Valero 2002 Annual Report Download - page 6

4LETTER TO SHAREHOLDERS
2002 AN ANOMALY
While we are proud of our significant achievements in 2002, it was a tough year for the refining industry.
The year got off to a rough start as the economy was still reeling from the terrorist attacks of
September 11, 2001. We also experienced the warmest winter in the Northeast in a century. These two
factors substantially reduced both oil and refined product demand, which resulted in poor refined product
margins. The sluggish demand also caused OPEC to shut in crude oil production, which substantially
reduced the production of heavy, sour crude oil and resulted in extremely narrow sour crude oil discounts.
In addition to all of these difficult market conditions,
we also had six of our 12 refineries down for
required maintenance in the first quarter of 2002.
Given all of these factors, it is not surprising that
we lost money in the first quarter. However, Valero
employees can take great pride in the fact that we
made money each and every quarter the rest of
the year—despite the dismal margin environment.
We ended the year with revenues of $27 billion,
operating income of $471 million, and net income of
$92 million or $.83 per share. And, I am proud to
say that despite the challenging market conditions,
Valero still outperformed its peers, as well as the
S&P 500 Index, in shareholder return. Valero’s
shareholder return was down by only 3.5 percent,
while the Dow Jones Energy Index was down 15.4
percent, and the S&P 500 Index was down 23 percent.
The good news is that 2003 is shaping up to be a record year for Valero. Refined product margins are
at historically high levels and are expected to remain strong throughout the year—supported by good
consumer demand, coupled with lower-than-average inventory levels that are largely the result of a
colder-than-normal winter, the Venezuelan Oil Worker’s Strike, and the historically high level of
planned maintenance at U.S. refineries in the first quarter of 2003.
Meanwhile, Valero has only one refinery scheduled for major maintenance this year. So, while other
refineries are down, we’ll be producing and benefiting from the strong margin environment. In fact,
total throughput volumes are expected to be up 10 percent over last year.
Valero is also benefiting from widening sour crude oil discounts as Venezuelan crude oil has begun
returning to the market and OPEC production has increased. For example, the discount for Arab Medium
sour crude oil was $2.50 per barrel in April of 2002. It has more than doubled to $5.30 per barrel for
April of 2003. This is really important because every $1.00 improvement in the sour crude oil discount
improves our earnings by about $2.00 per share.
These improved market conditions have already resulted in a 10 percent increase in our stock price
so far this year.
LONG-TERM OUTLOOK JUST AS BULLISH
And the long-term outlook for the refining industry—and for Valero in particular—is just as bullish.
Since 1981, the number of U.S. refineries has been cut in half—from 324 to 141. And there is no
substantial new capacity coming on-line. In fact, the lower sulfur gasoline and diesel specifications imposed
by the federal government, which will go into effect in the next few years, are expected to reduce gasoline
$40
12/97 12/98 12/99 12/00 12/01 12/02
$80
$120
$160
VALERO ENERGY CORPORATION
PEER GROUP
S&P 500
COMPARISON OF 5-YEAR
CUMULATIVE TOTAL RETURN