Valero Energy Corp. saw its net income more than triple to $3.067 billion in the first quarter from $905 million in the corresponding period in 2022, it reported Thursday, but its shares traded lower as shareholders wrangle the sheet of the company’s climate route.
Earnings per share rose $8.29 from $2.21 year-over-year, despite lower prices, as sales volumes rose while cost of sales fell.
Revenue fell to $36.439 billion, but operating income rose $2.659 billion to $4.043 billion compared to January-March 2022. This was because costs of sales declined more by half to offset a $39 million increase in general and administrative expenses year over year.
“Revenue decreased by $2.1 billion in the first quarter of 2023 compared to the first quarter of 2022, primarily due to lower petroleum-based transportation fuel product prices associated with sales made by our refining,” Valero said in a filing with the US Securities and Exchange Commission (SEC). “This decrease in revenue, along with an increase in general and administrative expenses (excluding depreciation expense) of $39 million, primarily due to an increase in certain employee compensation expenses, saw more than offset by a decrease in cost of sales of $4.8 billion, which was primarily due to lower costs of crude oil and other raw materials.”
All three of Valero’s segments posted operating income growth, led by refining, which added $2.103 billion to $36.439 billion year over year. Refining growth was the result of higher distillate and gasoline margins, higher oil discounts and higher production volumes of 130,000 barrels per day.
Renewable Diesel had operating income of $205 million, an increase of $56 million, as the DGD Port Arthur plant, which began operating in the previous quarter, brought sales volumes to 1.3 million of gallons per day to offset a $152 million impact from lower prices.
Ethanol posted operating income of $39 million from $1 million in January-March 2022. Higher production volumes of 138,000 gallons per day had a favorable impact of about $17 million, versus an unfavorable $18 million impact from lower prices.
Conflict over the Emissions Plan
Despite the profit increase, Valero closed down 1.71 percent to $114.64 on the New York Stock Exchange on 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 for May 9 because of “inadequate oversight of the company’s board climate-related risks and opportunities”.
Mercy has repeatedly called on the board to reform Valero’s greenhouse gas (GHG) reduction framework, which it has said falls short of industry standards.
“For example, in its 2035 GHG reduction target, Valero uses the low carbon profile of its biofuel products to offset its scope 1 and 2 emissions. The appropriate protocol would classify Valero’s biofuel emissions as scope 3 product emissions,” he wrote. “While we do not dispute that Valero’s biofuels are lower in carbon than their fossil fuel products, accepted protocols simply do not allow for this type of trade-off.”
The non-governmental organization World Resources Institute, which initiated the categorization of emissions from three domains in a GHG protocol accounting standard published in September 2001, defines domain I as direct emissions, those that “occur from from sources owned or controlled by the company,” as stated in its revised GHG accounting standard published in March 2004. Scope II emissions refer to electricity purchased by a company that “is produce in the installation where electricity is generated”. Scope III includes emissions from “the extraction and production of acquired materials; transport of purchased fuels; and use of the products and services sold”.
The United Nations Framework Convention on Climate Change has brought direct energy consumption, such as industrial processes and business travel through company-owned vehicles, under scope I. The agency’s scope II covers emissions from the purchase of electricity, heat and steam and scope III lists business travel via flights and public transport, as well as transmission and distribution losses, between others
In its GHG roadmap published in September 2022, Valero’s targets only cover emissions from its refineries. It plans to “reduce and shift” 100 percent of its refinery’s Scope I and II emissions by 2025 “through Board-approved projects and carbon sequestration projects in development,” as indicates on the plan.
Mercy said in an earlier letter as republished by Valero in an SEC filing on March 22: “While Valero has adopted near-term GHG reduction targets, it does not offer a robust decarbonization plan that ensures a resilient business model through the energy transition, exposing the company to reputational, regulatory and transition risks Valero’s climate action plan includes minimum absolute emissions reductions and an over-reliance on “displaced emissions” unverified without any reduction targets or actions associated with scope 3 emissions”.
Valero in that disclosure said that Mercy’s call to change GHG targets resulted in closing refineries. “Our strategy, on the other hand, is to manage the most resilient refining assets, increase our production of low-carbon fuels and achieve our aggressive targets by leveraging resilience and our low-carbon growth strategy,” he said, adding the appeal. had been rejected at Valero’s 2022 annual meeting.
On Scope III, he said no targets have been set “because the methodology is fraught with duplication and other challenges, and we don’t have a clear line of sight on the use of our products by third parties.”
Mercy in an SEC filing on March 23 responded: “In its statement of opposition, Valero’s Board claims that our proposal seeks targets that ‘can only come from refinery closures.’” That is inaccurate: We seek goals that reflect a consistently built trajectory to reduce emissions and a transition plan that demonstrates that Valero is positioning its assets to take full advantage of the new opportunities that will arise in the energy transition.”
But Valero was adamant, saying in an SEC filing to shareholders on Thursday: “Valero believes that limiting targets to absolute emissions reductions forces a strategy that can only realistically be achieved with refinery closures that are not consistent with our current business strategy.”
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