Valero Energy Corporation (VLO)

VLO 
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Valero Energy Corporation (VLO)

Q4 2012 Earnings Call

January 29, 2013 11:00 am ET

Executives

Ashley Smith – Vice President-Investor Relations

Bill Klesse – Chairman and Chief Executive Officer

Joe Gorder – President and Chief Operating Officer

Mike Ciskowski – Executive Vice President and Chief Financial Officer

Lane Riggs – Corporate Senior Vice President-Refining Operations

Gene Edwards – Executive Vice President and Chief Development Officer

Analysts

Jeff Dietert – Simmons & Co.

Evan Calio – Morgan Stanley

Doug Leggate – Bank of America Merrill Lynch

Robert Kessler – Tudor Pickering Holt & Co.

Cory Garcia – Raymond James

Roger Read – Wells Fargo Securities

Sam Margolin – Dahlman Rose

Blake Fernandez – Howard Weil

Faisel Khan – Citigroup Inc.

Edward G. Westlake – Credit Suisse Securities

Ann Kohler – Imperial Capital

Paul Sankey – Deutsche Bank

Chi Chow – Macquarie Capital

Presentation

Operator

Welcome to the Valero Energy Corporation Reports 2012 Fourth Quarter and Annual Earnings Conference Call. My name is Trish, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Ashley Smith. Please go ahead.

Ashley Smith

Thank you, Trish, and good morning and welcome to our earnings conference call today. With me are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Joe Gorder, President and COO; Gene Edwards, our Chief Development Officer; Kim Bowers, President of Retail and several other members of our 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 me after the call.

Before we get started, I would like to direct your attention to the forward-looking statements 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.

Okay, so as noted in the release, we reported fourth quarter 2012 earnings up $1 billion, or $1.82 per share. This includes a non-cash asset impairment loss of $37 million after taxes, or $0.06 per share, which is primarily related to permanently canceled capital projects at certain of our refineries. This is our highest forward curve quarter earnings per share since 2005.

For the full-year 2012, net income attributable to Valero stockholders was $2.1 billion, or $3.75 per share. Included in these results were non-cash asset impairment losses of $983 million after taxes, or $1.77 per share, and severance expense of $41 million after taxes, or $0.07 per share mainly related to the shutdown and impairment of the Aruba refinery.

Operating income was $1.6 billion versus operating income of $167 million in the fourth quarter of 2011. The increase in operating income was mainly due to higher refining margins in each of our refining regions; partially offsetting the operating income was a significant decline in ethanol margins.

Our fourth quarter refining throughput margin was $12.27 per barrel, which is a large increase versus a fourth quarter of 2011 margin, which was $5.46 per barrel. The increase in refining throughput margin was mainly due to wider discounts on medium sour, heavy sour, and domestic light crude oils.

For example, comparing the fourth quarter of 2011 to the fourth quarter of 2012, the Brent less Mars medium sour discounts improved by nearly $3 per barrel, Brent less Maya heavy sour discount improved by over $11 per barrel, and the Brent less WTI domestic light discount improved by nearly $7 per barrel.

Our fourth quarter 2012 refining throughput volume averaged $2.64 million barrels per day, down 73,000 barrels per day from the fourth quarter of 2011 mainly due to the lack of throughput volume at the Aruba refinery, which was shutdown in the first quarter of 2012.

Refining cash operating expenses in the fourth quarter of 2012 were $3.73 per barrel, which was in line with the third quarter of 2012, slightly below our guidance due mainly to lower than expected energy costs.

Before I cover retail and ethanol, I’d like to highlight several other items in our refining operations. First, we had a smooth and successful start-up in December of our new hydrocracker at Port Arthur, which was our largest project in company history. Since mid-December, the unit has been operating at approximately 50,000 barrels per day and has performed well.

Last week, we conducted performance test with the technology provider and we have begun rate test that should enable us to operate the unit at or near the permitted maximum rate of approximately 57,000 barrels per day.

We are continuing to work on new hydrocracker project at our St. Charles Refinery. We expect to complete that unit and begin operations in the second quarter of 2013. Both of these hydrocrackers were designed to take advantage of the current environment of strong diesel margins and cheap natural gas. Also, in the fourth quarter, we completed and started up our products pipeline that runs from Quebec Refinery to Montréal.

Our retail business reported fourth quarter 2012 operating income of $95 million, consisting of $78 million in the U.S. and $17 million in Canada, where we took a $9 million non-cash asset impairment loss per retail stores in Canada. For the year, our retail business generated $348 million of operating income, making it our second best year in history and nearly as high as last year’s record setting level of $381 million.

Retail fuel volumes in both regions declined slightly compared to fourth quarter 2011 as weak gasoline demand impacted sales. U.S. retail merchandise sales were higher than on flat merchandise margins in the fourth quarter of 2012 versus the fourth quarter of 2011. Canada retail merchandise sales and margins were down slightly in the fourth quarter of 2012 versus the fourth quarter of 2011.

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