What happened

Shares of Valero Energy (VLO 0.97%) surged 10.3% in January, according to data provided by S&P Global Market Intelligence. That furthered its gains from 2022, when the refining stock rocketed 64%. Several catalysts fueled last month's rally, including earnings, a dividend increase, and a new low-carbon project.

So what

Valero reported its fourth-quarter and full-year results last month. The company posted prodigious profits, as earnings tripled during the quarter and rocketed more than 10-fold for the full year. Its net income reached $3.1 billion, or $8.15 per share, in the quarter, which was $1.23 per share ahead of the analysts' consensus estimate.

Valero's refining business had its best utilization rate since 2018 at 97%, enabling it to capitalize on the wide gap between crude oil prices and refined product prices. That fueled a 230% jump in the refining segment's operating profit to $4.1 billion. Valero also profited from recent investments to grow its renewable fuel production. The company and its joint venture partner Darling Ingredients (NYSE: DAR) benefited from additional volumes from their Diamond Green Diesel (DGD) St. Charles plant expansion and the earlier-than-expected start-up of their DGD Port Arthur plant last quarter. Valero's renewable diesel earnings grew by 74% to $261 million.

The company's strong earnings and cash flow enabled it to reduce debt by $2.7 billion last year, bringing its total debt reduction to $4 billion since the second half of 2021. That balance sheet improvement allowed the company to return more cash to shareholders. Valero announced a 4.1% dividend increase last month.

Valero also continues to invest in the fuels of the future. Last month, the DGD joint venture approved a sustainable aviation fuel (SAF) project at their DGD plant in Port Arthur. They're investing $315 million (split 50% between Valero and Darling Ingredients) in the project that should start operations in 2025. It will have the capacity to upgrade about half of the existing refinery's 470 million gallon annual production capacity to SAF. The project will lower the carbon intensity of Valero's products and help fuel its long-term growth.

Now what

Valero is benefiting from the strong demand for refined petroleum products and renewable fuels. Meanwhile, it's investing heavily to enhance its margins and expand its renewable fuel production capacity. These drivers position Valero to continue producing lots of cash to support its growth and increased shareholder returns. Those catalysts could also give the energy stock the fuel to continue producing strong returns for investors.