Valero Energy Corporation (VLO)

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Valero Energy (VLO)

Q4 2011 Earnings Call

January 31, 2012 10:00 am ET

Executives

Ashley M. Smith - Vice President of Investor Relations

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

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

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

Jean Bernier - Executive Vice President

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

Lane Riggs - Senior Vice President of Refining Operations

Analysts

Douglas Terreson - ISI Group Inc., Research Division

Jeffrey A. Dietert - Simmons & Company International, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Blake Fernandez - Howard Weil Incorporated, Research Division

Sam Margolin - Global Hunter Securities, LLC, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Mark Gilman - The Benchmark Company, LLC, Research Division

Chi Chow - Macquarie Research

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Harry Mateer - Barclays Capital, Research Division

Presentation

Operator

Welcome to the Valero Energy Corporation Reports Fourth Quarter and Annual 2011 Earnings 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 M. Smith

Thank you, John. Good morning. With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Gene Edwards, our Chief Development Officer; Joe Gorder, Executive Vice President and President of European Operations; Kim Bowers, Executive Vice President and General Counsel; and Jean Bernier, 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 in 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 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.

Now, I'll turn the call over to Mike.

Michael S. Ciskowski

Thanks, Ashley, and thank you all for joining us today. As noted in the release, we reported fourth quarter 2011 income from continuing operations of $45 million, or $0.08 per share. This number includes an after-tax benefit of approximately $161 million, or $0.29 per share, from a year end LIFO inventory decrement.

Our fourth quarter 2011 operating income was $167 million versus operating income of $378 million in the fourth quarter of '10. Our fourth quarter refining throughput margin was $5.46 per barrel, which is a 25% decrease compared to the fourth quarter of '10. The decrease in throughput margins compared to the fourth quarter of '10 was due to lower margins for gasoline and petrochemical feedstocks, plus reduced discounts for medium and heavy sour feedstocks such as Mars and Maya crude oils. These declines were partially offset by higher margins for diesel.

In the fourth quarter of '11, Gulf Coast gasoline margins per barrel versus LLS decreased 185% to a negative $2.05 from a positive $2.42 in the fourth quarter of 2010. Gulf Coast ULSD margins per barrel versus LLS increased 39% from $9.88 in the fourth quarter of 2010 to $13.71 in the fourth quarter of '11. So far in the first quarter of 2012, Gulf Coast margins have moved higher, averaging over $5.50 per barrel for gasoline and about $16 per barrel for ULSD.

The Maya heavy sour crude oil discounts versus LLS decreased 44% from $12.75 in the fourth quarter of '10 to $7.19 per barrel in the fourth quarter of '11. The Maya discount has narrowed some in the first quarter, with the average down to around $4.50 per barrel.

The WTI crude discount versus LLS increased over $13 per barrel from $3.34 per barrel in the fourth quarter of 2010 to $16.70 per barrel in the fourth quarter of '11, which helped improve throughput margins in our Mid-Continent region from the fourth quarter of '10 to the fourth quarter of '11.

Our fourth quarter 2011 refinery throughput volume averaged to 2.7 million barrels per day, up 523,000 barrels per day from the fourth quarter of 2010. The increase in throughput volumes was mainly the addition of capacity from the acquisition of Pembroke and Meraux refineries, plus operating the Aruba Refinery, which was not in operation during the fourth quarter of 2010.

Refining cash operating expenses in the fourth quarter of '11 were $3.92 per barrel, which was higher than the third quarter of 2011 and our guidance, mainly due to costs of a legal settlement, plus higher regulatory and tax expense.

Our Ethanol segment reported its best quarter on record with $181 million of operating income, which was up $111 million from the fourth quarter of 2010 and up $74 million from the third quarter of 2011, mainly due to much higher gross margins. For the full year of 2011, our Ethanol segment reported operating income of $396 million, its best year ever. In addition, since we bought the first 2 plants in 2009 through the end of 2011, we estimate that in less than 3 years, our Ethanol business has generated cumulative pretax cash flow exceeding the purchase price and recovering our $750 million investment. As good as the fourth quarter was for Ethanol, I should point out though that Ethanol margins declined significantly in December, and it remained low so far in the first quarter.

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