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Valero maintains spending plan despite US tax reform

Valero Energy Corp. executives said benefits of U.S. tax reform would not make it stray significantly from its capital allocation strategy.

For the fourth quarter of 2017, the company reported $2.37 billion in earnings on a strong performance from its refining and marketing segment, up from $367 million a year ago. The results include a tax benefit of $1.9 billion stemming from the U.S. Tax Cut and Jobs Act that President Trump signed into law in late 2017.

Including the tax benefit of $4.26 per share, earnings per diluted share were $5.42 for the quarter, beating the S&P Capital IQ consensus GAAP estimate of $1.07 per share.

Company executives said during a Feb. 1 earnings conference call that they expect a $350 million improvement to cash flow from operations going forward, and would strive to return between 40% and 50% of discretionary cash flow to shareholders.

However, executives stressed that incremental discretionary cash flow would have to compete with growth investments and mergers and acquisitions.

For 2018, Valero executives outlined a plan boosting total CaxEx from $2.4 billion in 2017 to $2.7 billion in 2018, of which $1.7 billion would fund sustaining projects and the remainder would fund growth projects.

"Tax reform does change the economics a little bit on M&A," Valero CFO and Executive Vice President Michael Ciskowski said. "We would have the ability to deduct the purchase price of the [property, plant and equipment] in year one."

Like they did in the third quarter, executives stressed that they do not see good acquisition opportunities in the market.

Meanwhile, Valero Chairman, President and CEO Joseph Gorder said the company's rising share price would not stop it from pursuing buybacks.

"Frankly … we remain undervalued," Gorder said. "And as a result, I think you should expect that we're going to continue to balance out our [dividend] payout with repurchases."

Ciskowski said the company would not use extra cash to reduce debt at this time: "[Our debt-to-capitalization ratio] is at the lower end of our range [at 23%]. … We don't have a lot of maturities upcoming. None so far in 2018. And so I guess I just haven't thought much about paying debt at this time."

Turning to earnings results, the company reported refining segment income from operations for the quarter was $982 million, up from $645 million in the year-ago quarter, while ethanol segment income declined from $126 million to $37 million over the same period. The company's midstream segment, Valero Energy Partners LP, saw income from operations increase to $80 million from $70 million.

The company reported throughput at its refineries climbed from 2.9 million barrels per day in the year-ago quarter to 3.0 MMbbl/d in the fourth quarter of 2017 while margin per barrel climbed from $7.82 to $8.75.

For 2017, the company reported earnings of $4.07 billion, or $9.16 per share. Refining segment income from operations climbed from $3.77 billion to $4.01 billion, while the companies midstream segment saw operating income grow from $221 million to $292 million. At the same time, ethanol segment revenue declined to $172 million from $340 million.

In issuing guidance for 2018, the company said it expects refinery throughput of between 2.75 MMbbl/d and 2.86 MMbbl/d, versus the 2017 level of 2.86 MMbbl/d.

As of 3:40 p.m. ET, Valero's stock was trading at $94.24 on the New York Stock Exchange, down 1.8% on the day.