This summary is based on the second quarter fiscal 2008 earnings call conducted by Valero Energy Corp. (VLO) on July 29, 2008.
Management:
President, Chairman and CEO: William R. Klesse
EVP and CFO: Michael S. Ciskowski
EVP and COO: Richard J. Marcogliese
EVP, Marketing and Supply: Joseph W. Gorder
Director, IR: Ashley Smith
Key Investor Issues:
- Quarter-to-quarter EPS dipped from $3.57 to $1.37.
- Half year revenues were $64.6 billion versus $43 billion same period last year.
- The management repurchased 3.8 million common shares during the quarter.
Second-Quarter Financial Highlights:
The second quarter income from continuing operations was $734 million or $1.37 per share.
- The company’s income from continuing operations in the second quarter of 2007 was $2.1 billion or $3.57 per share.
- For the six months ended June 30, 2008, income from continuing operations was $995 million or $1.85 per share.
- This is in comparison with income from continuing operations of $3.2 billion or $5.28 per share for the six months ended June 30, 2007.
- The income from discontinued operations relates to the Lima, Ohio refinery, which the company sold effective July 1, 2007.
- The company recorded $35.5 billion in total costs and expenses versus $21 billion in the year ago quarter.
- For the six months ended June 30, 2008, total costs and expenses were $63 billion, an increase of 65.4% from $38.1 billion in the same period fiscal 2007.
- The G&A expenses excluding corporate depreciation were $117 million during the quarter. The $18 million decrease from the first quarter was mainly due to decreases in expenses for environmental and legal reserves and incentive based comp expense.
- The quarterly total depreciation and amortization was $369 million and interest expense net of capitalized interest was $83 million.
The Q2 operating income was $1.2 billion versus $3.2 billion in the year ago quarter.
- The decrease in operating income was primarily attributable to lower margins for many of the company’s products in Q2 of 2008 compared with the same quarter last year.
- The margins for refined products declined as the cost of crude oil and other feed-stocks increased more rapidly than the prices of gasoline and other products such as asphalt, fuel oils, petroleum coke and petrochemical feed-stocks.
- The benchmark Gulf Coast gasoline margins decreased about $22 per barrel or 77$ from $28.95 per barrel in Q2 of 2007 to $6.60 per barrel in Q2 of 2008.
- Offsetting these weaker margins were significantly higher margins on distillate products such as diesel and jet fuels, which continued to experience strong global demand and improved differentials for sour crude oil.
- The decline in operating income was also due to refinery operating expenses which increased by $148 million from Q2 of 2007 to Q2 of 2008 mainly due to higher energy costs for electricity and natural gas.
- The management also advised that throughput volumes decreased in the same time frame by an average of 48,000 barrels per day in large part due to maintenance and repairs at the Aruba, Port Arthur, and Delaware City refineries.
In the refining operations, the company reported great progress in shifting production to take advantage of the strong market for distillates.
- From 2008’s first quarter to the second quarter, the management increased distillate production by 110,000 barrels per day while maintaining steady gasoline production.
- During the same time, the company also increased the use of discounted feed-stocks from 66% to 68%, partially due to improved operations at the heavy sour refineries.
- The management reported completion of a major turnaround at Delaware City, repair of the coke drum at Port Arthur and repair of the vacuum tower at the Aruba refinery.
The second quarter throughput volumes averaged 2.7 million barrels per day.
- This was 48,000 barrels per day lower than the second quarter of 2007 but nearly 140,000 barrels per day above the first quarter of 2008.
- The increase in volume from the previous quarter was due to higher operating rates at Port Arthur and Aruba.
The management anticipates strong distillate margins for the rest of the year and next.
- However, the gasoline margins are forecast to continue being weak and industry utilization rates are expected to decline.
- The management projects secondary products to have a margin recovery, particularly if the price of crude oil stabilizes or falls, as the prices of these products lag changes in the price of crude oil.
The company finished the quarter with $1.6 billion in cash.
- In July, the management added further to the cash position with the proceeds from the sale of the Kotz Springs refinery.
- The company continued to return cash to shareholders in the second quarter by increasing dividend by 25% and also by purchasing 3.8 million shares of common stock.
- In early July, the company purchased an additional two million shares and for the year, the company has bought back nearly 15 million shares.
- The company has about $3.6 billion of repurchase authorization.
- The management continues to review capital spending and now expects current year’s CapEx to be approximately $3.8 billion, down $700 million from the original estimate.
