Valero Energy Reports First Quarter 2023 Results ($VLO)

Our favorite proxies for refined fuels demand in the U.S. are the refining companies themselves as well as the pipeline companies (e.g. Magellan Midstream) that transport significant amounts of refined products. Last year there were a couple of times (1, 2) when those companies' earnings calls gave us great insight into the recovery in fuel demand, while the government's numbers were telling a different story.

For the first quarter of 2023, Valero reported net income attributable to Valero stockholders of $3.1 billion, or $8.29 per share; compared with $900 million, or $2.21 per share, the prior year quarter. With a $42 billion market cap, shares are trading for 3.4x this quarter's annualized earnings.

Valero returned over $1.8 billion to stockholders in Q1, consisting of $379 million of dividends and $1.5 billion in share repurchases (a payout ratio of 52 percent of adjusted net cash provided by operating activities). Valero says that they continue to target an annual payout ratio between 40 and 50 percent of adjusted net cash provided by operating activities. The shareholder returns in the first quarter are a 17% shareholder yield (annualized) on the current market cap.

We would put the EV of Valero at about $44 billion (very little net debt) and this quarter's free cash flow at $3.3 billion, which is a FCF/EV yield (annualized) of 30%. The market is implying some combination of (a) big, bad recession, (b) electric vehicle "transition," and/or (c) new refining capacity coming online to crush margins. 

Of course, the market is crying "recession" about all kinds of old economy that produce tangible things (steel, coal, oil, pipelines) but not about companies like Tesla, which still trades for 10 times book value. It's the fundamental mispricing of our time and it has been going on for almost three years, during which time the old economy companies have generated cash, paid off debt, and bought back stock.

Regarding oil demand: listen to the conference call comments on Q1 2023 demand for gasoline and diesel:

Refining throughput volumes in the first quarter of 2023 averaged 2.9 million barrels per day, which was 130,000 barrels per day higher than the first quarter of 2022. Throughput capacity utilization was 93% in the first quarter of 2023 compared to 89% in the first quarter of 2022. [...]

So, so far, our 7-day average in our wholesale system, our gasoline sales are up 16% year-over-year. Our diesel volumes are up 25% year-over-year. So our wholesale team continues to do a great job.

In March, we set a record at 998,000 barrels a day. In April, the volumes are trending right along those levels. So demand seems very, very strong in our system. And even the DTN data for the wholesale racks across the industry is very strong as well.

In terms of your question on diesel weakness, we're just not seeing it. I can tell you, in addition to the wholesale volumes, today, there's domestic arbs that are open from PADD 3 into PADD 2 as we're seeing a surge in agricultural demand that's going along with planting season. You also have a domestic arb open to ship from PADD 3 to PADD 1. We see strong waterborne premiums to go to Latin America. The transatlantic arb is open to Europe. And so for us, distillate fundamentals look pretty good. [...]

So our wholesale on the gasoline side, we're up 16% year-over-year. On distillate, we're up 25% year-over-year. March, we set a sales volume record 998,000 barrels a day. And then April, the volumes are trending about like they did in March. [...]

So we've come into driving season with 10 million barrels below where we were last year on gasoline inventory. So especially summer grade gasoline is very tight, and it is going to stress the Colonial system as we move into driving season.

Valero is making more money than ever before. Their wholesale volumes are record high. So you have to ask, how could oil demand be weak?