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    Valero Energy Corp (VLO)

    Business Description

    Valero Energy Corporation is a multinational company engaged in the manufacturing and marketing of petroleum-based and low-carbon liquid transportation fuels and petrochemical products . The company operates through three main segments: Refining, Renewable Diesel, and Ethanol, with a strong emphasis on petroleum-based products while also expanding into low-carbon fuel markets . Valero's product offerings include gasolines, blendstocks, distillates, renewable diesel, renewable naphtha, ethanol, and distillers grains .

    1. Refining Segment - Operates petroleum refineries that produce gasolines, blendstocks, distillates, and other products, serving as the largest contributor to Valero's revenues.
    2. Ethanol Segment - Operates ethanol plants that produce ethanol and distillers grains, contributing significantly to the company's revenue.
    3. Renewable Diesel Segment - Involves the operations of Diamond Green Diesel (DGD), a joint venture, producing renewable diesel and renewable naphtha.

    Q3 2024 Summary

    Initial Price$158.35July 1, 2024
    Final Price$137.47October 1, 2024
    Price Change$-20.88
    % Change-13.19%

    What went well

    • Valero's Sustainable Aviation Fuel (SAF) project finished ahead of schedule and under budget, demonstrating exceptional project execution and is expected to exceed the minimum return threshold of after-tax 25%, with strong commercial interest from airlines and freight carriers.
    • Valero anticipates tightening refining balances with product demand exceeding capacity additions beyond next year, leading to an extended period with tighter refining margins, supporting long-term refining fundamentals.
    • Increased supply of heavy sour crude from OPEC, Canada, and Venezuela is expected to widen sour crude differentials, positively impacting Valero's refining margins.

    What went wrong

    • Significant decline in refining segment operating income from $3.4 billion in Q3 2023 to $565 million in Q3 2024 indicates weaker financial performance.
    • Inflation has increased costs for maintenance, catalysts, and chemicals, making it harder to keep expenses under control.
    • Uncertainty in global refining markets due to potential oversupply and timing of refinery closures and new capacity additions may lead to pressure on refining margins.

    Q&A Summary

    1. Capital Allocation in Low Margins
      Q: Will you maintain buybacks if margins stay low?
      A: Valero intends to continue returning capital to shareholders even in a lower margin environment, thanks to its strong balance sheet and low-cost operations. They have committed to a minimum of 40–50% of cash flow from operations going to shareholders, and all excess free cash flow will support buybacks.

    2. California Refinery Strategy
      Q: Any update on California refinery plans?
      A: Facing increased regulatory pressures in California, Valero is considering all strategic options for its operations there. Historically, they have minimized capital expenditures in the state due to policy challenges, and now all alternatives are being evaluated as they assess their future in California.

    3. Refining Margins Outlook
      Q: How do you see refining margins evolving?
      A: Valero expects tightening balances in refining markets due to modest net capacity additions of about 300,000 barrels per day and demand growth of 700,000 barrels per day in 2025. Timing of refinery closures and new capacity will impact margins, and they anticipate an extended period of tighter balances leading to improved margins beyond next year.

    4. Renewables and Sustainable Aviation Fuel
      Q: What's the outlook for your renewable fuels business?
      A: The startup of the sustainable aviation fuel unit is ahead of schedule and under budget, with strong commercial interest from airlines and freight carriers. Valero expects positive policy tailwinds in 2025, including the Inflation Reduction Act, European SAF mandates, and potential RIN price increases, which should enhance returns exceeding their minimum after-tax threshold of 25%.

    5. Operating Expenses
      Q: How are you keeping OpEx low?
      A: Valero continues to manage operating expenses through disciplined cost control, maintaining a focus on low-cost operations. While lower natural gas prices have helped, they are actively working to offset inflation impacts on maintenance, catalyst, and chemical costs to sustain their cost advantage.

    6. Capture Rates Improvement
      Q: What needs to improve capture rates?
      A: Improvement in capture rates depends on factors like reduced crude market backwardation and better pricing for secondary products such as propylene and naphtha. As petrochemical demand improves, these factors should enhance margins and capture rates.

    7. Diesel Demand Trends
      Q: Is diesel demand improving?
      A: Valero has seen a recent increase in diesel demand, with a 5% year-over-year rise in the last two weeks. This suggests strengthening markets, and with tighter inventories, it could support higher diesel margins heading into winter.

    8. Port Arthur Coker Economics
      Q: How is the Port Arthur coker performing?
      A: The Port Arthur coker project is meeting return expectations set during funding, benefiting from processing heavy sour crude into light products. As sour crude differentials fluctuate, Valero anticipates capturing additional value from this asset.

    9. Naphtha Exports Outlook
      Q: What's driving naphtha export strength?
      A: Increased naphtha exports are due to reduced supply from hydroskimmer run cuts and improving petrochemical demand. Valero expects this trend to continue, supporting margins for naphtha and related products.

    10. Ethanol Volumes and Margins
      Q: Why are ethanol volumes at record levels?
      A: Valero has expanded ethanol production capacity and is leveraging export opportunities amid strong global demand. Despite margin pressures, the company is taking advantage of the abundant U.S. corn supply and increased international interest in ethanol-blended fuels.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    R. Lane RiggsChief Executive Officer, President, and Chairman of the BoardCEO & President: June 30, 2023 <br> Chairman: December 31, 2024R. Lane Riggs is the CEO and President of Valero Energy Corporation. He has been with Valero for over two decades, holding various leadership positions. He will become Chairman of the Board on December 31, 2024 .
    Jason W. FraserExecutive Vice President and Chief Financial OfficerJuly 15, 2020Jason W. Fraser is the Executive Vice President and CFO at Valero. He has held various leadership roles, including Executive Vice President and General Counsel, and has been with Valero since 2015 .
    Gary K. SimmonsExecutive Vice President and Chief Operating OfficerJuly 20, 2023Gary K. Simmons is the Executive Vice President and COO at Valero. He has held various leadership positions, including Chief Commercial Officer, and has been with Valero for several years .
    Richard J. WalshSenior Vice President, General Counsel, and SecretaryApril 22, 2021Richard J. Walsh oversees Valero's legal and governmental affairs, health, safety, and environmental compliance. He has been with Valero since 1999 and has held various leadership roles within the legal department .
    Joseph W. GorderExecutive ChairmanJuly 1, 2023Joseph W. Gorder has been serving as the Executive Chairman since July 1, 2023, after retiring as CEO. He has been a member of Valero's board since 2014 and will retire on December 31, 2024 .

    Questions to Ask Management

    1. Given the increasing regulatory pressures in California and the mention of considering "all options are on the table," can you elaborate on the specific strategic alternatives Valero is evaluating for its West Coast operations, and what factors would trigger a potential exit from the California refining market?

    2. With inflation impacting maintenance costs and challenges in controlling operating expenses, how sustainable is your current cost structure, and what additional measures are you implementing to mitigate these cost pressures, especially if energy costs like natural gas begin to rise?

    3. Considering the expected net refining capacity additions and closures in 2025 and uncertainties around demand recovery, how confident are you in your forecast of tightening balances and improved refining margins, and what contingencies are in place if supply-demand dynamics do not materialize as anticipated?

    4. Despite reports that ethanol margins are "really crumbling on paper," Valero is guiding to record ethanol production volumes; can you explain how you justify increasing production in a low-margin environment, and what risks do you foresee if export markets do not absorb this additional volume as expected?

    5. In light of strong product exports appearing to be more of a push from the U.S. rather than a pull from international markets, and with falling frac spreads, how do you assess the sustainability of export premiums, and what strategies do you have if export markets become less favorable and domestic inventories begin to rise?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateFebruary 22, 2024 September 19, 2024
    End Date/DurationNo expiration date No expiration date
    Total additional amount$2.5 billion $2.5 billion
    Remaining authorization$2.1 billion $2.5 billion
    DetailsPart of capital allocation strategy New authorization

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024
    • Guidance:
      1. Refining Throughput Volumes:
        • Gulf Coast: 1.83 million to 1.88 million barrels per day .
        • Mid-Continent: 425,000 to 445,000 barrels per day .
        • West Coast: 230,000 to 250,000 barrels per day .
        • North Atlantic: 380,000 to 400,000 barrels per day .
      2. Refining Cash Operating Expenses: $4.60 per barrel .
      3. Renewable Diesel Segment:
        • Sales Volumes: 1.2 billion gallons in 2024 .
        • Operating Expenses: $0.45 per gallon, including $0.18 per gallon for noncash costs .
      4. Ethanol Segment:
        • Production: 4.7 million gallons per day .
        • Operating Expenses: $0.37 per gallon, including $0.05 per gallon for noncash costs .
      5. Net Interest Expense: $140 million .
      6. Depreciation and Amortization Expense: $690 million .
      7. General and Administrative (G&A) Expenses: $975 million for 2024 .
      8. Capital Investments: $2 billion for 2024 .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      1. Refining Throughput Volumes for Q3 2024:
        • Gulf Coast: 1.77 million to 1.82 million barrels per day .
        • Mid-Continent: 405,000 to 425,000 barrels per day .
        • West Coast: 235,000 to 255,000 barrels per day .
        • North Atlantic: 390,000 to 410,000 barrels per day .
      2. Refining Cash Operating Expenses: $4.70 per barrel .
      3. Renewable Diesel Segment:
        • Sales Volumes: 1.2 billion gallons in 2024 .
        • Operating Expenses: $0.45 per gallon, including $0.18 per gallon for noncash costs .
      4. Ethanol Segment:
        • Production: 4.6 million gallons per day .
        • Operating Expenses: $0.40 per gallon, including $0.05 per gallon for noncash costs .
      5. Net Interest Expense: $140 million .
      6. Depreciation and Amortization Expense: $690 million .
      7. General and Administrative (G&A) Expenses: $975 million for 2024 .
      8. Capital Investments: $2 billion for 2024 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      1. Capital Investments: $2 billion for 2024 .
      2. Refining Throughput Volumes for Q2 2024:
        • Gulf Coast: 1.79 million to 1.84 million barrels per day .
        • Mid-Continent: 410,000 to 430,000 barrels per day .
        • West Coast: 245,000 to 265,000 barrels per day .
        • North Atlantic: 430,000 to 450,000 barrels per day .
      3. Refining Cash Operating Expenses: $4.55 per barrel .
      4. Renewable Diesel Segment:
        • Sales Volumes: 1.2 billion gallons in 2024 .
        • Operating Expenses: $0.45 per gallon, including $0.18 per gallon for noncash costs .
      5. Ethanol Segment:
        • Production: 4.5 million gallons per day .
        • Operating Expenses: $0.38 per gallon, including $0.05 per gallon for noncash costs .
      6. Net Interest Expense: $140 million .
      7. Depreciation and Amortization Expense: $710 million .
      8. General and Administrative (G&A) Expenses: $975 million for 2024 .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024
    • Guidance:
      1. Capital Investments: $2 billion for 2024 .
      2. Refining Throughput Volumes for Q1 2024:
        • Gulf Coast: 1.52 million to 1.57 million barrels per day .
        • Mid-Continent: 415,000 to 435,000 barrels per day .
        • West Coast: 235,000 to 255,000 barrels per day .
        • North Atlantic: 435,000 to 455,000 barrels per day .
      3. Refining Cash Operating Expenses: $5.10 per barrel .
      4. Renewable Diesel Segment:
        • Sales Volumes: 1.2 billion gallons in 2024 .
        • Operating Expenses: $0.45 per gallon, including $0.18 per gallon for noncash costs .
      5. Ethanol Segment:
        • Production: 4.5 million gallons per day .
        • Operating Expenses: $0.37 per gallon, including $0.05 per gallon for noncash costs .
      6. Net Interest Expense: $150 million .
      7. Depreciation and Amortization Expense: $700 million .
      8. General and Administrative (G&A) Expenses: $975 million for 2024 .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • ConocoPhillips
    • CVR Energy, Inc.
    • Delek US Holdings, Inc.
    • Energy Select Sector SPDR Fund
    • EOG Resources, Inc.
    • HF Sinclair Corporation
    • LyondellBasell Industries N.V.
    • Marathon Petroleum Corporation
    • Occidental Petroleum Corporation
    • PBF Energy Inc.
    • Phillips 66