2. Global Spare Capacity Growing,
Expect Competition to Increase
MMBPD
Global Refining Supply and Demand
3.0
Petroleum Demand Growth
2.5 Crude Unit Expansions
Conversion Capacity Growth
2.0
1.5
1.0
0.5
0.0
2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: Industry reports and Valero forecast; 2008 through 2010 estimates are based on consultant averages and are subject to change; includes capacity creep
High i
Hi h prices and now global economic
d lbl i Globally, tili ti
Gl b ll utilization rates are falling
t f lli
weakness are slowing demand Projects getting canceled and
Global refining capacity is increasing deferred
• New refineries and expansions
p Threat to less competitive refiners
p
• Biofuels and condensates Expect economic recovery to
increase demand and improve
margins 1
3. More Refining Capacity
Owned by Independents
U.S. Refining Capacity Ownership
69% 59%
41%
31%
1990 2008
Independents Integrateds
Source: DOE, industry reports and Valero estimates
Independent refiners lack upstream economics, so must reduce
p p
throughputs to be profitable
2
4. Petroleum Demand Growing In
Developing Economies
2007/2008/2009
thousand barrels per day
Europe FSU
103
109
71
-57
-205
-362
North America
Asia
109
510
446
347
Middle East
-429
416 299
295
-1,141
Africa
Latin America 113 36
37
283 250 202
Global Demand Growth
(million barrels per day)
2007 0.95 1.1%
2008 0.12 0.1%
2009 0.35 0.4%
3
Source: IEA (11/13/2008)
5. Falling Crude Oil Prices
$160 WTI Cushing (per bbl)
$140
$120
$100
$80
$60
$40
Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08
Source: Argus weekly averages; 2008 through November 28
Longer-term – expect prices to stabilize
Market looking for support – $50/barrel
appears to be holding for now • Lower prices causing project delays
p gp j y
• Demand continuing to fall • Non-OPEC crude production at low
• 2009 economic growth looks very low growth or decline in 2009
• Expect growth to resume in 2nd • Lower prices support demand
half of 2009 growth, especially in developing
th i ll i d li
• Expect OPEC to cut again in countries
December and/or next year
4
6. Poor Gasoline Margins
9.8 $40 Gulf Coast Gas Crack (vs. WTI, per bbl)
U.S. Gasoline Demand, 4-Week Avg (mmbpd)
$35
9.6 2007
$30
$25
9.4
$20
2007
9.2 $15 5-Yr Avg
2008
$10
9.0 $5 2008
5-Yr Avg
$0
8.8
-$5
-$10
8.6
Jan Apr
p Jul Oct
Jan Apr
p Jul Oct
Source: DOE unadjusted weekly data; 2008 through November 21 Source: Argus weekly averages; 2008 through November 28
Ethanol currently less economic to blend
Weak U.S. demand in 2008
Weak prices and margins reducing
p g g
• Slowing economy
g y
imports
• Rising unemployment
Expect refiners to reduce utilization for
• Previously high pump prices
gasoline making units (FCCs and
caused “staycations” last summer
reformers)
Lower pump prices causing some
L i i
demand response, seeing signs of Expect margins to be positive after winter
recovery
5
7. Distillate Margins
Continue To Be Outstanding
Gulf Coast On-Road Diesel Crack U.S. and Europe Commercial Distillate/
500
$40
(vs. WTI, per bbl) Gasoil Inventories (millions of barrels)
$35 2006
475
$30
2008 2007
450
$25
2005
2007
2008
$20 425
2009 Forward
Curve
$15
400
$10
5-Yr Avg
375
$5
Jan Apr Jul Oct
Jan Apr
p Jul Oct
Source: Argus weekly averages; 2008 through November 28; LSD prior to May 2006; Source: IEA and Euroilstock as of October 2008; Includes heating oil, diesel, gasoil
ULSD after April 2006
Expect long-term demand growth
Distillate margins strong all year
• Growing faster than gasoline
U.S.
U S and European inventories relatively
worldwide
low
• Economic growth drives diesel
Near-term, expect support from winter
demand
2009 forward curve at high levels
Supply options limited
European specifications tighten on
• Fewer substitutes such as ethanol
January 1, 2009
for gasoline
World demand driving distillate margins
6
8. Feedstock Discounts Very Favorable
Crude Differentials Below WTI (per bbl)
$25 40% Crude Differentials as a Percentage of WTI
35%
Maya
$20
30%
Mars
Maya
25%
$15 Mars
20%
$10 15%
10%
$5
5%
$0 0%
2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008
Source: Argus monthly averages; 2008 through November 28
Source: Argus monthly averages; 2008 through November 28
Expect feedstock differentials for Cancellations and deferrals of cokers and
medium and heavy grades to remain upgraders reduce demand for heavy oil
favorable • Examples: MRO Detroit, VLO Port Arthur,
• Many resids and heavy sours trading Petro-Canada Fort Hills, Suncor
much cheaper than Maya Voyageur, and BA Energy Heartland
While production of heavy sour is Demand growing faster for light versus
declining south of the border, Canadian heavy products, keeping heavy-light
production has been growing differentials wide
7
9. Valero’s Strategy for Gasoline and
Distillate Trends
Distillate and Gasoline Yields on Total Production
50%
45%
40%
35%
30%
2006 2007 2008 Est. 2009 2010 2011 2012
Actual Actual Potential Potential Potential Potential
Distillate Gasoline
Gasoline Distillate
Limiting incremental gasoline
Li iti i tl li Shifting gasoline production to di till t
Shifti li d ti t distillate
production at reformers and • De-tuning FCCs, adjusting cut points and temps, using
FCCs previously built spare hydrotreating capacity
• Building hydrocrackers at St. Charles and Port Arthur
Complying with RFS ethanol
py g
• Distillate yields: 2007 at 33%, potentially more than 40%
requirements
Able to export high quality diesel to premium
markets worldwide
8
10. Valero’s Assets Are Competitive
Independent Refiners’ Total Capacity: Size vs. Complexity
acity
250
ghput Capa
VLO
(thousand barrels per day)
200
SUN
p
rage Refine Throug
150
TSO
ery
100
FTO
DK
WNR
50
Size of bubble
HOC
ALJ shows relative
h l ti
Aver
throughput capacity
0
6 7 8 9 10 11 12
Average Nelson Complexity
Source: Oil and Gas Journal and Valero estimates
Valero’s refineries are larger and more complex
9
11. Valero’s Assets Are Competitive
Valero’s 3Q08 Feedstock Slate
U.S. Conversion Capacity (mbpd)
80%
70%
Cat Cracking
Light
60% Hydrocracking Sweet
Heavy
Crudes &
Coking
50% Sour and
Other
Resids
31%
40% 37%
30%
%
20%
Feedstocks
Sour and
10% Acidic priced below
Crudes light sweet
0% 32% crude oil
VLO TSO FTO CVI DK SUN WNR ALJ HOC
Source: Company reports
Source: Oil and Gas Journal
Nearly 70% of Valero’s feedstocks
Valero leads in conversion capacity as
price below WTI light sweet crude oil
a percentage of crude distillation
t f d di till ti
capacity Longer-term strategy to capture
increasing Canadian heavy sour
Enables Valero to convert low-quality,
production on Gulf Coast
discounted feedstocks into high-
quality products
10
12. Valero Is Financially Competitive
Diluted Shares Outstanding (Wtd. Avg.)
Millions
Net Debt-to-Capitalization Ratio (period-end)
60% 680
50%
640
Cut share
40% count by 125
million (19%)
600
30%
since year-
end 2005
20% 560
10%
520
0%
2001 2002 2003 2004 2005 2006 2007 3Q08
Outlook
Stock Buybacks
Strong Balance Sheet
Continuing balanced approach
Low net-debt-to-cap ratio Significantly
reduced share • Planning a mix of capital
High cash position and liquidity:
count projects, debt retirement, stock
$2.8 billion in cash plus more
buybacks, and dividends
Purchased $952
than $4 billion of credit available,
Planning to maintain financial
million year-to-
net of LCs issued, as of Sept. 30
strength
date
2009 debt maturities: only $300
Running a process for Aruba
million
Reviewing all assets
Investment-grade debt rating
11
13. Disciplined Capital Program
Preliminary 2009 budget estimated at $3.5 billion
• Deferred St. Charles paraxylene project and Port Arthur coker project, but
continuing to invest in our assets
• Some plants underinvested prior to our ownership
• 2009 capital budget remains in progress – may continue to reduce budget
Millions
2008 Estimate 2009 Estimate
$3,500
$3,000
$3 000
Strategic
$1,435
$995
Tier II
$55
$710
Sustaining/
$1,070
Reliability
$690
Turnarounds $405
$650
$475
Regulatory
12
14. Key Strategic Growth Projects
Total
Cost1 Start-
Refinery Project $mm Up Description
New hydrocracker – 50 mbpd
Hydro-
St. Charles $1,250 4Q10 Upgrades low-value feedstocks mainly
cracker into ULSD with 25% volume expansion
Crude unit expansion – 45 mbpd
Crude/
St. Charles $250 3Q09 estimated
Coker Coker expansion – 10 mbpd estimated
Convert to conventional design
St. Charles FCC $225 1Q10 Improve reliability and get 5%+ volume
expansion
Hydro- New hydrocracker – 50 mbpd estimated
Port Arthur cracker/ $1,700 3Q11 Crude expansion – unlock up to 75 mbpd
existing capacity
Crude
1 Total project cost includes non-strategic capital costs and interest and overhead
13
15. Targeting $1 Billion of Operating
Income Improvements
millions
$1,000
Other
$200 Ope at g
Operating
$800 Expenses
$250 Energy
$600
Efficiency
y
$400
$550 Mechanical
$200 Availability
y
(Reliability)
$0
2008 2009 2010 2011
Assessed refining system based on 2006 Other opportunities available
Solomon Survey results throughout company
• Identified gaps of approximately $1 billion • Managing corporate headcount
of annual operating income (based on • Centralizing administrative
2006 prices) functions and reducing overhead
14
16. Retail – Outstanding Results
Earned quarterly record of
$107 million in 3Q08
Completed Albertson’s
tuck-in acquisition in 3Q08
• Now operate 1,013 U.S. sites
1 013 U S
• Canadian network at 871
sites $4.50 Average U.S. Retail Gasoline Price ($/gal)
• T t l retail sites 1 884
Total t il it 1,884 $4.00
2008
Falling crude oil prices $3.50
$3.00
helping margin expansion
pg g p
2007
$2.50
4Q08 looking very good $2.00
• October best month in $1.50
company history Jan Mar May Jul Sep Nov
Source: DOE, 2008 through December 1
15
17. Committed to Creating
Long-Term Shareholder Value
Continuing balanced approach with cash
Maintaining t
M i t i i strong b lbalance sheet
ht
Expect acquisition opportunities to become
available
a ailable
Despite tough environment, Valero currently
profitable
At stock price of $17 per share, trading at
P/E of less than 4x consensus 2008 EPS
estimates!
Shareholder value is management’s focus
management s
16
19. Refining Portfolio
Quebec, Canada
• 265,000 bpd capacity
• 7.6 Nelson complexity
Benicia, California
• 170,000 bpd capacity
• 15.0 Nelson complexity
Paulsboro, New Jersey
• 195,000 bpd capacity
p p y
• 9.1 Nelson complexity
Wilmington, California Delaware City, Delaware
• 135,000 bpd capacity • 210,000 bpd capacity
• 15.9 Nelson complexity • 13.2 Nelson complexity
Lima, Ohio
• 165,000 bpd capacity
• SOLD in 2007 for
McKee, Texas $1.9 billion
• 170,000 bpd capacity
• 9.4 Nelson complexity
Memphis, Tennessee
• 195,000 bpd capacity
• 75N l
7.5 Nelson complexity
l it
• Under Strategic Evaluation
Three Rivers, Texas
• 100,000 bpd capacity
• 12.4 Nelson complexity Ardmore, Oklahoma
• 90,000 bpd capacity
Corpus Christi, Texas
• 10.9 Nelson complexity
• 315,000 bpd capacity
• Under Strategic Evaluation
• 18.4 Nelson complexity
Krotz Springs, Louisiana
Springs
• 85,000 bpd capacity St. Charles, Louisiana
Texas City, Texas • 6.5 Nelson complexity • 250,000 bpd capacity
Legend • 245,000 bpd capacity • Sold July 2008 for more • 14.3 Nelson complexity
• 10.8 Nelson complexity than $500 million
Valero Marketing Presence
Houston, Texas Port Arthur, Texas San Nicholas, Aruba
• 145,000 bpd capacity • 310,000 bpd capacity • 275,000 bpd capacity
p p y
Core Refinery • 15.1 Nelson complexity • 11.8 Nelson complexity • 7.0 Nelson complexity
• Under Strategic Evaluation
Non-Core Refinery Under Strategic Evaluation
Non-Core Refinery – Sold
Note: Capacity shown in terms of crude and feedstock throughput
18
Sources: Nelson complexities, Oil & Gas Journal and Valero estimates
20. Valero’s Refineries Look Undervalued
with a Stock Price at $17 per Share
$30,000 Value per Barrel of Daily Throughput Capacity
$25,000
$20,000
$15,000 7% of
Replacement
$10,000
Cost
$5,000
$0
USGC New Build VLO Replacement Lima Transaction Krotz Springs VLO Implied Refining
1
(Estimated) Cost (Estimated) Value Transaction Value Assets
Value per Complexity-Adjusted Barrel of Daily Capacity
$2,000
$1,600
$1,200
7% of USGC
New Build
$800
Value
$400
$0
USGC New Build VLO Replacement Lima Transaction Krotz Springs VLO Implied Refining
1
(Estimated) Cost (Estimated) Value Transaction Value Assets
1 Transaction
value includes estimated value of earn-out at $170 million
19
See Appendix for details of calculations
21. Implied Value of Valero’s
Refining Assets
Billions, except per unit amounts
Market Value of Equity at $17/share
qy $8.9
Book Value of Debt1 6.5
Less: Cash1 -2.8
= E ti t d Enterprise Value
Estimated E t i Vl 12.6
12 6
Less: Book Value of Net Working Capital1 -0.5
Less: Incremental Market Value of Inventories1 -7.6
Less: Estimated Value of Retail Assets2 -1.0
= Implied Value of Refining Assets $3.5
Implied Value Per:
• Barrel of daily throughput capacity
(3.070mmbpd)3 $1,140
• Barrel of complexity-adjusted capacity
(2.64mmbpd crude, 11.30 Nelson)4 $117
1As 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
20
22. Canadian Crude Supply Strategy
Keystone XL Pipeline System
Agreed to Begins: Hardisty
participate as a Ends: Port Arthur
Length: 1933 miles
g
prospective Product: Heavy Sour Crude Oil
shipper on the Planned Capacity: 1.1 million bpd
Keystone
Pipeline System
Option to take an Keystone XL Phase 2 Keystone
Q4, 2011
equity ownership Q4, 2009
position in the
Keystone
Partnerships Cushing Extension
Q4, 2010
• Current
participants are
TransCanada
Keystone XL Phase 1
and Q4, 2010
ConocoPhillips
Valero has 233 MBPD of coking capacity on the U.S. Gulf Coast
- Plan to increase to 243 MBPD by 2011
21
23. Valero Is the Industry Leader,
Yet Looks Undervalued vs. Peers
12
Most Geographically Diverse Refining Capacity Leading Nelson Complexity Index
10
RM
8
WC
6
MC
4
GC
2
EC
0
DK ALJ WNR HOC TSO FTO SUN VLO
DK ALJ WNR HOC TSO FTO SUN VLO
Source: Oil & Gas Journal and Valero estimates Source: Oil & Gas Journal and Valero estimates
Low Price to 2009 Estimated Earnings Ratio
Lowest Volatility of Quarterly Diluted EPS
180% from Continuing Operations Since 2002
10x
160%
140%
120%
8x
100%
80%
60% 6x
40%
20%
0% 4x
HOC TSO FTO SUN VLO DK ALJ WNR HOC TSO FTO SUN VLO
Source: Bloomberg, November 26, 2008
Source: Bloomberg
22
24. Safe Harbor Statement
Statements contained in this presentation that state the Company's or
management's expectations or predictions of the future are forward–
looking t t
l ki statements intended t be covered b th safe h b provisions of
t i t d d to b d by the f harbor ii f
the Securities Act of 1933 and the Securities Exchange Act of 1934. The
words quot;believe,quot; quot;expect,quot; quot;should,quot; quot;estimates,quot; and other similar
expressions id if f
i identify forward–looking statements. I i i
d l ki 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.
23
