This summary is based on the second quarter fiscal 2007 earnings call conducted by Valero Energy Corp. (VLO) on July 31, 2007.
President: Gregory King
Chairman of the Board and CEO: William Klesse
CFO : Michael Ciskowski
EVP of Marketing and Supply: Joseph Gorder
EVP of Corporate Development and Strategic Planning: Eugene Edwards
EVP of Operations: Richard Marcogliese
Key Investors Issues
- EPS after paying preferred dividends were $3.89 per share compared to $2.98 per share last year.
- Net income grew to $2.25 billion, up from $1.9 billion a year ago.
- Revenue was $24.20 billion compared to $25.59 billion in the prior-year period.
Second Quarter Highlights
Earnings came in at $3.89 per share.
These earnings are a 31% improvement over the $2.98 per share earned in the second quarter of 2006, which was previous record. These results include the operations of the recently divested Lima, Ohio refinery, which are classified as discontinued operations in the financial tables that accompany the earnings release.
Given the strong margin environment in the second quarter, Valero’s throughput margin for continuing operations was $18.14 per barrel, or 16% higher than the $15.59 per barrel earned in the second quarter of 2006.
- Regarding operation, mid-continent throughput levels increased over the first quarter due to the return of McKee refinery to limited operations in mid-April at around 80,000 barrels a day.
- As more units were brought online, rates increased to approximately 150,000 barrels per day by the end of the quarter. The company plans to run at this level until the propane de-asphalting unit is repaired, which the company expects to occur late in the fourth quarter.
Cash operating costs at the refineries were $3.87 per barrel, 9 cents per barrel increase over the first quarter was primarily due to higher energy and reliability expenses which were partially offset by an increase in throughput volume.
- General and administrative expenses excluding corporate depreciation were $177 million. The $32 million increase form the first quarter was mainly due to an increase in charitable contributions and charges related to the cancellation of a services agreement with New Star Energy.
- Total depreciation and amortization expense was $337 million and interest expense, net of capitalized interest was $83 million. The $25 million increase in net interest expense from the first quarter was primarily due to the financing associated with the accelerated share repurchase program or the ASR.
- Effective tax rate on continuing operations was 33.8%, which was in line with guidance on the last earnings call.
- Capital spending was $592 million, which includes $101 million of turnaround expenditures.
As to stock repurchase program, the company entered into an ASR with an affiliate, J.P. Morgan.
That allowed the company to immediately purchase 42.1 million shares of common stock for an up front payment of $3 billion. The final price for the share’s purchase would be determined based on a discount to the volume weighted average trading price during the period it took J.P. Morgan to fulfill their requirements under the ASR. J.P. Morgan recently completed their requirements, which resulted in Valero settling the contract with a cash payment to J.P. Morgan of $94.5 million. So the 42.1 million shares purchased in April cost $3.1 billion instead of the 3 billion.
Included in the ASR, the company has utilized nearly 4 billion of the 6 billion authorizations so far this year.
- Total debt stood at $6.9 billion, which compares to $4.9 billion at the end of March. The company has paid down $230 million of maturing debt in April, and it borrowed $3 billion on a bridge loan to fund the ASR program. The company repaid the bridge loan with $750 million of cash on hand, and the $2.25 billion of notes.
- Cash balance was over $2.3 billion. Subsequent to the quarter end, the company closed the sale of the Lima refinery.
- Proceeds after taxes, and other related expenses, are expected to be approximately $1.8 billion.
- The company has seen DOE data report record gasoline demand this driving season, despite retail prices being around $3 per gallon. At the percentage of disposable income, gasoline purchases are still low, about 50% of the late 70’s and early 1980’s level.
- The Lima refinery was sold because it was not cored to overall strategy.
- CapEx budget remains $3.5 billion.
Third Quarter 2007 Outlook
- As to third quarter operations, turnaround activity is relatively light, so for modeling purposes, Gulf Coast refinery throughputs are expected to be of approximately 1.55 million to 1.6 million barrels per day.
- Mid-continent throughputs should be around 450 thousand barrels per day, which is lower than the usual guidance for this region, due to the Lima sale.
- West Coast throughput should average between 280 and 290 thousand barrels per day, and Northeast system should average in the range of 550 to 570 thousand barrels per day.
- Refinery cash operating expenses are expected to be lower than the second quarter levels, at about $3.65 per barrel, mainly due to higher expected throughput volumes, and lower expected energy costs.
- G&A expense is expected to be around $160 million, which is $17 million lower than the second quarter, due to the non-recorded charges in the second quarter.
- Net interest expense should be around $93 million, which is expected to increase from the second quarter, due to a full quarter effect of the ASR financing.
- Total depreciation and amortization expense should be around $345 million.
Fiscal 2007 Outlook
- The company intends to purchase an additional $2 billion of shares this year to complete the board-approved program. The company is in a great refining environment of strong product demand, favorable discounts for low-quality feedstocks, and tight refining capacity worldwide.
- Over the remainder of this year, the company intends to purchase an additional $2 billion of shares in the open market.
Key questions from the second quarter earnings call conducted by Valero Energy Corp. on July 31, 2007.
