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valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008
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valero energy Merrill Lynch Energy Conference Presentation – December 3, 2008

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  • 1. Merrill Lynch Large Cap Energy Conference December 3, 2008
  • 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
  • 18. Appendix 17
  • 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

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