Valero Earnings: Refining Sags, Renewable Diesel Soars, but Refining Environment Improving

Valero Energy VLO reported second-quarter earnings that exceeded market expectations as it continued to benefit from a relatively favorable refining market, strong operations, and growing renewable diesel business. However, adjusted earnings fell to $1.9 billion during the second quarter from $4.6 billion the year before as refining margins normalized after a record 2022. During the quarter it paid out 53% of adjusted cash flow in dividends and repurchases, above its 40%-50% annual target.

We plan to update our fair value estimate with the latest market conditions and third-quarter guidance, which will likely result in a modest valuation increase as market conditions have improved in recent weeks.

Of note during the quarter was the strong performance of the renewable diesel business that reported operating income of $440 million compared with $152 million a year before, due in part to higher sales volumes after the startup of DGD Port Arthur in fourth-quarter 2022. The segment should continue to grow over time as management identifies new project opportunities to capitalize on the competitively advantaged (lower feedstock costs) business. Currently, its advancing a project at Port Arthur that will provide the option to upgrade half the facilities’ 470 million gallons of annual production to SAF.

While refining segment adjusted operating income fell to $2.4 billion from $6.1 billion the year before, earnings remain strong relative to historical levels. Meanwhile, gasoline margins have been improving during the third quarter on low inventory levels and strong demand. Once again, management called out the discrepancy between the relatively week gasoline demand figures the EIA is posting and what management sees in its system where demand is comparable with prepandemic levels. Meanwhile, the outlook for diesel margins remains favorable amid low inventory levels and strong demand.