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Valero's weak Q3 refining results offset by positive renewable diesel growth

Highlights

Valero posts record renewable diesel output

Q4 refining margins expected to rise

Export demand remains strong

New York — Valero Energy reported a third-quarter operating loss from its refining segment, partially offset by growth in the renewable diesel segment, the company said Oct. 22.

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"The third quarter was another challenging period in which refining margins continued to be pressured by pandemic-imposed restrictions on global economies," said Valero's CEO Joe Gorder on the company's third-quarter operations call.

Valero's refining segment posted a $575 million operating loss for the third quarter compared with earnings of $1.1 billion in 3Q 2019. Per barrel refining operating income fell into negative territory across its US refining operations as refinery utilization hovered around the 80% mark.

Gorder cited restrictions on personal mobility resulting in lower demand for refined products across the globe and less incentive to produce crude, leading to "narrower crude [price] discounts."

However, Valero's renewable diesel operating income for the quarter rose to $184 million compared with the $123 million in the third quarter 2019 as sales volumes rose to 870,000 gal/day.

"Our low carbon renewable diesel business remains resilient with another quarter of performance, realizing a margin of $2.72/gal and setting a record for sales volumes," said Gorder.

Valero pioneered the move by US refiners into the renewable fuels space.

Valero's ethanol segment posted earnings of $36 million in the third quarter, compared with a $43 million loss in 3Q 2019.

Demand rises from Q2

As weak as Valero's Q3 refining margins were, they were an improvement from the second quarter as demand for gasoline, diesel and jet improved by 25%, 7% and 57%, respectively, between quarters, Energy Information Administration data showed.

Demand increased due to the "incremental easing and restrictions on businesses and the reopening of some schools," said Gorder.

Valero's margins were also helped by "robust" gasoline and diesel exports to Latin America in the third quarter.

"We exported 316,000 b/d in the third quarter, which is significantly higher than the 107,000 b/d we exported in the second quarter," Gorder said.

"We also saw a steady increase in our wholesale volumes into Mexico," he said, adding that Valero is one of the largest private fuel importers in Mexico.

However, Valero expects to run at slightly lower rates in Q4 than in Q3, as it seeks "proper operating levels for our inventories," said Lane Riggs, Valero's chief operating officer.

"Inventory volumes we need [today] are different than we needed in the past," he added.

Valero expects to keep runs at about 80% of capacity in the fourth quarter, but at around 2.48 million b/d compared with the 2.526 million b/d average in the third quarter.

"We expect margins to improve as economies continue to reopen and product inventories come down to normal five-year levels. US gasoline inventories are already in the middle of the five-year range. Distillate inventories higher than the five-year range but trending down," Gorder said, noting that demand from winter heating and harvest is expected to winnow inventories.

Gorder also expects some support from refinery closures and fall maintenance schedules.

Valero shifts spending toward renewables

As it finishes up refinery optimization projects currently underway, Valero is shifting capital spending dollars towards renewables.

With the St. Charles alkylation unit on track for completion by the end of this year, the Diamond Pipeline expansion finished in 2021, and the Port Arthur, Texas coker project due online in 2023, Valero now expects to use 40% of its $1.6 billion in growth capital spending in 2021 "expanding our renewable diesel business," said Gorder.

Already underway is the joint venture Diamond Green Diesel expansion project at the St. Charles, Louisiana, refinery, which will increase renewable diesel production by 400 million gallons/year to 675 million gallons/year, and is expected to be completed in 2021. .

"Diamond Green Diesel also continues to make progress on the advanced engineer review for a potential new 400 million gallons per year renewable diesel plant at our Port Arthur, Texas, refinery," said Gorder.

"We are also evaluating a number of other low-carbon growth projects that are in the development phase of our gated process," he added.

Valero also recently rolled out its SASB Report, which aligns its performance with the Sustainable Accounting Board framework.

The company is targeting a 63% reduction in greenhouse gas emissions by 2025 "through investments and board-approved projects," said Homer Bhuller, Valero's head of investor relations.

"The targets will be achieved through absolute emissions reductions through refining efficiencies, offsets by our ethanol and renewable diesel production and global blending and credits for renewable fuel," said Bhuller.

Demand for renewable diesel is expected to rise as Canada's clean fuel standard comes into effect in 2022 and some US states look to add in Low Carbon Fuel Standards, similar to California. S&P Global Platts Analytics expects US annual diesel demand to average 50 billion gallons/year between 2022 and 2030.