Valero Energy Corporation (NYSE: VLO) today reported fourth quarter 2007 income from continuing operations of $567 million, or $1.02 per share, which compares to $1.1 billion, or $1.74 per share, in the fourth quarter of 2006. Fourth quarter 2006 results included a $196 million pre-tax gain, or $0.21 per share, on the sale of the company's remaining 59 percent ownership interest in NuStar GP Holdings, LLC. Excluding this gain, fourth quarter 2006 income from continuing operations was $954 million, or $1.53 per share.
For the year ended December 31, 2007, income from continuing operations was $4.6 billion, or $7.72 per share, compared to the company's income from continuing operations of $5.3 billion, or $8.36 per share, for the year ended December 31, 2006. Excluding the special items discussed in Notes (4), (5) and (6) in the attached financial tables, income from continuing operations for 2007 was $4.5 billion or $7.79 per share versus income from continuing operations of $5.1 billion or $8.02 per share for 2006. For all periods shown in the accompanying financial tables, income from discontinued operations relates to the Lima, Ohio refinery, which the company sold effective July 1, 2007.
Fourth quarter 2007 operating income was $884 million versus $1.4 billion reported in the same period of 2006. Several factors combined to reduce operating income in the fourth quarter of 2007 versus the fourth quarter of 2006. Refined product margins were lower because the cost of crude oil and other feedstocks increased more than product prices. For example, the Gulf Coast gasoline margin was around 30 percent lower when compared to the fourth quarter of 2006. Margins for many of the company's secondary products, such as asphalt, fuel oils, and petrochemical feedstocks, were also lower than in the fourth quarter of 2006 as the prices for these products did not increase in proportion to the costs of the feedstocks used to produce them. Finally, refinery operating expenses increased by $123 million, primarily due to increases in maintenance expense and energy costs.
"We reported good results for the fourth quarter considering the dramatic increase in feedstock costs relative to product prices," said Bill Klesse, Valero's Chairman of the Board and Chief Executive Officer. "Our complex refineries were able to take advantage of the wide sour crude discounts in the fourth quarter when the Maya discount to WTI averaged about $15 per barrel, and the Mars discount averaged nearly $9 per barrel. We also benefited from having a large and geographically diverse refining system, which provides relatively more earnings stability through exposure to multiple refining regions."
Regarding uses of cash, capital spending in the fourth quarter was about $890 million, of which $180 million was for turnaround expenditures. For the full year 2007, capital spending was $2.8 billion, of which approximately $520 million was for turnaround expenditures. Concerning stock buybacks, the company spent $1.0 billion to purchase 15.4 million shares of its common stock during the fourth quarter. For the full year 2007, the company spent $5.8 billion to purchase 84.3 million shares of its common stock.
"2007 was another solid year for Valero," Klesse said. "During the year, we had strong earnings, sold the Lima, Ohio refinery, increased our dividend by 50 percent, and our retail and Canadian operations had their best years ever. Also in 2007, we purchased 14 percent of the company's outstanding shares. Combining stock purchases in 2006 and 2007, we have purchased nearly 120 million shares of our common stock which represents almost 20 percent of our outstanding shares at the end of 2005.
"Looking at market fundamentals, we continue to see wide discounts to WTI for the sour and heavy crude oils and other feedstocks that make up more than 60 percent of our throughput volumes. However, margins for some of our secondary products, such as asphalt, fuel oils, and petrochemical feedstocks, are still weak and will affect benchmark margin realization. On the other hand, we expect diesel margins to remain strong since inventories are well below the levels seen last year and on-road diesel demand remains good.
"For gasoline markets, we expect a repeat of the normal seasonal pattern in which supplies fall, demand grows, and margins rise as we head toward the summer driving season. Similar to previous years, winter-grade gasoline inventories have been building ahead of the industry-wide plant maintenance period that generally begins in late January. Due to lower production during maintenance, winter-grade gasoline stocks typically decline before the transition to summer-grade gasoline, which is much more difficult to produce because of tighter specifications. Another limitation on gasoline production is that the strong diesel margins create an incentive to maximize diesel production over gasoline. We think the combination of these supply constraints with seasonal demand growth will result in stronger gasoline margins this spring and summer.
"With regard to our strategy of optimizing our portfolio, we initiated a process to explore strategic alternatives for our Memphis and Krotz Springs refineries, and we have retained JPMorgan to assist us in that process. We are also continuing the strategic review of our Aruba refinery.
"Going forward, we are committed to delivering industry-leading returns to our shareholders. To do this, we have taken a balanced approach to allocating free cash flow, and we clearly delivered on that commitment in 2007. Looking into 2008, we plan to continue our balanced approach of investing in growth projects, improving our operating performance, paying off debt, buying back more stock, and increasing dividends, while maintaining our investment-grade credit rating. In doing so, we remain focused on increasing shareholder value and becoming a better positioned, better performing, and more valuable company for the long term," Klesse said.
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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 web site at www.valero.com.
About Valero
Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 22,000 employees and 2007 annual revenues of $95 billion. The company owns and operates 17 refineries throughout the United States, Canada and the Caribbean with a combined throughput capacity of approximately 3.1 million barrels per day, making it the largest refiner in North America. Valero is also one of the nation's largest retail operators with approximately 5,800 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.