瓦萊羅能源 (VLO) 2008 Q1 法說會逐字稿

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  • Operator

  • Good morning.

  • I will be your conference operator today.

  • At this time I would like to welcome everyone to the Valero Energy Corporation first quarter results conference call.

  • All lines have been placed to mute to prevent any background noise.

  • After the speakers' remarks there will be a question and answer session.

  • (OPERATOR INSTRUCTIONS) Thank you.

  • Mr.

  • Smith, you may begin your conference.

  • - Director, IR

  • Thank you.

  • Good morning, and welcome to Valero Energy Corporation's first quarter 2008 earnings conference call.

  • With me today are Bill Klesse, our Chairman and CEO; Michael Ciskowski, our CFO; and other members of our executive management team.

  • If you have not received the earnings release and would like a copy you can find one on our website at Valero.com.

  • Also, attached to the earnings release are tables that provide additional financial information on our business segments.

  • If you have any questions after reviewing these tables, please feel free to contact Investor Relations after the call.

  • Before we get started, I would like to direct your attention to the forward-looking statements disclaimer contained in the press release.

  • In summary, it says that statements in the press release and on this conference call that state the Company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under Federal Securities laws.

  • There are many factors that could cause actual results to differ from expectations including those we've described in our filings with the SEC.

  • Now I will turn the call over to Mike.

  • - CFO

  • Thanks, Ashley, and thank you for joining us today.

  • As noted in the release, our first quarter 2008 earnings came in at $0.48 per share.

  • The earnings include a benefit of $0.12 a share arising from the business interruption insurance recovery related to the fire at the McKee refinery in the first quarter of 2007.

  • The $101 million pre-tax benefit from the insurance recovery is reflected in the mid-Continent throughput margins for the first quarter of 2008.

  • This incident has been settled, and there will be no further recoveries.

  • First quarter 2008 operating income was $472 million or $371 million excluding the previously mentioned insurance recovery.

  • This compares to $1.7 billion reported in the same period last year.

  • The decrease in operating income was obviously due to the lower throughput margin per barrel of $8.48 which was down $3.67 per barrel versus the first quarter of 2007.

  • The key driver of the decline was lower margins for gasoline and our other products such as asphalt, fuel oils, petroleum coke and petrochemical feedstock.

  • These margins compressed in the first quarter as the prices for those products did not increase proportionately with the increase in crude costs.

  • When comparing the first quarter of 2008 to 2007, the average margins for many of these secondary products declined between $10 and $40 per barrel which had a negative price impact on throughput margins of around $700 million on a pre-tax basis.

  • However, throughput margins benefited from strong margins on diesel and jet fuel and from wide differentials for the heavy and sour feedstocks we are able to run.

  • First quarter 2008 operating income was also affected by a $180 million increase in refinery operating expenses from the first quarter of 2007.

  • This was mainly due to higher energy costs from the increase in the cost of natural gas, and higher maintenance expenses including those related to the repairs to the coke drums at our Port Arthur refinery and the vacuum tower at our Aruba refinery.

  • First quarter operating income was also affected by lower throughput volume that averaged around 2.6 million-barrels per day or 138,000 barrels per day lower than the first quarter of 2007 and nearly 200,000 barrels per day below the prior quarter.

  • The reduction was mostly because of the previously mentioned maintenance activity.

  • General and administrative expenses excluding corporate depreciation were $135 million, the $29 million decrease from the fourth quarter was mainly due to a decrease in incentive-based compensation expense.

  • For the first quarter total depreciation and amortization expense was $367 million, net interest expense was $97 million, and our effective tax rate on continuing operations was 34% in line with guidance from the prior quarter.

  • Regarding cash flows for the quarter, capital spending was approximately $640 million which includes $103 million of turn around expenditures.

  • In the first quarter we continued our stock buyback program by spending $518 million to purchase 8.8 million shares of our common stock.

  • We currently have approximately $3.8 billion of repurchase authorization in addition to our ongoing antidilution program.

  • With respect to our balance sheet, at the end of March our total debt was $6.5 billion.

  • During the quarter we used approximately $375 million to pay down debt.

  • We ended the quarter with a cash balance of $1.4 billion and a debt to capitalization ratio net of cash of 21.7%.

  • As to second quarter operations the following guidance assumes that no divestitures closed in the second quarter.

  • For modeling purposes purposes you should expect Gulf Coast refinery throughput of approximately 1.45 to 1.5 million-barrels per day.

  • Gulf Coast throughputs will be affected by maintenance, especially at our Port Arthur refinery where we are completing the work on the coke drums and at the Aruba refineries that we're completing the repairs to the vacuum tower.

  • We expect both of these repair projects to be completed in mid-May.

  • Mid-Continent throughput should be about 430,000 barrels per day.

  • West Coast throughput should average between 275,000 and 285,000 barrels per day, and the Northeast system should average in the range of 530,000 to 540,000 barrels per day.

  • On operating expenses due to the higher expected energy costs and completing the repairs at Port Arthur and Aruba, refinery cash operating expenses are expected to be about $4.70 per barrel.

  • With respect to some of the other items for the second quarter, we anticipate G&A expense to be around $150 million, net interest expense should be around $80 million, total depreciation and amortization expense should be around $370 million, and for the second quarter you should be using a 34% tax rate for modeling purposes.

  • Finally, we are updating our guidance for our 2008 capital spending including turn arounds which we now estimate should be around $4.2 billion versus our prior guidance of $4.5 billion.

  • The decrease is mainly due to updates on the timing of some of our major projects.

  • Now I will turn it over to Bill.

  • - CEO

  • Thank you, Mike.

  • Good morning.

  • As Mike said, we ended the first quarter in great financial position, even after taking into consideration the challenging margins for gasoline and other products plus the operating issues we experienced.

  • Looking at gasoline, fundamentals have been improving as inventories have declined over the last six weeks and gasoline demand has been good.

  • Accordingly, the average April Gulf Coast gasoline crack has more than doubled versus March.

  • Going from around $3 to $6.50 per barrel.

  • We still expect a good summer driving season.

  • We also continue to see strong on-road diesel cracks which have averaged close to $30 per barrel in April because of strong global demand.

  • We believe that diesel cracks will stay excellent for the foreseeable future given the difficulty in meeting tighter sulfur specs worldwide and strong demand worldwide.

  • On the feedstock side we continue to realize wide differentials for medium and heavy crude oil and other feedstock, and we expect these decision counts to remain wide for the rest of the year.

  • Recently my crude oil has priced around $23 below WTI and Mars crude oil has priced nearly $10 below WTI.

  • These differentials have increased in part due to the strong demand for light sweet crude oil because of their higher clean product yields, especially diesel.

  • I have mentioned previously that we are working closely with a potential buyer for our Aruba refinery, and we expect to complete the process in the second quarter after the repairs for the vacuum tower are complete.

  • For our Memphis and Clark Springs refineries, we are currently negotiating with selected bidders.

  • We have been very pleased by the high level of interest these assets have generated.

  • We have also initiated a process to review strategic alternatives for our Ardmore refinery, and we expect to conclude that process this year as well.

  • In closing, I would be the first to admit that the gasoline season hasn't been impressive.

  • The current high refined product prices are difficult for consumers, but distillate margins are excellent.

  • As to our performance, the issues have been isolated to basically 3 of our 17 refineries.

  • Our financial results have also been negatively impacted by very poor margin for other products which are about 20% of our refined product yields.

  • With time I think there will be an adjustment to the pricing of these other products.

  • Concerning reliability, the Port Arthur coke drum repair we have undertaken should work, but ultimately the drums will be replaced in the first or fourth quarter of 2009 or at best or in a best case the first quarter of 2010.

  • The new drums should be at our site by year end.

  • We realize it is hard to see, but we are improving our plants and the resultant reliability.

  • With proceeds from the potential asset sales and from our operations, we'll continue to take a balanced approach to allocating cash among growth investment, at and around our core refineries, stock buyback, dividend increases, and high coupon debt repayments.

  • Valero continues to be the best value in our industry because our balance sheet is strong because we have the most geographic diversification, the most processing complexity, and highest gross margin potential, and lots of self help opportunity.

  • We'll now open the call to questions.

  • - Director, IR

  • We're ready for Q&A.

  • Operator

  • (OPERATOR INSTRUCTIONS) Your first question is from Mark Flannery with Credit Suisse.

  • Sir, you have the floor.

  • - Analyst

  • Thanks.

  • I would like to talk about CapEx.

  • If you run like a generic 3-2-1 NYMEX crack for the rest of the year, that's sort of around 11ish right now, just assume nothing changes, do you think this year's $4.2 billion and next year's $5 billion worth of CapEx is appropriate or would you look to make some adjustments to that?

  • - CEO

  • We think it is appropriate because obviously we have some asset sales under way.

  • - Analyst

  • Right, so basically in the absence of asset sales you wouldn't necessarily feel so confident about that number; is that right?

  • - CEO

  • Well, we also have a very strong balance sheet, and since we haven't run that K, but these projects that we're undertaking are very good for the long-term, and they will add a lot of shareholder value.

  • - Analyst

  • Okay.

  • Great.

  • That's it.

  • Thanks very much.

  • Operator

  • Your next question comes from Paul Cheng with Lehman Brothers.

  • - Analyst

  • Hi.

  • Good morning.

  • You're saying that the proceeds are going to be allocate accordingly, should we assume the bulk of the asset sales is going for the share buyback and whether that's a shot for you in funding for your CapEx that you will use the debt to fuel the cap or that not really a reasonable assumption?

  • - CEO

  • I think what you're asking, Paul, is we'll have cash flow from operations.

  • We had the asset sales that we're working and making good progress on, and we'll generate excess cash.

  • I have told everyone that we intend to take out another 250 million--?

  • - CFO

  • Almost 300.

  • - CEO

  • 300 million of high coupon debt this year, so we'll do that.

  • We already bought 8.8 million shares of stock.

  • We've also disclosed that we have a plan to buy more of our shares, but you'll see us maintain a balanced approach.

  • We'll also hold some additionally liquidity because of the current market situation we see.

  • So I think you just should assume that you're going to get what you've been getting from us.

  • - Analyst

  • I see.

  • Okay.

  • Upon the sales of Aruba, let's assume that they close sometime this quarter, what will be the effective tax rate going forward may look like?

  • Is it about back up into the 38, 40%?

  • - CFO

  • No.

  • I think the last numbers I saw would be about 36% if we sell Aruba.

  • - Analyst

  • Okay.

  • And I have to apologize.

  • Earlier you're talking about throughput in Mid-Continent.

  • What's the number again.

  • - CFO

  • On our Mid-Continent it is going to be about 430,000 barrels per day.

  • - Analyst

  • 430.

  • Two final questions.

  • Short one, one on the Mid-Con I don't know whether you guys on the (inaudible) purchase is using the P+1 method and if you do loss in the quarter?

  • And also that in this quarter are you seeing any meaningful inventory gain or loss trading or hedging gain or loss?

  • - CEO

  • I guess what you're asking are we using a posted price purchasing in the Mid-Continent?

  • - Analyst

  • That's correct, yes, sir.

  • - CEO

  • No.

  • We still do our purchasing and hedging in the Mid-Continent, and since I will just anticipate the question that we'll get from Mark, the cost is about $15 million in the quarter.

  • - Analyst

  • 15?

  • - CEO

  • We don't do P plus purchasing there.

  • We do it on -- we just buy a lot of crude on the market and go in exchange for physical.

  • - Analyst

  • Right.

  • And Bill, you're saying 15 or 50?

  • - CEO

  • 15.

  • - Analyst

  • 1-5.

  • - CEO

  • Right.

  • And then on the hedging there is nothing meaningful.

  • - Analyst

  • There is nothing meaningful on the inventory, I presume.

  • - CEO

  • Nothing on inventory.

  • - Analyst

  • Thank you.

  • Operator

  • (OPERATOR INSTRUCTIONS) Your next question comes from Roger Read with Natixis Bleichroeder.

  • - Analyst

  • Good morning.

  • Natixis Bleichroeder, but I understand the difficulties.

  • Regards to the 20% of the refined product yield that you said lower value products with a much lower yield, is there anything you're doing internally to adjust to that or anything you can do internally?

  • Should we consider that the sale or potential sale of the refineries that you've highlighted will help that process or is it simply a factor of how the market needs to work its way out here?

  • - CEO

  • I think as a general statement the market needs to work its way out.

  • The products we're talking about are asphalt, petroleum coke, lubricants, propylene, propane, fuel oils, resids, and if you think about petroleum coke, if we sell Aruba as planned, obviously we're going to make less petroleum coke, but as a general statement these products either have not kept up with the rise in crude oil price or in the case of propane, propylene, those types, compete against in a way natural gas liquids.

  • So you wind up with a little different competitive base there there.

  • - Analyst

  • Okay, but again nothing -- basically it is what it is, and we're going to have to just roll through all that, nothing -- bottom of the yield is bottom of the yield, I guess.

  • - CEO

  • Yes, obviously we try to minimize bottoms, right, so, Roger, I tell you eventually it is going to work its way through the system, and also depends on crude oil pricing.

  • We've had an extremely rapid rise in crude oil prices here since the beginning of the year.

  • - Analyst

  • Sure.

  • One final question, kind of just on the demand side.

  • If I look at your retail fuel volume sales year-over-year relative to the number of stations opened, fairly flat, yet if we look at the statistical numbers from the government or some of the other services, it indicates down.

  • Could you walk us through maybe what's different between your retail and what you're seeing in your retail and what we're seeing in sort of the national numbers?

  • - CEO

  • Well, year-to-date in our retail in same store, this would be the Company-operated retail, is down about 0.8%, so 1%.

  • Part of it is where we're located.

  • Obviously where a lot of our stores are in Texas, New Mexico, Arizona, Colorado in the Company ops side of this, and I would assume that the economy is doing a little better in those markets, so we haven't seen some of the numbers that you have heard.

  • However, nationally, at least some of the statistics only show the gasoline is down just around 1%, remains to be seen.

  • - Analyst

  • Well, I was trying to make a little adjustment for the number of stations, not just the flat number.

  • - CEO

  • I gave you the same store per station.

  • I gave you the volume per same store.

  • It is down 0.8% and the store count is only 3 different, I think.

  • 953 versus 950 this year.

  • - Analyst

  • I am sorry, I had 963 in the number there.

  • I am looking at the statement, not the model as it was last year.

  • - CEO

  • Well, it is 950 this year?

  • - Director, IR

  • 950 down from 963 in the press release.

  • - CEO

  • Okay.

  • 963, then.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from Chi Chow with Tristone Capital.

  • You have the floor, sir.

  • - Analyst

  • Good morning.

  • Given the wide disparity between gasoline diesel crash right now, how are you optimizing your production of each product as well as crude runs?

  • - CFO

  • I will answer that.

  • We have been tracking this situation for a number of months we constantly update the planning models and basically on a fractionation basis we were trying to recovery as much distillate boiling range of production as we possibly can.

  • Our capital program where we put in hydro treating capacity over the last couple of years have positioned us pretty well to do that and process the additional recovery.

  • In addition, we are out looking for feedstocks we can purchase of higher sulfur distillate materials where we can run through some of our spare capacity.

  • Beyond that, we have got a number of longer range steps on the outlook but this high diesel crack environment will continue which involves things like changing catalyst formulation down and making physical hardware improvements to some of our facilities.

  • - Analyst

  • Are those changes longer term in nature, or is that something we're going to see potentially this year?

  • - CFO

  • Well, it is sort of a combination of the distillation changes you can do right away.

  • You can change high frac and severity which we've done right away.

  • The rest are either intermediate term or longer term.

  • You can change catalyst formulation in the cat cracker, you see that in the next six months.

  • If you have to make physical revisions to units, that's probably more of a two-year route kind of scenario.

  • - COO

  • And what I would say, in terms of volumetrics in this general area, there is probably where we were last year some 200,000 barrels per day of recoverable distillate we can move out of the gasoline pool and we're trying to capture every bit of that.

  • - Analyst

  • Thanks, Rich.

  • Are you still cutting back on FCC runs at this point?

  • - COO

  • Yes.

  • We still are cut back in a couple of locations, and we really take a look at the marginal value of gasoline versus the marginal cost of a firing low sulfur cat feed.

  • As a result we're running lower throughput.

  • Our cat cracker in the St.

  • Charles refinery.

  • We also took a controllable shutdown of our small cat cracker in the east plant at Corpus Christi which is a 20,000 a day cat cracker.

  • - Analyst

  • Thanks.

  • Can you give some general comments on the state of the diesel market now?

  • Obviously the cracks are extremely high, but how much of this is support by the export market versus what's going on with demand here domestically?

  • - CEO

  • Go ahead.

  • - COO

  • Well, I think the export market is low, distillate prices very high, not only in Europe, Latin America, now the strike at [Grangemouth] requiring more diesel being reported in the U.K., so I think that's a big driver.

  • The barrels leaving the U.S.

  • and keeping especially the low sulfur barrels are very tight right now.

  • - CEO

  • We've said before we've been pretty active in the export market also, and it is still very strong.

  • - Analyst

  • How are you seeing demand here domestically?

  • Seems like things are slowing down.

  • You see some of the data points, UPS and Fed Ex and whatnot and rail cars being parked up in Montana.

  • Are you seeing weakness here domestically, though?

  • - CEO

  • We are seeing weakness in the U.S.

  • markets, but I think it is more than offset by the ex ported market, though.

  • - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Operator

  • Your next question is from Ann Kohler with Caris.

  • - Analyst

  • Good morning.

  • I just wanted a point of clarification.

  • When you were in New York last month, if I recall correctly you indicated that you wanted to receive a certain valuation for the assets that you had up for sale specifically at this point, Memphis and Clark Springs and if you were unable to achieve that price you would reconsider selling those assets; is that correct.

  • - CEO

  • That's correct.

  • Operator

  • Great.

  • Thank you.

  • (OPERATOR INSTRUCTIONS) Your next question is from Mark Gilman with Benchmark.

  • You have the floor.

  • - Analyst

  • Good morning, guys.

  • Bill, I just want to express my sincere appreciation for asking and answering of my primary question, but I do have others.

  • - CEO

  • Thank you.

  • - Analyst

  • Give us an update where your mindset is on Paulsboro, noting that Ardmore has now been added to the list regarding strategic alternatives?

  • - CEO

  • We're still taking a good hard look at that and no decision has been made.

  • - Analyst

  • Could I ask you why is it that it just seems in discussions like this that Three Rivers is considered a keeper?

  • - CEO

  • Well, because we ought make Benzene and Three Rivers, it does give us exposure to the petrochemical business and it's also tied indirectly with our Corpus Christi complex.

  • We have a piece of pike.

  • We optimize between the two.

  • We support our marketing in the San Antonio out of that facility, so if you look at the pipeline network, even though it is owned by New Star, it flows from Corpus through there as well as down to the Rio Grande Valley to Laredo and into San Antonio, so we look at it as an integrated business, the same is true for Houston.

  • We look at Houston the same way tied to Texas City, and we just made a, completed last year the very large Mile High decracker in Houston where we ship products from Texas City up to the Houston market Hydro Tree.

  • So we try to operate those two examples as a combined facility even though they're separated by some models.

  • - Analyst

  • Okay, Bill, if I could one more, give us a read given that pricing relationships have changed a fair amount over the course of the first quarter.

  • What if any capture you're achieving regarding the ethanol gasoline spread?

  • - EVP, Marketing, Supply

  • Well, yes, to the extent we can, Mark, we are.

  • This is Joe.

  • We're blending as much as we can, and to the extent we can blend conventional we're doing that also with our system, though, and the way we market, selling into the spot market, it is a bit tough to capture that.

  • - CEO

  • I am not sure exactly what you're asking, but yes, there is economics to blend any place that we have or have access to facilities to blend, we're blending, so if that's what you're asking, we're doing it.

  • There is a lot of our places either in San Antonio we can't use it because per on a 7.8-pound here, but in a lot of markets you can if the infrastructure is there, but clearly the economics are in our favor to blend.

  • - EVP, Marketing, Supply

  • We're converting a terminal at Memphis now to do that also.

  • - Analyst

  • Okay, guys, thanks very much.

  • Appreciate it.

  • Operator

  • Your next question comes from [Raul Egarwal] with [Marapin Asset Management].

  • Have you the floor, sir.

  • - Analyst

  • Hi.

  • Thanks for taking my questions.

  • If I can question just to follow-up on the previous one.

  • If the ethanol capture is in your favor and you are getting value out of it, have you ever given thought to actually bringing one of those ethanol producers inhouse or are you comfortable having that logistics chain out of your operation system in some ways?

  • - CEO

  • Raul, it is clearly a make versus buy and when you look at the supply chain or value chain right now all the economic rent is being taken by the farmer and/or the blender, and we're capturing it where we can as we said in the last question, and I think you have to decide when do you think the rent is going to be taken by the ethanol producer and right now we don't see that at least for the foreseeable future.

  • - Analyst

  • Understood.

  • Just one follow-up if you may permit me.

  • When you say make versus buy, I am assuming there is some discount to be applied to making because it does take some timeframe to make an asset, I guess?

  • - EVP, Marketing, Supply

  • I think right now production costs at ethanol plant probably don't cover the price of corn being over $6 a bushel, so we don't see any profit or much of any being generated there particularly return on investment.

  • - CEO

  • I think if you look at where all the money is being made, it is being made on the front end and that's why so many of these ethanol plants are struggling economically or financially.

  • It is a make versus buy for us, at least when we look at from the plant range to the host.

  • - Analyst

  • Thank you.

  • Operator

  • This concludes today's Q&A session.

  • You may begin with your closing remarks.

  • - Director, IR

  • Thank you.

  • Just want to thank everyone for listening to today's call.

  • If you have any additional questions, please feel free to call the Investor Relations department.

  • Thank you.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.