01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Valero Energy (NYSE: VLO) closed 2007 with strong but lower earnings than 2006: income from continuing operations fell 14% to $4.6 billiona ($7.72 per diluted share) on revenue of $95.3 billion, up 9%.
The decline was driven by an $827 millionb drop in refining operating income, as secondary products (asphalt, fuel oils, petroleum coke, sulfur) lagged crude cost increases, the McKee Refinery fire in February 2007 cut operating income by about $325 million, and interest expense rose. Net income of $5.2 billion was supported by an $827 million pre-tax gain on the sale of the Lima, Ohio refinery to Husky Energy, which was recorded in discontinued operations. Capital allocation was aggressive.
Valero generated $5.3 billionc of operating cash flow, raised the quarterly dividend from $0.08 to $0.12, and repurchased roughly 14% of its beginning-2007 shares, including 84.3 million shares for $5.8 billion. The board approved a new $3 billion buyback on February 28, 2008, on top of the remaining $1.13 billion under the $6 billion program. Funding came partly from $2.25 billion of new notes issued in 2007, and total debt plus capital leases rose to $6.9 billion.
Ratings remained investment grade (BBB / Baa3 / BBB). Management's 2008 outlook is positive for refining margins, citing expected gasoline supply tightness, strong diesel margins, and wide sour crude differentials. Key near-term risks include a January 2008 fire at the Aruba refinery (partial operations resumed mid-February, full operations expected in Q2 2008), a planned Port Arthur coker maintenance outage, and a 2008 capital program of about $4.5 billiond.
Legal exposure includes MTBE litigation (83 cases), retail fuel temperature class actions (22 cases), and a Rosolowski verdict that was vacated. Management stated none of these is expected to be material individually, though the MTBE cases could be material in aggregate.
02—Key points
Key Highlights
- 2007 income from continuing operations was $4.6 billion ($7.72 per diluted share), down 14% from $5.3 billion ($8.36) in 2006, while operating revenues rose 9% to $95.3 billion.
- Refining operating income fell $827 million to $7.4 billion; throughput margin per barrel slipped to $12.33 from $12.47 as secondary-product margins weakened.
- The $827 million pre-tax gain on the July 2007 sale of the Lima refinery to Husky (about $2.4 billion proceeds) lifted net income to $5.2 billion.
- Returned substantial capital: $5.8 billion in share buybacks in 2007 (about 14% of shares outstanding), dividend raised to $0.12 quarterly from $0.08, and a new $3 billion repurchase program approved February 28, 2008.
- Operating cash flow was $5.3 billion, against $2.8 billion of capital investment; total debt and capital leases rose to $6.9 billion, with all senior unsecured ratings still investment grade.
- 2008 outlook is positive for gasoline and diesel margins and sour crude differentials, with a planned capital budget of about $4.5 billion.
- Operational setbacks: McKee refinery fire in February 2007 (about $325 million operating income impact, now fully repaired) and an Aruba refinery fire in January 2008 (full operations expected in Q2 2008).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Operating Expenses | $83.36B |
| Operating Income | $6.63B |
| Interest Expense | $466.00M |
| Net Income | $5.23B |
| EPS (Basic) | $9.24 |
| EPS (Diluted) | $8.88 |
| Shares Outstanding (Basic) | 565.00M |
| Shares Outstanding (Diluted) | 579.00M |
05—Questions
Frequently Asked Questions
How did Valero's 2007 earnings compare with 2006?
Income from continuing operations fell 14% to $4.6 billion ($7.72 per diluted share) from $5.3 billion ($8.36). Net income was $5.2 billion, down modestly from $5.5 billion, because the 2007 figure includes an $827 million pre-tax gain on the Lima refinery sale in discontinued operations. Operating income declined 10% to $6.9 billion, mainly because of weaker refining margins on secondary products and the McKee refinery outage.
What is Valero doing with its excess cash?
Valero is returning cash to shareholders. In 2007 it bought back 84.3 million shares for $5.8 billion, raised its quarterly dividend 50% to $0.12, and on February 28, 2008 approved a new $3 billion buyback on top of the existing $6 billion program, which had about $1.13 billion left at year-end. It also spent $2.8 billion on capital projects and environmental work in 2007, with about $4.5 billion planned for 2008.
What are the biggest operational and legal risks disclosed?
Operationally, the company cites volatile refining margins, dependence on imported sour crude from several politically sensitive regions, and refinery interruptions. Recent incidents include the McKee fire in 2007 and the Aruba fire in January 2008. Legally, it faces 83 MTBE groundwater lawsuits, where management says an adverse outcome in all cases could be material, along with 22 retail fuel temperature class actions and numerous environmental enforcement matters, none of which it considers individually material.
What is the outlook for 2008?
Management expects positive refined product margins for 2008, with gasoline margins supported by winter-to-summer transition constraints and strong diesel demand. Sour crude differentials are expected to stay wide, and the turnaround schedule is relatively light apart from a Port Arthur coker outage in early 2008. The Aruba refinery is expected to be fully back in operation in the second quarter of 2008, and management does not expect the fire to have a material effect on 2008 results.
06—Continue