SAN ANTONIO -- Valero Energy Corp. has reported third-quarter 2008 income from continuing operations of $1.2 billion, or $2.18 per share, which compares to $848 million, or $1.34 per share, in third-quarter 2007.
The third-quarter 2008 results include the company's pre-tax gain of $305 million on the sale of its Krotz Springs, La., refinery to a subsidiary of Alon USA Energy Inc., which was effective July 1, 2008. Excluding this gain, third-quarter 2008 income from continuing operations was $982 million, or $1.86 per share. Due to long-term product supply agreements between Valero and [image-nocss] Alon, the results of operations related to the Krotz Springs refinery have not been presented as discontinued operations.
Income from continuing operations for the nine months ended Sept. 30, 2008, was $2.1 billion, or $4.02 per share, compared to $4 billion, or $6.66 per share, for the nine months ended Sept. 30, 2007. Excluding the gain on the sale of the Krotz Springs refinery, income from continuing operations for the nine months ended Sept. 30, 2008 was $2 billion, or $3.70 per share.
Third-quarter 2008 operating income was $1.8 billion compared to $1.2 billion for third-quarter 2007. Excluding the gain on the sale of the Krotz Springs refinery, the increase in operating income was mainly due to higher margins for distillate products, such as diesel and jet fuels. Partially offsetting the higher margins for distillate products was a decrease in margins for gasoline.
"As a result of our good earnings, our financial position has continued to improve," said Bill Klesse, Valero's chairman and CEO. "At the end of the third quarter, our net debt-to-capitalization ratio was 15.8%, one of the lowest in company history. Given the very uncertain economic environment, we have significantly reduced our capital spending. We estimate total capital spending for 2008 will be approximately $3 billion, down $800 million from our last update, and down $1.5 billion from our original budget of $4.5 billion. For 2009, we estimate capital spending will be $3.5 billion, also down $500 million from our previous guidance. We will continue to review our capital spending considering our opportunities and the economic outlook."
Regarding uses of cash in third-quarter 2008, the company's capital spending was $749 million, of which $76 million was for turnaround expenditures. The company also used $78 million for dividend payments and spent $74 million to purchase 2 million shares of its common stock. In October, the company purchased an additional 8.3 million shares, taking the year-to-date total purchases to nearly 23 million shares, or more than 4% of shares outstanding at the beginning of this year.
"Looking at market fundamentals, a key item in the third quarter was the sharp drop in the price of crude oil, and this decline has obviously continued so far in the fourth quarter," said Klesse. "The price of WTI light sweet crude oil began the third quarter at approximately $140 per barrel, but recently closed below $65 per barrel. Although the fall in crude oil prices has not translated into higher margins for all of Valero's products, the lower crude oil prices have led to substantially lower retail pump prices, which is positive for consumers and demand for our products. The lower prices will also provide consumers a clearer view of the magnitude of the subsidies necessary to make alternative fuels competitive."
He added, "Regarding third-quarter product margins, conditions were very volatile. Low gasoline margins in July were followed by higher margins in August as production adjusted to demand. When the hurricanes hit the Gulf Coast and reduced refinery production, gasoline inventories fell to historically low levels, and margins responded, which increased average margins for the third quarter. In contrast to the volatile movement of gasoline margins, distillate margins remained very good throughout the third quarter as global supply and demand balances were tight. With winter approaching, we continue to expect excellent distillate margins even though worldwide economic activity is slowing."
Margins for many of the company's secondary products, such as asphalt, heavy fuel oil, petroleum coke, and petrochemical feedstocks, increased in the third quarter compared to the prior quarter as the cost of crude oil fell faster than the prices of those products. This favorable margin relationship continues as crude prices continue to fall.
"In our refining operations, the hurricanes certainly complicated matters," said Klesse. "We had four refineries shut down, but we were fortunate to avoid major damage from the hurricanes. We thank all of our employees for a dedicated and committed effort to return our refineries and most of our retail stores to normal operations as quickly as possible. Uncertainty in the financial markets and a pessimistic economic outlook have noticeably added to the inherent volatility in the refining industry. Valero's stock price, like those of nearly all companies in the energy sector, has been hit hard. Obviously, we feel that our stock price has been beaten down unfairly when you consider our balance sheet strength, cash position, operations and continuing profitability. You can expect us to maintain our balanced approach by investing in growth projects, paying off debt, buying back stock and increasing dividends, but clearly we intend to hold much more cash than in the past."
Valero, San Antonio, owns and operates 16 refineries throughout the United States, Canada and the Caribbean with a combined throughput capacity of approximately 3.1 million barrels per day, making it the largest refiner in North America. Valero is also one of the nation's largest retail operators with approximately 5,800 retail and branded wholesale outlets in the United States, Canada and the Caribbean under brands including Valero, Diamond Shamrock, Shamrock, Ultramar and Beacon.
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