a $64M loss from discontinued Aruba Refinery operations; there was no such loss in 2015.
Outlook, risks, and contingencies
- Management expected energy markets and margins to remain volatile in the near to medium term. For Q4 2015, gasoline margins were expected to decline seasonally from then-current levels, crude discounts remained volatile, ethanol margins were expected to stay depressed while gasoline prices were low, and biofuel-credit prices were expected to remain unpredictable.
- Management warned that lower crude and refined-product prices could reduce inventory carrying values. Biofuel compliance costs were $283M for the first nine months of 2015, versus $265M in 2014. Most greenhouse-gas program costs had been recovered from customers; net costs were described as immaterial.
- For 2015, Valero expected approximately $1.8B in capital expenditures and $700M in turnaround and catalyst costs. It held an option through January 2016 to purchase 50% of the Diamond Pipeline project; exercising it would add capital investment.
- An environmental cleanup and related litigation involving a former Illinois refinery site could result in a loss of $0–$200M above the amount accrued. Other recorded litigation liabilities were described as not material. Benicia refinery air-quality violation notices remained under resolution; management did not expect the reported environmental proceedings to materially affect financial position, results, or liquidity.
- Valero cited risks including refining and ethanol margin volatility, commodity and biofuel-credit prices, operational outages, environmental regulation and remediation, litigation, foreign exchange, and potential changes in credit ratings. Management said liquidity was sufficient for ongoing requirements, but future financing availability and terms were not assured.
Important facts for investors to verify
- Whether strong refining margins—especially gasoline margins—persisted after Q3, and how crude discounts and distillate margins evolved.
- Whether ethanol margins recovered from the steep year-over-year decline and whether biofuel-credit costs increased.
- Cash conversion and capital allocation: operating cash flow, capital and turnaround spending, debt levels, share repurchases, and dividends.
- Actual 2015 capital spending and any decision to exercise the Diamond Pipeline option.
- Developments in the Illinois environmental matters, including potential exposure above the recorded accrual, and resolution of Benicia notices.
- Availability of liquidity, the status of receivables-facility capacity, and maintenance of investment-grade credit ratings.