Valero Profit Up But Shares Down Amid Emissions Target Row

Valero Profit Up But Shares Down Amid Emissions Target Row
Valero traded lower despite net income more than tripling to $3.067 billion year on year.
Image by hernan4429 via iStock

Valero Energy Corp. saw its net income more than triple to $3.067 billion in the first quarter from $905 million in the corresponding 2022 period, it reported Thursday, but its stocks traded lower as shareholders dispute the company’s climate roadmap.

Profit per share rose $8.29 from $2.21 year on year despite lower prices as sales volumes climbed while sales costs slid.

Revenues fell to $36.439 billion but operating income surged by $2.659 billion to $4.043 billion compared to January-March 2022. This was because sales costs declined by more than half to offset a $39-million increase in general and administrative expenses year on year.

“Revenues decreased by $2.1 billion in the first quarter of 2023 compared to the first quarter of 2022 primarily due to decreases in product prices for the petroleum-based transportation fuels associated with sales made by our Refining segment”, Valero said in a filing with the USA Securities and Exchange Commission (SEC). “This decrease in revenues, along with an increase in general and administrative expenses (excluding depreciation and amortization expense) of $39 million primarily due to an increase in certain employee compensation expenses, was more than offset by a decrease in cost of sales of $4.8 billion, which was primarily due to decreases in crude oil and other feedstock costs”.

All of Valero’s three segments registered growth in operating income, led by refining, which added $2.103 billion to $36.439 billion year on year. The refining growth resulted from higher distillate and gasoline margins, bigger petroleum discounts and greater throughput volumes of 130,000 barrels a day.

Renewable diesel had an operating income of $205 million, up by $56 million as the DGD Port Arthur Plant, which started operation in the previous quarter, drove sales volumes to 1.3 million gallons per day to offset a $152-million impact from lower prices.

Ethanol logged an operating income of $39 million from $1 million in January-March 2022. Higher output volumes of 138,000 gallons per day had a favorable impact of about $17 million, against an unfavorable impact of $18 million from lower prices.

Dispute over Emissions Plan

Despite the profit surge, Valero closed 1.71 percent lower to $ 114.64 on the New York Stock Exchange Thursday, when it announced the results.

Earlier this week Mercy Investment Services Inc. urged fellow Valero shareholders to vote against the re-election of director nominees Deborah Majoras, Rayford Wilkins and Robert Profusek when the company holds its annual meeting scheduled May 9 over the board’s “inadequate oversight of the company’s unique climate-related risks and opportunities”.

Mercy has repeatedly called on the board to reform Valero’s greenhouse gases (GHG) reduction framework, which it has said is below industry standards.

“For example, in its 2035 GHG reduction target, Valero uses the lower-carbon profile of its biofuels products to offset its scope 1 and 2 emissions. Proper protocol would instead categorize Valero’s biofuel emissions as scope 3 product emissions”, it wrote. “While we do not dispute that Valero’s biofuels are lower carbon than its fossil fuel products, accepted protocols simply do not allow for this type of offset”.

Non-government organization World Resources Institute, which initiated the three-scope emissions categorization in a GHG protocol accounting standard published September 2001, defines Scope I as direct emissions, that which “occur from sources that are owned or controlled by the company”, as stated on its revised GHG accounting standard published March 2004. Scope II emissions refer to electricity purchased by a company and which “occur at the facility where electricity is generated”. Scope III comprises emissions from “extraction and production of purchased materials; transportation of purchased fuels; and use of sold products and services”.

The United Nations Framework Convention on Climate Change has put under Scope I direct energy consumption such as industrial processes and business travel through company-owned vehicles. The agency’s Scope II covers emissions from the purchase of electricity, heat and steam and Scope III lists business travel through flights and public transport, as well as transmission and distribution losses, among others.

In its GHG roadmap published September 2022, Valero’s targets cover only emissions from its refineries. It plans “reducing and displacing” 100 percent of its refinery Scope I and II emissions by 2025 “through Board-approved projects and carbon sequestration projects under development”, as stated on the plan.

Mercy said in an earlier letter as republished by Valero in a SEC filing March 22: “While Valero has adopted short-term GHG reduction targets, it does not provide a robust decarbonization plan ensuring a resilient business model through the energy transition, exposing the Company to reputational, regulatory and transition risks. Valero’s climate action plan includes minimal absolute emissions reductions and an overreliance on unverified 'displaced emissions' with no reduction target or actions associated with scope 3 emissions”.

Valero in that disclosure said Mercy’s call for changes to GHG targets translated to shutting down refineries. “Our strategy, on the other hand, is to run the most resilient refining assets, grow our low-carbon fuels production, and meet our aggressive targets by leveraging resilience and our low-carbon fuels growth strategy”, it said, adding the call had been rejected at Valero’s 2022 annual meeting.

On Scope III, it said it has not set a target “because the methodology is riddled with duplication and other challenges, and we do not have a clear line of sight to the use of our products by third parties”.

Mercy in a SEC filing March 23 replied: “In its Statement of Opposition, Valero’s Board claims that our proposal seeks targets that ‘can only come from refinery closures.’ This is inaccurate—we seek targets that reflect a consistently constructed trajectory to lower emissions, and a transition plan that demonstrates that Valero is positioning its assets to take full advantage of new opportunities that will arise in the energy transition”.

But Valero was insistent, saying Thursday in a SEC filing addressed to shareholders: “Valero believes limiting targets to absolute emission reductions forces a strategy that can only be realistically achieved with refinery closures that are inconsistent with our current business strategy”.

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