The economy has come to a screeching halt for the time being, and companies need cash in order to fulfill short-term obligations while some operations are shut down. But while other companies scramble, oil refiner and retailer Valero Energy's (VLO -0.20%) management understood the risks in advance. The moves it made in 2019 are helping it successfully navigate the industry's cash crunch today.
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This calls for copious cash
Right now, no one knows when we'll all be able to go back to work. And without employees working and customers buying, a lot of companies can't pay their short-term bills, much less turn a profit. They need cash -- and a revolving credit line can provide it.
Companies set up revolving credit lines for emergencies like these. A bank agrees to lend the company a set amount of money -- sometimes up to billions of dollars. The company can tap this cash reservoir when it needs the money. When the company repays the bank for what it borrowed, the reservoir refills, ready to be borrowed again in the future. Think of it like the limit on your credit card; it goes down when you rack up charges on your account, then rises again when you pay your bill each month.
Refiners envy Valero's cash-handling skills
In uncertain times like these, stakeholders in a company are looking less for growth, and more for companies that can meet short- and long-term obligations. Well-run companies keep up a healthy credit position, balancing smooth everyday operations with savvy borrowing and repayment. And few companies kept as keen an eye on this balance in 2019 as Valero.
Valero has 15 oil refineries, 14 ethanol plants, and one renewable diesel segment. It takes a lot of liquidity to operate such a capital-intensive operation. Fortunately, Valero has access to about $7.8 billion according to their 2019 10-K. This number includes the $2.5 billion of cash Valero has on hand; $1.3 billion in local lines of credit and ability to borrow; and $4 billion -- negotiated up from $3 billion in the past year -- in revolving credit. More impressively, the company announced at the end of 2019 that it hadn't borrowed a single penny from that $4 billion pile.
That kind of available liquidity helps boost investors' confidence in Valero's future, especially with oil prices facing falling demand and a glut of supply. But it also raises an interesting question: If its business needs abundant cash to keep running, how has Valero managed to maintain such a huge hoard in reserve?
Giving "cash balance" a whole new meaning
Management has been able to sustain such a liquidity level -- its cash stockpile and borrowing capacity -- through a balancing act of its cash flow.
For one thing, Valero can thank the 2017 Tax Cuts and Jobs Act for its ability to accumulate that huge cash pile. Tax cuts boosted the company's cash balance by $1.9 billion as a one-time benefit in 2017.
In addition, Valero can keep its revolving credit free from use and its cash on hand to optimize liquidity because that the company adjusts capital spending based on its cash needs. In times when the company forecasts huge cash flows, the company will spend more on capital investments -- like in 2014, when it spent $2.8 billion. In 2016, when the company was forecasting a much lower cash flow, the company only spent $2.0 billion on capital investments. Management will adjust capital spending in order to meet liquidity requirements, and it's very good at it, it seems.
The upcoming debt and lease obligations, excluding purchasing obligations for operations, are about $1.4 billion, and the dividend will be another $1.5 billion, since the common stock count has gone down thanks to the crafty share repurchasing Valero has done. That's a total of $2.9 billion in bills it has to pay -- easily covered by its $7.8 billion in available cash and borrowing capacity.
Plenty of fuel in the tank
The mix of having all of the capacity under a revolving credit line, along with Valero's cash position makes me confident that management is well equipped for a demand-side crunch for the year. Fortunately for refiners, demand tends to rise in times of low commodity prices. So once we're all allowed to leave our houses again, Valero's operations will likely breathe a sigh of relief -- if they hadn't already.
