Valero Energy Corporation Reports Record Third Quarter Earnings

Business Wire, Oct 26, 2004

SAN ANTONIO -- Valero Energy Corporation (NYSE:VLO) today reported record net income of $434.5 million, or $1.57 per share, for the third quarter of 2004, which is more than double the company's prior record net income for the third quarter of $191.1 million, or $.75 per share, achieved last year. For the nine months ended September 30, 2004, Valero's net income was $1.3 billion, or $4.78 per share, again more than double the net income of $489.9 million, or $2.05 per share, for the nine months ended September 30, 2003. The company's per share results have been adjusted to reflect the two-for-one common stock split distributed on October 7, 2004. The company's debt-to-capitalization ratio, net of cash, was 35.1 percent at September 30, 2004, compared to 40.3 percent at December 31, 2003.

Third quarter operating income for the company's refining segment was $760.5 million, compared to $393.4 million for the same period last year. The improvement from the third quarter last year was driven by record distillate margins, record throughput levels (primarily due to the acquisition of the Aruba refinery in March), and record sour crude discounts. In particular, the increase in the sour crude discounts over the third quarter last year contributed approximately $480 million to operating income.

Operating income for the company's retail segment was $36.6 million for the third quarter, compared to $47.3 million in the third quarter of last year, primarily due to lower retail fuel margins in the U.S. system caused by higher crude oil prices during the quarter.

"Refined product margins, particularly distillate margins, were outstanding this quarter but the real story was the significant move in sour crude discounts," said Bill Greehey, Valero's Chairman of the Board and Chief Executive Officer. "Our results this quarter prove the importance of our superior leverage to sour crude discounts. In the third quarter, nearly 60 percent of the feedstocks we processed were sour, including 500,000 barrels per day of heavy, sour crude oils such as Maya, which had discounts averaging almost $12 per barrel for the quarter. And, we believe that we will continue to benefit from wider sour crude discounts well into the future since most of the growth in crude oil demand is for sweet crudes, while the vast majority of the world's incremental crude reserves are sour and heavy. Our proven strategy of acquiring and investing in refineries to process more sour crude oils will continue to benefit our shareholders going forward.

"Currently, sour crude discounts are at record levels. Thus far in the fourth quarter, the discount for Mars sour crude oil has averaged more than $10 per barrel while the Maya discount has averaged nearly $14 per barrel. In addition, Arab Medium and Arab Heavy discounts for October and November are already set and will average $8.58 per barrel and $11.05 per barrel, respectively. So, our fourth quarter earnings will benefit from these wider discounts.

"With regard to refined products, we are seeing the highest heat cracks ever for this time of year due to continued strong demand and low inventories. For the fourth quarter, the forward curve is indicating that the Gulf Coast heat crack will exceed $9 per barrel and the New York Harbor heat crack is trading at more than $11 per barrel. If heat cracks achieve these levels, they will set new records for a fourth quarter. With the industry experiencing an above average level of turnaround activity in October, we also expect gasoline margins to remain favorable in the fourth quarter. This is being reflected in the forward curve for gasoline for the fourth quarter, which is currently at around $5.00 per barrel in the New York Harbor.

"Given the record sour crude discounts and the very strong refined product margins, we believe current First Call estimates for the fourth quarter remain significantly understated.

"Looking ahead to next year, we strongly believe that the same supply and demand fundamentals that contributed to our record earnings in 2004 will continue into next year. In fact, sour crude discounts, which were low in the first quarter of 2004, should be better in 2005. Our throughputs for 2005 are expected to be up by approximately 100,000 barrels per day due to having the Aruba refinery in our system for the full year and the benefits of several strategic projects we completed this year. And, if you look at the forward curve for next year, it is indicating that gasoline margins will be similar to this year's high levels and that distillate margins should be around $1 per barrel higher than this year's. For these reasons and more, we believe the best is yet to come for Valero," said Greehey.

Valero's senior management will hold a conference call at 11:00 a.m. ET (10:00 a.m. CT) today, October 26, to discuss this earnings release. A live broadcast of the conference call will be available on the company's website at www.valero.com.

Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 20,000 employees and expected annual revenues of more than $50 billion. The company owns and operates 15 refineries throughout the United States, Canada and the Caribbean. Valero's refineries have a combined throughput capacity of approximately 2.4 million barrels per day, which represents approximately 12 percent of the total U.S. refining capacity. Valero is also one of the nation's largest retail operators with more than 4,500 retail and wholesale branded outlets in the United States, Canada and the Caribbean under various brand names including Diamond Shamrock, Shamrock, Ultramar, Valero, and Beacon. For more information, please visit www.valero.com.