Valero Energy Corp., which manufactures and markets transportation fuels, began to see improvements in fuel demand in the second half of April, a gradual recovery that is expected to improve as the economy comes back to life following severe Covid-19 restrictions.

Valero

The management team of the San Antonio, TX-based operator shared a microphone Wednesday to discuss first quarter performance and the near-term outlook.

“The ensuing collapse of economic activity due to stay at home orders and travel restrictions has driven down demand for our products, particularly gasoline and jet fuel,” CEO Joseph Gorder said. “Operationally, we’ve adjusted the throughput rates at our refineries to more closely match product supply with demand and to ensure that our supply chain does not become physically infeasible. We also temporarily idled a number of our ethanol plants and reduced the amount of corn feedstock processed at the remaining plants to address the decreased demand for ethanol.”

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There are glints of sunshine emerging from the dense fog created by the coronavirus.

In the last two weeks in March, Valero’s gasoline demand was “about 55% of what you would call normal,” Chief Commercial Officer Gary Simmons said. “For the first couple of weeks in April, it seemed to stabilize around that level, but now we’re starting to see demand pick back up already. If you look at the seven-day average… it’s about 64% of normal.”

Valero is seeing a near 9% increase in gasoline demand from early April, with the pickup mostly in the Midcontinent and the Gulf Coast regions, where some of the stay-at-home orders were being slowly lifted. High-demand states, including Texas and Florida, were partially lifting stay-at-home orders, allowing retail stores and restaurants to open to limited customer traffic.

“In San Antonio proper…I’m serving on some committees that are working on some issues here, but we’ve seen a 14% increase in traffic over the last couple of weeks,” Gorder said. “So people are starting to get out more…I think there probably is a pent-up demand for folks to get out of their houses and get mobile and to shop again and to go to restaurants again…

“I do think we’re going to see more activity and not only here, but much more broadly particularly through the South.”

Some forecasters have suggested that Covid-19 may lead to structural changes in demand for transportation fuel, particularly the airline industry.

“We’ve reduced our discretionary capital spending and our share buybacks, and we’re not considering any acquisitions until there’s certainly further improvements in the market,” Gorder said. “The things that we’ve talked about for years are the things that we’ve implemented and that we use both when margins are really strong and when margins are weak like they have been here over the last six or eight weeks.”

The recovery is expected to be “more gradual on the demand side as people continue to work from home,” Gorder said. “We see some offsetting things” from people working from home, “but then you’re going to have people driving more and probably using mass transit less going forward…because social distancing is hard when you’re on mass transit…

“Overall, we see a fairly gradual recovery, and gasoline demand getting back close to where it was before Covid-19. On the jet fuel side, I think we believe that the lower net demand is probably here with us longer, and it probably is a late-year-type recovery…when people start to feel comfortable flying again.”

For Valero, however, the business is still being run for the long term, as the pandemic eventually will subside. It has no plans to change the business structure for short-term issues.

Valero also has seen little disruption from force majeures from producers declared on crude. Most contracts have a 30-day cancellation and the company is holding customers to it, Simmons said.

In April, Continental Resources Inc. reportedly declared a force majeure on at least one oil delivery contract with its supplier.

Regarding oil exports, April volumes were down by around 10% from the overall first quarter, Simmons noted. “In May, with what we’re selling forward, you’re seeing a far lower demand in the Latin American countries than what we’ve typically seen kind of support.”

There has been a fall-off in diesel exports to around 50% of normal, he said. “Some of that is just because the U.S. inventory was very low and the U.S. market was stronger, and we were better off keeping the barrels in the domestic markets than to ship them abroad. exports falling off around 50% of normal.”

Gasoline, however, has been up more than 10%. Valero is selling wholesale barrels into Mexico, and “we’ve been surprised at how well those volumes have held up.” On Tuesday (April 28), Mexico exports were at 85% of the levels in the first quarter.

Valero’s total refining throughput volumes averaged 2.8 million b/d in 1Q2020, in line from a year ago, while throughput capacity utilization was 90%. Refining cash operating expenses of $3.87/bbl were 28 cents lower than in the year-ago period, primarily because of low natural gas prices.

Net losses totaled $1.9 billion (minus $4.54/share) for 1Q2020 versus year-ago profits of $141 million (34 cents). The refining segment generated an operating loss of $2.1 billion, compared with year-ago income of $479 million.

Valero expects 2020 capital expenditures to be $2.1 billion, down $400 million from initial guidance. In modeling 2Q2020 operations expectations, refining throughput volumes are forecast to be 1.325-1.375 million bbl for the Gulf Coast, with the Midcontinent averaging 315,000-335,00 b/d and the West Coast at 215,000-235,000 b/d.

At the end of March, Valero had $1.4 billion of share repurchase authorizations remaining. The board also has approved a quarterly dividend of 98 cents/share.