Fitch Ratings has affirmed
The Rating Outlook is Stable.
Valero's ratings reflect de-leveraging actions taken to date; the current strength of the market for refined products, which has benefited from dislocations associated with Russian sanctions; the company's large size and high-quality refining assets, advantaged cost position, moderate capex, good liquidity, and diversification into renewable fuels.
These strengths are balanced by a challenging macroeconomic outlook in the context of high inflation and increasingly restrictive central bank interest rate policies, risks around demand destruction, periodically volatile working capital requirements across the industry, rising environmental compliance costs, and the long-term secular growth challenges from decarbonization trends.
Key Rating Drivers
Incremental Debt Repayment: To date Valero has repaid just under
Strong YTD Results: North American refiners experienced blockbuster YTD results, driven by record crack spreads, with the
Size, Scale and Diversification: Valero is one of the world's largest independent refiners, with 15 refineries and approximately 3.2 million barrels per day (bpd) of throughput capacity. Complexity is above average with a Nelson portfolio complexity of 11.6 (12.6 for the
Cautious Outlook: Despite record YTD results there are reasons to be cautious about the forward outlook. In addition to the ongoing
Focus on Shareholders: Similar to other refiners, Valero channels a significant portion of FCF to shareholder distributions, with a targeted payout ratio of 40%-50% of adjusted CFO, split between dividend and buybacks. YTD this includes approximately
Leading Renewables Position: Valero is the second largest corn ethanol and renewable diesel producer in the world. Its ethanol position includes 12 plants in the Midwest with 1.6 billion gpy of capacity, and a pending expansion into carbon capture and storage. In renewable diesel, jv capacity is set to increase to 1.2 billion gpy with DGD3 (estimated online 4Q22). Renewables are a key plank of VLO's ESG strategy, providing a cash flow hedge against rising environmental compliance costs (RINs).
Renewable diesel is heavily reliant on continuing state and federal government credits to generate returns, including RINs, LCFS and the BTC (which was recently extended in the Inflation Reduction Act). Feedstock inflation and aggressive capacity expansion remain key concerns for the space, along with lower LCFS prices.
Feedstock Advantage: Valero's refineries enjoy feedstock advantages, including access to discounted crudes, especially at
Long Term Regulatory Pressure: Refiners face long-term regulatory pressures that will cap product demand in the
Derivation Summary
Valero's ratings reflect its status as a premier independent refiner. In terms of size and scale, with 15 refineries and approximately 2.6 million bpd of crude capacity (3.2 million bpd of throughput capacity), Valero's core refining capacity is larger than peers
Valero's refining asset quality is high and advantaged in several ways, including geographically (large concentration of price-advantaged capacity on the Gulf and mid-continent); operationally (flexibility to take advantage of light-light and light-heavy crude spreads); and ongoing access to lower cost
Diversification is limited versus peers. Unlike
Key Assumptions
WTI oil prices of
Refining margins trend down over the forecast but remains above-midcycle levels in the medium term;
Consolidated capex (including turnaround expenses and joint venture capex) of approximately
Modest dividend growth resumes in 2023;
Excess FCF funneled to share buybacks but company retains above-average cash balances over forecast period.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Greater earnings diversification or evidence of lower cash flow volatility;
Material incremental debt reduction relative to pre-pandemic levels;
Mid-cycle debt/EBITDA leverage at or below 1.2x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A change in philosophy on use of the balance sheet, including debt-funded shareholder distributions;
Mid-cycle debt/EBITDA leverage above approximately 2.2x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Robust Liquidity: Valero's liquidity was robust at
In addition, Valero has a separate
Issuer Profile
Valero is a large independent refiner with 15 refineries and approximately 2.6 million bpd of crude distillation capacity (3.2 million bpd throughput capacity), as well as the second largest corn ethanol and renewable diesel producer in the world.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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