One industry that has a possibility of seeing the largest changes under the Trump administration is the refining business. Tax rates, border adjustment taxes, oil pipelines, and EPA renewable fuels regulations are all on the table. For Valero Energy (NYSE: VLO), that's a lot of change to address. Of course, analysts had lots of questions about these issues on Valero's most recent conference call. Here's what management had to say.
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Ensuring a return of capital to shareholders
One of the things that Valero did take a bit of flack for this past quarter was its very high payout ratio. The amount paid in dividends and share repurchases for the year was well above its total net income. While that may be a concern for some shorter-term thinking, CEO Joseph Gorder wanted to remind everyone that this past year was exceptional and that the company's operational abilities still support its payout to shareholders:
Could a border adjustment tax impact the bottom line?
Something else that is very much at the forefront of investors' minds is the Trump administration's proposed policies on trade, especially those related to border adjustment taxes. For a company like Valero that imports a decent amount of Mexican crude oil, this could be a concern. As Gorder pointed out, though, Valero has the option to buy from other places other than just Mexico, and having that flexibility should be able to offset any huge changes in that regard. He said:
Restarting the pipeline debate
Another question asked was the potential impact the company could see from the Keystone XL pipeline getting approval. When originally developed, Valero was considered an anchor customer for the pipeline, as it would take a large volume commitment for the project. Gary Simmons, senior VP of supply, international operations and systems optimization, reiterated the benefits this could mean for Valero and how it's not expecting for the project to be completed, but would certainly be happy if it is. Said Simmons:
The refining business has been a hotbed of merger and acquisition activity lately as the industry goes through a big wave of consolidation. So far, Valero has been pretty quiet on this front. It sniffed at aLyondellBasell (NYSE: LYB) refinery in the Houston area that was taking offers, but Lyondell decided to hold onto it. So when asked about some other opportunities it's looking at, Gorder talked about how the company may go in a different direction:
We actually saw this play out in January when Valero used its subsidiary partnership Valero Energy Partners (NYSE: VLP) to acquire an interest in a crude oil pipeline from Plains All American Pipeline. This is a different strategy than most refiner-related MLPs because they have historically been used to drop down midstream assets from the parent company. It appears, though, that Valero may be looking to use midstream to really grow the business efficiently.
Unleash the capital
Valero has some refining assets overseas, and as a result the company has quite a bit of cash sitting abroad. This, of course, raised the question among analysts during the call about repatriation taxes and how the company could benefit. While there would be some obvious benefits, Gorder was quick to point out that the company didn't see getting that cash back quickly changing much:
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