Valero (VLO -1.65%) ended 2022 with a bang. The fuel company reported $3.1 billion, or $8.15 per share, of net income in the fourth quarter, more than triple the prior-year period's $1 billion, or $2.46 per share. That drove its 2022 total to $11.5 billion, or $29.04 per share, a stunning 1,179% more than the $930 million, or $2.27 per share, it earned in 2021.
While robust market conditions helped power that surge, Valero also benefited from recently completed capital projects. With more expansions on track to enter service in the next year, it could have more fuel to grow earnings.
Cashing in on the conditions
Valero's refining segment posted $4.3 billion in profits in the fourth quarter, up 230% from the prior year. The company refined an average of 3 million barrels of crude oil per day as its facilities operated at 97% capacity during the quarter, which was its best rate since 2018.
That high utilization level enabled Valero to capitalize on the sizable price difference between crude oil and the refined petroleum products it sells (known as the crack spread) due to robust fuel demand.
The company's renewable-diesel segment, consisting of its Diamond Green Diesel (DGD) joint venture with Darling Ingredients, generated $261 million in operating income for the quarter. That's 74% above the year-ago level of $150 million.
Volumes skyrocketed to 2.4 million gallons per day, 55% higher than the prior-year period. The company benefited from the additional output from the DGD St. Charles plant expansion and the earlier-than-expected completion of its DGD Port Arthur plant last quarter.
Those strong results offset materially lower earnings in the company's ethanol segment, where operating income plunged from $474 million in the 2021 fourth quarter to $7 million a year later. Production volumes declined by 340,000 barrels per day to 4.1 million in the 2022 fourth quarter. In addition, the company went up against a tough comparable period as ethanol prices and demand were robust in 2021 while inventories were low.
The fuel to keep growing
Strong conditions in the refining market helped Valero's stunning profit surge last year. The company also benefited from its expansion-related investments. While market conditions could weaken this year if the economy slows, its capital projects will help pick up some slack.
The company's renewable-diesel segment will get a boost from the recently completed Port Arthur project, which came on line ahead of schedule and under budget. It added an incremental 470 million gallons of annual renewable-diesel capacity, boosting the total to 1.2 billion gallons. It also grew the company's capacity for renewable naphtha (an important component for solvents) to 50 million gallons, a 20-million-gallon increase.
Meanwhile, the company has several refinery optimization projects underway that will reduce costs and help it capture higher margins. The most notable is the Port Arthur Coker project, which it expects to finish in the second quarter.
Lastly, the company and its partners BlackRock and Navigator are working on a carbon sequestration project that should start up late next year. Valero is the anchor shipper on the system, which will connect eight of its ethanol plants. The project will reduce the company's carbon intensity and should significantly improve its margin profile:
Image source: Valero investor relations presentation.
As the slide shows, the project could enable Valero to capture tax credits and value from the low carbon fuels standard (LCFS) program to more than triple the average profit per gallon it earns on its ethanol production.
These and other incentives are leading Valero to consider additional low-carbon opportunities. It's advancing options associated with sustainable aviation fuel, renewable hydrogen, additional renewable naphtha, and other carbon sequestration opportunities. Future projects could further enhance the company's margins and earnings potential, given the sizable market potential for lower-carbon energy.
Positioned for more profits
Valero produced prodigious profits last year, thanks partly to a robust refining market. While demand for its products ebbs and flows with the economy, the company has positioned its business to generate strong profits by investing in projects that boost its margins. Because of that, it's in an excellent position to continue making mounds of money, potentially giving it the fuel to continue producing robust returns for investors.
