Thanks to continued weak crude prices and strong gasoline demand, Valero (VLO 3.92%) posted solid fourth-quarter results before the opening bell on Thursday. While the quarter was a bit weaker year over year due to lower ethanol prices, the company still drove past analysts' estimates.
A look at the numbers
Valero reported adjusted net income from continuing operations of $862 million, or $1.79 per share. While that was a bit below last year's fourth-quarter results of $952 million, or $1.83 per share, it was $0.34 per share better than analysts expected.
The sole driver of those strong results was Valero's refining segment, which delivered adjusted operating income of $1.5 billion for the quarter, in line with the prior period. The company continued to capture solid refining margins, while operating at 97% of its capacity. This helped it overcome most of the weakness in its ethanol segment, whose adjusted operating income fell from $154 million in last year's fourth quarter to just $37 million this past quarter. That decrease was mainly due to weaker ethanol prices and was despite the fact that its volumes improved by 131,000 gallons per day due to ongoing optimization and plant improvements.
Cash generation remains strong
Thanks to the continued strength of its refining segment, Valero is generating a ton of cash. The company is using some of that cash to invest in growth-oriented projects, with the rest being returned to shareholders. In fact, during the fourth quarter the company sent just over $1 billion in cash back to its investors after paying $240 million in dividends and buying back $767 million in stock. For the full year, it returned 80% of its adjusted net income back to investors.
Valero reinvested the rest of its cash back into its business to both maintain operations and grow for the future. Those investments are already bearing fruit after it was able to commission its new crude unit at the Corpus Christi refinery, complete the hydrocracker expansion at the Port Arthur refinery, and complete the crude unit expansion at the McKee refinery last quarter. In addition, it acquired a 50% interest in the Diamond Pipeline last quarter that will connect the key oil hub at Cushing, Oklahoma, to Valero's refinery in Memphis, Tennessee, providing it with more control over its access to cheap domestic crude.
Valero expects to continue to return cash to shareholders while investing for the future. For 2016, it is targeting to return 75% of its net income via share repurchases and dividends, with the company recently announcing a 20% dividend increase. The rest of its cash will be invested back into the business, with expectations that it will spend $1 billion on growth capex.
About 55% of that spending will be on logistics projects that it expects to eventually drop down to its MLP Valero Energy Partners (NYSE: VLP). That's an increase from the $400 million it invested in 2015 on logistics assets, which likewise are eventually expected to be dropped down to Valero Energy Partners. That's on top of the almost $1 billion in MLP-eligible EBITDA the company currently generates from assets such as pipelines, terminals, and transportation assets that are ripe for future drop-downs to Valero Energy Partners.
In addition to those investments in logistics, Valero expects its investments in a new crude unit at its Houston refinery to be completed by the second quarter of this year. Also, it recently approved the construction of a 13,000 barrel-per-day alkylation unit at that refinery, which will cost $300 million and be complete by the first half of 2019. That asset will upgrade low-cost natural gas liquids into premium-priced alkylate and is another example of the company's focus on building assets to capture the value difference between low-cost shale production and premium-priced upgraded products.
Valero continues to benefit from the strong refining environment, one that's paying big dividends for shareholders because it is providing the company with more cash than it needs for growth-oriented investments. In turn, that's leading to robust shareholder returns that aren't showing any signs of ending.