As companies start to announce earnings, investors can see just how much the economic downturn has affected business. San Antonio-based refiner Valero's (VLO 0.90%) recent first quarter earnings announcement shows the company is taking the downturn in stride. There are some things to look forward to in quarter two, though.
By the numbers
Valero saw a revenue decline of about 8.9% in the first quarter of this year compared to the first quarter last year. Thanks to a non-cash charge of $2.5 billion the company took for inventory valuations, it ended the quarter with a net loss of $1.8 billion.
Every period a company has to report its assets on its balance sheet at fair value. This non-cash charge for inventory valuation was due to the plummet in oil prices for the refineries' feedstocks, which includes crude oil. Basically, the inventory the company holds now costs $2.5 billion less to replace. This charge is not cash going out of the company, it's merely a representation of the change in market value of the company's holdings.
Perhaps more what's on investors minds is what the company is doing with its cash. The company's cash from operations was negative $49 million for the quarter, largely thanks to an unusual reduction in accounts payable of $4.2 billion. The company attributes this reduction to a combination of reduced price for commodities and its own reduction in purchasing these commodities.
These losses show potentially the worst of what is going to happen to the company during the fall in commodity prices and the economic downturn. Prior to the closing up of the economy, management bought back nearly 2.1 million shares. The company has since suspended its stock buyback campaign in a defensive maneuver. Management also announced it is keeping its dividend at $0.98 per quarter on its common stock.
Lastly, the company issued only $300 million of debt in the period. Though the company did mention its recent $1.5 billion debt raise on April 16, which occurred outside of the first quarter. The company only mentions the debt was taken out for general corporate purposes.
Damage control
During the quarter the company saw the potential effects the drop in commodity prices would have. The company's reaction was to defer $400 million in capital spending to potentially next year, as well as suspend stock buybacks.
The suspension of stock buybacks and reduction in capex seems to be the worst of the announcement the company provided. Investors are surely glad the company has such little defensive maneuvers to take in such an environment.
Looking forward
In the second quarter of the year the company may realize further devaluations of its inventory because the price of oil did not stop falling in March. Though, the company did seem to take the worst of this in the first quarter.
The investing public will likely see higher cash flow from operations in the coming quarters accompanied with higher quarterly revenues thanks to the reopening of the economy.
Valero's capital structure shows that it can make through a downturn with barely a scratch. It's not too late to buy Valero stock and take advantage of its resiliency.
