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Valero Energy Corporation (NYSE:VLO) Q3 2023 Earnings Call Transcript

Valero Energy Corporation (NYSE:VLO) Q3 2023 Earnings Call Transcript October 26, 2023

Valero Energy Corporation beats earnings expectations. Reported EPS is $7.49, expectations were $7.36.

Operator: Greetings, and welcome to the Valero Energy Corp. Third Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Homer Bhullar, Chief Vice President, Investor Relations and Finance. Thank you. Please go ahead.

Homer Bhullar: Good morning, everyone, and welcome to Valero Energy Corporation's third 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. Although 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.

A modern seaborne tanker off the coast of a major metropolitan city, transporting liquefied petroleum gas.

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 third quarter. In fact, we set a record for third quarter earnings per share. Finding margins were supported by strong product demand against the backdrop of low product inventories, which remained at 5-year lows despite high refinery utilization rates globally. The strength in demand was evident in our U.S. wholesale system, which matched the second quarter record of over 1 million barrels per day of sales volume. Our refineries operated well and achieved 95% throughput capacity utilization in the third quarter, which is a testament to our team's continued focus on operational excellence. We continue to prioritize strategic projects that enhance the earnings capability of our business and expand our long-term competitive advantage.

The DGD Sustainable Aviation Fuel, or SaaS project at Port Arthur remains on schedule and is expected to be complete in 2025. Once complete, we expect the Arthur plant [ph] to have the optionality to upgrade up to 50% of its current of 470 million-gallon annual renewable diesel production capacity at SaaS. The project is estimated to cost $315 million, with half of that attributable to Valero. With the completion of this project, Diamond Green Diesel is expected to become one of the largest manufacturers of SaaS in the world. On the financial side, we honored our commitment to shareholder returns with a payout ratio of 68% of adjusted net cash provided by operating activities through dividends and share repurchases in the third quarter and we ended the third quarter with a net debt to capitalization ratio of 17%.

In closing, while there are broader factors that may drive volatility markets, we remain focused on things we can control. This includes operating our assets efficiently in a safe, reliable and environmentally responsible manner, maintaining capital discipline by adhering to a minimum return threshold for growth projects and honoring our commitment to shareholder returns. So with that, Homer, I'll hand the call back to you.

Homer Bhullar: Thanks, Lane. For the third quarter of 2023, net income attributable to Valero stockholders was $2.6 billion or $7.49 per share compared to $2.8 billion or $7.19 per share for the third quarter of 2022. Adjusted net income attributable to Valero stockholders was $2.8 billion or $7.14 per share for the third quarter of 2022. The refining segment reported $3.4 billion of operating income for the third quarter of 2023 compared to $3.8 billion for the third quarter of 2022. Refining throughput volumes in the third quarter of 2023 averaged 3 million barrels per day, implying a throughput capacity utilization of 95%. Refining cash operating expenses were $4.91 per barrel in the third quarter of 2023, higher than guidance of $4.70 per barrel primarily attributed to higher-than-expected energy prices.

Renewable Diesel segment operating income was $123 million for the third quarter of 2023 compared to $212 million for the third quarter of 2022. Renewable diesel sales volumes averaged 3 million gallons per day in the third quarter of 2023, which was 761,000 gallons per day higher than the third quarter of 2022. The higher sales volumes in the third 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 third quarter of 2022, primarily due to lower renewable diesel margin in the third quarter of 2023. The ethanol segment reported $197 million of operating income for the third quarter of 2023 compared to $1 million for the third quarter of 2022.

Ethanol production volumes averaged 4.3 million gallons per day in the third quarter of 2023, which was 831,000 gallons per day higher than the third quarter of 2022. Operating income was higher than the third quarter of 2022, primarily as a result of higher production volumes and lower corn prices in the third quarter of 2023. For the third quarter of 2023, G&A expenses were $250 million and net interest expense was $149 million. Depreciation and amortization expense was $682 million and income tax expense was $813 million for the third quarter of 2023. The effective tax rate was 23%. Net cash provided by operating activities was $3.3 billion in the third quarter of 2023. Included in this amount was a $33 million favorable change in working capital and $82 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 $3.2 billion in the third quarter of 2023. Regarding investing activities, we made $394 million of capital investments in the third quarter of 2023 of which $303 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance and $91 million was for growing the business. Excluding capital investments attributable to the other joint venture members share of DGD capital investments attributable to Valero were $352 million in the third quarter of 2023. Moving to financing activities. We returned $2.2 billion to our stockholders in the third quarter of 2023 of which $360 million was paid as dividends and $1.8 billion was for the purchase of approximately 13 million shares of common stock resulting in a payout ratio of 68% of adjusted net cash provided by operating activities.

This results in a year-to-date payout ratio of 58% as of September 30, 2023. 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 $5.8 billion of cash and cash equivalents. Debt to capitalization ratio, net of cash and cash equivalents was 17% as of September 30, 2023 and we ended the quarter well capitalized with $5.4 billion of available liquidity, excluding cash. Separately, as reported by Navigator last week, they cancelled their CO2 pipeline project. We still see carbon capture and storage as a strategic opportunity to reduce the carbon intensity of conventional ethanol, which would also qualify it as a feedstock for sustainable aviation fuel. Without carbon capture and storage, conventional ethanol does not have a pathway into staff under today's policies.

We continue to evaluate other projects to sequester CO2. Turning to guidance. We still expect capital investments attributable to Valero for 2023 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts and joint venture investments. About $1.5 billion of that is allocated to sustaining the business and the balance to growth. For modelling our fourth quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.77 million to 1.82 million barrels per day; Mid-Continent at 445,000 to 465,000 barrels per day; West Coast at 245,000 to 265,000 barrels per day; and North Atlantic at 470,000 to 490,000 barrels per day. We expect refining cash operating expenses in the fourth quarter to be approximately $4.60 per barrel.

With respect to the renewable diesel segment, we expect sales volumes to be approximately 1.2 billion gallons in 2023. Operating expenses in 2023 should be $0.49 per gallon, which includes $0.19 per gallon for noncash costs such as depreciation and amortization. Our ethanol segment is expected to produce 4.4 million gallons per day in the fourth quarter. Operating expenses should average $0.39 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization. For the fourth quarter, net interest expense should be about $145 million, and total depreciation and amortization expense should be approximately $690 million. For 2023, we expect G&A expenses to be approximately $925 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 2 questions. If you have more than 2 questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions.

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