Merrill Lynch Large Cap Energy ConferenceLarge Cap Energy Conference
December 3, 2008
Global Spare Capacity Growing,Expect Competition to Increase
MMBPD Global Refining Supply and Demand
2.5
3.0Petroleum Demand Growth
Crude Unit Expansions
1.5
2.0
2.5 Crude Unit Expansions
Conversion Capacity Growth
0.5
1.0
Source: Industry reports and Valero forecast; 2008 through 2010 estimates are based on consultant averages and are subject to change; includes capacity creep
0.02001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Hi h i d l b l i Gl b ll tili ti t f lliHigh prices and now global economic weakness are slowing demand Global refining capacity is increasing
• New refineries and expansions
Globally, utilization rates are fallingProjects getting canceled and deferredThreat to less competitive refiners
1
p• Biofuels and condensates
pExpect economic recovery to increase demand and improve margins
More Refining Capacity Owned by Independents
U.S. Refining Capacity Ownership
69% 59%
31%41%
1990 2008
Independent refiners lack upstream economics, so must reduce
Independents IntegratedsSource: DOE, industry reports and Valero estimates
2
p pthroughputs to be profitable
Petroleum Demand Growing In Developing Economies
Europe FSU
2007/2008/2009thousand barrels per day
North America
Europe FSU
Asia
71 109 103
-362
-57
109
-205
Middle East
Asia
-429
295416 299
446 510347
109
Latin AmericaAfrica
113 37 36
295 299
-1,141
283 250 202
Global Demand Growth(million barrels per day)
37
3
(million barrels per day)2007 0.95 1.1%2008 0.12 0.1%2009 0.35 0.4%
Source: IEA (11/13/2008)
Falling Crude Oil Prices
$140
$160 WTI Cushing (per bbl)
$80
$100
$120
$40
$60
Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08
Market looking for support – $50/barrel appears to be holding for now
Longer-term – expect prices to stabilize• Lower prices causing project delays
Source: Argus weekly averages; 2008 through November 28
• Demand continuing to fall• 2009 economic growth looks very low
• Expect growth to resume in 2nd
half of 2009
p g p j y• Non-OPEC crude production at low
growth or decline in 2009• Lower prices support demand
th i ll i d l i
4
half of 2009• Expect OPEC to cut again in
December and/or next year
growth, especially in developing countries
Poor Gasoline Margins
2007$30$35$40
9.6
9.8 U.S. Gasoline Demand, 4-Week Avg (mmbpd) Gulf Coast Gas Crack (vs. WTI, per bbl)
5-Yr Avg
2008$5$10$15$20$25
20082007
9.0
9.2
9.4
2008
-$10-$5$0$5
Jan Apr Jul Oct
5-Yr Avg
8.6
8.8
Jan Apr Jul Oct p
Weak U.S. demand in 2008• Slowing economy
pSource: DOE unadjusted weekly data; 2008 through November 21
Ethanol currently less economic to blendWeak prices and margins reducing
Source: Argus weekly averages; 2008 through November 28
g y• Rising unemployment• Previously high pump prices
caused “staycations” last summerL i i
p g gimportsExpect refiners to reduce utilization for gasoline making units (FCCs and reformers)
5
Lower pump prices causing some demand response, seeing signs of recovery
reformers)Expect margins to be positive after winter
Distillate Margins Continue To Be Outstanding
$30
$35
$40 Gulf Coast On-Road Diesel Crack (vs. WTI, per bbl)
475
500
2006
U.S. and Europe Commercial Distillate/Gasoil Inventories (millions of barrels)
2008
2007
$15
$20
$25
$30
2009 Forward Curve
425
4502005
2008
2007
5-Yr Avg$5
$10
$15
Jan Apr Jul Oct
Curve
375
400
Jan Apr Jul Octp
Distillate margins strong all yearU S and European inventories relatively
Source: Argus weekly averages; 2008 through November 28; LSD prior to May 2006; ULSD after April 2006
Expect long-term demand growth• Growing faster than gasoline
Source: IEA and Euroilstock as of October 2008; Includes heating oil, diesel, gasoil
U.S. and European inventories relatively lowNear-term, expect support from winter2009 forward curve at high levels
Growing faster than gasoline worldwide
• Economic growth drives diesel demand
Supply options limitedEuropean specifications tighten on January 1, 2009World demand driving distillate margins
6
Supply options limited• Fewer substitutes such as ethanol
for gasoline
Feedstock Discounts Very Favorable
30%35%40%
Maya$20
$25 Crude Differentials as a Percentage of WTICrude Differentials Below WTI (per bbl)
15%20%25%30%
Mars
$10
$15MayaMars
0%5%
10%
$0
$5
2002 2003 2004 2005 2006 2007 20082002 2003 2004 2005 2006 2007 2008
Expect feedstock differentials for medium and heavy grades to remain
Source: Argus monthly averages; 2008 through November 28 Source: Argus monthly averages; 2008 through November 28
Cancellations and deferrals of cokers and upgraders reduce demand for heavy oilmedium and heavy grades to remain
favorable• Many resids and heavy sours trading
much cheaper than Maya
upgraders reduce demand for heavy oil • Examples: MRO Detroit, VLO Port Arthur,
Petro-Canada Fort Hills, Suncor Voyageur, and BA Energy Heartland
7
While production of heavy sour is declining south of the border, Canadian production has been growing
Demand growing faster for light versus heavy products, keeping heavy-light differentials wide
Valero’s Strategy for Gasoline and Distillate Trends
50%Distillate and Gasoline Yields on Total Production
35%
40%
45%
30%
35%
2006 Actual
2007 Actual
2008 Est. 2009 Potential
2010 Potential
2011 Potential
2012 Potential
GasolineLi iti i t l li
DistillateShifti li d ti t di till t
Actual Actual Potential Potential Potential PotentialDistillate Gasoline
Limiting incremental gasoline production at reformers and FCCsComplying with RFS ethanol
Shifting gasoline production to distillate• De-tuning FCCs, adjusting cut points and temps, using
previously built spare hydrotreating capacity• Building hydrocrackers at St. Charles and Port Arthur
8
p y grequirements • Distillate yields: 2007 at 33%, potentially more than 40%
Able to export high quality diesel to premium markets worldwide
Valero’s Assets Are Competitive
250
acity
Independent Refiners’ Total Capacity: Size vs. Complexity
VLO
SUN200
ghpu
t Cap
ape
r day
)
TSO
100
150
ery
Thro
ugd
barr
els
p
FTO
HOC
WNR
ALJ
DK
50
rage
Ref
ine
(thou
san
Size of bubble h l tiHOCALJ
06 7 8 9 10 11 12
Average Nelson Complexity
Ave
r shows relative throughput capacity
Average Nelson Complexity
9
Source: Oil and Gas Journal and Valero estimates
Valero’s refineries are larger and more complex
Valero’s Assets Are Competitive
70%
80%
Cat Cracking
U.S. Conversion Capacity (mbpd)
Light
Valero’s 3Q08 Feedstock Slate
30%
40%
50%
60% HydrocrackingCoking
Heavy Sour and Resids
37%
Light Sweet
Crudes & Other31%
0%
10%
20%
%
VLO TSO FTO CVI DK SUN WNR ALJ HOC
Sour and Acidic Crudes
32%
Feedstocks priced below light sweet crude oil
VLO TSO FTO CVI DK SUN WNR ALJ HOCSource: Oil and Gas Journal
Valero leads in conversion capacity as t f d di till ti
Source: Company reports
Nearly 70% of Valero’s feedstocks price below WTI light sweet crude oila percentage of crude distillation
capacityEnables Valero to convert low-quality, discounted feedstocks into high-
price below WTI light sweet crude oilLonger-term strategy to capture increasing Canadian heavy sour production on Gulf Coast
10
discounted feedstocks into high-quality products
production on Gulf Coast
Valero Is Financially Competitive
680
50%
60%Diluted Shares Outstanding (Wtd. Avg.)MillionsNet Debt-to-Capitalization Ratio (period-end)
600
640
20%
30%
40%
50%Cut share
count by 125 million (19%) since year-end 2005
520
560
0%
10%
20%
2001 2002 2003 2004 2005 2006 2007 3Q08
end 2005
OutlookContinuing balanced approach
• Planning a mix of capital
Stock BuybacksSignificantly reduced share
Strong Balance SheetLow net-debt-to-cap ratioHigh cash position and liquidity: Planning a mix of capital
projects, debt retirement, stock buybacks, and dividends
Planning to maintain financial strength
reduced share countPurchased $952 million year-to-date
High cash position and liquidity: $2.8 billion in cash plus more than $4 billion of credit available, net of LCs issued, as of Sept. 30
11
strengthRunning a process for ArubaReviewing all assets
date2009 debt maturities: only $300 millionInvestment-grade debt rating
Disciplined Capital ProgramPreliminary 2009 budget estimated at $3.5 billion
• Deferred St. Charles paraxylene project and Port Arthur coker project, but continuing to invest in our assetscontinuing to invest in our assets
• Some plants underinvested prior to our ownership• 2009 capital budget remains in progress – may continue to reduce budget
2009 Estimate
$3 000
$3,500Millions2008 Estimate
$55
$995$1,435
$3,000Strategic
Tier II
$405$690
$1,070 $710
Turnarounds
Sustaining/ Reliability
12
$475 $650 Regulatory
Key Strategic Growth Projects
Refinery Project
Total Cost1
$mmStart-
Up DescriptionRefinery Project $mm Up Description
St. Charles Hydro-cracker $1,250 4Q10
New hydrocracker – 50 mbpdUpgrades low-value feedstocks mainly into ULSD with 25% volume expansion
St. Charles Crude/ Coker $250 3Q09
Crude unit expansion – 45 mbpd estimatedCoker expansion – 10 mbpd estimated
St. Charles FCC $225 1Q10Convert to conventional designImprove reliability and get 5%+ volume expansion
Port ArthurHydro-
cracker/ Crude
$1,700 3Q11New hydrocracker – 50 mbpd estimatedCrude expansion – unlock up to 75 mbpd existing capacity
1313
1 Total project cost includes non-strategic capital costs and interest and overhead
Targeting $1 Billion of Operating Income Improvements
$1,000Other Operating $200
millions
$600
$800Ope at gExpenses
Energy Efficiency
$250
$200
$400
y
Mechanical Availability
$550
$02008 2009 2010 2011
y(Reliability)
Assessed refining system based on 2006 Solomon Survey results
• Identified gaps of approximately $1 billion
Other opportunities available throughout company
• Managing corporate headcount
14
of annual operating income (based on 2006 prices)
• Centralizing administrative functions and reducing overhead
Retail – Outstanding ResultsEarned quarterly record of $107 million in 3Q08Completed Albertson’s tuck-in acquisition in 3Q08 • Now operate 1 013 U S sites
$4.50
• Now operate 1,013 U.S. sites • Canadian network at 871
sitesT t l t il it 1 884
Average U.S. Retail Gasoline Price ($/gal)
$3.00
$3.50
$4.00• Total retail sites 1,884Falling crude oil prices helping margin expansion
2008
$1.50
$2.00
$2.50p g g p
4Q08 looking very good• October best month in
company history
2007
Jan Mar May Jul Sep Novcompany history
15
Source: DOE, 2008 through December 1
Committed to Creating Long-Term Shareholder Value
Continuing balanced approach with cashM i t i i t b l h tMaintaining strong balance sheetExpect acquisition opportunities to become a ailableavailableDespite tough environment, Valero currently profitableprofitableAt stock price of $17 per share, trading at P/E of less than 4x consensus 2008 EPSP/E of less than 4x consensus 2008 EPS estimates!Shareholder value is management’s focus
16
Shareholder value is management s focus
Appendix
17
Refining Portfolio
Benicia, California• 170,000 bpd capacity• 15.0 Nelson complexity Paulsboro, New Jersey
• 195,000 bpd capacity
Quebec, Canada• 265,000 bpd capacity• 7.6 Nelson complexity
Wilmington, California• 135,000 bpd capacity• 15.9 Nelson complexity
p p y• 9.1 Nelson complexity
Delaware City, Delaware• 210,000 bpd capacity• 13.2 Nelson complexity
McKee, Texas• 170,000 bpd capacity• 9.4 Nelson complexity
Memphis, Tennessee• 195,000 bpd capacity
7 5 N l l it
Lima, Ohio• 165,000 bpd capacity• SOLD in 2007 for
$1.9 billion
Three Rivers, Texas• 100,000 bpd capacity• 12.4 Nelson complexity
Corpus Christi, Texas• 315,000 bpd capacity• 18.4 Nelson complexity
Krotz Springs Louisiana
Ardmore, Oklahoma• 90,000 bpd capacity• 10.9 Nelson complexity• Under Strategic Evaluation
• 7.5 Nelson complexity• Under Strategic Evaluation
Valero Marketing Presence
Krotz Springs, Louisiana• 85,000 bpd capacity• 6.5 Nelson complexity• Sold July 2008 for more
than $500 million
Texas City, Texas• 245,000 bpd capacity• 10.8 Nelson complexity
Houston, Texas• 145,000 bpd capacity
Port Arthur, Texas• 310,000 bpd capacity
St. Charles, Louisiana• 250,000 bpd capacity• 14.3 Nelson complexity
San Nicholas, Aruba• 275,000 bpd capacityCore Refinery
Legend
18
• 15.1 Nelson complexity • 11.8 Nelson complexityp p y
• 7.0 Nelson complexity• Under Strategic Evaluation
Note: Capacity shown in terms of crude and feedstock throughputSources: Nelson complexities, Oil & Gas Journal and Valero estimates
Non-Core Refinery Under Strategic Evaluation
Core Refinery
Non-Core Refinery – Sold
Valero’s Refineries Look Undervalued with a Stock Price at $17 per Share
$20,000
$25,000
$30,000 Value per Barrel of Daily Throughput Capacity
$5,000
$10,000
$15,000 7% of Replacement
Cost
$0USGC New Build
(Estimated)VLO Replacement Cost (Estimated)
Lima Transaction Value
Krotz Springs Transaction Value
VLO Implied Refining Assets1
$1,200
$1,600
$2,000 Value per Complexity-Adjusted Barrel of Daily Capacity
7% of USGC
$0
$400
$8007% of USGC New Build
Value
19
$0USGC New Build
(Estimated)VLO Replacement Cost (Estimated)
Lima Transaction Value
Krotz Springs Transaction Value
VLO Implied Refining Assets
1 Transaction value includes estimated value of earn-out at $170 millionSee Appendix for details of calculations
1
Implied Value of Valero’s Refining Assets
Billions, except per unit amountsMarket Value of Equity at $17/share $8.9q yBook Value of Debt1 6.5
Less: Cash1 -2.8E ti t d E t i V l 12 6= Estimated Enterprise Value 12.6
Less: Book Value of Net Working Capital1 -0.5Less: Incremental Market Value of Inventories1 -7.6Less: Estimated Value of Retail Assets2 -1.0= Implied Value of Refining Assets $3.5Implied Value Per:
• Barrel of daily throughput capacity (3.070mmbpd)3 $1,140
• Barrel of complexity-adjusted capacity
20
(2.64mmbpd crude, 11.30 Nelson)4 $1171As of 9/30/08; 2Company estimate for evaluation purposes only; 33,500,000,000 / 3,070,000 = $1,140; 43,500,000,000 / 2,640,000 / 11.30 = $117
Canadian Crude Supply StrategyKeystone XL Pipeline SystemBegins: HardistyEnds: Port ArthurLength: 1933 miles
Agreed to participate as a prospective g
Product: Heavy Sour Crude OilPlanned Capacity: 1.1 million bpd
prospective shipper on the Keystone Pipeline System
Keystone XL Phase 2Q4, 2011
Keystone Q4, 2009
Option to take an equity ownership position in the Keystone
Cushing Extension Q4, 2010
Keystone Partnerships
• Current participants are
Keystone XL Phase 1Q4, 2010
TransCanada and ConocoPhillips
21
Valero has 233 MBPD of coking capacity on the U.S. Gulf Coast- Plan to increase to 243 MBPD by 2011
Valero Is the Industry Leader, Yet Looks Undervalued vs. Peers
RM
Most Geographically Diverse Refining Capacity
8
10
12 Leading Nelson Complexity Index
WC
MC
GC 4
6
8
Source: Oil & Gas Journal and Valero estimates
DK ALJ WNR HOC TSO FTO SUN VLO
EC
Source: Oil & Gas Journal and Valero estimates
0
2
DK ALJ WNR HOC TSO FTO SUN VLO
120%140%160%180%
Lowest Volatility of Quarterly Diluted EPS from Continuing Operations Since 2002
8x
10x
Low Price to 2009 Estimated Earnings Ratio
20%40%60%80%
100%
6x
8x
22Source: Bloomberg
0%20%
HOC TSO FTO SUN VLOSource: Bloomberg, November 26, 2008
4xDK ALJ WNR HOC TSO FTO SUN VLO
Safe Harbor StatementStatements contained in this presentation that state the Company's or management's expectations or predictions of the future are forward–l ki t t t i t d d t b d b th f h b i i flooking statements intended to be covered by the safe harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words "believe," "expect," "should," "estimates," and other similar
i id if f d l ki I i iexpressions identify forward–looking statements. It is important to note that actual results could differ materially from those projected in such forward–looking statements. For more information concerning factors that could cause actual results to differ from those expressed or forecasted, see Valero’s annual reports on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission, and available on Valero’s website at www.valero.com.
2323
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