Valero Energy's (NYSE: VLO) fourth-quarter results were a pretty dull affair. Revenue and earnings were in line with expectations as a weak refining environment and high compliance costs continued to weigh on decent operations at the company level. The one thing that was different, though, was a recent announcement from its subsidiary partnership,Valero Energy Partners (NYSE: VLP), that shows a change in strategy. Here's a quick look at the results from the quarter and what investors should expect for the rest of 2017.
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By the numbers
Data source: Valero Energy earnings release.
These results are a mixed bag. Earnings were up compared to this time last year on a GAAP basis, but much of that was because the company took a $1.30-per-share inventory value adjustment in the fourth quarter of last year. That's part of the reason why Valero's operating income was higher in Q4 2015 but per share earnings were higher in this past quarter.
From an operational standpoint, it continues to see refining margin pressure and higher costs to comply with the U.S. EPA's renewable fuels standards. The company's realized throughput margin for its entire refining business -- the price spread between the price of refined products and crude oil -- was a paltry $8.22 per barrel. That's a decline from $9.07 per barrel in the third quarter and $10.87 per barrel this time last year. Valero didn't do itself many other favors as per-barrel operating costs compared to last year increased 10% to $3.83 per barrel.
Perhaps the biggest takeaway from those figures is how much the little things matter in the refining business. A dollar or two difference in refining margins with a few cents increase in per-barrel operating costs can quickly become a major change to the bottom line.
Data source: Valero Energy earnings release.*ADJUSTED OPERATING INCOME IS DEFINED AS OPERATING INCOME EXCLUDING LOWER OF COST OR MARKET INVENTORY VALUATION ADJUSTMENT AND ASSET IMPAIRMENT LOSS. Author's chart.
Net cash from operations saw a nice uptick to $998 for the quarter. With that cash, the company bought 2.7 million shares for $169 million. That rate of repurchase was considerably lower than in the prior quarter, but that isn't necessarily a bad thing. For one, the company had a higher rate of capital spending in the quarter for some turnaround work. Also, shares have gained 15% since the end of the third quarter, so perhaps the lower repurchases are a sign of managementdoing the right thing and buying back shares when prices are lower. Valero ended the quarter with a very healthy $4.8 billion in cash on the books.
Change of pace
Typically, Valero Energy Partners exists almost solely to receive dropdown assets from its parent. A few weeks ago, though, we saw a slight diversion from this strategy as the partnershipacquired a 40% interest in one of Plains All American's (NYSE: PAA) pipelines. According to management, this particular pipeline is a strategic fit because it is a major supplier for its Ardmore, Oklahoma, refinery. For some other master limited partnerships that are tied to refiners, this could be an interesting alternative for growth when growth from dropdowns becomes limited.
From the mouth of management
As has been the case in prior quarters, CEO Joseph Gorder reiterated the high costs of complying with the renewable fuels standards and that the rules need to be adjusted. He said:
It's worth keeping in mind that Valero is one of the nation's largest ethanol producers for gasoline, so it's not as though the company is looking to completely scrap those regulations because it does see value in using ethanol.
2016 wasn't a great year for refiners in general, but Valero did a decent job of maintaining profits. It's too soon to tell what 2017 will hold for Valero and other refiners, but if oil prices continue to rise, then you have to imagine that it may not be great. In the meantime, what matters is that the company continue to keep its operational costs low. As long as that happens, it should do OK no matter what the industry throws at it.
It's also important to watch how the company manages the growth of Valero Energy Partners. There are over $1 billion worth of EBITDA of MLP-eligible assets currently being held at the parent level, so there is still plenty of room to grow there. If there are other outside opportunities that are more attractive, though, don't be surprised if we see this happen again.
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