Valero Energy Corporation performed very well in 2018.
Management is committed to rewarding shareholders via buybacks and dividend increases.
Covering the financial and operational performance of Valero Energy’s three main divisions.
Refining giant Valero Energy Corporation (NYSE:VLO) just reported its earnings for the fourth quarter of 2018 that won over some love from Wall Street. Both its earnings and revenue generation beat expectations, which is always a good sign. As of this writing, Valero yields 4.2%, as management boosted the firm’s quarterly payout by 13% in January 2019. This is on top of rewarding investors through $1.7 billion in share buybacks and $1.4 billion in dividend payments last year. Let’s dig in.
Strong refining margins carry the firm higher
Valero Energy’s operating income climbed up to $4.7 billion in 2018 from $3.7 billion in 2017. However, due to a $0.9 billion income tax benefit in 2017 versus a $0.9 billion income tax expense in 2018, it appears that the firm’s income generation materially weakened last year, which isn’t really the case. From 2017 to 2018, Valero Energy’s net income attributable to stockholders fell from $4.1 billion to $3.1 billion. A 4% reduction in its outstanding diluted share count helped offset some of the pain as its EPS dropped from $9.16 to $7.29 on a fully-diluted basis.
When comparing the performance of its refining division on a year-over-year basis, it is clear Valero Energy did quite well in 2018. Its average total throughput volumes for the year climbed by 2% to 2,986,000 bpd, which lifted its product yield by 2% to 3,025,000 bpd.
On top of higher throughput volumes, Valero’s refining margin grew by 10% year-over-year to $10.05 per barrel in 2018. Refining margin means the crack spread Valero received, the difference between its feedstock costs and the price received for its petroleum product production. Strong crack spreads ultimately enabled its refining division’s adjusted operating income per barrel of throughput (the amount of income generated per refined barrel after taking crack spreads and operating expenses into account) to grow by 22% year-over-year to $4.58 per barrel in 2018.
Crude-by-rail has rebounded across U.S. as production has outstripped pipeline capacity
2 Feb 2019, By Rebecca Elliott and Paul Ziobro, The Wall Street Journal
The use of trains to carry crude is surging after dropping in recent years amid concerns about safety, as drillers in parts of North America produce more oil than area pipelines can accommodate.
An average of 718,000 barrels of crude a day traversed America’s railways as of October, the latest data available, an 88% increase from a year earlier, according to the U.S. Energy Information Administration. That compares with a peak average of about 1.1 million barrels in October 2014.
Much of the recent oil train growth is due to record shipments from Canada, where pipeline expansion projects, including Keystone XL and Trans Mountain, have stalled amid environmental opposition and legal delays. Crude-by-rail shipments also have ticked up from North Dakota’s Bakken region and the Permian Basin of West Texas and New Mexico, according to energy-monitoring firm Genscape Inc.
The crude-by-rail comeback is expected to last through late this year in the Permian, and longer in North Dakota and Canada, as companies struggle to lay new pipe as quickly as drillers are getting oil out of the ground.
Shipping oil by train is more expensive than sending it through a pipeline, so producers often avoid making longterm commitments to rail companies. It costs about $20 a barrel to send oil by rail from Canada to the U.S. Gulf Coast, compared with about $12.50 by pipeline, according to energy investment bank Tudor Pickering Holt & Co.
But pipeline projects typically lag behind growth in oil and gas production, and the gap has lengthened in many parts of the country in recent years as local activism has made it increasingly difficult to complete projects. Meantime, North American oil production topped 15.6 million barrels daily in August, a 17% annual increase, according to the EIA.
Bottlenecks have grown particularly severe in Canada. Heavy crude there was selling locally for more than $50 a barrel below U.S. benchmark prices last fall, reflecting producers’ inability to get it to market due to pipeline problems. U.S. oil prices have since fallen about 24%, closing at $54.23 a barrel on Wednesday.
The congestion in Canada spurred companies including Houston-based ConocoPhillips and Calgary-based Cenovus Energy Inc. to ink rail deals.
“The intention is to bridge us over to the next major pipeline expansion, so a few years,” ConocoPhillips finance chief Don Wallette, Jr. said last fall.
Cenovus’s three-year agreements will allow it to transport about 100,000 barrels of oil daily to the U.S. Gulf Coast, where refiners mix it with lighter crudes to produce fuel.
In October, about half of the oil the U.S. imported by rail from its northern neighbor went to the Gulf Coast, EIA data show, helping to offset a 30% decline in crude purchases from Venezuela over the past two years. Roughly a quarter went to the Midwest, while smaller amounts went to the East and West coasts.
Derailments, notably one in Lac-Mégantic, Quebec, that killed 47 people in 2013, have raised concerns about the safety of transporting oil by trains on a large scale. That prompted federal regulators to impose tougher safety requirements for railcars, though opposition remains in some communities.
The heightened demand for oil train transportation has benefited railroads including Union Pacific Corp., whose petroleum shipments rose 30% last year to 228,470 carloads as the company handled more crude oil. But Chief Executive Lance Fritz said the Omaha, Neb.-based railroad isn’t investing heavily to support crude-by-rail shipping because the demand could evaporate once major pipeline projects come online. “We’re careful to make these commitments because it’s a short-lived phenomenon,” Mr. Fritz said in a recent interview. “It’s just not going to be around for long-term returns.”
Since shipping oil by rail is generally more expensive, pipelines remain a more attractive option when available, analysts say. “People would love to have the optionality to move onto crude by rail whenever they want to, but nobody wants to be signing a check for it,” RBN Energy analyst John Zanner said.
Mr. Zanner said because of limited supply of railcars and other infrastructure he doesn’t expect oil train shipments from Canada to increase significantly as a result of U.S. sanctions on Venezuela’s state-owned oil company.
Oil companies often use trains on an ad hoc basis, and rail provides geographic and financial alternatives for producers wary of committing to new pipes. Pipeline companies typically won’t proceed with a project unless drillers sign multiyear contracts guaranteeing payment regardless of whether they have oil to ship.
Whiting Petroleum Corp. is weighing those trade-offs in North Dakota, where it is evaluating whether to support an additional pipeline or rely on costlier, but more flexible, crude-by-rail transportation. Crude production in the state, once the heart of oil-train transportation, has swelled about 38% since the Dakota Access Pipeline opened in 2017, federal data show, testing the limits of existing pipelines.
In November, oil sold in Minnesota fetched as much as $19 a barrel less than it would have at the main U.S. trading hub in Cushing, Okla., reflecting the bottleneck, according to price reporting agency S&P Global Platts. “You’re always balancing between getting the infrastructure in place versus flexibility,” said Peter Hagist, a senior vice president for Whiting.
Repost from The Motley Fool [Valero’s profits continue at massive levels, although not as high as in 2017 when the Republicans gave corporations unheard-of tax windfalls. I have highlighted the only reference to west coast production. Of special interest: search this long transcript for the 9 references to “exports” and the 18 references to “rail.” – R.S.]
Valero Energy Corp (VLO) Q4 2018 Earnings Conference Call Transcript
VLO earnings call for the period ending December 28, 2018.
By Motley Fool Transcribers, Jan 31, 2019 at 4:36PM
Valero Energy Corp (NYSE:VLO) Q4 2018 Earnings Conference Call Jan. 31, 2019, 10:00 a.m. ET
Good day, ladies and gentlemen, and welcome to the Valero Energy Corporation’s Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Homer Bhullar, Vice President of Investor Relations. Sir, you may begin.
Homer Bhullar — Vice President, Investor Relations
Good morning, and welcome to Valero Energy Corporation’s fourth quarter 2018 earnings conference call. With me today are Joe Gorder, our Chairman, President and Chief Executive Officer; Donna Titzman, our Executive Vice President and CFO; Lane Riggs, our Executive Vice President and COO; Jason Fraser, our Executive Vice President and General Counsel and several other members of Valero Senior 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 tables that provide additional financial information on our business segments. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call.
I would 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 filings with the SEC.
Now I’ll turn the call over to Joe for opening remarks.
Joseph W. Gorder — Chairman, President and Chief Executive Officer
Thanks, Homer, and good morning, everyone. We are pleased to report that we completed another good quarter where we ran our business well and delivered solid financial results. Throughout the quarter, we maintained our unrelenting focus on operations excellence, which enabled us to operate safely and reliably in an environmentally responsible manner.
We also delivered on our commitment to invest in growth projects and acquisitions that increase Valero’s earnings capability, while maintaining solid returns to our stockholders. In 2018, we matched our 2017 record for process safety performance, and we continued to outperform the industry on our personnel injury rates.
For logistics investments we made over the last several years are contributing significantly to earnings. Our investments in Line 9B, the Diamond Pipeline and the Sunrise Pipeline expansion increased our systems flexibility, allowing us to take advantage of the opportunities available in the fourth quarter of 2018. In fact, we set a record for total light crude runs at 1.5 million barrels per day and a record for North American light crudes process at over 1.3 million barrels per day.
We also continued to maximize product exports into higher netback markets in Latin America. Turning to capital allocation, we continued to execute according to our disciplined framework. Our projects in execution remain on track. Construction is scheduled to finish on the Houston alkylation unit in the second quarter and the Central Texas pipelines and terminals are expected to be completed in mid 2019. Continue reading Listening in: Valero on recent earnings, then Q&A with investors→