Washington's 'Reckless Rhetoric'

Valero's Klesse blasts Congress as anti-consumer, anti-capitalism

Published in CSP Daily News

SAN ANTONIO -- Bill Klesse, Valero Energy Corp.'s chairman and CEO, in discussing the oil company's second-quarter financial results, used the opportunity to decry Congress' lack of understanding of the petroleum industry. "We can manage industry challenges, but unfortunately, reckless rhetoric in Washington, D.C., complicates our forward progress. Too many in Congress fail to appreciate our industry's efficiencies, they won't acknowledge the excellent jobs we provide, they ignore the taxes we pay and worst of all, many in Congress are more interested in scoring populist political points than [image-nocss] reducing energy costs," he said.

"To not allow companies to look for oil and gas when there are huge potential reserves in the U.S. is irresponsible. Instead, Congress wants to provide subsidies for inefficient technologies. Instead of solutions, they want to reduce CO2 emissions without regard for the economy. The direction we see Congress moving is not good for consumers, our shareholders or our country. We will continue to advocate sound policies based on facts and market realities," he added.

Valero, meanwhile, has reported second-quarter 2008 income from continuing operations of $734 million, or $1.37 per share. The company's income from continuing operations in second-quarter 2007 was $2.1 billion, or $3.57 per share. For the six months ended June 30, 2008, income from continuing operations was $995 million, or $1.85 per share, compared to the company's income from continuing operations of $3.2 billion, or $5.28 per share, for the six months ended June 30, 2007.

Second-quarter 2008 operating income was $1.2 billion, versus $3.2 billion reported in second-quarter 2007. The decline in operating income was primarily attributable to lower margins for many of the company's products in second-quarter 2008 compared to the same quarter last year. Margins for refined products declined as the cost of crude oil and other feedstocks increased more rapidly than the prices of gasoline and other products. Somewhat offsetting these weaker margins were significantly higher margins on distillate products such as diesel and jet fuels, which continued to experience strong global demand, and improved differentials for sour crude oil.

Other factors contributing to the decline in operating income include refinery operating expenses, which increased by $148 million from second-quarter 2007 to second-quarter 2008, primarily due to higher energy costs for electricity and natural gas. Also, throughput volumes decreased in the same time frame by an average of 48,000 barrels per day in large part due to refinery maintenance and repairs.

"Despite the difficult environment for margins on gasoline and many secondary products, Valero continued to be profitable," said Bill Klesse, San Antonio-based Valero's chairman and CEO. "In our refining operations, we've made great progress in shifting production to take advantage of the strong market for distillates…. Looking at market fundamentals, we expect distillate margins should be strong for the rest of the year and next; however, we expect gasoline margins to continue to be weak and industry utilization rates to decline. We expect secondary products to have a margin recovery, particularly if the price of crude oil stabilizes or falls, as the prices of these products lag changes in the price of crude oil."

He added, "Our balance sheet continues to be in excellent shape with $1.6 billion in cash at the end of June. In July, we added further to our cash position with the proceeds from the sale of the Krotz Springs refinery. We continued to return cash to our shareholders in the second quarter by increasing our dividend by 25% and also by purchasing 3.8 million shares of our common stock. In early July, we purchased an additional 2 million shares, and for the year, we have purchased nearly 15 million shares. We continue to review our capital spending very closely and now expect this year's expenditures to be approximately $3.8 billion, down $700 million from our original estimate."

Concerning asset sales, Klesse said that although Valero has received preliminary indications of interest from parties regarding its Ardmore and Memphis refineries, "we have not yet received a proposal that we believe is in the best interest of our employees and shareholders, so these refineries remain under strategic review. Obviously, gasoline margins have weakened and the availability of financing is clearly lacking as the financial markets continue in turmoil; however, we plan to continue to pursue a potential transaction for Aruba."

He concluded, "As I've said before, the refining industry historically has been seasonal, volatile, and cyclical. Even when the industry faces challenges, our employees are committed to excellence in achieving cost efficiencies while continuing to improve our safety, environmental, and reliability performance. To make Valero a more valuable company for the long term, we expect to continue our balanced approach by investing in selected growth projects, improving our operating performance, buying back more stock and increasing dividends, while maintaining our investment-grade credit rating."

Valero, with approximately 22,000 employees and 2007 revenues of more than $95 billion, 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.