This is a summary of the first quarter fiscal 2008 earnings call as conducted by Valero Energy Corp. (VLO) on April 29, 2008
Management:
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CEO and Chairman: Bill Klesse
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EVP and CFO: Mike Ciskowski
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EVP and COO: Rich Marcogliese
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EVP Marketing and Supply: Joe Gorder
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Director of IR: Ashley Smith
Key Investors Issues:
- Revenue increased 49% to $27.9 billion from $18.8 billion in the prior year.
- Valero Energy Corp spent $518 million to purchase 8.8 million shares of common stock.
- Operating income declined 72 % from $1.7 billion reported in the same period of last year to $472 million.
First Quarter Highlights
Income from continuing operations of $261 million, or 48 cents per share included a pre-tax benefit of $101 million, or 12 cents per share, of business interruption insurance recovery related to the fire at the company''s McKee refinery in 2007.
- The company''s income from continuing operations in the first quarter of 2007 was $1.1 billion, or $1.77 per share.
- Operating income declined 72 % from $1.7 billion reported in the same period of last year to $472 million, attributed to the lower throughput margin per barrel of $8.48, which was down $3.67 per barrel versus 2007.
- The key driver of the decline was lower margins for gasoline and other products such as asphalt, fuel oils, petroleum coke and petrochemical feedstock.
- These margins compressed in the first quarter as the prices for those products did not increase proportionately with the increase in crude costs.
The average margins for many of these secondary products declined between $10 and $40 per barrel resulting in a negative price impact on throughput margins of around $700 million on a pre-tax basis.
- However throughput margins have benefited from strong margins on diesel and jet fuel and from wide differentials for the heavy and sour feedstock.
- Operating income was also affected by $180 million increase in refinery operating expenses from the first quarter of 2007.
- This was mainly due to higher energy costs from the increase in the cost of natural gas and higher maintenance expenses including those related to the repairs to the coke drums at the Port Author refinery and the vacuum tower at our Aruba refinery.
Lower throughput volumes that averaged around 2.6 million barrels per day or 138,000 barrels per day lower than the first quarter of 2007 and nearly 200,000 barrels per day below the prior quarter negatively impacted the operating income.
- The reduction was mostly because of maintenance activity.
- Capital spending was $640 million, which includes $103 million of turnaround expenditures.
- Valero Energy Corp spent $518 million to purchase 8.8 million shares of common stock and it currently has approximately 3.8 billion of repurchased authorization in addition to the ongoing anti-dilution program.
At the end of March, total debt was $6.5 billion and the firm used approximately $375 million to pay down debt.
- Valero Energy Corp ended the quarter with a cash balance of $1.4 billion and a debt-to-capitalization ratio net of cash of 21.7%.
- For modeling purposes, Gulf Coast refinery is expected to have throughput of approximately 1.45 million to 1.5 million barrels per day affected by maintenance, especially at the Port Arthur refinery and at the Aruba refinery.
- These repair projects are expected to be completed in mid-May.
Gasoline fundamentals have been improving as inventories have declined over the last six weeks and gasoline demand has been good.
- Accordingly, the average April Gulf Coast gasoline products has more than double versus March going from $3 to $6.50 per barrel.
- The firm also continues to experience strong on-road diesel cracks which have averaged close to $30 per barrel in April because of strong global demand.
On the feedstock side, wide differentials have been realized from medium and heavy sour crude oil and other feedstock.
- Recently, Maya crude oil has priced around $23 below WTI and Mars crude oil has priced nearly $10 below WTI.
- These differentials have increased in part due to strong demand for light sweet crude oil, because of their higher plain product yields especially diesel.
- The sale of the Aruba refinery is expected to be complete in the second quarter after the repairs vacuum tower are complete. The Memphis and Clark Springs refineries, are currently undergoing negotiations with selective bidders.
Fiscal 2008 Outlook
- Mid-Continent throughput should be about 430,000 barrels per day and West Coast throughput should average between 275,000 and 285,000 barrels per day and the Northeast system should average in the range of 530,000 to 540,000 barrels per day.
- On operating expenses, due to the higher expected energy costs and completing the repairs at Port Arthur and Aruba refinery cash operating expenses, are expected to be about $4.70 per barrel.
