Valero Energy Corporation (NYSE:VLO) Q1 2024 Earnings Call Transcript

Valero Energy Corporation (NYSE:VLO) Q1 2024 Earnings Call Transcript April 25, 2024

Valero Energy Corporation beats earnings expectations. Reported EPS is $3.82, expectations were $3.18. VLO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Valero Energy Corp. First Quarter 2024 Earnings Conference. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Homer Bhullar, Vice President, Investor Relations and Finance. Thank you. Please go ahead.

Homer Bhullar: Good morning, everyone, and welcome to Valero Energy Corporation’s first quarter 2024 earnings conference call. With me today are Lane Riggs, our CEO and President; Jason Fraser, our Executive Vice President and CFO; Gary Simmons, our Executive Vice President and COO; and several other members of Valero’s senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at investorvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments and reconciliations and disclosures for adjusted financial metrics mentioned on this call. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call.

I would now 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 state 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 earnings release and filings with the SEC. Now, I’ll turn the call over to Lane for opening remarks.

Lane Riggs: Thank you, Homer, and good morning, everyone. We are pleased to report strong financial results for the first quarter despite heavy planned maintenance across our refining system. Our team’s ability to optimize and maximize throughput while undertaking maintenance activities illustrates the benefit from our longstanding commitment to safe and reliable operations. Refining margins remain supported by tight product balances with supply constrained by seasonally heavy refining turnarounds and geopolitical events. Product demand was strong across our wholesale system, with diesel demand higher and gasoline demand about the same as last year. We continue to execute strategic projects and enhance earnings capability of our business and expand our long-term competitive advantage.

DGD Sustainable Aviation Fuel, or SAF project, at Port Arthur is progressing ahead of schedule, and is now expected to be operational in the fourth quarter of 2024. With the completion of this project, Diamond Green Diesel is expected to become one of the largest manufacturers of SAF in the world. In addition, we are pursuing shorter cash cycle projects that optimize and capitalize on opportunities and improve margins around our existing refining assets. These projects are focused on increasing feedstock flexibility, optimizing the value of our project mix, and maximizing utilization of existing conversion capacity. On the financial side, we repaid the $167 million outstanding principle amount of our 1.2% Senior Notes that mature on March 15.

And in January, we increased the quarterly cash dividend on our common stock from $1.02 per share to $1.07 per share. Looking ahead, we expect refining margins to remain supported by tight product balances and seasonably low product inventories ahead of the driving season. Longer-term, product demand is expected is exceed supply even with the start of the new refineries this year and the limited announced capacity additions beyond 2025. In closing, we remain focused on [things] (ph) that have been a hallmark of our strategy; maintaining operating excellence, executing our projects well, discipline around our capital investments, and our commitments to shareholder returns. So, with that, Homer, I’ll hand the call back to you.

Homer Bhullar: Thanks, Lane. For the first quarter of 2024, net income attributable to Valero stockholders was $1.2 billion or $3.75 per share, compared to $3.1 billion or $8.29 per share for the first quarter of 2023. First quarter 2024 adjusted net income attributable to Valero stockholders was $1.3 billion or $3.82 per share, compared to $3.1 billion or $8.27 per share for the first quarter of 2023. The Refining segment reported $1.7 billion of operating income for the first quarter of 2024, compared to $4.1 billion for the first quarter of 2023. Refining throughput volumes in the first quarter of 2024 averaged 2.8 million barrels per day. Throughput capacity utilization was 87% in the first quarter of 2024. Refining cash operating expenses were $4.71 per barrel in the first quarter of 2024, lower than guidance of $5.10 per barrel, primarily attributed to lower energy costs and higher throughput.

Renewable Diesel segment operating income was $190 million for the first quarter of 2024, compared to $205 million for the first quarter, 2023. Renewable Diesel sales volumes averaged 3.7 million gallons per day in the first quarter of 2024, which was 741,000 gallons per day higher than the first quarter of 2023. The higher sales volumes in the first quarter of 2024 were due to the impact of additional volumes from the DGD Port Arthur plant, which was started up in the fourth quarter of 2022, and was in the process of ramping up rates in the first quarter of 2023. Operating income was lower than the first quarter of 2023 due to lower renewable diesel margin in the first quarter of 2024. The Ethanol segment reported $10 million of operating income for the first quarter of 2024 compared to $39 million for the first quarter of 2023.

Adjusted operating income was $39 million for the first quarter of 2024. Ethanol production volumes averaged 4.5 million gallons per day in the first quarter of 2024, which was 283,000 gallons per day higher than the first quarter of 2023. For the first quarter of 2024, G&A expenses were $258 million. Net interest expense was $140 million. Depreciation and amortization expense was $695 million. And income tax expense was $353 million. The effective tax rate was 21%. Net cash provided by operating activities was $1.8 billion in the first quarter of 2024. Included in this amount was a $160 million unfavorable impact from working capital and $122 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD.

Excluding these items, adjusted net cash provided by operating activities was $1.9 billion in the first quarter of 2024. Regarding investing activities, we made $661 million of capital investments in the first quarter of 2024. Of which, $563 million was for sustaining the business including costs for turnarounds, catalysts, and regulatory compliance, and the balance was for growing the business. Excluding capital investments attributable to the other joint venture member share of DGD and other variable interest entities, capital investments attributable to Valero were $619 million in the first quarter of 2024. Moving to financing activities, we returned $1.4 billion to our stockholders in the first quarter of 2024. Of which, $356 million was paid as dividends and $1 billion was for the purchase of approximately 6.6 million shares of common stock, resulting in a payout ratio of 74% for the quarter.

Through share repurchases, we have reduced our share count was over 20% since yearend 2021. With respect to our balance sheet, as Lane mentioned we repaid the $167 million outstanding principal amount of our 1.2% senior notes that matured on March 15. We ended the quarter with $8.5 billion of total debt, $2.4 billion of finance lease obligations, and $4.9 billion of cash and cash equivalents. The debt-to-capitalization ratio net of cash and cash equivalents was 17% as of March 31, 2024. And we ended the quarter well-capitalized with $5.3 billion of available liquidity excluding cash. Turning to guidance, we still expect capital investments attributable to Valero for 2024 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance, and joint venture investments.

About $1.6 billion of that is allocated to sustaining the business and the balance to growth. With approximately half of the growth capital towards our low carbon fuels businesses and half towards refining projects. For modeling our second quarter operations, we expect refining throughput volumes to fall within the following ranges, Gulf Coast at 1.79 million to 1.84 million barrels per day, Mid-Continent at 410,000 to 430,000 barrels per day, West Coast at 245,000 to 265,000 barrels per day, and North Atlantic at 430,000 to 450,000 barrels per day. We expect refining cash operating expenses in the second quarter to be approximately $4.55 per barrel. With respect to the renewable diesel segment, we expect sales volumes to be approximately 1.2 billion gallons in 2024.

Operating expenses in 2024 should be $0.45 per gallon, which includes $0.18 per gallon for non-cash costs such as depreciation and amortization. Our ethanol segment is expected to produce 4.5 million gallons per day in the second quarter. Operating expenses should average $0.38 per gallon, which includes $0.05 per gallon for non-cash costs such as depreciation and amortization. For the second quarter, net interest expense should be about $140 million. And, total depreciation and amortization expense should be approximately $710 million. For 2024, we expect G&A expenses to be approximately $975 million. That concludes our opening remarks. Before we open the call to questions, please limit each turn in the Q&A to two questions, if you have more than two questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions.

Operator: Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Today’s first question is coming from Theresa Chen of Barclays. Please go ahead.

See also 15 Best Avalara Software Alternatives in 2024 and 8 Powerful Alternatives to Elasticsearch.

Q&A Session

Theresa Chen: Good morning. Want to get a sense of your product supply and demand outlook from here, and maybe touching on Lane’s earlier comments. And specifically, what is happening with respect to diesel and jet margins from the recent pullback, and where do you think we’ll go from here?

Gary Simmons: Hey, good morning, Theresa. It’s Gary. I’ll you some insight just to what we’re seeing in the market today, and then some thoughts on your final question. Overall, we continue to see strong light product demand. In our system, we’ve seen gasoline sales trending at levels equal to last year. Diesel sales in our system are actually trending about 2% higher than last year. So, I think when we look at all the data, we would expect gasoline demand to be flat to slightly up from last year. Vehicle miles travel data is encouraging, would indicate we could see some gasoline demand surprise to the upside. Diesel demand, flat to slightly down compared to last year. However, again, some of the freight indices appear to be turning, and indicate we could start seeing better demand.

And then, jet fuel demand up year-over-year, I think that isn’t really consistent with the sell-off in distillates, like you’re seeing. And I think some of that’s just attributable to the fact that the market appears to be reacting to headlines. So, in particular, you have the drone attacks in Russia, diesel gets very strong. But then there’s a lag in the supply chain. So, the physical markets aren’t really seeing that interruption in diesel. In fact, Russian exports, following the drone attacks, was actually higher. And so, now, we’re finally getting to the point where Russian exports are starting to fall off, but the markets have kind of dismissed that, and sold off pretty hard. I think diesel is too weak. And the two things I would point to on diesel being too weak, hydroskimming margins in Europe were negative, cracking margins are negative.

And unless something significant has happened on the demand side that we don’t see, we need that capacity to run, which would indicate margins are going to have to get stronger from here on.

Theresa Chen: Very helpful. Thank you, Gary. And maybe following up on the point about Russia, and appreciate you going through the dynamics on the diesel exports, and such. Maybe looking at the naphtha side of things, and so if the naphtha exports starts to fall off as well, what does that imply for octane economics? And in light of maybe more naphtha from some of the new refining capacity added, like what is the next impact and the translation to gasoline margins as a result?

Gary Simmons: Yes, so I think in order to see any meaningful changes in the price of naphtha or discount to gasoline, you really need to see pet-chem demand pick back up for naphtha. And a lot of that is just tied to crude flat prices. As long as crude flat price is high, it’s hard for naphtha to compete as a feedstock into pet-chems. And so, when that happens, then naphtha is trying to find a home into — to gasoline, which creates strong octane in order to be able to get it blended into the gasoline pool.

Theresa Chen: Thank you.

Operator: Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.

Neil Mehta: Good morning, team, another really strong quarter. And I want to ask about the cash flow payout as you’re well above the numbers that you’ve targeted as the floor. And so, the $1 billion of repurchase level, do we view that as a sustainable run rate? And how do you think about how investors should anchor to a payout guidance?

Jason Fraser: Morning, Neil. This is Jason. I’m going to ask Homer to address that question.

Homer Bhullar: Yes, Neil, I think given the strength of our balance sheet in the first quarter, and the fact that we’re not really looking to build more cash, we had a pretty strong payout, at 74%. And you’ll remember, last quarter was 73%, which ended the year at 60%. So, I think you can think of the 40% to 50% range as a long-term through cycle commitment. But in periods where fundamentals are strong, balance sheet is good, like it is now, and sustaining growth CapEx and dividend is covered, you can think of that as the floor. So, the 40% to 50% of the floor, and I think reasonably expect any excess cash flow to continue to go towards buybacks.

Neil Mehta: And that’s helpful, Homer. And then, follow-up is just on DGD. There was a pull forward of the SAF project, so it looks like project is tracking well for ’24 startup. So, just how — and once it comes into service, what’s the back of the envelope of how we should think about the incremental economics? And what type of premium margins do you think you could sustain on SAF barrels?

Eric Fisher: Yes, this is Eric. The project continue — like you said, the project construction is going well. Startup will be in the fourth quarter. As far as what we see in uplift, I think if you look to see what state and federal tax program benefits are, there’s a lot of credits that have been stated in the IRA, whether it’s 45Z or BTC or PTC. And then, in Europe, you’ve got the Argus quote, that all kind of give you a good feel of what that product is going to be worth. We’ve got strong interest in sales, and we do not see a problem moving it at returns that are going to meet our project return threshold.

Operator: Thank you. The next question is coming from Roger Read of Wells Fargo. Please go ahead.

Roger Read: Yes, thank you, and good morning. Probably to come back on some of the macro stuff here. Crude differentials, we’ve got some, I guess, discipline out of OPEC, we’ve got TMX starting up, I guess, on us any day now. We have some tightness from some other places that typically have exported heavier crudes to the Gulf Coast. So, just curious what you’re seeing on the crude, call it, availability front, and expectations on differentials.

Gary Simmons: Yes, Roger, this is Gary. I think we saw crude differentials move a little bit wider in the first quarter, which we expected. And that was mainly just driven by demand. With heavy turnaround seasonally in the U.S. Gulf Coast, demand was off a little bit, and allowed the differentials to widen. But we believe that the differentials would be relatively tight to most of the year, until you get the OPEC production back on the market. At least the consultant supply-demand balances would indicate maybe third or fourth quarter of this year you’ll start to see OPEC production ramp back up. I would tell you we’re not having any trouble in terms of availability of feedstock. It’s just more narrowed differentials than what we would like.

Roger Read: Fair enough. And then, to follow-up on your earlier comments about the structure of the diesel market, the need for cracks to go up, this time, last year, we saw gasoline, for a little while move above — gasoline cracks move above diesel cracks. We have that seasonally again. But is there any reason that you would lean into a max gasoline over a max diesel or a blended sort of outlook relative to what you’ve been doing over the last couple years here?