Change at Valero Energy Corporation

Comparatively to competitors, Valero Energy has recently benefited from higher domestic crude oil prices, as evidenced by its best stock performances since 2012. The San Antonio-based American business dominates the production and export of fuels and petroleum goods. The company has grown its refinery base beyond the United States territory to venture in the United Kingdom, Ireland, Caribbean and Canada. Today, the fortune 500 company owns sixteen petroleum refineries with an estimated daily throughput capacity of 3.1 million barrels besides the eleven-ethanol plants with an annual production of 1.4 billion gallons (Valero, 2017). Regarded as the largest retail operator in US market prior to the 2013 spinoff of CST brand, Valero took off strongly in navigating the stormy industry to its present iconic status in the energy sector (Alpha, 2016). With time getting tougher in the US energy sector marked by falling domestic crude productions and lifting the crude exports ban, Valero must continuously embrace change to accomplish sustainable business.

Company Overview

Since its formation in 1980, Valero has witnessed continued growth as a mid-sized refining and marketing entity to report great financial results. The company has weathered challenges that have incapacitated non-integrated refineries, tough economic environment and shrinking crack margin to replicate its profitable years (Alpha, 2016). Although operating through mid-continent channels, Valero sells products through wholesale racking and bulk marketing strategies with over 7,400 outlets operating under its brand name in earlier mentioned countries. In particular, its wholesale operations stretch across forty-four US states, six provinces in Eastern Canada and growing base in Ireland and the UK (Valero, 2017).

Valero Energy has grown its retail and refinery divisions through internal-oriented expansion and strategic acquisitions. The latter is marked by the acquisition of Basis Petroleum in 1997, Paulsboro in 1998, Benicia from ExxonMobil in 2000 and Hunway Refining Company in 2001. This acquisition spree actively reflects in its present geographic presence, specifically the 2001 purchase of Ultramar Diamond Shamrock and later Premcor Inc., in 2005. The company would however halt its acquisition strategy following years of accumulated losses leading to the layoff of 500 employees in 2009 following an annual loss of $365 million. A turnaround in the company would however, deliver the company from its financial woes leading to the acquisition of Chevron Corp in early 2011 prior to the 2013 CST brands spun off (Valero, 2015).

The company runs three reportable segment including refining, ethanol and retail (CST Brands), Inc. This provides the company market heed in the refinery market, focused ethanol production and logistics interplay amongst them stretched to the CST Brands Inc. The 2013 spun off allowed Valero greater operational specialty to take on rivals in the energy sector. This marked a key victory for the company over the peer group comprising USA Energy, BP plc, Delek US Holdings, Holly Frontier Corp, Marathon Petroleum Corp, PBF Energy, Royal Dutch Shell, Western Refining, CVR energy, Philips 66 and Tesoro Corp (SEC, 2017). Its dominance over this peer group reflects in its sustained five-year cumulative total returns that surpassing both the Peer Group and S&P 500 Index since 2012 as shown in figure 1 below.

Figure 1 showing a comparison of five-year cumulative total return.

With over thirty-year experience in refining operations, Valero has grown into a reputable mid-continent leader in its three reportable segments. The company has optimized its resource base in overcoming backdrops in the energy sector, environmental challenges, international conflicts, political instabilities and bulky environmental and governmental regulation (SEC, 2017). This masterly corresponds with its increased value for its common stock as shown in figure 2 below.

2011

2012

2013

2014

2015

2016

Valero Common Stock

$ 100.00

166.17

274.19

274.85

403.46

406.63

S&P 500

$ 100.00

116.00

153.58

174.60

177.01

198.18

Peer Group

$ 100.00

109.23

132.93

122.45

110.45

130.66

Figure 2 showing cumulative total return based upon price appreciation and dividend reinvestment

The great results realized in Valero Energy reflect in its superior cumulative return as an output of optimized operations. This emerges from the great quarterly operating income realized in 2016 despite experiencing tough environment. In particular, the company reported a remarkable $814 million operating income in second quarter withstanding the shrinking crack spread amidst high gasoline inventories. The great quarterly results however mask the declining financial performance reflecting the tough economic environment characterizing the energy sector. Since 2012, Valero has faced reducing operating revenue and increased debt residual in its capital base. For instance, its operating revenue has declined almost by half from a high of $138, 393 in 2012 to $75, 659 in 2016 as displayed in figure 3 below (SEC, 2017; Valero, 2016).

2016

2015

2014

2013

2012

Operating Revenues

$75,659

$87,804

$130,844

$138,074

$138,393

Debt and Capital lease

$7,866

$7,208

$5,747

$6,224

$6,423

Figure displaying Valero operating revenues and residual debt financing

Challenges Confronting Valero Energy

Strained Crack Margin

Valero Energy confronts a tough operating environment marked by declining financial results since 2012. Although the company has steered its achievement clear of struggling peers in the non-integrated segment, the situation shows signs of further decline likely to confront Valero. Firstly, the crack margin of US gasoline shows a declining trend that would possibly lower the operating revenues of non-integrated refining companies (Alpha, 2016). This would hit Valero given its inadequacies in cost minimization in the refinery plants.

Secondly, crude oil has registered a turnaround to command rising prices. From an averaged $50 in 2016, the price is set to increase towards the range of $55-60 within the 2017 period (Alpha, 2016). This prediction shows rising oil prices will adversely affect refiners, Valero included, as increased input costs. The rising crude oil prices will impose extraordinary pressure to gasoline prices forcing the companies into accumulating high inventories. This practice will expose the company to increased operation costs associated with lower crack margin. Such occurrences will obviously disrupt Valero good footing in the non-integrated refinery segment.

Opposed Fossil Fuel Habits

The swelling witnessed in the global population and widespread industrialization in developing nations has created enormous hunger for energy. With fossil fuels contribution more than half of the energy requirements, refinery companies have an assured future for their business. Nevertheless, as the billion-population turn to fossil fuels to power their vehicles, engines and heat their homes, the planet faces a devastating future. Combustion of gas, coal and oil is a leading factor to rising greenhouse gases within the earth’s atmosphere leading to climatic changes. Scientists and pro-renewable groups agree the solution to addressing the disaster is stopping weaning our future to fossil fuel habits (Gray, 2017). Although marking an agenda yet it its early stages, its realization would mark a catastrophic end of Valero Energy refineries.

Transformation towards Renewable Energy

The trend mandates Valero to embrace changes corresponding to upcoming decades of transformation towards renewable energy. The implications go far deeper than management routine adaptations to having fundamental shifts in how its people will behave relative to political, environmental, social and economical issues. There is little doubt that shifting from non-renewable sources of energy is the grand challenging in the present planet. This arises from the need to address climatic changes and overcome an impending disaster from continued use of fossil fuels (Gray, 2017). While technology and latest inventions have made tapping into renewable energy sources including solar and wind possible, Valero Energy and its peer refinery group face a huge task. Valero currently suffers inadequacy in embracing the grand shift to renewable sources of energy given its sole reliance on refineries and petrochemical manufacturing (Valero, 2016).

Energy Demand in Untapped Markets

While Valero has put a remarkable performance amidst the tough economic environment for fossil fuels, the company seems lost in the immediate hike in energy demand. A significant amount of world population, perhaps a billion people, lack access to modern energy sources. Industrialization and economic growth in such areas including Asia, Africa and Latin America, has seen a dramatic rise in demand of energy. These high growth markets align away from markets served by Valero and its acquired subsidiaries. The company misses on tapping into the soon blossoming segment comprising over 3 billion individuals cooking and heating their homes through stoves, coal, animal dung and wood (Gray, 2017). This picture illustrates a ready market for Valero to expand beyond the US, the UK, Canada and Caribbean that it has failed to accomplish.

The concentrated focus on a few markets leads the company to miss on zones where infrastructural developments are underway including the Africa, Asia and parts of Europe. Faced by the increased global quest for reducing carbon IV oxide, the company should tactfully venture into creating a renewable segment. This transformation has brought renewable sources including solar, wind, geothermal and hydro as currently contributing a fifth of the global energy supply. The devotion on expanding its fossil fuel refineries leads the company missing on the wind power despite being the fastest growing over other renewable sources (Gray, 2017). The trend seems hitting it hard in the markets where Valero emphasizes its refinery and petrochemical operations. Advanced solar panel technologies have made it possible to generate energy in overcast conditions targeting the UK, Canada and the US. The UK leads with over 12GW solar energy feeding into the national electricity network (Gray, 2017). Solar energy grew globally at fifty percent and even further gains realized through photovoltaic technology to reduce the production costs.

Addressing the Challenges

Hooking up the new developments in the energy sector into Valero would hardly cause disruptions to the existing system. This is inevitable for a company whose dominance in the non-integrated refinery segments faces a doubting pressure from rising production cost, lower crack margins and increasing input costs. Having the solar and wind power parallel to the fossil fuel refineries would create increased intra-business rivalry since they are substitutes (Alpha, 2016). This suggests the introduction of such changes into the operating environment will leave some employees involved in fossil fuels. This would arise of senior employees who will view the introduction as imminent job insecurity when the company embraces renewable sources as a fourth reportable segment (Valero, 2017). The solution lay in leading the change through a participative approach that accommodates an ethical platform to involve senior staff members in the change management.

Reaching to Dissenting Voices

Valero Energy operations experience a lengthy list of risk factors capable of adversely affecting its business, operations and financial conditions. These realities make case for continued monitoring of the company operations to avoid plunging the company into further woes when implementing the aforementioned changes (Alpha, 2016). The company should consider reaching to the dissenting voices by addressing their concerns and creating buy-ins amongst themselves first before seeking the participation of more willing parties. Doing so, the company will ensure their concerns are adequately addressed thereby stopping them from undermining the change process. This is achievable by identifying reasons why staff members would oppose the changes, analyzing their fears and linking such to their causative factors (Valero, 2015). This would enable the company to identify and address the origin of such opposition rather than channel resources taming opposing forces that continuously resurface to undermine the change process.

Winning the opposing forces requires identifying with their dissenting position to learn and understand their reasons. The execution of this strategy will involve having sequential participation of the employees within their departmental units sensitizing them of the reasons and benefits derived from implementing the change. At this point, it is critical to identify individuals likely to stage opposition and quickly win them to the implementation team and involving them in the change process alongside other buy-ins. For instance, experts in the fossil fuel refineries would oppose the introduction of rival renewable energy on ground that such marks the end of their employment (Alpha, 2016). The company can quickly cite such as the expansion of its product offering to withstand changing business operations and need to save its shrinking operating revenue. The involvement of such parties during the preliminaries would save the company resources and time it would spend addressing such concerns.

Embracing renewable energy

Incorporating renewable energy as an additional reportable segment will require Valero leadership to make case for their acceptance to save the future of the company. This will involve setting tasks aligned to introducing the renewable energy operations. The success of addressing these differences necessitate assembling a team of lead individuals on why embracing renewable operations into the organization serves the interests of all (Gray, 2017). The team should champion the benefits of embracing solar, wind and hydropower into its system. The team members should utilize participative approaches to bring others on board. Its primary theme should prioritize a comparison of why solar power and wind power would ensure the continuity of the system eternally.

Open Implementation Policy

The changes witnessed in the markets served by the Valero brands in renewable energy sources should serve as indicators of impending loss of the company in its dominant regions to rivals embracing both renewable and non-renewable segments. This mandates an in-depth analysis showing how delays in having the solar power and wind power would give rival an opportunity to dethrone Valero. Considering that employees are the critical to realizing Valero goals, it serves well to use an open –policy to accommodate their views (Valero, 2015). This should however link to the realization of industrial transformation towards renewable source of energy. The accommodation of their views during dialogue would deliver little confusion and opposition during the implementation process. Ideally, the change team should emphasize the more good they stand to derive in their involvement in adjusting to renewable sources.

Phased change-over in high-growth areas

Creating more buy-ins should feature as the primary objective in formulating a dependable support base to implementing organization changes. As earlier mentioned the company faces shrinking financial results in the US, UK and Caribbean region. The solution for this rests upon expanding operations in other countries including Asia, Africa and Latin America zones away from the zonal arrangements the company has operated in the past (Gray, 2017). Navigating the new operating channels mandated embracing the sector wide trends that would shield the company from the emerging trends. Winning this contest requires interacting with other operating environments to learn, interact and acquire additional skills applicable in the new working environment.

The alignment of the company operations to a fitting schedule enabled the execution of daily activities to the students. A switch to the neighborhood for ending the surfacing differences during the company’s activity equally required aligning its operations to the desired requirements. Delivering the designed change under this circumstances necessitate a change of the operation culture. The tough economic environment confronting the non-integrated refineries mandate embracing a low-cost operations philosophy relative to the crack margin realized within the operations. Realizing this goal in the organization would require using the change point men tasked with championing for its support to create more buy-ins amongst employees (Valero, 2017). The platform to winning this crowd was incorporating the low-cost production techniques in future operations. The ability to reach majority of the employees would play an essential role in winning more converts into optimizing production processes to safeguard company-wide interests.

Constructive Employee Mandate

The interplay between the existing processes, ideas and operations would bring confusion introducing the low-cost optimization strategy. A big concern would be broadening the scope of employee mandate. Considering that this will be difficult for employees to ditch their usual processes, it will serve right to embrace induction programs (Alpha, 2016). This would deliver both minimal disruptions and offer detailed supervision of the employees during the early stage. This would enable employees learn from the experts already exposed to the product optimization environment. The provision of management guidance during the induction process would offer employees sought clarifications within their existing framework of management. The resulting atmosphere would bring a mutual exchange platform where the employees would continuously interact with their immediate supervisors (Valero, 2016).

Introducing additional focus on the developing markets, developed markets and expanded product offering that suits the environmental requirements. With this in mind, Valero should set in place a supportive team within its subsidiary offices. This obliges Valero to embrace the local talents in the additional high-growth market areas to learn and later orient others into the venture. Alike the switch to renewable sources, having a guide team would create an easier follow up and monitoring progress made rather making overhaul changes at once. The involvement of individuals conversant with the local industry would assist the company realize less disruptive process (Valero, 2017). This amounts to a phased-changeover process where the company would prioritize a pilot study prior to embracing full operations to avoid suffering investment shocks. Besides, this will involve engaging the locals in the management of the company though assisted by experienced expatriates to retain the Valero model.

Navigating the Regulatory Hurdle

The solution to eliminating disastrous climatic changes in future has necessitated tough environmental and governmental regulations to companies dealing with fossil fuels. In this perspective, Valero faces a huge test to comply with the regulatory climate. Since the introduction of the greenhouse gas emission credits, Valero faces a difficult task ahead in complying with the emission program (Valero, 2016). Navigating the compliance course necessitates aligning internal structures to avoid paying huge fines, license cancellations and incurring litigation costs. The use of legislative and regulatory actions by government authorities compels Valero Energy to embrace an internal alignment structure tasked with ensuring compliance with the provisions. The core objective of this program is inducting the entire staff into strict compliance channels that would save the company from violating the legislative provisions. The company could achieve this by enacting internal company standards and aligning its existing policies to match the rulemakings made by the government agencies.

Realizing this change would necessitate using the legislative provisions as a reference system, upon which, all its corporate standards are rooted. Achieving this would involve facilitating regular workshops and departmental seminars in a referral system adjusted to reflect the changing provisions. As such, Valero should create a culture of legislative orientation to existing and new environmental regulations including the California Global Warming Solutions Act and the Quebec cap-trade system on greenhouse gas emission allowances (SEC, 2017). Having an internal legal structure will involve bring the compliance responsibility into the individual departments where the company would adequately monitor progress made with incorporating the provisions. A key strategy to winning the backing of the workforce is involving them actively into familiarizing with the legal provisions during their formulations, implementation and reviews. This would help shed the tag of imposed will of the senior management, instead own the compliance checks for the common good of all stakeholders and protecting future generations.

Conclusion

Valero Energy is an American company that is based in San Antonio. The company leads in international manufacturing and marketing of fuels and petrochemical products. Currently, the company has ventured into other markets such as in the United Kingdom, Ireland, Caribbean and Canada. Valero Energy has in the recent years enjoyed more domestic gut in crude oil than rivals reflected in its top stock performances. Its wholesale racking and bulk marketing strategies brings it massive revenues across its three reportable segments. However, in the recent years, the oil and gas industry has been faced with major changes and difficulties at the same time. This requires Valero Energy and other organizations in this industry to embrace the changes to guarantee themselves survival and a competing edge.

The company faces mounting challenges that may erode its ability to replicate its profitable past that has progressively declined over time. This emerges from the sequence of risk factors and challenges facing the company. They include declining crack margin, industrial transformation towards renewable energy, opposed fossil fuel habits, energy hike and restrictive regulatory mandate. The company requires to put in place adequate strategies that will enable it accommodate the new changes in the industry. The solution to overcome these challenges lay in leading the change through a participative approach that accommodates all workforce members prior to its implementation. Valero energy could lead the change process by reaching out to dissenting employees, translating them into buy-ins, having open and phased changeover process aligned to constructive mandate of the employees. Importantly, to achieve change in the organization, the company will require involving all its stakeholders from the suppliers, employees, shareholders, government authorities and international partners.

References

Alpha. (2016, September 04). Valero Undervalued In A Tough Refining Environment. Retrieved May 10, 2017, from https://seekingalpha.com/article/4004050-valero-undervalued-tough-refining-environment

Gray, R. (2017, March 13). The Biggest Energy Challenges Facing Humanity. Retrieved May 10, 2017, from http://www.bbc.com/future/story/20170313-the-biggest-energy-challenges-facing-humanity

SEC. (2017, January). Valero Form 10-K SEC Filling 2016. Retrieved May 10, 2017, from http://getfilings.com/sec-filings/170223/VALERO-ENERGY-CORP-TX_10-K/

Valero. (2015). Company History. Retrieved May 10, 2017, from http://www.valero.com/OurBusiness/Pages/CompanyHistory.aspx

Valero. (2016, January). Valero Energy Corporation Form 10-K 2015. Retrieved May 10, 2017, from https://www.sec.gov/Archives/edgar/data/1035002/000103500216000069/vloform10-kx12312015.htm

Valero. (2017, January 31). Valero Energy Reports 2016 Fourth Quarter and Full Year Results. Retrieved May 10, 2017, from https://www.valero.com/en-us/Documents/Newsroom/4Q16%20VLO%20A-Earnings%20Release_%20Tables%20FINAL%201-30-17.pdf