Valero Energy Corporation (VLO)

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Valero Energy (VLO)

Q4 2010 Earnings Call

January 26, 2011 11:00 am ET

Executives

Michael Ciskowski - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Joseph Gorder - Chief Commercial Officer and Executive Vice President of Marketing & Supply

William Klesse - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Ashley Smith - Vice President of Investor Relations

Analysts

Jeffrey Dietert - Simmons & Company

Cory Garcia - Raymond James

Evan Calio - Morgan Stanley

Eli Bauman

Chi Chow - Tristone Capital

Douglas Leggate - BofA Merrill Lynch

Blake Fernandez - Howard Weil Incorporated

Presentation

Operator

Good morning, my name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valero Energy Reports 2010 Fourth Quarter and Annual Results Conference Call. [Operator Instructions] Mr. Ashley, you may begin your conference.

Ashley Smith

Thank you, Andrea, and good morning, and welcome to Valero Energy Corporation's Fourth Quarter 2010 Earnings Conference Call. With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Joe Gorder, our Chief Commercial Officer; Kim Bowers, our Executive Vice President and General Counsel and John Bernier, our Executive Vice President.

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 statement disclaimer contained in the press release. In summary, it said 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 described in our filings with the SEC. Now I'll turn the call over to Mike.

Michael Ciskowski

Thanks, Ashley, and thank you for joining us today. As noted in the release, we reported fourth quarter 2010 income from continuing operations of $180 million or $0.32 per share. This number includes a $36 million after-tax gain or $0.06 per share on the sale of our interest in the Cameron Highway oil pipeline and an after-tax loss of $80 million or $0.14 per share from the mark-to-market impact of positions related to the forward sales of refined products. Excluding those items, our results would've been $0.40 per share.

I should note that the loss from discontinued operations shown in the financial tables relates to the Delaware City refinery that was sold in the second quarter of 2010 and the Paulsboro refinery that was sold in the fourth quarter of 2010. The fourth quarter 2010 results from discontinued operations include a non-cash pretax charge of $980 million related to the Paulsboro refinery.

Fourth quarter 2010 operating income was $378 million versus an operating loss of $135 million in the fourth quarter of 2009. The $513 million increase in operating income was mainly due to higher margins for diesel and gasoline, plus better discounts for low quality feedstocks, all of which contributed to a 49% increase in refinery throughput margins compared to the fourth quarter of 2009.

Looking at the Gulf Coast margins versus WTI, the ULSD margin more than doubled from $6.33 per barrel in the fourth quarter of 2009 to $13.22 per barrel in the fourth quarter of 2010. The Gulf Coast gasoline margin increased nearly 50%, from $3.90 per barrel in the fourth quarter of 2009 to $5.76 per barrel in the fourth quarter of 2010.

Looking at the feedstock discounts, the Maya heavy sour crude oil discount to WTI expanded 40% from $6.72 per barrel in the fourth quarter of 2009 to $9.40 per barrel in the fourth quarter of 2010. Another way to look at this is, as a percentage of WTI, so the Maya discount increased from 8.8% of WTI in the fourth quarter of 2009 to 11.1% of WTI in the fourth quarter of '10, which is a 26% improvement year-over-year.

So far in the first quarter of 2011, benchmark margins and heavy sour feedstock discounts versus WTI have been strong for this time of the year. Compared to January 2010, Gulf Coast gasoline margins are up 75%. ULSD margins were up 152% and Maya discounts on an absolute basis are up 8%.

I should point out that while margins and heavy sour crude discounts versus WTI have improved from this time last year, WTI has been trading in a discounted range when compared to other lights weak crudes in the medium sour.

Our fourth quarter 2010 refinery throughput volume averaged 2.2 million barrels per day, an increase of 205,000 barrels per day or 10% compared to the fourth quarter of 2009. Refinery cash operating expenses in the fourth quarter of '10 were $3.64 per barrel.

Cash operating expenses were lower than the third quarter and guidance, primarily due to a decline in energy cost. Our Retail and Ethanol segments also performed well and turned in excellent full year results.

U.S. retail had $19 million of operating income in the fourth quarter and $200 million for the year, making it the second-to-best year for our U.S. Retail segment.

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