Valero Energy Corporation (VLO)
Q2 2009 Earnings Call Transcript
July 28, 2009 11:00 a.m. ET

Executives

Ashley Smith – Vice President, Investor Relations
Michael Ciskowski – Executive VP and Chief Financial Officer
Rich Marcogliese – Executive VP and Chief Operating Officer
Joseph Gorder – Executive VP, Marketing and Supply
William Klesse - Chairman, President and Chief Executive Officer

Analysts

Jeff Dietert – Simmons & Co
Paul Sankey - Deutsche Bank
Arjun Murti - Goldman Sachs
Paul Cheng - Barclays Capital
Neil McMahon - Sanford Bernstein
Faisel Khan - Citigroup
Chi Chow - Tristone Capital
Mark Gilman – The Benchmark Company
Blake Fernandez - Howard Weil
Jason Gammel – Macquarie Research
Cory Garcia - Raymond James

Presentation

Operator

Good morning. My name is Molly and I will be your conference operator today. At this time, I’d like to welcome everyone to the Valero Energy Corp. second quarter 2009 earnings conference call. All lines have been placed on-mute to prevent any background noise. After the speakers'' remarks, there will be a question-and-answer session. (Operator instructions) If you’d like to ask a question during this time simply press * then the number 1 on your telephone keypad. If you’d like to withdraw your question, press the pound key.

Thank you. Mr. Smith. You may begin your conference.

Ashley Smith – Vice President of Investor Relations

Thank you, Molly. Good morning and welcome to Valero Energy Corporation''s second quarter 2009 earnings conference call. With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; and other members of our executive management team. If you have not received the earnings release and would like a copy, you can find one on our website at valero.com. Also attached to the earnings release are table that provides additional financial information on our business segment. If you have any questions after reviewing these tables, feel free to contact me after the call.

Before we get started, I’d like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that states the company''s or management''s expectations or predictions of the future, are forward-looking statements intended to be covered by the Safe Harbor provisions under Federal Securities Laws. There are many factors that could cause actual results to differ from our expectations, including those we''ve described in our filings with the SEC.

Now, I will turn the call over to Mike.

Michael Ciskowski – Chief Financial Officer

Thanks Ashley, and thank you for joining us today. As noted in the release, we reported a second quarter 2009 net loss of $254 million or $0.48 per share, which compares to $734 million of net income or $1.37 per share in the second quarter of 2008. The second quarter 2009 operating loss was $317 million versus $1.2 billion of operating income in the second quarter of 2008. The decrease in operating income was mainly due to much lower refining margins on diesel and jet fuel and significantly lower sour crude oil discounts versus the same quarter last year.

For example, benchmark Gulf Coast diesel margins versus WTI decreased 79% from $28.85 per barrel in the second quarter of 2008 to $6.16 per barrel in the second quarter of 2009. Regarding crude oil discounts, the Maya heavy sour crude oil discounts versus WTI decreased 78% from $21 in the second quarter of 2008 to $4.57 per barrel in the second quarter of 2009. Also the discounts to WTI on the Mars medium sour crude oil decreased 69% to $2.19 per barrel over the same timeframe. Our second quarter refinery throughput volume averaged 2.5 million barrels per day which was in the range of our guidance, but 257,000 barrels per day below the second quarter of 2008. This decrease in volume was mainly due to lower utilization rates, unscheduled downtime of McKee and Delaware City and the reduction in capacity from the sale of the Krotz Springs Refinery in 2008.

Refinery cash operating expenses were $4.30 per barrel or $0.10 per barrel below our guidance and $0.23 per barrel below the second quarter 2008, due mainly to lower energy cost, which was partially offset by write-offs on our cancelled projects. General and administrative expenses excluding corporate depreciation were $124 million in the second quarter. The decrease of $21 million versus the first quarter and $16 million versus our guidance were primarily due to lower expenses or incentive compensation and the legal reserves. For the second quarter, total depreciation and amortization expense was $389 million, which was in line with our guidance, but higher than the first quarter of 2009, due mostly to the addition of the ethanol plant. Interest expense net of capitalized interest was $82 million, which was lower than our guidance, mainly due to the reversal of accrued interest on a sales tax audit that settled in our favor.

The effective tax rate was 40%. Considering the loss for the quarter, this rate was favorable to the guidance rate of 31%, due to the use of federal tax credits and state tax benefits. Regarding cash flows for the second quarter, capital spending was $698 million, which includes $82 million of turnaround and catalyst expenditures. We are still on track to come in around $2.5 billion for total capital and turnaround cost this year.

Also in the quarter, we paid $78 million in dividends on our common stock and we paid off $209 million of debt that matured in April. And we also acquired the ethanol plants for $556 million, which included working capital. With respect to our balance sheet at the end of June, total debt was $7.4 billion. We ended the quarter with a cash balance of $1.6 billion, which includes the $799 million of net proceeds from the equity offering in early June and we had over $4.6 billion of additional liquidity available. At the end of the quarter, our debt-to-cap ratio net of cash was 25.9%. As to the refining outlook, low product margins and narrow sour crude discounts were the key drivers of our second quarter operating loss. Although, product cracks had rebounded recently, we expect refining margins and sour crude discounts for the third quarter to be similar to what we experienced in the second quarter, which means we could have another loss. And the fourth quarter could be just as challenging. What is needed is a sustained recovery in the economy to drive growth and demand for refined products and to also pull lower quality crude oils on to the market. This leads into Valero strategy, which is to maintain our financial health by cutting costs, optimizing our assets and preserving cash.

Our major growth projects, the two hydrocrackers on the Gulf Coast have been placed on hold until we have better visibility on the need for that capacity. We have a comfortable cash balance, partly because of the equity offering in June, which was conducted to ensure we had a strong balance sheet to weather a low margin environment and to complete the acquisition of the interest in the TRN refinery, which we believe, was a high-quality asset at a good price. Although, we didn’t move forward on that transaction, we are not in a hurry to do any acquisition. For now, we will continue to focus on what is in our control, our cost structure and our refinery operation.