Analyzing Valero Energy’s Debt Position


Mar. 21 2019, Published 9:39 a.m. ET

Valero Energy’s debt

Valero Energy’s (VLO) net debt-to-EBITDA ratio was 0.9x in the fourth quarter—lower than the average peer ratio of 1.4x. The average peer ratio considers six refining companies. The ratio shows a firm’s debt level as a multiple of its earnings. The lower the rate, the better the debt position.

In the fourth quarter, Valero Energy’s total debt-to-capital ratio was 29%—below the average peer ratio of 35%. The debt-to-capital ratio shows the percentage of debt in a firm’s capital structure. Marathon Petroleum (MPC), HollyFrontier (HFC), and Phillips 66’s (PSX) total debt-to-capital ratios were 38%, 27%, and 29%, respectively, in the fourth quarter.

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Net debt-to-EBITDA ratio trend

Valero Energy’s net debt-to-adjusted EBITDA ratio was 0.9x in the fourth quarter of 2018—higher than the fourth quarter of 2017. The ratio rose due to a steeper increase in the net debt than the rise in the trailing 12-month adjusted EBITDA.

The net debt rose due to an increase in the total debt and a fall in the cash from the fourth quarter of 2017 to the fourth quarter. The net debt rose due to capex and growth activities combined with shareholder returns in the form of dividends and share repurchases. Valero Energy’s adjusted EBITDA rose in the past year due to higher earnings from its core Refining segment.

What does the debt position suggest?

Both of Valero Energy’s debt ratios are below the industry average—a comfortable situation. Valero Energy has the financial power to manage the challenging environment.

Going forward, Valero Energy will have to manage the impact of volatile refining earnings, the ongoing capex, shareholders’ returns, and the volatile RIN expense on its financial strength and flexibility—a significant factor that investors will monitor.


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