Thursday, July 27, 2023

Valero (VLO) Comments on Demand (Q2 2023)

Our favorite proxies for refined fuels demand in the U.S. are the refining companies themselves as well as the pipeline companies (such as Magellan Midstream) that transport significant amounts of refined products. The three largest refining companies in the U.S. are Marathon Petroleum, Valero (VLO), and ExxonMobil. Trying to get a sense of demand based on proxy indicators is important because there are times (1, 2) when those companies' earnings calls gave us better insight than the government's numbers.

For the second quarter of 2023, Valero reported net income attributable to Valero stockholders of $1.9 billion, or $5.40 per share; compared with $4.7 billion, or $11.58 per share, the prior year quarter. At the current $45 billion market cap, shares are trading for 6x this quarter's annualized earnings.

Valero returned over $1.3 billion to stockholders in Q2, consisting of $367 million of dividends and $951 billion in share repurchases (a payout ratio of 53 percent of adjusted net cash provided by operating activities). Valero has said that they are targeting 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 12% shareholder yield (annualized) on the current market cap. Valero has bought back 19 million shares year-to-date, which is about 5% of the total at the beginning of the year.

We would put the EV of Valero at about $50 billion (very little net debt) and the first half of 2023 free cash flow at $3.7 billion, which is a FCF/EV yield (annualized) of 15%. 

There was an exchange on this quarter's conference call about demand for refined fuels:

Manav Gupta
Good. The second question here is the DOE data is telling us whatever it is, and there are obviously some concerns around demand out there, but the cracks are telling us a completely different story. The cracks are telling us the demand for products is remarkably strong. So just wondered if you could highlight some of the -- what you're seeing in terms of demand in various regions?

Gary Simmons
Yes, Manav, this is Gary. We do believe that the DOE is understating gasoline demand. But even their data is showing on a 4-week average basis gasoline demand up about 3%. But if you look at our numbers, of course, Lane mentioned we had record volumes in both May and June of over 1 million barrels a day. We're seeing gasoline sales in our system up 14% year-over-year, up 22% from pre-pandemic levels.

Gasoline inventory year-over-year is down 7.5 million barrels. So it's trending at the low end of the 5-year average range. Typically, this time of year, you have an open arb to ship barrels from Europe into the United States. But with inventory low in Europe, that arb is closed, which is hindering imports, and we see strong export demand from the U.S. Gulf Coast into South America.

So the fundamentals around gasoline look very good. Diesel inventory is up 6 million barrels, but continues to trend below the 5-year average range. Diesel inventory is flat, where historically, this time of year, we start to see diesel building. Again, while the DOE reflects weaker diesel demand year-over-year, it looks like the weekly data is continually being revised up.

Last year when oil and fuel prices were spiking, the government stopped publishing data on demand for two weeks because of a "voltage irregularity," and once publication resumed after this "pause," the data has no longer seemed congruent with what other sources reported.

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