Executive Summary / Key Takeaways

• Valero Energy Corporation demonstrates robust operational excellence in its refining segment, achieving record throughputs and strong margins despite dynamic market conditions and geopolitical disruptions.
• The company is strategically pivoting its West Coast operations, including the planned closure of its Benicia refinery, to reallocate capital and enhance overall portfolio efficiency.
• Valero's Renewable Diesel segment, particularly its Sustainable Aviation Fuel (SAF) production, is a key long-term growth driver, leveraging technological advantages and feedstock flexibility to navigate evolving policy landscapes.
• A strong balance sheet and disciplined capital allocation underpin Valero's commitment to shareholder returns, evidenced by significant share buybacks and consistent dividend growth.
• The outlook for refined products remains constructive, with tightening global supply-demand balances and anticipated widening crude differentials, while the renewable fuels market seeks policy clarity for sustained growth.

Valero's Enduring Energy Narrative

Valero Energy Corporation, founded in 1980, has evolved into a formidable player in the energy sector, specializing in petroleum-based and low-carbon liquid transportation fuels and petrochemical products. Its strategic focus on downstream operations, encompassing Refining, Renewable Diesel, and Ethanol segments, positions it uniquely within an industry grappling with energy transition and volatile commodity markets. Valero's overarching strategy is built on operational excellence, disciplined capital deployment, and a steadfast commitment to shareholder returns, all supported by a robust financial foundation.

The industry landscape is characterized by strong global demand for petroleum-based transportation fuels, which has consistently outpaced supply, leading to persistently low inventory levels. This tightness is exacerbated by refinery rationalizations, delayed ramp-ups of new facilities, and ongoing geopolitical disruptions. For instance, global light product demand is projected to grow by approximately 460,000 barrels per day next year, while net capacity additions are only around 415,000 barrels per day, suggesting continued tight supply-demand balances. Valero's operational prowess, particularly its feedstock flexibility and high utilization rates, allows it to capitalize on these market dynamics.

In the competitive arena, Valero stands as a leading refiner, often compared to integrated giants like ExxonMobil and Chevron , and downstream specialists such as Phillips 66 and Marathon Petroleum (MPC). While ExxonMobil (XOM) and Chevron (CVX) benefit from diversified upstream and downstream portfolios, Valero's specialized focus on refining and renewable fuels provides agility and efficiency in these core areas. Phillips 66 (PSX), for example, is actively transforming its refining business to become a low-cost leader, aiming to reduce its average operating cost per barrel to $4.75-$5.00, a move that directly challenges Valero's established cost structures. However, Valero's extensive refining capacity and strong retail network provide a competitive moat, enabling efficient processing and direct customer access. The company's low carbon intensity (CI) advantage in its Renewable Diesel segment, particularly for waste oil feedstocks, further differentiates it from competitors, as Europe and the U.K. predominantly accept low CI feedstocks for their decarbonization mandates.

Technological Edge: Fueling Efficiency and Future Growth

Valero's operational excellence is deeply rooted in its continuous investment in technological differentiation and innovation across its segments. In refining, the company consistently pursues short-cycle, high-return optimization projects to enhance asset capability and profitability. A prime example is the FCC Unit Optimization project at its St. Charles refinery, a $230 million initiative slated to begin operations in the second half of 2026. This project is designed to increase the yield of high-value products, including high-octane alkylate, by enhancing light olefin production for alkylation. This is expected to boost high-octane alkylate output by approximately 6,000 to 7,000 barrels per day, leveraging existing alkylation capacity.

Beyond specific projects, Valero employs advanced technologies to improve reliability and efficiency. The company has a long-standing commitment to leveraging data quality and consistent practices across its system, which is now proving advantageous in exploring AI and machine learning applications to further enhance operational availability. Furthermore, Valero utilizes drones for inspection, allowing for precise assessment of equipment without extensive scaffolding, thereby improving maintenance planning and execution. Efforts to consolidate control rooms and enhance operator efficiency through technology are also ongoing, contributing to overall operational discipline.

In the Renewable Diesel segment, Valero's Diamond Green Diesel (DGD) joint venture utilizes the Hydrotreated Esters and Fatty Acids (HEFA) process to produce renewable diesel, naphtha, and neat Sustainable Aviation Fuel (SAF) from waste and renewable feedstocks. The SAF project, which became fully operational in the fourth quarter of 2024, demonstrated flawless startup and a wide range of operability, meeting project goals and facilitating smooth production and sales. This technology allows DGD to produce synthetic paraffinic kerosene (SPK), a renewable blending component that can be mixed up to 50% with conventional jet fuel. The ability to efficiently convert diverse waste feedstocks into low-carbon fuels provides a significant competitive advantage, especially in markets with stringent carbon intensity requirements. Valero's platform is considered advantaged due to its feedstock flexibility, certification capabilities, and access to various international markets, particularly Europe and the U.K., which prioritize low CI feedstocks.

Segment Performance: A Tale of Three Engines

Valero's financial performance in the first nine months of 2025 reflects the dynamic interplay of its diversified segments, operational strengths, and market conditions. The company reported net income attributable to Valero stockholders of $1.1 billion for the third quarter of 2025, or $3.53 per share, compared to $364 million, or $1.14 per share, for the third quarter of 2024. For the first nine months of 2025, net income attributable to Valero stockholders was $1.2 billion, or $3.89 per share, a decrease from $2.5 billion, or $7.66 per share, in the prior year, primarily due to a significant asset impairment loss.

Refining Segment

The Refining segment remains Valero's powerhouse, delivering strong results in a supportive market. For the third quarter of 2025, the segment's operating income surged by 184.96% year-over-year to $1,610 million, driven by higher gasoline and distillate margins and increased throughput volumes. Refining throughput utilization reached an impressive 97% in the third quarter of 2025, with the U.S. Gulf Coast and North Atlantic regions achieving new all-time highs. This operational prowess is a testament to Valero's long-standing investments in reliability and efficient execution.

However, the first nine months of 2025 saw a decrease in Refining segment operating income to $2,346 million from $3,534 million in the same period of 2024. This was largely impacted by a $1.10 billion asset impairment loss related to Valero's California operations, specifically $901 million for the Benicia Refinery and $230 million for the Wilmington Refinery. The decision to cease refining operations at the Benicia Refinery by the end of April 2026 is a strategic response to California's stringent regulatory environment and the asset's higher operating and maintenance costs. Valero intends to continue supplying its contractual wholesale obligations in California through flexible waterborne imports, leveraging global arbitrage opportunities.

Looking ahead, refining fundamentals are expected to remain robust, supported by low light product inventories and continued supply tightness globally. Sour crude differentials are anticipated to widen with increased OPEC+ and Canadian production, which typically benefits Valero's complex refining system. Management forecasts fourth-quarter 2025 refining throughput volumes to range from 1.78 million to 1.83 million barrels per day for the Gulf Coast, 420,000 to 440,000 barrels per day for Mid-Continent, 240,000 to 260,000 barrels per day for the West Coast, and 485,000 to 505,000 barrels per day for the North Atlantic. Refining cash operating expenses for the fourth quarter are projected at approximately $4.80 per barrel.

Renewable Diesel Segment

The Renewable Diesel segment, represented by the DGD joint venture, is navigating a complex policy and market landscape. For the third quarter of 2025, operating income decreased by 20% year-over-year to $28 million, and the segment reported an operating loss of $248 million for the first nine months of 2025. This decline was primarily due to higher feedstock costs and reduced sales volumes, partially offset by higher renewable diesel product prices. The segment's performance has been influenced by "policy clarity vagueness" regarding EPA's Renewable Volume Obligations (RVOs) and Small Refinery Exemptions (SREs), as well as rising fat prices.

Despite these challenges, the long-term outlook for renewable diesel remains positive. Management expects demand to stay consistent, driven by mandates in Europe and Canada, and DGD's inherent low carbon intensity advantage. The 45Z Production Tax Credit (PTC), which replaced the blender's tax credit, favors carbon intensity-based credits and limits product imports into the U.S., benefiting DGD's platform. While the PTC's impact on profitability for non-waste oil feedstocks is lower than the previous credit, DGD's waste oil-based platform is well-positioned. The successful startup of the SAF project in late 2024, with its ability to produce high-quality SAF from waste feedstocks, further strengthens this segment. For the fourth quarter of 2025, renewable diesel sales volumes are expected to be approximately 258 million gallons, with operating expenses around $0.52 per gallon, including $0.24 per gallon for non-cash costs.

Ethanol Segment

The Ethanol segment delivered a strong third quarter in 2025, with operating income increasing by 19.61% year-over-year to $183 million. This was primarily driven by higher ethanol and corn co-product prices and increased production volumes, despite rising corn prices. For the first nine months of 2025, operating income was $257 million.

The outlook for ethanol is positive, supported by a record corn crop and favorable natural gas prices, which keep feedstock costs in check. Strong domestic and export demand, coupled with growing international interest in higher ethanol blends (e.g., Canada moving to E15, Brazil and India exploring E20s-E30s), provides a tailwind. Valero, as a leading exporter of ethanol, is well-positioned to benefit from this global demand. Ethanol production volumes are expected to average 4.6 million gallons per day in the fourth quarter of 2025, with operating expenses around $0.40 per gallon, including $0.05 per gallon for non-cash costs. While national year-round E15 implementation in the U.S. faces logistical and supply challenges, regional growth and export opportunities remain significant.

Financial Fortitude and Shareholder Commitment

Valero's financial health remains robust, providing a solid foundation for its strategic initiatives and shareholder returns. The company generated $3.80 billion in cash from operating activities during the first nine months of 2025. This strong cash flow was strategically deployed: $1.50 billion for capital investments, $2.60 billion returned to stockholders through share repurchases and dividends, and $440 million for public debt repayment. As of September 30, 2025, Valero maintained total liquidity of $9.90 billion, with a healthy debt-to-capitalization ratio of 18%.

The company's commitment to shareholder returns is a core tenet of its strategy. Valero repurchased 10.31 million shares for $1.50 billion in the first nine months of 2025, reducing its share count by approximately 23% since year-end 2021. The Board's approval of a 6% increase in the quarterly cash dividend in January 2025 further underscores this commitment. Management aims to return all excess free cash flow to shareholders, beyond its minimum payout commitment of 40% to 50% of adjusted cash flow and maintaining a target cash position.

Capital investments attributable to Valero for 2025 are projected at approximately $1.90 billion, with $1.60 billion allocated to sustaining the business and the remainder to growth strategies. This disciplined approach ensures that investments support long-term value creation while maintaining financial flexibility. The reinstatement of 100% expensing for qualified property under the One Big Beautiful Bill Act (OBBB) is expected to lower cash tax liabilities in earlier years, further enhancing cash flow for reinvestment or shareholder returns.

Strategic Outlook and Risk Mitigation

Valero's outlook is shaped by a confluence of favorable market dynamics and strategic responses to evolving risks. The company anticipates continued tightening in global supply-demand balances for refined products, supported by limited new refining capacity and ongoing geopolitical disruptions. Sour crude differentials are expected to widen, benefiting Valero's complex refining assets. The company's proactive decision to cease operations at its Benicia refinery by April 2026, while incurring a significant asset impairment loss, is a strategic move to exit a challenging regulatory environment and reallocate resources to more profitable ventures. This decision also involved recognizing $337 million in asset retirement obligations and $50 million for employee transition costs.

However, the energy landscape is not without its challenges. Valero faces market risks from commodity price volatility, foreign currency exchange rates, and the escalating cost of compliance credits for Renewable and Low-Carbon Fuel Programs, which totaled $1.20 billion for the first nine months of 2025. The evolving policy environment for renewable fuels, particularly the implementation of the 45Z PTC and the ongoing discussions around RVOs and SREs, introduces uncertainty. While the OBBB Act extends clean fuel credits, it also imposes new feedstock origin requirements and eliminates the special SAF credit rate after 2025, posing a challenge for 2026. Valero's management acknowledges these complexities, with Eric Fisher noting that the "PTC changing Jan 1 on all foreign feedstocks as well as SAF, that will be a challenge as we start 2026". The company's ability to adapt its feedstock sourcing and product allocation will be crucial.

Environmental regulations continue to become more stringent, potentially increasing future costs. Furthermore, the concentration of customers in the refining and wholesale/retail sectors presents credit risk, though Valero's diversified accounts receivable portfolio aims to mitigate this. Valero's strategic positioning, including its operational flexibility and technological advantages in low-carbon fuels, is designed to mitigate these risks and capitalize on opportunities. The company's long-term ambition includes GHG emissions reduction targets, with growth capital allocated to low-carbon projects consistent with these goals.

Conclusion

Valero Energy Corporation stands as a testament to operational mastery and strategic adaptability in a dynamic energy world. Its core investment thesis is rooted in the enduring strength of its refining assets, which consistently deliver robust performance through operational excellence and strategic flexibility, as evidenced by record throughputs and strong margins. Complementing this, Valero's deliberate expansion into low-carbon fuels, particularly through its DGD Renewable Diesel and SAF operations, positions it for future growth in an evolving energy landscape. While the company faces challenges from regulatory shifts and market volatility, its technological advantages in feedstock flexibility and low carbon intensity production provide a significant competitive edge.

The strategic decision to exit the Benicia refinery underscores a disciplined approach to portfolio optimization, reallocating capital to higher-return opportunities. This, combined with a strong balance sheet and a steadfast commitment to returning excess free cash flow to shareholders through dividends and aggressive buybacks, reinforces Valero's appeal to discerning investors. As global demand for refined products remains strong and the renewable fuels market matures with greater policy clarity, Valero's integrated strategy, operational prowess, and technological leadership are poised to drive sustained shareholder value.