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. The cost of capital also exhibited variation, generally increasing over the period, though not consistently. Invested capital showed a consistent upward trend throughout the five years. These factors combined to produce a complex pattern in economic profit.

NOPAT Trend

NOPAT began at US$4,429 million in 2019, then decreased dramatically to a loss of US$1,650 million in 2020. A recovery was observed in 2021, with NOPAT reaching US$5,561 million. This was followed by a significant increase to US$13,520 million in 2022, before declining to US$7,868 million in 2023. The 2020 result represents a substantial deviation from the other years.

Cost of Capital Trend

The cost of capital started at 18.11% in 2019, decreased to 16.52% in 2020, and then increased to 17.46% in 2021. A further increase was noted in 2022, reaching 20.06%, followed by a slight decrease to 19.84% in 2023. The fluctuations suggest a changing risk profile or interest rate environment.

Invested Capital Trend

Invested capital demonstrated a consistent upward trend, increasing from US$40,757 million in 2019 to US$40,966 million in 2020, then to US$44,526 million in 2021. This growth continued to US$49,772 million in 2022 and reached US$51,119 million in 2023. This indicates ongoing investment in the business.

Economic Profit Trend

Economic profit was negative in 2019, 2020, and 2023, reaching lows of US$-2,951 million, US$-8,418 million, and US$-2,276 million respectively. A positive economic profit of US$3,537 million was achieved in 2022. The negative values suggest that, in those years, returns did not exceed the cost of capital. The substantial loss in 2020 aligns with the negative NOPAT for that year. The positive result in 2022 corresponds with the peak in NOPAT and a relatively moderate cost of capital.

The interplay between NOPAT, cost of capital, and invested capital significantly impacted economic profit. While invested capital consistently increased, the volatility of NOPAT and the fluctuations in the cost of capital resulted in inconsistent economic profit performance. The largest negative economic profit occurred in 2020, coinciding with the lowest NOPAT and a relatively stable cost of capital. The positive economic profit in 2022 was driven by a substantial increase in NOPAT.

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 -7.24%. This indicates that the company’s return on invested capital was below its cost of capital. The ratio deteriorated substantially in 2020, reaching -20.55%, signifying a wider gap between returns and costs. A notable improvement occurred in 2021, with the ratio moving to -4.97%, suggesting a narrowing of the gap. The ratio turned positive in 2022, reaching 7.11%, indicating that returns exceeded costs. However, this positive trend reversed in 2023, with the ratio declining to -4.45%, 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 occurred in 2020, coinciding with the most negative economic spread ratio. While economic profit improved in 2022, leading to a positive spread, the return to negative economic profit in 2023 resulted in a negative spread ratio once more.

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 continuous growth in invested capital occurred alongside the fluctuating economic spread ratio, suggesting that increased investment did not consistently translate into improved economic returns.

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, as the ratio returned to negative territory in the following year despite continued growth in invested capital.

The economic profit margin exhibited significant fluctuation between 2019 and 2023. Initially negative, the margin experienced a substantial decline in 2020 before recovering to positive territory in 2022, and subsequently reverting to a negative value in 2023. This volatility suggests a sensitivity to underlying economic profit and revenue dynamics.

Economic Profit Margin Trend

In 2019, the economic profit margin stood at -2.72%. This metric deteriorated considerably in 2020, reaching -12.97%, indicating a substantial decrease in economic profit relative to revenues. A recovery was observed in 2021, with the margin improving to -1.94%, though remaining negative. The most favorable result occurred in 2022, when the margin turned positive at 2.01%. However, this positive performance was not sustained, as the margin decreased to -1.57% in 2023.

The economic profit margin’s movement closely mirrors that of economic profit itself. The largest negative economic profit in the period occurred in 2020, coinciding with the lowest margin. While revenues decreased from 2019 to 2020, the decline in economic profit was proportionally larger, driving the margin to its lowest point. The substantial revenue increase in 2022 appears to have contributed to the positive economic profit margin observed that year, but the return to negative economic profit in 2023, despite a revenue decrease that was less severe than the 2019-2020 drop, suggests that factors beyond revenue are influencing profitability.

Revenue Correlation

Revenues decreased from US$108,324 million in 2019 to US$64,912 million in 2020, then increased to US$113,977 million in 2021 and peaked at US$176,383 million in 2022 before decreasing to US$144,766 million in 2023. While revenue and economic profit margin demonstrate some correlation, the relationship is not consistently direct. The significant revenue increase in 2022 did not fully offset the negative economic profit experienced in 2019 and 2020, and the decrease in revenue in 2023 did not result in a proportionally similar decline in the economic profit margin.

The fluctuations in economic profit margin highlight the importance of monitoring the factors driving both economic profit and revenue. Further investigation into the cost structure and capital efficiency would be necessary to fully understand the drivers behind these trends.