Analyst Note| Allen Good, CFA |
Valero Energy reported sharply weaker second-quarter earnings, but the worse of the fallout from the COVID-19 pandemic is probably behind it as demand begins what is likely to be a long, slow recovery. Net income was $1.3 billion during the quarter compared with $612 million a year ago. However, those figures include the benefit of a $1.8 billion lower cost of market inventory adjustment during the quarter. Excluding that benefit, adjusted second-quarter earnings fell to a loss of $504 million from $665 million last year due to weakness across every segment. Refining adjusted operating income fell to a loss of $383 million from earnings of $1.0 billion last year on narrower margin realizations and lower throughput volumes in every region. Renewable diesel adjusted operating income fell to $129 million from $145 million last year on weaker margins. Ethanol adjusted operating income fell to a loss of $20 million from earnings of $8 million last year on lower margins and a sharp drop in volumes. During the quarter, Valero returned $400 million to shareholders in dividends and did not repurchase any shares, but it has paid out 96% of adjusted operating cash flow year to date. Our fair value estimate and narrow moat rating are unchanged.