Valero Energy Corporation (VLO) Earnings

Management highlights

- Overall Financial and Operational Performance * Valero delivered strong Q2 2026 results driven by exceptional execution across all segments amid ongoing geopolitical and macroeconomic volatility. Net income attributable to Valero stockholders was $3.7 billion ($12.62 per share), up sharply from $714 million ($2.28 per share) in Q2 2025. Adjusted net income was also $3.7 billion ($12.54 per share). * Refineries operated safely and reliably to meet resilient transportation fuel demand, while renewable fuels segments performed well and added additional liquid fuel supply to the market. * Net cash from operating activities was $5.6 billion, with adjusted operating cash flow of $4.5 billion after excluding working capital and joint venture impacts. Total capital investments for the quarter were $350 million, $290 million of which went to sustaining business operations (turnarounds, catalysts, regulatory compliance) and the remainder to growth. - Capital Allocation and Balance Sheet * Valero maintained a strong, well-capitalized balance sheet, ending the quarter with $7.9 billion in cash and cash equivalents, $9.1 billion in total debt, and $2.2 billion in finance lease obligations. The net debt-to-capitalization ratio was 11%, with a $2.1 billion cash build during the quarter. * Cash holdings were built above the long-term target range of $4-$5 billion to preserve optionality in volatile markets, while still meeting minimum shareholder return commitments. Total shareholder returns reached $2.6 billion in Q2 2026 for a 59% payout ratio, and a $1.20 per share quarterly dividend was announced. * The company repaid $100 million in maturing notes in July, and has cash set aside to cover $572 million in remaining 2026 maturities. - Strategic Progress * The $230 million FCC unit optimization project at the St. Charles refinery remains on track for completion in Q3 2026, which will increase production of high-value products including finished gasoline. * The Port Arthur refinery DHT unit damage repair is ongoing, with the refinery continuing normal throughput operations during repairs.

Guidance

- Full-year 2026 capital investments attributable to Valero are guided to approximately $2 billion, with $1.7 billion allocated to sustaining business activities (including $250 million for Port Arthur DHT unit repairs, most of which is expected to be covered by insurance) and the remainder to growth projects. Repairs are expected to be completed by the end of 2026. - Full-year 2026 G&A expenses are expected to be approximately $960 million. - Q3 2026 refining throughput is guided to the following ranges: 1.78-1.83 million barrels per day (Gulf Coast), 460,000-480,000 barrels per day (Midcontinent), 110,000-120,000 barrels per day (West Coast), 450,000-470,000 barrels per day (North Atlantic). Refining cash operating expenses are expected to be ~$4.75 per barrel. - Q3 2026 renewable diesel sales volume is expected to be ~335 million gallons, with operating expenses of 49 cents per gallon (21 cents of which is non-cash depreciation/amortization). - Q3 2026 ethanol production is expected to average 4.8 million gallons per day, with operating expenses of $0.39 per gallon ($0.04 of which is non-cash depreciation/amortization). - Q3 2026 net interest expense is expected to be ~$140 million, with total depreciation and amortization of ~$700 million.

Segment performance

Valero has three core operating segments, with the following Q2 2026 financial performance: 1. Refining: Reported $4.5 billion in operating income (compared to $1.3 billion in Q2 2025), with adjusted operating income of $4.4 billion. Average throughput reached 3 million barrels per day, and cash operating expenses were $4.70 per barrel. This segment contributed approximately 81.2% of total segment operating income. 2. Renewable Diesel: Reported $717 million in operating income in Q2 2026, a reversal from a $79 million operating loss in the year-ago quarter. Average sales volumes hit 3.8 million gallons per day. This segment contributed approximately 13.0% of total segment operating income. 3. Ethanol: Reported $318 million in operating income in Q2 2026, up from $54 million in Q2 2025. Average production volumes reached 4.7 million gallons per day. This segment contributed approximately 5.8% of total segment operating income. Corporate and unallocated G&A expenses were $233 million for the quarter.

Risks & headwinds

- Ongoing geopolitical volatility (including conflicts in the Middle East and Ukraine, and global trade disruptions) creates commodity price and market uncertainty, and has contributed to large global product inventory deficits that may take years to replenish. - The RIN market for renewable fuel obligations is structurally short, with the RIN bank expected to be fully drawn down between late 2026 and mid-2027. There is uncertainty around market outcomes if the market becomes infeasible, which could push higher compliance costs to consumers. - Policy uncertainty around renewable fuel targets and trade policy creates headwinds for large-scale renewable diesel expansion, and administrative and tariff barriers slow incremental renewable fuel supply from foreign imports. - Commodity price volatility can lead to sudden working capital cash draws that impact liquidity, which is the primary reason Valero holds cash above its long-term target range at present. - Refining capacity damage from geopolitical conflicts may take longer to repair than currently projected, extending market tightness and volatility. - Inflation has increased both operating and capital costs for new refining projects, which supports higher floor mid-cycle margins but also raises return thresholds for new investment.

Analyst Q&A

• Q: What factors are shaping the Q2 to Q3 transition, and how is Valero approaching excess cash above its target cash balance for capital allocation? /

  A: Q3-to-date, the largest tailwind for Valero is improved feedstock costs, with more crude grades available at discounts to benchmarks (unlike Q2 when most physical crude traded at premiums). Valero built excess cash to mitigate working capital drawdown risk from sudden commodity price drops, and can simultaneously maintain higher cash holdings and pay out above its 50% payout target in the current strong environment. If volatility eases or commodity prices pull back and cash returns to the 4-5 billion target range, Valero is positioned to accelerate shareholder returns.

• Q: Has the global refining industry structurally shifted to a higher mid-cycle margin environment, and what is the outlook for renewable fuel profitability? /

  A: Management believes mid-cycle margins will be permanently higher than historical averages. Historically, crack spreads were set by complex cracking capacity in Northwest Europe, but now market balances are tight enough that margins are set by higher-cost hydro-skimming capacity, which faces rising carbon credit costs and inflation that push floor margins higher. Renewable diesel benefits from D4 RIN prices rising faster than feedstock costs, with strong tailwinds through 2026 and 2027. Ethanol benefits from structural production tax credits that nearly double mid-cycle margins through 2029, on top of current strong gasoline and octane prices.

• Q: What is the impact of ~5 million barrels per day of offline global refining capacity on inventories, and what is driving the current relative strength in gasoline cracks? /

  A: If all offline capacity came back online today, global light product inventories are 130 million barrels below normal seasonal levels and would remain below the 5-year average through 2027, with management expecting an even slower recovery than projections due to permanent damage to some Middle Eastern capacity and ongoing Russian capacity disruptions. Gasoline strength comes from closed transatlantic trade arbitrage (U.S. imports from Europe are down ~400,000 barrels per day from historical levels) combined with strong export demand from Latin America and resilient domestic demand, tightening U.S. balances.

• Q: How is Valero approaching new refining growth given the current capacity bottleneck and higher project costs? /

  A: Valero maintains strict capital discipline and gating requirements for all projects, with average annual strategic growth spending of ~$0.5-0.7 billion post-COVID (down from ~$1 billion pre-COVID). Most current growth spending is focused on small, short-cycle projects: yield improvement, feedstock flexibility, and commercial leverage, particularly to process more of the expected growth in heavy crude from Canada and Venezuela. Large new refining projects are very costly, and management will only pursue investments that meet strict return thresholds, with no plans to abandon discipline despite higher mid-cycle margins.