Valero Energy: impressive results (NYSE: VLO)

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Investment thesis

Valero Energy Corp. (NYSE: VLO), based in San Antonio, released its fourth quarter and full year 2021 results on January 27, 2022.

1 – Overview of 4Q21 and full-year 2021 results

The U.S. refiner reported adjusted earnings of $2.47 per share in the fourth quarter of 2021, in stark contrast to a loss of $1.06 per share in the year-ago quarter. The results exceeded analysts’ expectations.

Total revenue increased from $16,604 million in the year-ago quarter to $35,903 million in 4Q21.

The better-than-expected results were reinforced by higher refining throughput and higher refining margin. The company benefited from a strong recovery in gasoline demand which boosted results.

Quarterly operating income for the four quarters of 2021 is shown below. We can see that the refining segment has grown significantly.

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Chart operating profit by segment

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The refining margin per barrel of throughput increased from $9.85 in the prior quarter to $10.73, while the ethanol margin increased from $0.46 to $1.60.

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3Q and 4Q Chart Comparison Margin

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Valero Energy’s refining adjusted operating profit was $3.92 per barrel of throughput, compared to a loss of $2.03 a year ago.

2 – Investment thesis

The investment thesis is simple and has not changed since my previous article. I am a long-time VLO shareholder and intend to build on the weakness. However, the stock is reaching an overbought situation and could come back soon.

The refining business is defined by a highly volatile environment requiring serious near-term commercial LIFO to make this investment profitable. Thus, it is imperative to trade short-term VLO using at least 30% to 40% of your total position (trading also includes options). I will develop this strategy in detail in the last part of my article.

3 – Stock market performance

The chart below is a perfect example of this wild fluctuation. However, VLO is now up 40% YoY and paying a generous dividend yield of 4.82%.

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Data by Y-Charts

CEO Joe Gorder said on the conference call:

We saw continued improvement in our business during the fourth quarter, with refining margins supported by strong product demand. In our system, we ended the year with gasoline demand at pre-pandemic levels and diesel demand actually above pre-pandemic levels. We also saw a significant recovery in jet fuel as domestic and international travel opened up, rising from around 60% of pre-pandemic levels at the start of the year to around 80% by the end of the year. Product inventories were low due to refining capacity rationalization that has taken place over the past two years and the weather-related impacts of Winter Storm Uri and Hurricane Ida.

Valero Energy: Selected Financials – The Raw Numbers (Q4 2021)

Valero Energy 4T20 1T21 2Q21 3Q21 4Q21
Total revenue in billions of dollars 4:60 p.m. 20.81 27.75 29.52 35.90
Net income in millions of dollars -359 -704 162 463 1,009
EBITDA in millions of dollars 132 -43 1,199 1,366 1,443
Diluted EPS in $/share -0.88 -1.73 0.39 1.13 2.46
Cash flow from operations in millions of dollars 96 -52 2008 1,449 2,454
CapEx in millions of dollars 506 339 355 463 596
Free cash flow in millions of dollars -410 -391 1,653 986 1,858*
Total cash in billions of dollars 3.313 2.254 3.572 3.498 4.122
Total long-term debt (including current) in billions of dollars 14.67 14.68 14.68 14.23 13.87
Dividend per share in $ 0.98 0.98 0.98 0.98 0.98
Shares outstanding (diluted) in millions 407 407 407 408 408
Production of oil, natural gas and ethanol 4T20 1T21 2Q21 3Q21 4Q21
Flow volume in K Bop/d 2,550 2,410 2,835 2,854 3,033
Ethanol in K gallon p/d 4,124 3,562 4,203 3,625 4,402
Brent price ($/b) 45.10 61.09 69.00 73.22 79.85
Price of WTI ($/b) 42.56 57.84 66.09 70.58 77.36
Natural Gas Price ($/MM Btu) 2.55 19.66 2.93 4.25 4.54

Source: BIKE PR

* Estimated by Fun Trading

Revenue, profit details, free cash flow, throughput volume, ethanol production and margins

1 – Revenue hit a record high of $35.90 bmillion in 4Q21.

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Earnings History Chart

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Valero Energy’s revenue for the fourth quarter was $35.90 billion. The company posted quarterly earnings of $2.46 per diluted share, compared to a loss of $0.88 per diluted share a year ago.

Total cost of sales increased to $33,993 million from $16,834 million last year, primarily due to higher material costs and higher operating expenses.

Reported adjusted net income was $1,012 million, or $2.47 per share, for the fourth quarter and $1,152 million, or $2.81 per share, for the year.

Review of the different segments:

  • the refining sector: Segment operating profit was $1,095 million, compared to a loss of $476 million in the year-ago quarter. Higher refining throughput volumes supported the segment.
  • The Ethanol segment: Segment adjusted operating income was $475 million, compared to $17 million in the third quarter of 2020. Higher ethanol production volumes helped the segment. Production increased to 4,402,000 gallons per day from 4,124,000 gallons a year ago.
  • the Renewable diesel segment: Segment operating profit increased to $152 million from $127 million in the same period last year. The segment was supported by higher renewable diesel sales volumes, which increased to 1,592,000 gallons per day from 618,000 gallons a year ago.

2 – Free cash flow in 4Q21 was estimated at $1,905 million

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History of VLO FCF

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Note: Generic free cash flow is cash flow from operating activities less capital expenditures.

VLO had a year-over-year free cash flow ttm of $1,858 million. Free cash flow for the fourth quarter is estimated at $1,858 million.

The cash cost of the dividend is now $1,600 million per year, while ttm’s free cash flow is $1,838 million, suggesting that VLO could potentially pay out a little more dividends in 2022.

3 – Net debt is down to $9.75 billion as of December 31, 2021

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Cash Debt History Chart

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Valero Energy had total cash of $4,122 million in 4Q21, compared to $3,498 million in the prior quarter. Total debt and finance lease obligations were $13,870 million, compared to $14,677 million last year.

The company reduced Valero’s long-term debt by $693 million in the fourth quarter and by $1.3 billion in 2021.

4 – Flow and production of ethanol in 4T21

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Chart throughput history

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Refining throughput volumes were 3,033,000 barrels per day in the fourth quarter, up 18.9% year on year.

Commodity mix for all four quarters: Sweet Crude is the highest.

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Chart Flow Details

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The United States Gulf Coast provided approximately 59.2% of the total flow volume.

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Chart throughput details by region

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You can find the historical price comparison chart (Price: Brent and WTI).

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VLO Brent WTI Price History

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Technical (short-term) analysis and commentary

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TA chart analysis

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Note: Chart has been adjusted for dividend.

VLO forms a rising wedge pattern with resistance at $86.5 and support at $78. I suggest trading LIFO for around 40% of your total position.

LIFO trading can increase your tax burden, but it also helps you trade more efficiently and multiply your profits while maintaining your primary position for a much higher purpose.

The trading strategy is to sell around 30% at $86.25 or higher and wait for a possible retracement. If VLO can break through the resistance (breakout), the next upper resistance is estimated at $87.

Conversely, if VLO loses momentum, the next support is below $78, possibly falling to the 200MA at $72.50.

Warning: The TA table must be updated frequently to be relevant. This is what I do in my stock tracker. The table above has a possible validity of approximately one week. Remember that the TA chart is a tool only to help you adopt the right strategy. This is no way to predict the future. Nobody and nothing can.

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