Valero Energy Corp. (NYSE:VLO)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) experienced considerable volatility, beginning with a positive value in 2019, followed by a substantial loss in 2020, recovery in 2021, a peak in 2022, and a decline in 2023. Invested capital generally increased throughout the period, while the cost of capital exhibited its own variations.

Economic Profit Trend

Economic profit was negative in 2019, 2020, and 2021, indicating that returns did not exceed the cost of capital. The largest negative economic profit occurred in 2020, coinciding with the negative NOPAT. A positive economic profit was achieved in 2022, but this was not sustained, as economic profit turned negative again in 2023.

NOPAT Analysis

NOPAT decreased substantially from 2019 to 2020, resulting in a loss. It then recovered significantly in 2021 and reached its highest point in 2022. However, NOPAT decreased in 2023, though remaining positive.

Cost of Capital

The cost of capital fluctuated between 16.53% and 20.07% over the period. It increased from 2020 to 2022, then decreased slightly in 2023. The higher cost of capital in 2022 likely contributed to the difficulty in achieving a substantial economic profit despite the high NOPAT.

Invested Capital

Invested capital showed a consistent upward trend throughout the period, increasing from US$40,757 million in 2019 to US$51,119 million in 2023. This increase in invested capital, coupled with fluctuations in NOPAT and the cost of capital, significantly impacted economic profit.

The interplay between NOPAT, cost of capital, and invested capital resulted in a volatile economic profit. While invested capital grew consistently, the ability to generate returns exceeding the cost of capital was inconsistent, with only 2022 demonstrating a positive economic profit.

Net Income (Loss) Attributable to Stockholders

The net income experienced a significant decline in the year ending 2020, moving from a positive 2,422 million US dollars in 2019 to a negative 1,421 million US dollars. This was followed by a recovery period, with net income rising to 930 million US dollars in 2021. The company then showed strong profitability in 2022, reaching 11,528 million US dollars, before seeing a decrease to 8,835 million US dollars in 2023. Overall, this pattern indicates volatility with a substantial rebound post-2020.

Net Operating Profit After Taxes (NOPAT)

The NOPAT data mirrors the trends seen in net income, starting at 4,429 million US dollars in 2019 and dropping to negative 1,650 million US dollars in 2020. There was a pronounced recovery in 2021, with NOPAT increasing to 5,561 million US dollars. The highest value in the series occurred in 2022, with 13,520 million US dollars, followed by a reduction to 7,868 million US dollars in 2023. This fluctuation highlights a similar pattern of operational profitability impact and recovery as observed in net income.

The analysis of the annual financial data reveals significant fluctuations in the income tax expense (benefit) and cash operating taxes over the five-year period.

Income Tax Expense (Benefit)

The income tax expense exhibited a notable negative value in 2020, reaching a benefit of -$903 million, which contrasts sharply with the positive expense of $702 million in 2019. Following this period, the tax expense rose to $255 million in 2021, before surging substantially to $3,428 million in 2022. In 2023, this figure decreased somewhat but remained elevated at $2,619 million, indicating a return to significant tax liabilities compared to the earlier years.

Cash Operating Taxes

Cash operating taxes mirrored the trend seen in the income tax expense, with a negative outflow of -$931 million in 2020 compared to $577 million in 2019. Subsequently, there was a marked increase to $519 million in 2021, which escalated dramatically to $3,508 million in 2022. In the most recent year, 2023, cash operating taxes declined slightly to $2,654 million, but still remained considerably higher than pre-2020 levels.

Overall, the data indicates a period of tax benefit in 2020 followed by a consistent and substantial increase in tax expenses and cash operating taxes in the subsequent years. The sharp rise in both metrics during 2022 and 2023 suggests changes in earnings, tax policies, or other factors impacting the company's tax payable status, resulting in a significantly higher cash outflow related to taxes despite the decrease from the 2022 peak.

Total reported debt & leases

The total reported debt and leases exhibited a rising trend from 2019 to 2020, increasing from $10,962 million to $15,847 million. Subsequently, there was a consistent decline over the next three years, with figures decreasing to $15,125 million in 2021, then dropping more significantly to $12,722 million in 2022, and further to $12,637 million by the end of 2023. This indicates a period of increased leverage followed by a notable reduction in debt levels.

Total Valero Energy Corporation stockholders’ equity

Stockholders' equity showed a downward trajectory between 2019 and 2021, falling from $21,803 million to $18,430 million. However, a reversal occurred in 2022 when equity increased sharply to $23,561 million and continued to grow substantially to $26,346 million in 2023. This pattern suggests an initial period of equity erosion followed by a recovery and strengthening of the equity base.

Invested capital

Invested capital demonstrated a mostly steady upward movement over the five-year span. Starting at $40,757 million in 2019, it slightly increased in 2020 to $40,966 million, then advanced more markedly to $44,526 million in 2021. The growth trend continued with an increase to $49,772 million in 2022, reaching $51,119 million in 2023. This represents ongoing investment and capital deployment over the period.

Summary

Overall, the financial data reflect a phase of increased debt leverage in 2020, followed by deliberate deleveraging from 2021 onward. Concurrently, stockholders’ equity declined in the early years but rebounded strongly in the latest two years, indicating improved financial health or retained earnings accumulation. The continuous growth in invested capital suggests sustained investment efforts, aligning with the strengthening equity position and reduced reliance on debt financing during the latter years.

The economic spread ratio exhibited significant fluctuations between 2019 and 2023. Initially negative, the ratio demonstrated improvement in 2021 and 2022 before declining again in the most recent period. This variability suggests a dynamic relationship between economic profit and invested capital.

Economic Spread Ratio Trend

In 2019, the economic spread ratio was -7.25%. This indicates that the company’s return on invested capital was below its cost of capital. The ratio deteriorated substantially in 2020, reaching -20.56%, signifying a considerably wider gap between returns and costs. A partial recovery occurred in 2021, with the ratio improving to -4.98%, suggesting some narrowing of the gap. The most substantial improvement was observed in 2022, when the ratio turned positive at 7.09%, indicating that returns exceeded costs. However, this positive trend reversed in 2023, with the ratio declining to -4.47%, returning to a position where costs exceeded returns.

The economic spread ratio’s movement closely mirrors the fluctuations in economic profit. The largest negative economic profit values in 2020 and 2019 correspond with the most negative economic spread ratios. Conversely, the positive economic profit in 2022 aligns with the peak positive economic spread ratio. The 2023 decline in the economic spread ratio is consistent with the negative economic profit reported for that year.

Invested Capital

Invested capital consistently increased throughout the period, rising from US$40,757 million in 2019 to US$51,119 million in 2023. This steady growth in invested capital occurred alongside the fluctuating economic spread ratio, suggesting that increases in capital deployment did not consistently translate into improved profitability relative to cost.

The observed pattern suggests that external factors or internal operational changes significantly impacted the company’s ability to generate returns exceeding its cost of capital. The positive spread in 2022 appears to be an outlier, and the return to a negative spread in 2023 indicates a potential challenge in sustaining profitability relative to the growing capital base.

The economic profit margin exhibited significant fluctuation between 2019 and 2023. Initially negative, the margin experienced a substantial decline in 2020 before recovering in subsequent periods, only to conclude with a negative value in 2023. This pattern mirrors the volatility observed in economic profit over the same timeframe.

Economic Profit Margin Trend

In 2019, the economic profit margin stood at -2.73%. This metric deteriorated considerably in 2020, reaching -12.97%, indicating a substantial decrease in economic profit relative to revenue. A recovery was then observed in 2021, with the margin improving to -1.94%. The most positive result occurred in 2022, where the margin reached 2.00%, signifying economic profit generation. However, this positive trend reversed in 2023, with the margin declining to -1.58%.

The economic profit margin’s movement closely follows that of the absolute economic profit values. The largest negative economic profit in 2020 corresponded with the lowest economic profit margin. Similarly, the positive economic profit in 2022 aligned with the highest margin achieved during the analyzed period. The return to negative economic profit in 2023 resulted in a negative margin once again.

Revenue Relationship

Revenues decreased significantly in 2020, coinciding with the most substantial decline in the economic profit margin. Revenues then increased in 2021 and experienced a large jump in 2022. While revenues decreased in 2023, the economic profit margin still declined, suggesting factors beyond revenue were influencing profitability. The relationship between revenue and economic profit margin is not consistently direct, indicating that cost management and capital efficiency also play a crucial role.

Overall, the economic profit margin demonstrates a lack of consistent positive performance. While a period of economic profit generation was achieved in 2022, the surrounding years were characterized by negative economic profit margins, highlighting potential challenges in generating returns exceeding the cost of capital.