Valero Energy Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Valero operates refining, renewable diesel, and ethanol businesses. Comparisons are against the corresponding 2020 periods, which were heavily affected by the COVID-19 demand shock and inventory accounting adjustments. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $27.748 billion | $10.397 billion | $48.554 billion | $32.499 billion |
| Operating income (loss) | $509 million | $1.789 billion | $(157) million | $(488) million |
| Net income (loss) attributable to Valero stockholders | $162 million | $1.253 billion | $(542) million | $(598) million |
| Diluted earnings (loss) per share | $0.39 | $3.07 | $(1.34) | $(1.48) |
| Operating cash flow | Not provided for the quarter | $1.956 billion | $687 million |
Q2 adjusted operating income, a non-GAAP measure, was $521 million versus an adjusted operating loss of $456 million a year earlier. For the first half, adjusted operating loss was $107 million versus $189 million. The company cautions that these measures are not substitutes for GAAP results and may not be comparable with similarly titled measures at other companies.
- Segments, Q2: Refining operating income was $349 million (adjusted $361 million); renewable diesel operating income was $248 million; ethanol operating income was $99 million (adjusted $99 million). Refining adjusted income rose $744 million year over year, while renewable diesel and ethanol operating income each rose $119 million.
- Segment margins, Q2: Non-GAAP refining margin was $1.969 billion versus $1.078 billion; renewable diesel margin was $291 million versus $161 million; ethanol margin was $238 million versus $80 million.
- Cash and liquidity: Cash and equivalents were $3.572 billion at June 30, up from $3.313 billion at year-end. Reported total liquidity was $8.373 billion, including $5.013 billion of available committed capacity and $3.360 billion of cash available outside VIEs. A further $212 million of cash was held by VIEs for their own use.
- Debt: Balance-sheet debt and finance lease obligations totaled $14.680 billion, including $1.044 billion current and $13.636 billion long-term. Debt excluding finance leases had a carrying amount of $13.033 billion. No public debt was issued or redeemed in the first half; the company made $63 million of debt and finance lease repayments.
- Cash uses and shareholder returns: First-half investing cash flow was $(836) million, including $1.130 billion in capital investments before proceeds from the MVP interest sale. Financing cash flow was $(866) million, including $801 million of dividends. The quarterly dividend of $0.98 per share was declared again in July, payable September 2, 2021.
Material changes versus prior periods
- Revenue increased sharply as fuel prices and sales volumes recovered from pandemic-depressed 2020 levels. Q2 gasoline and diesel demand was near or above pre-pandemic levels in some markets; jet fuel demand recovered more slowly.
- Q2 GAAP operating income and earnings were below 2020 because Q2 2020 included a $2.2 billion benefit from reversing part of an earlier lower-of-cost-or-market inventory reserve. Excluding specified adjustments, operating performance improved substantially.
- First-half results remained loss-making. Refining’s adjusted operating loss worsened by $139 million year over year, principally reflecting higher biofuel-credit costs, lower crude and other feedstock discounts, and Winter Storm Uri costs. Renewable diesel and ethanol operating income improved.
- First-half operating cash flow rose to $1.956 billion, supported by a $1.251 billion favorable change in current assets and liabilities and receipt of a $962 million federal tax refund. Cash flow therefore includes significant timing and working-capital effects.
Outlook, risks, and unusual items
- Management expected gasoline, jet fuel, and diesel prices to continue improving in Q3 2021 as demand recovered and inventories returned toward historical levels. Sour crude discounts were expected to improve as OPEC production increased with demand.
- Management expected renewable diesel margins to moderate from Q2 record levels and ethanol margins to decline as domestic inventories rose. These are expectations, not guarantees; the filing gives no numerical earnings guidance.
- Winter Storm Uri caused estimated first-half excess energy costs of $579 million pretax ($467 million after tax). Management attributed $525 million pretax to refining and $54 million to ethanol.
- The pandemic’s effects remained uncertain, including the pace of demand recovery, new variants, restrictions, and vaccine distribution. Other stated risks include commodity and feedstock prices, refining margins, biofuel-credit prices and mandates, weather and operational disruptions, regulation, foreign exchange, and access to financing.
- Biofuel compliance costs were $995 million in the first half, up from $248 million in 2020. Management said substantially all cap-and-trade costs were recovered from customers and the net cost of those programs was immaterial.
- Other notable items included a $62 million gain on the sale of a 24.99% interest in MVP for $270 million, and a $24 million impairment charge related to cancellation of a Diamond Pipeline extension. A statutory tax-rate change, primarily the U.K. rate increase effective in 2023, generated a $64 million tax expense.
- The accounts-receivable sales facility was extended in July 2021 to July 2022 and increased from $1.0 billion to $1.3 billion. The $300 million Gulf Opportunity Zone bonds are subject to mandatory tender in June 2022. The filing reported no material changes to previously disclosed risk factors or legal proceedings.
Most important facts for investors to verify
- Whether recovery in fuel demand translates into durable refining margins, particularly given international supply and slower jet-fuel recovery.
- How much first-half cash generation was attributable to working-capital timing and the one-time $962 million tax refund, versus recurring operating cash generation.
- The persistence of elevated biofuel-credit costs and the sensitivity of segment earnings to feedstock, commodity, and energy prices.
- Actual remaining 2021 capital investment versus the stated $2.0 billion plan attributable to Valero, and the funding needs of renewable diesel growth projects.
- Liquidity and refinancing implications of the June 2022 mandatory tender for the $300 million Gulf Opportunity Zone bonds, alongside facility maturities and other obligations.