While weak oil prices are wreaking havoc on producers' profits, they've been the fuel for robust profitability by refiners. That was clear by reviewing Valero Energy's third-quarter results where it clearly cashed in on low crude prices. The strong market conditions were really the key theme of the company's third-quarter conference call with CEO Joe Gorder highlighting five ways the company is cashing in on this opportunity.
1. We're being incentivized to run at nearly full capacityThe first thing Gorder pointed out about the market is the fact that, "Favorable product margins, which were supported by strong demand during the quarter, incentivized us to run at high utilization rates." In other words, because refining margins were so strong last quarter, Valero did everything it could to process as much crude as it could run through its system. According to John Locke, the company's Executive Director-Investor Relations, Valero's,
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The company had to work extra hard to overcome some unplanned downtime but did so because the margins that could be earned during the quarter were just so tantalizing.
Photo credit: Flickr user David Stanley.
2. Our strategic investments are just about to pay offA key focus of Valero has been to invest to upgrade its system to increase its access to, and processing capabilities of, cheaper North American crude oil. Those investments are about to pay off. According to Gorder,
When these projects go into service over the next few months they are expected to improve the company's margins even further.
3. We're returning a lot of cash to shareholdersBecause its refining margins are so strong, Valero is generating a ton of cash flow above what it needs for these investments in system upgrades. That is leaving it with an abundance of cash to return to shareholders. According to Gorder,
Most oil companies have suspended share buybacks and many of the weaker ones have even ceased paying a dividend. Valero, on the other hand, has been buying back its stock hand-over-fist with John Locke noting on the call that it has bought back 35.5 million shares for $2.2 billion this year. Further, it has increased its dividend twice this year when most other energy-related companies aren't even able to maintain the current dividend rate.
4. We continue to use our MLP to capture valueAside from the strong cash flow Valero is generating via its operations, the company is also cashing in on the value disconnect between refining assets and assets owned within MLPs. We can see this by comparing the trading valuation -- measured by Enterprise Value-to-EBITDA -- of Valero and its MLP.
This disconnect is why the company continues to strategically use its MLP,Valero Energy Partners , to purchase MLP appropriate assets from Valero with Gorder noting on the call that, "We also executed another dropdown transaction earlier this month to Valero Energy Partners, which is our sponsored MLP." The company plans to continue to drop down assets to Valero Energy Partners to capture the higher value investors place on MLP assets with plans to sell $1 billion in assets to its MLP next year. Those transactions will provide it with even more cash that could be used for a variety of strategic initiatives such as buying back more stock, bolstering its balance sheet, or even making a strategic acquisition.
5. We're optimistic on 2016In looking at what lies ahead, Gorder said that,
In other words, Valero doesn't see any speed bumps slowing down the strong refining market, which is why it expects 2016 to be a solid year for the company. Further, the company is also poised to benefit from the strategic projects it is placing into service as well as additional drop downs to Valero Energy Partners, both of which should bolster its cash flow and financial position in the year ahead.
Investor takeawayValero is really thriving right now. It's cashing in on low crude prices and is poised to capture even more value after its strategic investments come online over the next few months. Further, it is also capturing the value disconnect of some of its assets by moving them over to its MLP. This is driving strong cash returns for investors, which appear poised to continue given the favorable outlook the company has for the year ahead.
The article 5 Things Valero Energy Corporations CEO Wants You to Know originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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