Valero Energy Corporation (NYSE: VLO) today reported second quarter net income of $1.9 billion, or $2.98 per share, which compares to $847 million, or $1.53 per share, in the second quarter of last year. The company’s second quarter 2006 results represent the highest quarterly net income in the company’s history.
For the six months ended June 30, 2006, Valero’s net income was $2.7 billion, or $4.29 per share, compared to the company’s net income of $1.4 billion, or $2.49 per share, for the six months ended June 30, 2005.
Second quarter 2006 operating income for the company’s refining segment was $3 billion, more than twice the $1.4 billion achieved in the same period last year. The increase in operating income was primarily due to significantly higher gasoline and distillate margins, wider sour crude oil discounts and higher throughput volumes due to the acquisition of Premcor Inc. in September 2005. Partially offsetting these factors was the roughly $275 million, or 29 cents per share, impact to operating income from unplanned outages during the quarter.
“Our business environment remains outstanding, as this was the best quarter in the company’s history,” said Bill Klesse, Valero’s Chief Executive Officer. “The robust gasoline and distillate margins, along with very wide sour crude oil discounts, reflect the persistent tightness in the global refining system. The combination of slower than anticipated growth in global refining capacity, tighter fuel specifications and continued demand growth is expected to keep the supply and demand balance for refined products tight for the foreseeable future. Our large, complex and geographically diverse refining system positions us perfectly to benefit from this environment. As a result, we expect to continue delivering outstanding earnings and generating significant free cash flow.
“We more than doubled last year’s second quarter net income despite heavy turnaround activity in our Northeast system and unplanned outages at a few of our refineries. Regarding our turnarounds, we completed a major plant-wide turnaround on time and on budget at Quebec. We also successfully completed a turnaround and expansion of the cat cracker at Paulsboro. For the remainder of the year, our turnaround activity is light.
“Refined product margins in the second quarter were impressive. Gulf Coast conventional gasoline margins averaged $20 per barrel, while Gulf Coast off-road diesel margins averaged almost $12 per barrel. A significant development in the refined products market this year has been the increasing premiums for reformulated gasoline blendstocks (RBOB) and on-road diesel. The price premium for RBOB above conventional gasoline on the Gulf Coast averaged over $5.50 per barrel during the second quarter, while the premium for Gulf Coast on-road diesel versus off-road diesel averaged about $6.75 per barrel. This is important to Valero as nearly 30 percent of our gasoline production is sold as RBOB and about 75 percent of our distillate production is sold at substantial premiums to off-road diesel or heating oil,” said Klesse.
Regarding the company’s cash flow, capital spending for the first half of 2006 was approximately $2 billion, of which $387 million was for turnaround expenditures. For the year, the company anticipates capital spending of approximately $3.5 billion. In addition, the company paid off $221 million of long-term notes and purchased roughly 20 million shares of its common stock during the first half of 2006, as part of a program to buy back 5 percent of its outstanding shares in 2006.
“Valero achieved record earnings in the first half of 2006, and we expect the second half of the year to be even better. In fact, the third quarter is off to an unprecedented start. In July, Gulf Coast gasoline margins averaged $22 per barrel and on-road diesel margins averaged $18.75 per barrel, while sour crude oil discounts remained wide. For August and September, Gulf Coast gasoline margins are trading in the futures market at $21 per barrel and $17 per barrel, respectively, while Gulf Coast on-road diesel margins are trading around $18 per barrel for August and $19.50 per barrel for September. Given this margin environment, we expect that our third quarter earnings will be better than what we earned in the second quarter and substantially higher than the current average analyst estimate.
“Looking further ahead, the transition to providing low sulfur on-road diesel at retail locations by October 15 should further tighten diesel supplies as we head toward winter. And, keep in mind that the 75,000 barrel per day Port Arthur expansion should be operating in the fourth quarter and that we will continue to benefit from the accretion from our share buyback program. With these factors in mind, you can see why we expect 2006 to be another record year for Valero,” said Klesse.
Valero’s senior management will hold a conference call at 11 a.m. ET (10 a.m. CT) today to discuss this earnings release and provide an update on company operations. A live broadcast of the conference call will be available on the company’s website at www.valero.com.
Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 22,000 employees and annual revenues of more than $80 billion. The company owns and operates 18 refineries throughout the United States, Canada and the Caribbean with a combined throughput capacity of approximately 3.3 million barrels per day, making it the largest refiner in North America. Valero is also one of the nation’s largest retail operators with more than 5,000 retail and branded wholesale outlets in the United States, Canada and the Caribbean under various brand names including Valero, Diamond Shamrock, Shamrock, Ultramar, and Beacon. Please visit www.valero.com for more information.
Statements contained in this release 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 of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words “believe,” “expect,” “should,” “estimates,” and other similar expressions identify forward-looking statements. It is important to note that actual results could differ materially from those projected in such forward-looking statements. For more information concerning factors that could cause actual results to differ from those expressed or forecasted, see Valero’s annual reports on Form 10‑K and quarterly reports on Form 10‑Q, filed with the Securities and Exchange Commission and on Valero’s website at www.valero.com.
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