Why did Valero post a net loss in 1998 after a profitable 1997?

The loss was driven mainly by a collapse in refining margins. Oversupplied crude, a warm winter that depressed heating oil demand, the Asian economic crisis, and high refinery utilization all pushed product prices down, prompting $170.9 million in inventory write-downs. Excluding those charges, 1998 net income would have been about $63.8 million.

What did the Paulsboro refinery acquisition add to Valero?

Valero bought Mobil's 155,000 BPD Paulsboro refinery for $228 million plus about $107 million for inventories and other items. It increased throughput capacity by roughly 25%, expanded Northeast market access, and added lubricant and asphalt production. Mobil also agreed to supply crude feedstock and buy light products under long-term contracts, and it has an earn-out of up to $20 million a year and $50 million in total.

How is Valero financing its growth, and how leveraged is it?

Growth was largely financed with bank borrowings. Long-term debt increased to $822 million from $430 million, and short-term debt was $160 million. The debt-to-capitalization ratio was 47.5% at year-end 1998, and the company was in compliance with its debt covenants. It also filed a $600 million shelf registration and was considering up to $300 million in long-term debt issuance in 1999.

Is the $.08 quarterly dividend at risk?

The Board declared a $.08 quarterly dividend in January 1999 and has paid that amount for seven consecutive quarters since the 1997 spin-off. Dividends are reviewed quarterly based on earnings and cash flow. Annual dividends fell to $.32 in 1998 from $.42 in 1997, and with a 1998 loss and a weak first quarter expected, future payouts depend on margin recovery.

What is the outlook for refining margins?

Management expects only marginal near-term improvement and a significant Q1 1999 loss. It expects longer-term improvement from stronger gasoline demand, higher demand for low-sulfur diesel and jet fuel, ample discounted sour crude, and refinery cutbacks and turnarounds that should reduce inventories. Beyond 1999 it anticipates moderate improvement as capacity additions slow and Phase II RFG takes effect in 2000.

VLO 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 26, 1999. Cited figures are marked; the original filing is the authoritative source.

Valero Energy's 1998 10-K shows a company in a difficult year: a net loss of $47.3 million^a, or $.84 per diluted share, versus net income of $96.1 million ($1.74 per diluted share) in 1997.

Revenue fell 4% to $5.54 billion^b as the average sales price per barrel dropped 32%, offset by a 42% increase in sales volumes. The decline was driven by an industry-wide collapse in refining margins, with fourth-quarter 1998 margins hitting 15-year lows amid a warm winter, the Asian economic crisis, and a global crude oversupply. Valero took $170.9 million in pre-tax non-cash inventory write-downs, and excluding them, 1998 net income would have been about $63.8 million ($1.14 per share).

The company's footprint grew substantially. The September 1998 purchase of Mobil's 155,000 BPD Paulsboro, New Jersey refinery for $228 million^c (plus about $107 million for inventories) lifted total throughput capacity to roughly 735,000 BPD across five refineries, and the Basis acquisition in 1997 added the Texas City, Houston and Krotz Springs plants. Capital spending was about $567 million in 1998, and the funding came largely from bank borrowings.

Long-term debt rose to $822 million^d from $430 million, and the debt-to-capitalization ratio stood at 47.5%. Management expected a significant net loss in the first quarter of 1999, citing continued weak margins, though it anticipated gradual improvement over the longer term.

For investors, the central issues are the commodity-driven earnings volatility of a pure refiner, the leverage taken on to finance the Paulsboro acquisition, and the outlook for margins. The dividend was held at $.08 per quarter, though it was reduced from $.13 in early 1997.

02—Key points

Key Highlights

Net loss of $47.3 million ($.84 per diluted share) in 1998, compared with net income of $96.1 million ($1.74 per diluted share) in 1997.
Operating revenues fell 4% to $5.54 billion; the average sales price per barrel dropped 32%, while sales volumes rose 42% to 894 Mbpd.
Non-cash inventory write-downs totaled $170.9 million pre-tax ($1.98 per share after tax), with $133.2 million taken in Q4 1998 alone.
Acquired Mobil's 155,000 BPD Paulsboro, NJ refinery in September 1998 for $228 million plus about $107 million in inventories, raising total capacity to about 735,000 BPD.
Average throughput margin fell to $3.53 per barrel from $4.35, and total operating cost per barrel was $2.63.
Long-term debt rose to $822 million from $430 million; the debt-to-capitalization ratio was 47.5%, and an $835 million revolving credit facility matures in November 2002.
Management expects a significant net loss in Q1 1999 due to weak margins and a Corpus Christi turnaround, with only gradual improvement expected thereafter; the quarterly dividend remains $.08 per share.

03—Questions

Frequently Asked Questions

Why did Valero post a net loss in 1998 after a profitable 1997?
The loss was driven mainly by a collapse in refining margins. Oversupplied crude, a warm winter that depressed heating oil demand, the Asian economic crisis, and high refinery utilization all pushed product prices down, prompting $170.9 million in inventory write-downs. Excluding those charges, 1998 net income would have been about $63.8 million.
What did the Paulsboro refinery acquisition add to Valero?
Valero bought Mobil's 155,000 BPD Paulsboro refinery for $228 million plus about $107 million for inventories and other items. It increased throughput capacity by roughly 25%, expanded Northeast market access, and added lubricant and asphalt production. Mobil also agreed to supply crude feedstock and buy light products under long-term contracts, and it has an earn-out of up to $20 million a year and $50 million in total.
How is Valero financing its growth, and how leveraged is it?
Growth was largely financed with bank borrowings. Long-term debt increased to $822 million from $430 million, and short-term debt was $160 million. The debt-to-capitalization ratio was 47.5% at year-end 1998, and the company was in compliance with its debt covenants. It also filed a $600 million shelf registration and was considering up to $300 million in long-term debt issuance in 1999.
Is the $.08 quarterly dividend at risk?
The Board declared a $.08 quarterly dividend in January 1999 and has paid that amount for seven consecutive quarters since the 1997 spin-off. Dividends are reviewed quarterly based on earnings and cash flow. Annual dividends fell to $.32 in 1998 from $.42 in 1997, and with a 1998 loss and a weak first quarter expected, future payouts depend on margin recovery.
What is the outlook for refining margins?
Management expects only marginal near-term improvement and a significant Q1 1999 loss. It expects longer-term improvement from stronger gasoline demand, higher demand for low-sulfur diesel and jet fuel, ample discounted sour crude, and refinery cutbacks and turnarounds that should reduce inventories. Beyond 1999 it anticipates moderate improvement as capacity additions slow and Phase II RFG takes effect in 2000.

04—Continue

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