Valero

Valero told analysts the company was benefitting from tight capacity and it did not see the situation changing

Valero’s CEO told analysts the company was benefitting from a situation where “global product supply remains constrained due to roughly 4 million barrels per day of global refining capacity being taken permanently off-line since 2020.” “JOSEPH W. GORDER, CHAIRMAN & CEO, VALERO ENERGY CORPORATION: We’re pleased to report strong financial results for the third quarter, credited to our safe and reliable operational performance and continued strength in refining fundamentals. Refining margins remain supported by strong product demand, low product inventories and continued energy cost advantages for U.S. refineries compared to global competitors. Despite high refinery utilization rates, global product supply remains constrained due to roughly 4 million barrels per day of global refining capacity being taken permanently off-line since 2020 for a variety of reasons, including unfavorable economics or as part of planned conversions to produce low carbon fuels. Product demand across our system remains strong, with gasoline and diesel demand higher than pre-pandemic levels, and jet fuel demand steadily approaching 2019 levels. Our refining utilization increased to 95% in the third quarter as we continue to maximize refining throughput.” (Q3 2022 Valero Energy Corp Earnings Call, 10/25/2022)

Valero CEO: “refining fundamentals remain strong as global product supply remains constrained due to capacity reductions and high natural gas prices in Europe, which are setting a higher floor on margins.”JOSEPH W. GORDER, CHAIRMAN & CEO, VALERO ENERGY CORPORATION: Looking ahead, refining fundamentals remain strong as global product supply remains constrained due to capacity reductions and high natural gas prices in Europe, which are setting a higher floor on margins. In addition, we continue to realize the benefit from discounted sour crude oil and fuel oil feedstocks in our system. While geopolitical and macroeconomic factors may drive volatility in the market, we remain focused on what we can control, maximizing refinery utilization in a safe, reliable and environmentally responsible manner to provide essential products. We also remain committed to advancing the growth of our low carbon fuels businesses to increase profitability and further strengthen our competitive advantage.” (Q3 2022 Valero Energy Corp Earnings Call, 10/25/2022)

Valero’s COO predicted higher margins for refiners for the foreseeable future thanks to closures: “it’ll be a higher call on refining capacity…we do believe the next mid-cycle will be higher than the last mid-cycle.” “R. LANE RIGGS, PRESIDENT & COO, VALERO ENERGY CORPORATION: Yes, sure. Doug, it’s Lane. From a work process, we define the mid-cycle as being sort of the average margin with a few tweaks that we think are market anomalies that go through the entire business cycle. So we’re not through the next business cycle yet, but we do believe structurally, you’ve had entered a period where we’ve had refinery closures through the pandemic. You’re going to have probably not as much investment in the fossil fuel industry, in particular, refining going forward at the time when everybody is trying to understand exactly how the balances are going to work. But our view is, it’ll be a higher call on refining capacity. So we’re not prepared to quantify that, but we do believe the next mid-cycle will be higher than the last mid-cycle.” (Q3 2022 Valero Energy Corp Earnings Call, 10/25/2022)

Valero’s COO: “Europeans and North America and everyone else is sort of under ESG pressure aren’t really trying to increase refining capacity. “ “R. LANE RIGGS, PRESIDENT & COO, VALERO ENERGY CORPORATION: And then on a longer-term basis, just whether Europeans and North America and everyone else is sort of under ESG pressure aren’t really trying to increase refining capacity. So if there is a region of the world that’s going to raise refining capacity, that will probably be India and China.” (Q3 2022 Valero Energy Corp Earnings Call, 10/25/2022)

Valero’s CEO said their margins were boosted by “refinery capacity rationalization” and the Russia-Ukraine conflict limiting supply. “Joseph Gorder – CEO: Refining margins in the second quarter were supported by continued strength in product demand, coupled with low product inventories and continued energy cost advantage for U.S. refineries compared to global competitors. Product supply is constrained as a result of significant refinery capacity rationalization that was triggered by the COVID-19 pandemic, driving the shutdown of marginal refineries and conversion of several refineries to produce low carbon fuels. In addition, the Russia, Ukraine conflict intensified the supply tightness with less Russian products in the global market. However, product demand has been strong due to the summer driving season and pent-up demand for travel.” (Valero Q2 2022 Earnings Call, 7/28/2022)

Valero told analysts “there’s really no indication of any demand destruction.”“Gary Simmons – Senior Key Executive: Manav, this is Gary. I can tell you through our wholesale channel, there’s really no indication of any demand destruction. In June, we actually set barrels a day in the month of June, which surpassed our previous record in August of ’18 where we did 904,000 barrels a day. We read a lot about demand destruction mobility data showing in that range of 3% to 5% demand destruction. Again, we’re not seeing it in our system. We did see a bit of a lull in the first couple of weeks of July, but our 7-day averages now are back to kind of that June level, with gasoline at pre- pandemic levels and diesel continuing to trend above prepandemic levels.” (Valero Q2 2022 Earnings Call, 7/28/2022)

Valero’s CEO predicted “ the margin environment is going to be higher for some time… well above what we would consider to be a traditional mid-cycle,” suggesting it would lead to more dividends and buybacks. “Joseph Gorder – CEO: Yes. And, Roger, I agree completely with what Jason said. I mean we want to go ahead and get things cleaned up and get this balance sheet absolutely bulletproofed and carrying a bit more cash is something that makes a lot of sense to do. You’d like to have your maintenance and turnaround CapEx covered with cash on hand, the dividend covered with cash on hand. And then we’ll see where we go. But anyway, I think for now, we’re on the right course. And as Gary has stated, it looks like the margin environment is going to be higher for some time. It certainly is today, not what we experienced in the second quarter, but certainly, well above what we would consider to be a traditional mid-cycle. And if we continue to build cash, we’ll continue to honor the payout, and it will probably move from the lower end to the higher end.” (Valero Q2 2022 Earnings Call, 7/28/2022)

Valero’s Chief Legal Officer said of the Inflation Reduction Act “there are some things in there that are helpful to our business,” particularly the SAF tax credit.“Richard Walsh – Chief Legal Officer: Yes. This is Rich Walsh. I mean we just saw the bill came out late last night, 700 pages, we’re looking through it. I mean there are some things in there that are helpful to our business. The tax credit, obviously, we’re just talking about. There’s also a SAF tax credit in there as well that we’ll be looking at. And there’s other things, too, we’re trying to sort through. So I think it was a surprise to everybody that came out that quick. I don’t think we really ever thought that the blenders tax credit was going to be — (inaudible) credit would be a problem we thought it would end up on one of these bills before the end of the year. But it’s always good to see it looking stronger and on the forefront.” (Valero Q2 2022 Earnings Call, 7/28/2022)

On earnings calls, Valero executives repeatedly highlighted the upside of cutting refining supply

Valero’s CEO talked up the “the refining capacity rationalization that’s taken place in the last two years.” “Joe Gorder — Chairman and Chief Executive Officer: Product inventories were low as a result of the refining capacity rationalization that’s taken place in the last two years and weather-related impacts from Winter Storm Uri and Hurricane Ida. On the crude oil side, OPEC+ increased production throughout the year with improving demand, supplying the market primarily with sour crude oils, resulting in wider sour crude oil discounts to Brent crude oil. As a result of all these dynamics, we saw a steady recovery in margins throughout the year, particularly for our complex refining system. In regards to our ethanol segment, ethanol prices were near record highs in the quarter, supported by strong demand and low inventories. (Valero Energy Q4 2021 Earnings Call, 1/27/2022)

Valero’s CEO: “we remain optimistic on refining margins. with low global light product inventories, strong product demand, global supply tightness due to significant refining capacity rationalization and wider sour crude oil differentials.” “Joe Gorder — Chairman and Chief Executive Officer: Looking ahead, we remain optimistic on refining margins. with low global light product inventories, strong product demand, global supply tightness due to significant refining capacity rationalization and wider sour crude oil differentials. We also remain optimistic on our low-carbon businesses, which we continue to expand with the growing global demand for lower carbon-intensity products. We’ve been leaders in the growth of these businesses and maintain a competitive advantage with our operational and technical expertise. (Valero Energy Q4 2021 Earnings Call, 1/27/2022)

A Valero executive said they were “very bullish gasoline” since they are trying to feed high demand “with significantly less refining capacity.” “Garry Simmons — Executive Vice President and Chief Commercial Officer: And so with where gasoline inventories, are very bullish gasoline moving forward. As you already pointed out, we expect to see gasoline demand back to 2019 levels, which was close to peak gasoline demand and we’ll be trying to feed that demand with significantly less refining capacity. So we expect the gasoline markets to be very tight. When you move to diesel, of course, diesel inventories are not only low in the United States, but they’re low globally. (Valero Energy Q4 2021 Earnings Call, 1/27/2022)

A Valero executive predicted diesel inventories would remain low in part due to “the rationalization that’s occurred.” “Garry Simmons — Executive Vice President and Chief Commercial Officer: Diesel demand actually in our system has been about 7% of where it was in 2019. So some of those factors, in particular, weather, that are negatively impacting gasoline are actually are having a positive impact on diesel demand. So we see very strong diesel demand. And we actually don’t see a clear path in the near future to be able to restock those investors with turnaround activity that’s occurring in the industry, along with the rationalization that’s occurred. (Valero Energy Q4 2021 Earnings Call, 1/27/2022)

Valero’s CFO said with “where margins are now, the call on capacity is pretty much max.”“Lane Riggs — President and Chief Operating Officer: Hey, Sam. It’s Lane. So we are trying to study the data right now because what we see the similar issue in terms of what — where utilization is and versus closures. And again, it’s just sort of what we’re sort of preliminarily deciding or looking at as we think that there’s probably some slowdowns that are occurring maybe because of maintenance deferrals or turnaround deferrals in the industry. We don’t — that’s not something we know, but it’s a theory as to what you’re seeing. And certainly, where margins are now, the call on capacity is pretty much max. So other than the turnarounds and the outages, the refinery utilization ought to be in this 90% to 95% range. Once you get all the DOE data worked out to make sure all the refineries that you think shouldn’t be in and everything. But that’s kind of where we see it as well.” (Valero Energy Q4 2021 Earnings Call, 1/27/2022)

Valero’s CEO: “we continue to have a favorable outlook on refining margins as a result of low global product inventories, continued demand recovery, and global balances supported by the significant refinery capacity rationalization seen over the last year and a half.” “Joe Gorder — Chairman and Chief Executive Officer: Looking ahead, we continue to have a favorable outlook on refining margins as a result of low global product inventories, continued demand recovery, and global balances supported by the significant refinery capacity rationalization seen over the last year and a half. In addition, the expected high natural gas prices in Europe and Asia through the winter should further support liquid fuels demand as power generation facilities, industrial consumers, and petrochemical producers see incentives to switch from natural gas to refinery oil products for feedstock and energy needs. (Valero Energy Q3 2021 Earnings Call, 10/21/2021)

Valero estimated it had lost 675,000 barrels per day in capacity with no plans to expand 

In October 2021, Valero said they had 675,000 barrels per day less refining capacity than pre-pandemic.“Gary Simmons — Executive Vice President and Chief Commercial Officer: So that’s nice to see. At that level, your kind of overall total light product demand is about 300,000 barrels a day below where it was in 2019, but you’ve got 675,000 barrels a day less refining capacity. So already really tighter supply demand balances, at least domestically than we were pre-pandemic. And then we are seeing encouraging signs on the jet side.” (Valero Energy Q3 2021 Earnings Call, 10/21/2021)

Valero’s CEO said the company was not planning to “invest in additional refining capacity.” “Joe Gorder — Chairman and Chief Executive Officer: And so, although we continue to look at what’s in the market just to be sure we don’t miss opportunities, I wouldn’t anticipate that you should expect us to be doing anything on that front. I’d rather invest in the assets that we know, continue to optimize the assets that we have, and build the renewables business right now than invest in additional refining capacity. (Valero Energy Q3 2021 Earnings Call, 10/21/2021)

Despite high demand, Valero reported cut additional refinery capacity for maintenance in 2021.“With total US light product inventories at 5-year lows and product demand recovering to over 95% of 2019 levels, Valero reported Q3 refinery utilization of 91%, running at higher-than-forecast run rates. Valero’s current gasoline sales are holding at 95% of 2019 levels, while diesel sales have risen to 10% over 2019 levels. However, Valero plans to cut runs in the fourth quarter at its West Coast refineries and two North Atlantic refineries due to unspecified planned work.” (S&P Global, 10/21/2021)

Valero said it was going to use profits and high prices to send more cash to shareholders

Valero CFO: “getting on to buybacks and the return of cash to shareholders. As you said, things are looking better now.” “Jason Fraser — Executive Vice President and Chief Financial Officer: But getting on to buybacks and the return of cash to shareholders. As you said, things are looking better now. For 2021, the payout was 50% with just the dividend and some minimal buybacks related to the employee plans. But with the margin increase in the fourth quarter and they’re continuing to be strong during the first quarter so far, if this pattern of recovery does continue, we do anticipate we’ll be doing buybacks this year to meet our target. And we feel we can both continue to our pattern, our goal of having aggressive debt paydown this year and also meet our shareholder return commitment via projects — via buybacks, I’m sorry. We definitely don’t think they’re mutually exclusive. And it’s all driven by our framework and targets we’ve had in place for several years. (Valero Energy Q4 2021 Earnings Call, 1/27/2022)

Valero predicted no change in their capex budget, so “as we end up with extra, as you said, excess cash flow, we have our commitment to shareholders to return to 40% to 50%.” “Jason Fraser — Executive Vice President and Chief Financial Officer: OK. Yeah, on capex, I mean, our capex budget going forward, we’re forecasting to be pretty consistent with as we’ve done in the past, so really no change there. Then as we end up with extra, as you said, excess cash flow, we have our commitment to shareholders to return to 40% to 50%. That really hasn’t changed. We have our dividend, which we think is in a pretty good place relative to the peers, and then we’ll have buybacks to make up to our target. Then cash beyond that, we are going to look at delevering a bit. That’s a commitment we made. We bought back the $575 million of floater rate notes just last month, and we’re looking to do more next week — I mean, sorry, next year as we move forward. (Valero Energy Q3 2021 Earnings Call, 10/21/2021)

Valero Energy’s CEO noted that “high natural gas prices in Europe” were providing “structural margin advantage” for their refineries in the US.“Joe Gorder — Chairman and Chief Executive Officer: Thanks, Homer, and good morning, everyone. I’m pleased to report that today, we delivered solid financial results for the first quarter, led by a continued recovery in our refining segment. Refining margins were supported by strong product demand, coupled with very low product inventories globally. Refinery capacity rationalizations that have taken place in the last couple of years continue to contribute to the supply tightness. In addition, high natural gas prices in Europe are supporting product cracks to compensate for the higher operating costs. This, in turn, provides a structural margin advantage for U.S. refineries particularly those located in the Gulf Coast, where natural gas costs are significantly lower than in Europe. Turning to our low carbon segments.” (Valero Energy Q1 2022, 4/26/2022)

Valero’s CEO cited low supply, high demand, and the “natural gas price disparity between the US and Europe” as reasons “we’re encouraged by the refining outlook.Joe Gorder — Chairman and Chief Executive Officer: On the financial side, we remain committed to our capital allocation framework, which prioritizes a strong balance sheet and an investment-grade credit rating. We further reduced our long-term debt by $750 million in February through debt reduction and refinancing transactions, bringing our total long-term debt reduction to $2 billion in six months. And we continue to honor our commitment to stockholder returns with an annual target payout ratio of 40% to 50%. We restarted stock buybacks in the first quarter which, combined with our dividend, returned $545 million to our stockholders. Looking ahead, the fundamentals that drove strong results in the first quarter, particularly in March, continue to provide a positive backdrop for the refining segment. We expect product demand to remain healthy with light products demand near pre-pandemic levels and the pent-up desire to travel and take vacations should drive incremental demand for transportation fuels as we head into the summer. Global product inventories remain low, particularly for diesel and there’s less refining capacity available to replenish inventories. In addition, natural gas price disparity between the U.S. and Europe should provide a structural margin advantage for U.S. refiners especially for assets located in the Gulf Coast. In closing, we’re encouraged by the refining outlook, which, coupled with our growth strategy and low carbon fuels, should further strengthen our long-term competitive advantage and drive long-term stockholder returns.” (Valero Energy Q1 2022, 4/26/2022)