Valero Energy (VLO)

Q2 2010 Earnings Call

July 27, 2010 11:00 am ET

Executives

Joseph Gorder - Executive Vice President of Marketing & Supply

S. Edwards - Executive Vice President of Corporate Development & Strategic Planning

Michael Ciskowski - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Richard Marcogliese - Chief Operating Officer and Executive Vice President

Kimberly Bowers - Executive Vice President and General Counsel

William Klesse - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Ashley Smith - Vice President of Investor Relations

Analysts

Edward Westlake - Crédit Suisse AG

Douglas Terreson - ISI Group Inc.

Jacques Rousseau - RBC Capital Markets Corporation

Paul Cheng - Barclays Capital

Evan Calio - Morgan Stanley

Mark Gilman - The Benchmark Company, LLC

Chi Chow - Tristone Capital

Faisel Khan - Citigroup Inc

Douglas Leggate - BofA Merrill Lynch

Jeffrey Dietert - Simmons & Company International

Paul Sankey - Deutsche Bank AG

Blake Fernandez - Howard Weil Incorporated

Presentation

Operator

Good morning, and welcome to the Valero Energy Corporation's Second Quarter 2010 Earnings Conference Call. And I would now like to introduce your host, Mr. Ashley Smith. Sir, please go ahead.

Ashley Smith

Thank you, Brandy. Good morning, and welcome to Valero Energy Corporation's Second Quarter 2010 Earnings Conference Call. With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Rich Marcogliese, our COO; Gene Edwards, our Executive Vice President of Corporate Development and Strategic Planning; Joe Gorder, our Executive Vice President of Marketing and Supply; and Kim Bowers, our Executive Vice President and General Counsel.

If you have not received the earnings release and would like a copy, you can find one on our website at valero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments. If you have any questions after reviewing these tables, please feel free to contact me after the call.

Before we get started, I'd like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we described in our filings with the SEC.

Now I'll turn the call over to Mike.

Michael Ciskowski

Thanks, Ashley, and thank you for joining us today. As noted in the release, we reported second quarter 2010 income from continuing operations of $530 million or $0.93 per share. I should note that the $53 million after-tax gain from discontinued operations shown in the financial tables relates to the Delaware City assets that were shut down in 2009 and sold in June of this year.

Second quarter 2010 operating income was $921 million versus an operating loss of $192 million in the second quarter of 2009. The $1.1 billion increase in operating income was mainly due to higher margins for distillate and secondary products, such as petrochemicals, asphalt and lube oils as well as improved sour crude discounts.

The improvement we saw in diesel margins was most significant. If you look at the benchmark ULSD [ultra-low-sulfur diesel] margins on the Gulf Coast, they nearly doubled from $6.16 per barrel in the second quarter of 2009 to $12.14 per barrel in the second quarter of 2010. Secondary margins also made strong contributions. For example, propylene margins improved 156%, and lube oil margins increased 104% versus the second quarter of the 2009.

Sour crude oil discounts also improved during the second quarter. The Maya heavy sour crude oil discount to WTI [West Texas Intermediate] expanded from $4.57 in the second quarter of 2009 to $9.75 in the second quarter of 2010. Another way to look at this is as a percentage of the WTI price, so the Maya discount increased from 7.7% of WTI in the second quarter of 2009 to 12.5% of WTI in the second quarter of 2010, which is a 62% improvement year-over-year.

Our second quarter 2010 refinery throughput volume averaged 2.3 million barrels per day, which is slightly higher than the top end of our guidance as the strong margins incentivized higher run rates. However, compared to the second quarter of last year, volumes were down 55,000 barrels per day, mainly due to the continued idle status of our Aruba refinery.

Refinery cash operating expenses in the second quarter of 2010 were $3.55 per barrel, which was well below our guidance. This was primarily due to the higher throughput volumes and lower-than-expected maintenance, catalyst and chemicals and energy costs.

We are pleased to see that our focus on cost reductions is showing results. In fact, we're on pace to exceed our target of $100 million in pretax cost savings in 2010. The combinations of numerous company-wide initiatives and commitment by our employees has yielded nearly $90 million in cost savings through June and there is more to come.

Looking at our other business segments. Retail had its best-ever second quarter, with operating income at $109 million which is 68% higher than the second quarter of 2009, primarily due to higher fuel margins in the U.S. Our Canadian Retail operations also performed well during the quarter.

Our Ethanol segment had $35 million of operating income in the second quarter of 2010, which is $13 million higher than the second quarter of 2009, but down from the first quarter of this year due mainly to compression in margins between ethanol and corn prices. Despite very competitive industry conditions, our Ethanol business has been profitable and we are pleased with the performance of this business.

Read the rest of this transcript for free on seekingalpha.com