Valero Energy Corporation (VLO)

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Valero Energy (VLO)

Q2 2011 Earnings Call

July 26, 2011 11:00 am ET

Executives

Jean Bernier - Executive Vice President of Corporate Communications, Information Services and Supply Chain Management

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

Clay Killinger - Senior Vice President and Controller

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

S. Edwards - Chief Development Officer and Executive Vice President of Corporate Development & Strategic Planning

Lane Riggs - Senior Vice President of Refining Operations

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

Ashley Smith - Vice President of Investor Relations

Analysts

Edward Westlake - Crédit Suisse AG

Jeffrey Dietert - Simmons & Company

Evan Calio - Morgan Stanley

Mark Gilman - The Benchmark Company, LLC

Paul Cheng

Douglas Leggate - BofA Merrill Lynch

Doug Terreson - ISI Group Inc.

Cory Garcia - Raymond James & Associates, Inc.

Chi Chow - Macquarie Research

Blake Fernandez - Howard Weil Incorporated

Presentation

Operator

Welcome to the Valero Energy Corporation's Second Quarter 2011 Earnings Release Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Mr. Ashley Smith, Vice President, Investor Relations. Mr. Smith, you may begin.

Ashley Smith

Okay, thank you, John, and good morning and welcome to Valero Energy's Second Quarter of 2011 Earnings Conference Call. With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Gene Edwards, our Chief Development Officer; Joe Gorder, our Chief Commercial Officer; Kim Bowers, EVP and General Counsel; and Jean Bernier, EVP and President of Ultramar. 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 about 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 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 can cause actual results to differ from our expectations, including those we've 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 second quarter 2011 net income attributable to Valero's stockholders from continuing operations of $745 million or $1.30 per share. Our second quarter 2011 operating income was $1.3 billion versus operating income of $904 million in the second quarter of 2010. The second quarter refining throughput margin was $11.41 per barrel, which is an increase of $1.84 per barrel over the second quarter of '10 and our highest second quarter margin in nearly 3 years.

The increase in throughput margins compared to the second quarter of '10 was due to higher margins for gasoline and diesel, plus wider discounts for heavy-sour crude oils on the Gulf Coast and light-sweet crude oils in the Mid-Continent.

One of the drivers of our year-over-year gain in throughput margins was the increase in gasoline and diesel margins. For example, the Gulf Coast gasoline margin per barrel versus LLS increased to 29% from $7.97 in the second quarter of '10 to $10.26 in the second quarter of '11. Looking at the Gulf Coast ULSD versus LLS, margins per barrel increased 16% from $9.88 in the second quarter of 2010 to $11.49 in the second quarter of 2011. So far in the third quarter, margins have moved significantly higher to average around $13 per barrel for gasoline and $16.50 per barrel for ULSD.

Another driver for our margin gain over last year was crude oil discounts. The Maya heavy-sour crude oil discounts versus LLS increased to 21% from $12 in the second quarter of 2010 to $14.58 per barrel in the second quarter of 2011. The Maya discount has narrowed some in the third quarter with the July average down to around $12 per barrel.

An additional benefit for Valero came from WTI-type and Eagle Ford crudes pricing at a substantial discount to LLS. The WTI discount to LLS increased more than $13 per barrel from $2.26 in the second quarter of 2010 to $15.47 in the second quarter of 2011. The discount helped our McKee, Ardmore and Three Rivers refineries where their crude oil is priced at or below WTI. In the third quarter, the WTI discount to LLS has continued to widen with the July average of just above $16 per barrel.

As noted in the release, we are increasing the use of discounted Eagle Ford crude in our system. During the second quarter, we processed an average of 37,000 barrels per day of Eagle Ford, an increase of 12,000 barrels per day over the first quarter. This crude replaced expensive waterborne sweet crudes saving around $16 per barrel in the second quarter. We are continuing to look for additional ways to use more of this discounted crude. We plan to process 25,000 barrels per day of Eagle Ford crude at our Corpus Christi refinery during the third quarter and our Three Rivers refinery should have the ability to process nearly 60,000 barrels per day of Eagle Ford crude by the end of this year.

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