Valero Energy Corporation (NYSE:VLO) Q4 2023 Earnings Call Transcript

Valero Energy Corporation (NYSE:VLO) Q4 2023 Earnings Call Transcript January 25, 2024

Valero Energy Corporation beats earnings expectations. Reported EPS is $3.55, expectations were $2.95. Valero Energy Corporation 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 Valero Energy Corp. Fourth Quarter 2023 Earnings Conference Call. 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. You may begin.

Homer Bhullar: Good morning, everyone, and welcome to Valero Energy Corporation’s fourth quarter 2023 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 fourth quarter and the full year. With the exception of our 2022 results, we delivered the highest fourth quarter and full year adjusted earnings in company’s history in 2023, demonstrating the earnings capability of our portfolio. Our refining system achieved 97.4% mechanical availability in 2023, which is our best ever. We also set a record for environmental performance and matched our previous record for process safety, illustrating the benefits from our longstanding commitment to safe, reliable and environmentally responsible operations. Now through organic growth of our wholesale system, we set an annual record for sales volume in 2023 at approximately 1 million barrels per day, demonstrating the strength of our branded and wholesale marketing network.

We continue to pursue strategic projects that enhance the earnings capability of our business and expand our long-term competitive advantage. The DGD Sustainable Aviation Fuel, or SAF project at Port Arthur remains on schedule to completion expected in the first quarter of 2025 for a total of $315 million. Half of that attributable to Valero. With the completion of this project, DGD 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 to improve margins around our existing refining assets. On the financial side, we continue to honor our commitment to shareholders. We returned 73% of adjusted net cash provided by operating activities to shareholders through dividends and share repurchases in the fourth quarter, resulting a 60% payout ratio for 2023, and last week, our Board approved a 5% increase in the quarterly cash dividend.

Looking ahead, we expect refining margins to remain supported by tight product supply and demand balances. In the near term, product inventories ahead of the summer driving season are expected to be constrained with heavy industry-wide turnaround activity in the first quarter, providing support to refining margins. Long term, we expect global demand growth to exceed products applied despite new refinery startups. In closing, our team’s simple strategy of pursuing excellence in operations, return-driven discipline on growth projects and a demonstrated commitment to shareholder returns has driven our success and positions us well for the future. So with that, Homer, I’ll hand the call back to you.

Homer Bhullar: Thanks, Lane. For the fourth quarter of 2023, net income attributable to Valero stockholders was $1.2 billion or $3.55 per share compared to $3.1 billion or $8.15 per share for the fourth quarter of 2022. Fourth quarter 2022 adjusted net income attributable to Valero stockholders was $3.2 billion or $8.45 per share. For 2023, net income attributable to Valero stockholders was $8.8 billion or $24.92 per share compared to $11.5 billion or $29.04 per share in 2022. 2023 adjusted net income attributable to Valero stockholders was $8.8 billion or $24.90 per share compared to $11.6 billion or $29.16 per share in 2022. The refining segment reported $1.6 billion of operating income for the fourth quarter of 2023 compared to $4.3 billion for the fourth quarter of 2022.

Refining throughput volumes in the fourth quarter of 2023 averaged 3 million barrels per day. Throughput capacity utilization was 94% in the fourth quarter of 2023. Refining cash operating expenses were $4.99 per barrel in the fourth quarter of 2023, higher than guidance of $4.60 primarily due to an environmental regulatory reserve adjustment in the West Coast. Renewable Diesel segment operating income was $84 million for the fourth quarter of 2023 compared to $261 million for the fourth quarter of 2022. Renewable Diesel sales volumes averaged 3.8 million gallons per day in the fourth quarter of 2023, which was 1.3 million gallons per day higher than the fourth quarter of 2022. The higher sales volumes in the fourth quarter of 2023 were due to the impact of additional volumes from the DGD Port Arthur plant, which started up in the fourth quarter of 2022.

Operating income was lower than the fourth quarter of 2022 due to lower renewable diesel margin in the fourth quarter of 2023. The Ethanol segment reported $190 million of operating income for the fourth quarter of 2023 compared to $7 million for the fourth quarter of 2022. Adjusted operating income was $205 million for the fourth quarter of 2023 compared to $69 million for the fourth quarter of 2022. Ethanol production volumes averaged 4.5 million gallons per day in the fourth quarter of 2023, which was 448,000 gallons per day higher than the fourth quarter of 2022. Adjusted operating income was higher than the fourth quarter of 2022, primarily as a result of higher production volumes and lower corn prices in the fourth quarter of 2023. For the fourth quarter of 2023, G&A expenses were $295 million, and net interest expense was $149 million.

G&A expenses were $998 million in 2023. Depreciation and amortization expense was $690 million and income tax expense was $331 million for the fourth quarter of 2023. The effective tax rate was 22% for 2023. Net cash provided by operating activities was $1.2 billion in the fourth quarter of 2023. Included in this amount was a $631 million unfavorable impact from working capital and $65 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 $1.8 billion in the fourth quarter of 2023. Net cash provided by operating activities in 2023 was $9.2 billion. Included in this amount was a $2.3 billion unfavorable impact from working capital and $512 million of adjusted net cash provided by operating activities associated with the other joint venture member’s share of DGD.

Excluding these items, adjusted net cash provided by operating activities in 2023 was $11 billion. Regarding investing activities, we made $540 million of capital investments in the fourth quarter of 2023, of which $460 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, capital investments attributable to Valero were $506 million in the fourth quarter of 2023 and $1.8 billion for 2023. Moving to financing activities. We returned $1.3 billion to our stockholders in the fourth quarter of 2023 of which $346 million was paid as dividends and $966 million was for the purchase of approximately 7.5 million shares of common stock, resulting in a payout ratio of 73% for the quarter.

As Lane mentioned, this results in a payout ratio of 60% for the year. Through share repurchases, we reduced our share count by approximately 11% in 2023 and by 19% since year-end 2021. With respect to our balance sheet, we ended the quarter with $9.2 billion of total debt, $2.3 billion of finance lease obligations and $5.4 billion of cash and cash equivalents. The debt-to-capitalization ratio, net of cash and cash equivalents was 18% as of December 31, 2023. And we ended the quarter well capitalized with $5.3 billion of available liquidity, excluding cash. Turning to guidance. We 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 fuel businesses and half towards refining projects. Our low carbon fuels growth capital is primarily for the SAF project. Our refining growth projects aim to increase our crude flexibility in the Gulf Coast extract more value out of some of our conversion unit capacity, improve our access to some key product markets and improve our logistics into or out of our refineries. All of these projects meet or exceed our minimum return threshold of 25% after-tax IRR. For modelling our first quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.52 million to 1.57 million barrels per day which includes turnaround work on the legacy coker at our Port Arthur refinery.

Mid-Continent at 415,000 to 435,000 barrels per day West Coast at 235,000 to 255,000 barrels per day; and North Atlantic at 435,000 to 455,000 barrels per day. We expect refining cash operating expenses in the first quarter to be approximately $5.10 per barrel, reflecting lower throughput due to turnaround activity across our system. 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 first quarter. Operating expenses should average $0.37 per gallon, which includes $0.05 per gallon for non-cash costs such as depreciation and amortization.

For the first quarter, net interest expense should be about 150 million, and total depreciation and amortization expense should be approximately 700 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 adhere to our protocol of limiting 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. Question-and-Answer Session.

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Q&A Session

Operator: [Operator Instructions]. Our first question today is coming from John Royall of JPMorgan. Please go ahead.

John Royall: Hey, good morning. Thanks for taking my question. Good morning. So my first question is on the macro side, just on light heavies. LLS-Maya has risen all the way to around $10 from about 6 beginning in the quarter, yet we still have OPEC being restrictive in terms of production. Can you talk about the drivers of the widening of coastal heavy diffs and how you see them progressing from here?

Gary Simmons: Sure. This is Gary. I think a number of factors contributed to that. You did see production in Western Canada tick up a little bit in the fourth quarter. We’re seeing a few more Venezuelan barrels make their way into the U.S. Gulf Coast. So a little more supply on the market. But probably the biggest factor is as you got late in the fourth quarter and early this quarter, you’re starting to see the impact of turnarounds decreasing demand for some of those, especially the heavy sour barrels. In addition to those factors, you had the typical seasonality in high sulfur fuel oil, but lower high sulfur fuel demand for power generation kind of weighing on the heavy sour discounts as well. So our view is that through the first quarter, through refinery maintenance season, you’ll continue to see a little bit wider heavy sour discounts, but then you’ll start to see those come in and really for any meaningful impact to sustainable impact for the quality diffs we need more OPEC production on the market.

If you look at the consultant forecast, it looks like that could happen probably third quarter this year.

John Royall: Great. Thanks, Gary. And then my second question is on return of capital. So your number for the quarter was very strong, and you finished the year at 60% of CFO. I know you’ve talked about how you tend to come in above the range when cracks are strong. If ’24 ends up being kind of more of a mid-cycle type year or even below, how should we think about where you might fall in that 40% to 50% range this year?

Jason Fraser: Good morning. This is Jason. And I’ve got a bit of a cold. And if I talk too much, I’ll go into a coughing fits. So I’m going to ask Homer to respond.

Homer Bhullar: Thanks, Jason. Yes, John, I mean our approach to shareholder returns is driven by our annual target of 40% to 50% of adjusted net cash from operations. And obviously, that includes the dividend, which we consider non-discretionary and buybacks, which are considered the flywheel supplementing our dividend to hit our target. And given the strength in our balance sheet in the fourth quarter, as we highlighted, we had a 73% payout which resulted in a 60% payout for the year. And as you touched on, since 2014, we’ve regularly paid above our target. And in fact, the average payout for the 5 years leading into COVID was around 57%. So I think in short and periods when the balance sheet is strong as it is now and sustaining CapEx, the dividend and strategic CapEx is covered. You can reasonably think of our 40% to 50% target as a floor and expect any excess cash to go towards buybacks.

John Royall: Thank you.

Operator: Thank you. The next question is coming from Theresa Chen of Barclays. Please go ahead.

Theresa Chen: Good morning. Would you mind giving us an update on your clean products supply and demand outlook from here? Taking into account the recent inventory moves as well as the additional refining capacity ramping up internationally, some utilization even is not fully running and what you’re also seeing in terms of demand across your footprint, please?

Gary Simmons: Sure, Theresa. This is Gary. It’s always difficult to assess the markets this early, kind of the holidays and weather tend to have a big impact on-road transportation fuel demand and then fog in the Gulf kind of tends to limit exports. But domestically, I can tell you, demand for gasoline appears to be following typical seasonal patterns. It looks normal for this time of year and in line with where we were last year, I will tell you, gasoline volumes through our wholesale channel of trade are down, a few percent year-over-year. We’re not really concerned about that because you can see it’s in regions that were really impacted by weather. And as the weather we’re starting to see the volumes recover nicely. European gasoline markets are relatively strong.

That’s kept the transatlantic arb closed, and then market structure doesn’t really incentivize making summer great gasoline and putting it into storage. Gasoline exports into Mexico and Latin America have remained steady. So all of this really has us pretty optimistic on gasoline cracks once we move into spring and gasoline demand improves with driving season. On the diesel side, demand in our system is up about 7% compared to last year. Probably seeing more heating oil demand with a little bit colder weather. Diesel inventory remains at the bottom of the 5-year average range. So good demand combined with low inventory continues to support the diesel cracks. Diesel exports in our system were down a little in the fourth quarter. The Russian barrels making their way into South America have caused some changes in trade flow with more of our barrels going to Europe.

In Europe, warm weather tended to keep their demand down a little bit. But I can tell you thus far in the first quarter, we’re seeing much stronger European demand with the colder weather hitting there. We believe the diesel cracks continue to get support from increased jet demand. As kerosene gets pulled out of the diesel pool as we continue to recover from COVID. Jet demand last year was still down about 10.5% from pre-COVID levels. Most forecasts show us closing about half that gap this year. And then expectations for a little better for diesel demand with slightly colder weather and freight picking back up as well. So overall, back to your question on new capacity, it looks like to us somewhere about 1.5 million barrels a day of new capacity coming online, year-over-year growth in demand looks to be slightly over 1 million barrels a day.

So supply/demand balances are really fairly close to what we saw last year. The question really becomes timing of when that new capacity comes on. Our view is that it will take longer for those new refineries to start up and you don’t really see an impact on supply until later in the year. And if that holds, then you have relatively tight supply-demand balances was really the only difference being we’re starting from a different inventory position, as you’ve already mentioned. In our mind on that, we do expect to see inventory draws over the next several weeks. The cold weather had some impact on refinery operations, and then you’ll start to get into turnaround season, which we would expect total light product inventory to begin to draw.

Theresa Chen: Thank you for that detailed answer. And then maybe just looking within the U.S., what are your views on the divergence in product margins across regions? What do you think is causing the weakness in benchmark cracks in the Mid-Con particular just suppose with the strength in the Gulf Coast?

Gary Simmons: Yes. So historically, we’ve seen that the Mid-Con is short product in the summer and long product in the winter. And I think we’re seeing that this year. The market is just long and especially the weathers tended to hit that region more and so we see demand off in that region. But I think once you start to see the weather clear and you get back into driving season, the Mid-Continental recover. Seeing the same thing kind of on the West Coast, weathers tended to impact demand on the West Coast. And so we’ve seen that market a little bit softer than maybe you would typically see for this time of year.