SAN ANTONIO, Texas -- Independent oil refiner Valero Energy Corp. reported a net loss for first-quarter 2002 of $38.6 million, or 37 cents per share, compared to net income of $136.1 million, or $2.13 per share, in first-quarter 2001.
Operating income for the quarter was $200,000, compared to operating income of $237.1 million for the same period last year. Since the acquisition of Ultramar Diamond Shamrock Corp. was completed on December 31, 2001, UDS’s operations are not included in the first-quarter 2001 results.
“The weak economic conditions, a record warm winter in the Northeast, reduced jet fuel demand and depressed sour crude discounts all combined to produce what was one of the worst refining margin environments in a decade,” said Bill Greehey, Valero’s chairman and CEO. “In addition to the overall poor refining margin environment, our results were further impacted by a significant level of maintenance activity throughout our refining system and economic-related run cuts we initiated during the quarter. Even though margins improved in March, it was not enough to overcome the losses incurred earlier in the quarter.”
Compared to first-quarter 2001 levels, the company’s average throughput margin per barrel declined 49 percent. Refining operating results were primarily impacted by the fact that, in general, gasoline margins declined nearly 40 percent from first-quarter 2001 levels and distillate margins were down more than 50 percent. The decline in gasoline and distillate margins was primarily due to the high inventory levels for these products. By comparison, gasoline and distillate margins in first-quarter 2001 were exceptionally high as a result of a much colder winter and high natural gas prices.
The discounts on the company’s key sour crude oil feedstocks declined by more than 50 percent from the near-record first-quarter 2001 discounts, primarily as a result of the Organization of Petroleum Exporting Countries’ production cuts, which were predominantly sour crude oils. Even with sour crude oil discounts averaging only $2.59 per barrel in the first quarter, the company still achieved an approximate $1.25 to $1.50 per barrel net margin advantage over sweet crude alternatives, depending on refinery configuration and location.
Refinery utilization rates were about 15 percent below normal operating rates during the quarter, which equated to more than $60 million of lost operating income. Operations at several of the company’s refineries were affected by maintenance-related activities. During the quarter, seven of the company’s 12 refineries experienced downtime for turnaround activities. The most significant were the Benicia refinery on the West Coast, the Corpus Christi and Texas City refineries on the Gulf Coast and the McKee refinery in the Mid-Continent region. In addition, the uneconomic operating conditions early in the quarter led the company to cut runs significantly in January and February.
Segment operating income for the company’s retail operations, before administrative expenses, was $3.4 million for the quarter versus a loss of $200,000 in first-quarter 2001. The company’s U.S. retail operations reported an operating loss of $19.3 million, primarily due to exceptionally low retail fuel margins, which averaged five cents per gallon in the first quarter. Offsetting these results was a contribution to operating income from the company’s Northeast retail operations of $22.7 million. In the U.S. retail market, rapidly rising crude prices made it very difficult for retailers to pass along these costs to customers. As crude prices have stabilized recently, U.S. retail margins have improved from first quarter levels and, for the month of April, have averaged more than twelve cents per gallon.
Despite the “challenging earnings environment,” first-quarter 2001 was significant for Valero, said Greehey, because it “made major strides” in integrating UDS into Valero. “The integration has gone well, and the closing of the transaction has allowed us to begin capturing the synergies created by this acquisition. Even in the difficult margin environment we saw in the first quarter, we estimate that we were able to capture $40 million in synergies. We continue to expect to achieve more than $200 million in annual synergies in 2002 and more than double that over the next three years.”
Greehey added that the company expects to complete the sale of the Golden Eagle refinery and 70 Beacon retail sites to Tesoro Petroleum Corp. for $1.125 billion in early May. “From the proceeds, we intend to complete the repurchase of a total of $400 million of our stock…. We repurchased $100 million of our stock in December and have purchased $30 million year-to-date. We intend to apply the remainder of the proceeds to debt repayment, which would place our pro forma debt-to-capitalization ratio under 53 percent as of March 31. Obviously, this puts us well on our way toward achieving our goal of a debt-to-capitalization ratio of less than 50 percent by the end of this year,” he said.
Valero currently owns and operates 12 refineries in the U.S. and Canada with a combined throughput capacity of approximately two million barrels per day. It operates approximately 4,600 retail outlets in the U.S. and Canada under various brand names including Diamond Shamrock, Ultramar, Valero, Beacon and Total.
Separately, Scottsdale, Ariz.-based refiner-marketer Giant Industries Inc. reported net earnings of $123,000, or one cent per share, for the first quarter ended March 31, 2002. This compares to net earnings for first-quarter 2001 of $950,000 or 11 cents per share.
Giant’s chief financial officer, Mark Cox said: “We are pleased with our profitable operating results, given the weak U.S. refining and marketing environment throughout much of the first quarter of 2002. Our continued focus on reducing operating and administrative expenses was evident in the first quarter as these expenses were significantly lower than the same period last year.”
He added, “Additionally, our retail operations had operating improvements in the quarter as same store fuel volumes increased approximately two percent and merchandise sales increased approximately six percent versus the prior year’s levels. We are continuing to work toward the closing of the Yorktown refinery acquisition, which we currently expect to close before the end of May.”
Giant owns and operates two New Mexico crude oil refineries; a crude oil gathering pipeline system based in Farmington, N.M., which services the refineries, finished products distribution terminals in Albuquerque, N.M. and Flagstaff, Ariz.; a fleet of 145 crude oil and finished product truck transports; a travel center east of Gallup, N.M.; and a chain of 149 retail service station units in New Mexico, Colorado, and Arizona. It is also the parent company of Phoenix Fuel Co. Inc., an Arizona-based independent petroleum products distributor.
