This summary is based on the third quarter fiscal 2008 earnings call conducted by Valero Energy Corp. (VLO) on October 28, 2008.
Management:
CEO: Bill Kleese
EVP and CFO: Mike Ciskowski
EVP and COO: Rich Marcogliese
EVP, Corporate Development and Strategic Planning: Gene Edwards
EVP, Marketing and Supply: Joe Gorder
Executive Director, IR: Ashley Smith
Key Investor Issues:
- Quarter to quarter operating revenues increased from $24 billion to $36 billion.
- Income from continuing operations for the nine months was $2.1 billion or $4.02 per share versus $4 billion or $6.66 per share in the year ago period.
- The company reported a net debt to capitalization ratio of 15.8%, one of the lowest in the history of the company.
Third Quarter Financial Highlights:
The company reported third quarter 2008 earnings of $2.18 per share.
- Excluding the $305 million pre-tax gain on the sale of the Krotz Springs Refinery, the third quarter earnings were $1.86 per share.
- Due to long-term agreements between Valero and Alon, the results of operations related to the Krotz Springs Refinery were not presented as discontinued operations.
- Third quarter 2008 operating income was $1.8 billion or $1.5 billion excluding the gain on the sale of the Krotz Springs Refinery.
- This compares favorably to the $1.2 billion reported in the third quarter of 2007.
- The increase in operating income was due to the company''s higher throughput margin per barrel of $13.11 which was up $3.17 per barrel or 32% versus the third quarter of 2007.
- The main driver of the higher throughput margin compared with the third quarter of last year was the increase in margin per distillates such as diesel and jet fuels.
- Partially offsetting the higher distillate margins were lower margins for gasoline.
- Third quarter throughput volumes averaged around $2.6 million barrels a day which was 257,000 barrels per day lower than the third quarter of 2007 and 159,000 barrels per day below the second quarter of 2008.
- The decrease in volume compared with both of the prior periods was primarily due to the reduction in capacity from the sale of the Krotz Springs Refinery and lower operating rates caused by the hurricane.
- Refining cash operating expenses were $4.96 per barrel higher than the guidance.
- This was primarily due to writing off costs associated with the deferred capital projects, expenses associated with the hurricanes and lower than anticipate throughput due to the hurricanes.
General and administrative expenses excluding corporate depreciation were $169 million.
- The $52 million increase from the second quarter was mainly due to increases in legal, environmental tax and incentive based compensation cost.
- Approximately half was attributable to favorable adjustments in the second quarter that did not recur in the third quarter.
- For the third quarter, total depreciation and amortization expense was $370 million and interest expense net of capitalized interest was $81 million, both in line with our guidance.
- The effective tax rate was 36%.
Quarterly capital spending was $749 million which includes $76 million of turnaround expenditures.
- The management spent $74 million to purchase 2 million shares of stock.
- Since the end of the quarter, the company purchased an additional 8.3 million shares which takes the total purchases for the year to nearly 23 million shares.
- There currently is approximately $3.5 billion of repurchase authorization in addition to the ongoing anti-dilution program.
- Regarding future uses of cash, the management significantly reduced estimates for 2008 and 2009 expenditures on capital and turnaround costs.
- The company estimates 2008 expenditures will now be around $3 billion, down $800 million versus the previous guidance of $3.8 billion and down $1.5 billion from the original estimate of $4.5 billion.
- Next year’s spending on capital and turnarounds will total approximately $3.5 billion lower than the previous update of $4 billion.
At the end of September, the total debt was $6.5 billion.
-The company ended the quarter with a cash balance of $2.8 billion.
- The debt to capitalization ratio net of cash was 15.8% which was down from the second quarter ratio of 20.5% and one of the lowest in the company''s history.
- The management further strengthened the financial position during the quarter by increasing the amount of committed credit facilities by 10% to $3.2 billion.
- Including uncommitted amounts, the total credit facilities as of September 30th were $4.4 billion.
- The company had no barrowings on these facilities but did have $1.2 billion in letters of credit resulting in approximately $3.2 billion in total availability.
- In addition to this amount, the management had $900 million of capacity under the accounts receivable sales program.
- The primary revolvers do not mature until 2012 and these revolvers consist of contractual obligations from a large and diversified group of bank with no single bank holding more than 5%.
In early October, Moody''s recognized the company’s solid financial position by raising the investment grade credit rating from BAA3 to BAA2 with the stable outlook.
- For the rating upgrade, Moody''s cited many of the same factors that management believes differentiate Valero from other independent refiners.
- Key factors include the large complex operating skill, regional margin diversification, ample liquidity, low leverage with sufficient cash flow coverage.
Fourth Quarter Fiscal 2008 Outlook:
- Gulf Coast refinery throughput volume is expected to be approximately 1.425 million to 1.475 million barrels per day.
- Mid common throughput volume should average between 410,000 and 420,000 barrels per day.
- West Coast throughput should average between 270,000 and 280,000 barrels per day.
- Northeastern crude volume should average in the range of 560,000 to 570,000 barrels per day.
- Refining cash operating expenses are expected to be about $4.50 per barrel which is lower than the third quarter due to a combination of higher crude petroleum, lower expected energy cost and the absence of hurricane related cost.
- Q4 G&A expense is expected to be around $160 million.
- Net interest expense should be around $80 million and total depreciation and amortization expense should be around $370 million.
- For the fourth quarter, the management estimates a 32% tax rate.
Key questions and answers from the third quarter fiscal 2008 earnings call conducted by Valero Energy Corporation on October 28, 2008.
Roger Read (Natixis Bleichroeder):
What is your comment on turnarounds for the first part of 2009? How might you be scheduling on your turnarounds a little differently given the environment we''re in today?
