Valero discusses ethanol acquisitions, E15 during investor call

By Erin Voegele | October 25, 2018

Valero Energy Corp. has released third quarter financial results, reporting lower operating income for its ethanol division. Overall, the company reported increased net income when compared to the same period of last year.

Valero reported $21 million of third quarter operating income for its ethanol segment, down from $82 million during the third quarter of 2017. The decrease is primarily attributed to lower ethanol prices. Valero produced approximately 4 million gallons of ethanol per day during the three-month period, in line with production during the same quarter of last year.

The company reported its biofuel blending costs reached $94 million during the third quarter, down $136 million when compared to biofuel blending costs during the third quarter of 2017. The decrease is primarily attributed to lower renewable identification number (RIN) prices.

Overall, Valero reported $856 million in net income attributable to Valero stockholders, or $2.01 per share, compared to $841 million, or $1.91 per share, for the third quarter of last year.

During an investor call, Joe Gorder, president and CEO of Valero, addressed recent news that Valero has agreed to acquire three ethanol plants from Green Plains Inc. at a cost of $300 million, plus working capital estimated at $28 million. He said the three plants have a combined nameplate capacity of 280 million. “These plants utilize ICM and Delta-T technologies and are located in the corn belt, enabling us to transfer best practices from our existing portfolio and capture commercial and operational synergies,” he said. The acquisition is expected to close in the third quarter of this year. 

Gorder also briefly mentioned Valero’s Diamond Green Diesel plant, noting an expansion was completed in August that increased renewable diesel production capacity at the plant to 16,500 barrels per day. “Development continues on a project to add a parallel facility and further expand the production capacity to a total of 44,000 barrels per day,” he said. “A final investment decision is expected before year end.”

John Locke, vice president of investor relations at Valero, said the company expects its ethanol segment to produce a total of 4.1 million gallons per day during the fourth quarter, excluding production from the three Green Plains plants. Locke also noted, that given recent declines in ethanol and biodiesel RIN costs, the company is reducing its expected RINs expense for the year to between $450 million and $550 million.

During the Q&A segment of the investor call, Martin Parrish, vice president of alternative fuels at Valero, elaborated on the company’s decision to purchase the three Green Plains ethanol plants. He said ethanol is going to be in gasoline for a long time, and it’s a core part of Valero’s strategy. “The opportunity came up to buy three quality plants, so we took it,” he said. “We see corn ethanol as the most competitive octane source in the world. We expect ethanol demand to grow globally.” Parrish noted that ethanol exports are up about 30 percent year-on-year for the last three years and will account for approximately 10 percent of U.S. production this year. He also said that domestic growth in production is slowing, from about 3.6 percent in prior years to between 1 percent and 1.5 percent this year. “We think things are going to start improving on the supply demand balance, and with that we will get some margin improvements,” he continued.

The call also addressed the expected U.S. EPA rulemaking for E15. Jason Fraser, senior vice president of strategy, public policy and investor relations, said the company doesn’t think the EPA’s action will result in a large, sudden increase in ethanol penetration due to retailer concerns, liability issues, equipment expenses, and legal challenges. Parrish also indicated Valero expected to see a slow, measured penetration of E15 into the market, and said that E15 doesn’t really impact the company’s ethanol production thought process.

Valero currently owns 11 ethanol plants with a combined production capacity of 1.4 billion gallons per year. Following the acquisition of the three Green Plains facilities, the company will own 14 ethanol plants with a combined production capacity of approximately 1.68 billion gallons per year. The most recent data published on the Ethanol Producer Magazine online plant map shows the U.S. currently has 204 ethanol plants with a combined 16.7 billion gallons of capacity.