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.


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.


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%.

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.


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


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


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


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.


Chart Flow Details

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


Chart throughput details by region

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


VLO Brent WTI Price History

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Technical (short-term) analysis and commentary


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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