This summary is based on the first quarter fiscal 2007 earnings call conducted by Valero Energy Corp. (VLO) on April 26, 2007.
Management:
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Vice President, Investor Relations: Eric Fisher
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Executive Vice President and Chief Financial Officer: Mike Ciskowski
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Chairman: Bill Klesse
Key Investors Issues
- Earnings were up 41% to $1.1 billion or $1.86 a share.
- Revenues declined 6% to $19.7 billion.
- The Board increased the stock repurchase authorization to $6 billion and entered into an agreement with JPMorgan to purchase $3 billion shares under an accelerated share repurchase program.
First Quarter Highlights
Earnings were $1.1 billion or $1.86 per share, up 41% from $849 million or $1.32 per share in the prior year as a result of stronger gasoline and distillate margins throughout the company''s refining system.
- Operating income was $1.8 billion or $500 million higher than the $1.3 billion generated in the same period last year.
- Revenue dropped 5.7% to $19.7 billion from $20.9 billion in the prior year, despite the firm starting with a relatively healthy environment for the industry refining margins.
- As a result, throughput margin per barrel was $12.06, or almost $2 per barrel higher than the $10.11 earned in 2006.
Cash operating costs at the refineries increased to $3.74 per barrel, due to lower throughput volumes as a result of the unplanned outage at McKee.
- General and administrative expenses, excluding corporate depreciation, were $145 million, while total depreciation and amortization increased $26 million to $334 million, due to the completion of capital projects and higher turnaround in catalyst amortization.
- Total debt was $4.9 billion, down from $5.1 billion as the firm called in $183 million of high-cost debt.
- The firm paid off $230 million of maturing debt, while capital spending was $680 million including turnaround costs of $129 million.
- Regarding the stock buyback program, the firm spent $900 million to purchase 15.6 million shares of common stock plus another $275 million in early April to acquire another 4.1 million shares.
- The Board increased the company’s stock repurchase authorization to $6 billion from the $2 billion authorization announced last October.
Operational Highlights:
- Gulf Coast earnings benefited from the crude unit expansion at Port Arthur, which added 30,000 barrels per day of throughput capacity.
- This unit was commissioned in January and brings the total plant capacity up to 325,000 barrels per day of sour crude oil.
- The Mid-Continent throughput levels were impacted by the McKee outage that began on February 15, which damaged the propane deasphalter or the PDA unit, which uses propane to remove asphalt components from a portion of the feedstocks with a catalytic cracking unit.
With the PDA out of service, at least until the end of the year, achieving full throughput rates will be difficult and since the restart in April, the firm has brought on units and increased throughputs to the current level of around 85,000 barrels per day.
- By the end of June, it should be running in the range of 150,000 barrels per day and stay in this range through the end of the year.
- Feedstock differentials to West Texas Intermediate (WTI) crudeoil have been affected by a temporarily oversupplied WTI market at the Cushing, Oklahoma pricing hub, which was partially caused by the unplanned outage at the company''s McKee refinery.
Update on the ASR program:
- The company entered into a private ASR agreement with JPMorgan in which it will purchase its common stock for an up-front payment of $3 billion.
- Under the agreement, the number of shares to be held in treasury will be based on the price of the company’s common stock on Friday, April 27.
The shares are going to be delivered by end of April, 2007.
- The final price for the shares repurchased will be determined based on a discount to the volume weighted average trading price of the company’s common stock during a period of up to four months.
- The up-front payment to JPMorgan will be funded with a short-term bridge loan, which we expect to replace with longer term debt financing at a later date.
- The transaction was reviewed by the rating agencies, and they have indicated that they will maintain the investment grade ratings at BBB with S&P and Fitch and BAA 3 with Moody’s.
Strategic Insights:
- Gasoline and diesel margins have been impressive largely due to the strong gasoline and distillate demand throughout the first quarter and continues into the second quarter.
- On the supply side, imports have been low and the industry has not been able to increase production to catch up to demand for a variety of reasons, especially unplanned downtime, resulting in higher refining margins.
- These supply and demand trends will be in place for many years, as refineries are much more difficult and complex to operate in the low sulfur world, which means refining margins should stay higher for longer than most on Wall Street are expected.
The firm continues to focus on improving financial performance and returns for shareholders, having grown the company rapidly through acquisitions over the past ten years.
