Valero Energy Corporation has reported first quarter 2009 net income of $309 million, or $0.59 per share. This compares to first quarter 2008 net income of $261 million, or $0.48 per share, which included a pre-tax benefit of $101 million, or $0.12 per share, for an insurance recovery related to the first quarter 2007 fire at the McKee refinery.
First quarter 2009 operating income was $507 million versus $472 million in the first quarter of 2008, or $371 million without the previously mentioned insurance recovery. The increase in operating income was mainly due to higher refining margins on gasoline and secondary products, such as fuel oil, asphalt, and petroleum coke. Also contributing to the increase in operating income versus the first quarter of 2008 was a decline in refining operating expenses due primarily to lower energy costs. Partially offsetting the increase in first quarter 2009 operating income was the significant decline in sour crude oil discounts and lower diesel and jet fuel margins. Throughput volumes also declined due to downtime at certain refineries.
“We reported positive earnings despite weaker demand,” said Bill Klesse, Valero’s Chairman of the Board and Chief Executive Officer. “In fact, our first quarter 2009 earnings per share were 23% higher than the first quarter of 2008, and 64% higher if you exclude last year’s insurance recovery. In all our regions, gasoline margins were unseasonably strong and nearly double the level in the same quarter last year. Diesel and jet fuel margins were also good in the first quarter despite being down from last year’s high levels.
“Also in the first quarter, we entered the ethanol business by agreeing to buy seven ethanol plants from VeraSun. We closed on six of the plants in April, and we should close on the last plant soon. Acquiring these assets at a time of low ethanol margins enabled us to pay only 30% of replacement cost for some of the industry’s best ethanol plants. Since it is the government’s policy to include ethanol in motor fuel, this new business segment fits strategically with our business of producing clean, quality fuels for consumers. With this acquisition, we have established a sizable, strategic position within the ethanol business. Looking forward, we expect ethanol demand to grow under the federal mandate and catch up with production capacity by 2010.”
Regarding cash flows in the first quarter of 2009, the company’s capital spending was $902 million, of which $167 million was for turnaround and catalyst expenditures. The company paid $77 million in dividends on its common stock and issued $1 billion of senior unsecured notes. The company ended the quarter with $1.7 billion in cash and temporary cash investments.
“Our successful bond offering allowed us in April to pay down $200 million of maturing debt, fund our acquisition of the ethanol plants, and maintain our capital investment program,” Klesse said. “To further conserve cash, we reviewed our capital budget again and identified $200 million in additional reductions. This reduces our estimated 2009 capital spending to $2.5 billion from the previously announced $2.7 billion estimate.
“Demand for refined products is clearly down from last year due to the decline in economic activity and rising unemployment. However, better-than-expected gasoline fundamentals have supported margins so far this year. With pump prices around 40% lower than this time last year, gasoline demand could improve with the summer driving season. Recovery in demand for diesel and jet fuel could take longer, since those products are tied more closely to economic activity. The poor economic environment that is hurting so many people continues to adversely affect demand for our products.
“Politically, there are many different ideas and proposals being offered. Some proposals in Congress unfairly raise taxes and costs on certain businesses, including the U.S. refining industry, which would make it less competitive in the global economy and lead to higher domestic fuel prices. It is true that our country imports some refined products and significant volumes of crude oil from all over the world, but the refining jobs and investments are here. Our country must not allow the rhetoric around our dependence on foreign oil to lead America to become more dependent on foreign refined products. Refiners pay taxes, provide good-paying jobs, and efficiently make products that improve lives. These jobs should stay in America.
“As we have seen in the past, the refining business continues to be volatile and cyclical. To make it through these difficult times, we will continue to manage our balance sheet and reduce costs while prudently investing for higher, long-term shareholder returns. As always, operating safely, reliably, and in environmental compliance remains our top priority,” Klesse said.