Valero reports improved operating income for ethanol segment

By Erin Voegele | October 25, 2016

On Oct. 25, Valero Energy Corp. released third quarter financial results, noting the company’s ethanol segment reported $106 million of operating income for the three-month period, up from $35 million reported for the same quarter of 2015. Operating income from the segment was the highest reported since the fourth quarter of 2014.

According to Valero, ethanol production volumes averaged 3.8 million gallons per day during the quarter, consistent with the third quarter of 2015. The company said it expects ethanol demand to remain strong given high gasoline demand in the U.S. and significant ethanol exports. Record-high corn production in the U.S. is also expected to keep corn prices low in the near term.

Under its refining segment, Valero noted operating income declined to $990 million for the quarter, compared to $2.3 billion during the same period of the previous year. The company attributed the decrease to weaker gasoline and distillate margins, along with narrower discounts for most sweet and sour crudes relative to the Brent benchmark and higher costs to meet biofuel blending obligations, primarily the purchase of renewable identification numbers (RINs). Valero said biofuel blending costs were $198 million during the third quarter, up $104 million when compared to the third quarter of last year. The company also noted it continues to expect such costs to be between $750 million and $850 million for 2016.

Overall, Valero reported net income attributable to Valero stockholders of $613 million, or $1.33 per share. Adjusted net income attributable to Valero stockholders was $571, or $1.24 per share. During the same period of 2015, the company reported net income attributable to Valero stockholders of $1.4 billion, or $2.79 per share.  

During an investor call, Joe Gorder, president and CEO of Valero, noted the expense associated with RINs is significant to the company and has its full attention. He spoke about the petition Valero filed with the U.S. EPA earlier this year, asking the agency to move the point of obligation under the renewable fuel standard (RFS). He said Valero believes the change would improve the penetration of renewable fuels, reduce RIN fraud, lower RIN speculation, and reduce consumer costs while leveling the playing field among refiners and retailers. Gorder said that the American Fuel and Petrochemical Manufacturers has also filed a similar petition with the EPA, but noted not everyone in the oil industry agrees with moving the point of obligation. For example, companies with a more integrated system through retail are likely to be comfortable with the status quo. However, Gorder said in his view, aligning the natural point of compliance with the natural point of obligation will help remove speculation in the RIN market. He said people will not be incentivized to build inventories of RINs to hold out for higher prices. Gorder also indicated Valero is working to implement strategies to reduce its RIN purchase obligation through increasing terminal exposure, changing commercial arrangements and exports.