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

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.

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