Q4 2019 Earnings Call
This time, all participant lines turned to listen only mode. After the speakers presentation. There will be a question answer session to ask a question. During this session you wanting to press star one on your telephone. Please be advised the today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.
Homer bowler. Thank you. Please go ahead, Sir good morning, everyone and welcome to Valero Energy Corporation fourth quarter 2019 earnings Conference call.
With me today, our Joe Gorder, our chairman and Chief Executive Officer, Donna <unk>, our executive Vice President and CFO land rig, our president and COO, Jason Frazier, Our executive Vice President and General Counsel, Gary Simmons, Our executive Vice President and Chief Commercial Officer and.
Several other members of senior management team.
If you have not received the earnings release and would like a copy you can find one on our website at <unk> Dot com.
So attached to the earnings release, our tables that provides additional financial information on our business segments.
If you have any questions. After reviewing these tables, please feel free to contact our investor relations team after the call.
I would now like to direct your attention to the forward looking statement disclaimer contained in the press release.
In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward looking statements intended to be covered by the safe Harbor provisions under federal Securities laws.
There are many factors that could cause actual results to differ from our expectations, including goals. We've described in our filings with the FCC.
Now I'll turn the call over to Joe for opening remarks.
Thanks over and good morning, everyone.
We're pleased to report that we had a good quarter delivering solid financial results.
Our refineries operated well at 96% utilization, allowing us to take advantage of wider sour crude oil differentials and weakness in high sulfur residual feedstocks.
Overall 2019 was a challenging environment for the refining business, we started the year with gasoline inventories at record highs and gasoline cracks at historic lows. We were also faced with narrow sour crude oil differentials for most of the year, primarily due to sanctions on Venezuela and Iran. In addition to.
Okay, and Canadian crude oil production curtailments and differentials on inland sweet crude oils narrowed in the second half of the year with the startup of multiple new crude pipelines from the Permian basin to the Gulf Coast.
Despite this challenging backdrop, our team demonstrated the strength of our assets and prior investments to improve our feedstock and product flexibility, allowing us to deliver another year of steady earnings and free cash flow.
We demonstrated our crude supply flexibility by processing annual record, a 1.4 million barrels per day of North American Sweet crude oil as well as a record of approximately a 180000 barrels per day of Canadian heavy crude oil in 2019.
We also achieved another milestone by delivering the best ever year on employee safety performance and the lowest number of environmental events in company history, demonstrating our strong commitment to safety reliability and environmental stewardship.
We continue to invest in projects that enhance the flexibility in margin capability of our portfolio. In 2019, we successfully started up the Houston Alkylation unit and completed the central Texas pipelines and terminals project.
We have several growth projects there will be completed this year, including the Pasadena terminal Saint Charles Alkylation unit and the Pembroke Cogeneration unit.
Looking further out the diamond pipeline expansion should be completed in 2021, and the Diamond Green diesel and the Port Arthur Coker projects are still on track to be completed in 2021 and 2022, respectively.
We also continue to explore growth opportunities in our renewable fuels business, which is already the largest in North America as we previously announced the Diamond Green diesel joint venture is in the advanced Engineering review phase for a new renewable diesel plant at our Port Arthur Texas facility. If the project is a proof.
Operations are expected to commence in 2024, which would result in diamond Green diesel is renewable fuels production capacity, increasing to over 1.1 billion gallons annually or over 70000 barrels per day.
We remain disciplined in our allocation of capital a constant in our strategy for several years, which prioritizes are investment grade credit rating sustaining investment and maintaining a sustainable and growing dividend.
We expect our annual Capex for 2020 to be approximately 2.5 billion, which is consistent with our average annual spend over the last six years with approximately 1 billion allocated for high return growth projects that are focused on market expansion in margin improvement and the balance allocated to maintain.
Safe reliable and environmentally responsible operations.
You should continue to expect increment incremental discretionary cash flow to compete with other discretionary uses including organic growth investments M&A and cash returns to our investors.
Looking ahead, we have a favorable outlook for refining margins with the IMO 2020, low sulfur fuel oil regulation, which just took effect on January onest.
Hi, sulfur crude oils are expected to be more discounted due to lower demand is less complex refinery switch to sweeter crude oils.
Gross complex refining system is well positioned to take advantage of the discount at high sulfur crudes and fuel oils is feedstocks.
Our growing renewable diesel segment continues to generate strong results due to the high demand for renewable fuels.
In closing our incredible team's relentless focus on operational excellence steady pipeline of high return organic growth projects and a demonstrated commitment to shareholder returns should continue to position Valero well.
So with that Homer I'll hand, the call back to you.
Thanks, Joe.
For the fourth quarter of 2019 net income attributable to Valero stockholders was 1.1 billion or $2.58 per share compared to 952 million or $2.24 per share in the fourth quarter of 2018.
Fourth quarter 2019, adjusted net income attributable to Valero stockholders was 873 million or $2 in 13 cents per share compared to 932 million or $2.19 per share for the fourth quarter of 2018.
For 2019 net income attributable to Valero stockholders was 2.4 billion EUR $5.84 per share compared to 3.1 billion or $7.29 per share in 2018.
2019, adjusted net income attributable to Valero stockholders was 2.4 billion EUR $5 in 70 cents per share compared to 3.2 billion EUR $7.55 per share in 2018.
The 2018 and 2019 adjusted results exclude several items reflected in the financial tables that accompany the earnings release.
Reconciliations of actual to adjusted amounts please refer to those financial tables.
Operating income for the refining segment in the fourth quarter of 2019 was 1.4 billion compared to 1.5 billion for the fourth quarter of 2018.
Refining throughput volumes averaged 3 million barrels per day, which was inline with the fourth quarter of 2018.
Throughput capacity utilization was 96% in the fourth quarter of 2019.
Refining cash operating expenses of $3.93 per barrel were in line with the fourth quarter of 2018.
The ethanol segment generated $36 million of operating income in the fourth quarter of 2019 compared to a 27 million dollar operating loss in the fourth quarter of 2018.
Increase from the fourth quarter of 2018 was primarily due to higher margins, resulting from higher ethanol prices.
Ethanol production volumes averaged 4.3 million gallons per day in the fourth quarter of 2019.
Operating income for the renewable diesel segment was 541 million in the fourth quarter of 2019 compared to 101 million for the fourth quarter of 2018.
After adjusting for the retroactive blenders tax credit recorded in the fourth quarter of 2019 adjusted renewable diesel operating income was 187 million in the fourth quarter of 2019 compared to $167 million for the fourth quarter of 2018.
The increase in operating income was primarily due to higher sales volume.
Renewable diesel sales volumes averaged 844000 gallons per day in the fourth quarter of 2019, an increase of 124000 gallons per day versus the fourth quarter of 2018.
For the fourth quarter of 2019 general and administrative expenses were 243 million and net interest expense was 119 million.
General and administrative expenses for 2019 of 868 million were lower than 2018, mainly due to adjustments to our environmental liabilities in 2018.
For the fourth quarter of 2019, depreciation and amortization expense was 571 million and income tax expense was 326 million.
The effective tax rate was 20% for 2019.
Net cash provided by operating activities was 1.7 billion in the fourth quarter of 2019.
Excluding the unfavorable impact from the change in working capital of 434 million and our joint venture partners, 50% share of Diamond Green diesel net cash provided by operating activities, excluding changing going it's working capital adjusted net cash provided by operating activities was 1.9 billion.
With regard to investing activities, we made $722 million of capital investments in the fourth quarter of 2019 of which approximately 445 million, what's for sustaining the business, including cost for turnaround catalyst and regulatory compliance.
For 2019, we invested $2.7 billion, which includes all of Diamond Green diesel is capital investments of 160 million.
Excluding our partners, 50% share of Diamond Green diesel capital investments Valeros capital investments for 2019 were approximately $2.6 billion with approximately $1 billion of the total gross for growing the business.
Moving to financing activities, we returned 591 million to our stockholders in the fourth quarter.
$369 million was paid as dividends with the balance used to purchase 2.3 million shares of Valero common stock.
This brings our 2019 returned to stockholders to 2.3 billion and the total payout ratio to 47% of adjusted net cash provided by operating activities.
As of December 31st we had approximately $1.5 billion of share repurchase authorization remaining.
And last week, our board of directors approved a 9% increase in the regular quarterly dividend to 98 cents per share or $3.92 per share annually further demonstrating our commitment to return cash to our investors.
With respect to our balance sheet at quarter end total debt was 9.7 billion and cash and cash equivalents were 2.6 billion.
Well there debt to capitalization ratio net of 2 billion in cash was 26%.
At the end of December we had 5.3 billion of available liquidity excluding cash.
Turning to guidance, we continue to expect annual capital investments were 2020 to be approximately two and a half billion with approximately 60% allocated to sustaining the business and approximately 40% to growth.
The two and a half billion includes expenditures for turnarounds catalyst and joint venture investments.
For modeling our first quarter operations, we expect refining throughput volumes to fall within the falling ranges.
US Gulf Coast at 1.63 to 1.68 million barrels per day.
US mid continent at 400 tend to 430000 barrels per day.
Yes, West coast at 230 to 250000 barrels per day, and North Atlantic at 470 to 490000 barrels per day.
We expect refining cash operating expenses in the first quarter to be approximately $4.15 per barrel.
Our ethanol segment is expected to produce a total of 4.2 million gallons per day in the first quarter operating expenses should average 37 cents per gallon, which includes five cents per gallon for non cash costs, such as depreciation and amortization.
With respect to renewable diesel segment, we expect sales volumes to be 750000 gallons per day in 2020.
Operating expenses in 2020 should be 50 cents per gallon, which includes 20 cents per gallon for non cash costs, such as depreciation and amortization.
For the first quarter net interest expense should be about 113 million and total depreciation and amortization expense should be approximately 560 million.
For 2020, we expect DNA expenses, excluding corporate depreciation to be approximately 860 million.
The annual effective tax rate is estimated at 22%.
Lastly, we expect Rins expense for the year to be between 300 and $400 million.
That concludes are opening remarks before we open the call. The questions. We again respectfully request that callers adhere to our protocol a limiting each turn into Q into two questions.
If you have more than two questions. Please rejoin the queue as time permits.
This helps us ensure other callers have time to answer questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby well, we compile the Q and a roster.
And our first question comes from the line of Phil Gresh from JP Morgan. Your line is now fan.
Hi, good morning.
Florida Phil.
So first question.
Two part question I was wondering if you could discuss.
In the fourth quarter, what incremental actions Valero took in order to run more fuel oil as a feedstock across the portfolio and how much of that you're actually able to capture in the quarter.
As well as why you think the high sulfur fuel oil prices have started to strikes in here.
In the beginning of 2020.
But those line I'll start with the in terms of how we maybe looked at our operating conditions and our operating envelope among Gary can sort of finish up with the market.
The operating conditions, we widened our our window, our operating window to try to reach out and get more challenging.
Hi, Paul for Revit, we always weve per year on year, when you're really for.
Decade, we've been.
Somebody who buys a lot of high fall for the run on but we opened up the market went out look as we we believe the idea what is the market changes and try to conform or at least.
To the IMO 2020 to somebody title for reserves would free up in the marketplace.
We.
And we want to get it that we want to give that the reserve before it gets blended into the hospital fuel market because of the quality reasons.
Thats really what we did we reach out in Rand quite a few high sulfur the that we have not historically ramp.
Yes, so the second part of that in terms of I guess, where how much of it showed up in the fourth quarter, we ran on.
A lot of high sulfur reserves, but we really didnt see the discounted barrels coming in until about mid December . So it didnt have a real significant impact on fourth quarter results and you'll see that more going forward.
But in terms of high sulfur fuel getting more expensive.
We're still in the very early phase of what the significant transition in our industry as we respond to the IMO bunker self respect change and so when a change of the magnitude you would expect integrate some volatility in the markets it'll take some time for the markets to reach equilibrium. So we certainly see that there's not a lot of liquidity in the physical.
You all markets, we theres a lot more liquidity in the paper markets. If you look at the forward curve steeply backwardated and that kind of showing fuel gets back to 60, 65% of brand, which is kind of more where we think it will be so our view really in respect to high sulfur fuel and the crude oil quality discounts hasn't changed as the markets normalize.
We expect to see the discount widen back out is the forward curve reflects and as high sulfur fuel blend stocks have to compete for space with heavy sour crudes and complex refining capacity like we have in the Gulf Coast.
Okay got it thank you.
The second question just on the capital allocation side of things.
We continue to keep.
Capital spending flattish year in 2020, and really healthy dividend increase that you just have doubts which looks pretty well covered by cash flow. So just curious how you're thinking about this.
Increasing the dividend is it just a shift from the dividend to the buyback and you're sticking with the same constructs that you've had 40% to 50% of cash flow and.
Obviously, the buyback will reduce the dividend burden over time, but just curious how you're thinking about us today. Thanks.
No we haven't changed our policy and it continues to be that we want to returned 40% to 50% at that.
Cash flow from operations to the shareholders on the dividend increase.
Just a part of that payout, we don't have anything particular in line in regards to that dividend only pay out. It's just part of the overall cash return you might see that that dividend as a percentage of the total Barry.
Each year as our cash flow varied.
But buybacks will continue to.
Fill in the balance that return.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Manav Gupta from Credit Suisse. Your line is now open.
Joe could you talk a little bit about the Gulf Coast operating results you would almost up.
5% on operating income on the gas cost in the context Cemplank lunch time. This is like you have global media is one of which indicated the downstream lendings could be down 80% Cuattro look locker another onboarded pretty.
I don't see monies down 36% how is the little in an alternate unit will you have so much better than others.
But thats a really good question and I'd love to give you an intelligent answer, but what I, let one of these guys cover it here barrier Lane, you also have fulfillment of which.
First of all we did see higher higher discounts accrual discount than obviously there were the discount than in the fourth quarter. So if you're comparing third fourth quarter. That's part of the answer is with the second part of the answer is we got better Napa does.
Better NAFTA netback because of naphtha prices improved over the quarter and again, we also if you change the butane we when you compare fourth quarter third quarter is our ability to run cheaper butane or at least blend to obviously.
Helped us with our capture rates when compared to third quarter.
Hum.
A quick follow up on the renewable diesel and the expansion of goggles for late 2021.
You guys have indicated a normalized margin up only 125 versus a one year something utilized in this quarter without BDC, but if you put the beast. Even 125, you could get like 250 million EBITDA on the base margin and then about another one fucking million. So you're looking at the they've done enough like clean 90 of EBITDA on this strategy.
Axle from your capital expenditure point to fight so be it looks like a two year payback on the same died project like is the mats right already something off here.
Well, we feel pretty good about now this is Martin Parrish.
We're still feel good about the pro forma guidance for the 126 as excludes the blenders tax credit. So that puts you at 26 per gallon EBITDA I think that kind of checks out with what you're saying.
Oh.
Thanks, guys.
Yes, so manav.
You're very close.
Thank you.
You bet take care.
Thank you. Our next question comes from the line of Doug Leggate from Bank of America. Your line is now open.
Hi, Good morning, guys doing things to for semi spoken this year, so happy new year.
Thank you same to you Doug.
Joel I got one on the Mt market on one on the letter, let's go with Valero first maybe doing and wants to take this but.
Phil or the asked about the pit the 40, 50% of your cash payout I guess I'm more curious on the mix.
With that dividend I mean, you were very early to get on this train of returning a significant amount of cash to shareholders and is paid pardon the pun, but it has paid dividends in both the credibility of the business model as well as the relative performance of the stock, but why not more dividends or buybacks Im just curious how you think about them.
You want to you want to take a crack at it sure.
So what we have told we've explained to the market that we do you consider that dividends to be part of the nondiscretionary piece of our capital allocation. So when we look at that we we look at it in the context of it being test yet to the market.
Ill start with our peers in the market in general that but also more importantly, sustainable through market cycles. So.
Again, we regularly review that with those objectives in mind.
Yes, Doug what I would and does exactly right what I would add to what you said you've got to sustainability aspect to the down market cycle, which is something that we spend a lot of time looking out to be sure that we don't find ourselves cutting that dividend and you know you reinforced that by having a very strong balance sheet, but if I think about it longer term.
Okay and this is really where my brain goes it goes to the sustainability of the growth of the dividend going forward and.
And we want to continue to be able to grow we want to give our owners more every year and and the way that you go about doing that is tempering. It a little bit I think we started talking last year about moderating the dividends a little bit more which I think you. So we did this year and the other thing that's really encouraging from my perspective is it.
We've got these.
Capital projects that are coming on stream, there are providing significant future earnings potential and some of them are longer cash flow cycles, which we havent done a lot of over the last bunch years, but when we got another renewable diesel plant, we've got to coker and that if we end up doing the port Arthur renewable diesel plan in the future. These are huge EBITDA per day.
Using projects, which are going to really reinforce our ability to go ahead and continue to.
Deliver dividend growth going forward no, we're not making the promise because literally knows what might happen, but that would be our objective and that's that's kind of the way we look at investing our capital.
The the component part the percentage of the total payout that's made up of the dividend that the dividend comprises.
That's not formulaic it's more.
US looking at all of the factors involved in and there's a lot of sausage, making that takes place there that we won't get into here, but.
I always want to be in a position what we do something like this to let you know that we feel fairly assured that this isn't going to be an issue going forward.
I appreciate the lengthy answer Geismar my follow up Joel I don't know if you want to sort of this the one of the guys and I also from my congratulations to the new officers titles in the and the team, but maybe late wants to take this but.
Theres a lot of charts are about new capacity coming online in backend of this year and maybe for the next couple of years, obviously things are kind of soft that seems on the demand side, given what's going on with China, but im just wondering how you see the prognosis for the short term I am more tailwinds transitioning maybe into a more challenging refining environment.
Longer term, how you guys thinking about that and I'll leave it there. Thanks.
Thanks, Doug.
Yes, so I think for at least at least for the next year to two years, we see global oil demand growth kind of keeping pace with the capacity additions and we don't think we had favorable balances between production and consumption. But then yes. We start to show you know two to three years out that capacity addition start to out.
Pace level oil demand growth and at that time, we would expect to see some rationalization in the industry.
So next couple of years, you're not concerned about no obviously ramcos got a bunch of stuff coming online and then Asia kicks up 21.
22, so you're not concerned about the short to medium term outlook.
No we still show that.
Oil demand growth Outpaces capacity addition for that short term.
And we'll watch with which with interest guys and looking forward to senior ends in March at our conference. Thanks.
Thanks, Doug.
Thank you. Our next question comes from the line of Paul Sankey from Mizuho. Your line is now open.
Wonderful if I could follow up on the hi, guys.
Joe you you run higher than we expected in every region.
Could you talk about then that's obviously versus your guidance could you talk about the Preston.
Hi, volume I don't know if the volume.
Issue there, but certainly you capture suggests that's not the right directions to be looking in.
Furthermore, once youve hopefully help explain how come you are running at the levels that you are right across the system.
Q2. This is a follow up through the previous question.
If you took about any expectations you have for shutdowns in refining.
If margin state extremely weak and potentially get worse with this whole situation in China. Thanks.
Okay. So Paul will look.
We're kind of looking at each other let us give or take a crack at this and that will give you the opportunity. If we're not answered your question to follow up okay like yourself golf.
Pauses line I'll start we've got along.
Strategy really dating back to 2011 to to work in a very organized way our reliability project.
And what we've seen as our refining system has gone from say nine a by the 96% availability all way up to soar over 97% availability and Thats a helped us.
We are available when when the markets right and and build the performed better. In addition of that we do believe that we're the best in the industry in terms of understanding what feedstock go where in the systems that we're in and we're highly adaptable to that so I think that help us versus some other people in terms of our capture rates.
So they could you just digging a little bit on that better than anyone else argument because.
You know to an extent I guess, the computer programs modest sized or not if you could just go a bit down that rabbit hole that'd be grateful. Thanks.
Interesting you would say their commoditize, because everybody have tools.
Everybody believes that there.
They are all implementing these tools to some degree or another I would say that.
I believe we're moving more integrated in more aligned domain, making sure that our tools or characterize the fees than we understand our units very well. It's one thing to have the tool sometimes people have tool, but they don't use the tools, we have a world class planning and economics group when they do it.
Fantastic job coordinating with our refineries in terms of having those sub model.
Very well understood and therefore, we understand the operating envelopes and how those feedstock for characterized in our systems.
Yes, I mean, I guess further to previous previous question, we've seeing big Mega Royal see you would think have a similar structure in terms of the refining footprint to you guys.
Wildly underperforming against what you guys are achieving so thats just interesting.
Trying to establish what the competitive advantages.
Well, we appreciate that thank you.
And then a follow up question was on capacity.
Yes, So I think you know the situation in the far East is just developing and it's really too early for us to to be able to judge the magnitude of the impact that's going to have and whether it leads to refinery shutting down or not but the reality of it is we got capacity coming on stream. We've also got capacity that isn't running well and that.
You know in the foreseeable future probably won't be able to run well and so.
In it.
Paul if you assume at some point, it's a zero sum game.
There's going to be a lot of capacity that shouldn't run certainly in.
Post IMO world, it's going to have an effect on that.
So if you got poorly performing assets today, turning them around is a lengthy process and that if you've got a marginal asset due to economics.
Youre going to be the guy that has to buy out at some point time. So that's why we look at it I mean, frankly, our tendency is to focus a whole lot more on our business and what we can do to make it better and more efficient than kind of what's happening more broadly.
Yeah got it if I could just us good very specific follow up if we assume that those extreme weakness jet fuel demand what would that mean for you on the global industry and I'll leave it that thank you.
Okay. Thanks.
Let us our jet yield is about 8% as we make two under 250000 barrels a day a jet.
Some of that is contract demand in inland demand, which is going to stay but a lot of it and our Gulf coast refineries, we have the ability to put that into diesel and jet demand got soft and I suspect that's what would happen.
Thank you.
Thanks.
Thank you. Our next question comes from the line of Sam Margolin from Wolfe Research. Your line is now open.
Hello, how are you.
I'd say.
Hi, I know you said, you focus and getting business in that the market today Mark a question to start since our online and say, we don't focus on the market.
Okay.
[music].
So a lot of attention being paid to the collapse in diesel cracks part of the reason that.
Drop has been so pronounced since the peak that it started from was so high and at the time when you're at that peak it seemed obvious why but in retrospect.
I may is having more of a feedstock effect and then a product effect. So do you have any updated thoughts about that period, just three months ago. When diesel cracks were peaking in retrospect, what was really driving that and maybe that will help inform how we can escape this headwind in the intermediate term.
Yes, and so I think you know as we got to the back half of fourth quarter, obviously fall turnaround season.
You know wind it down and we started to see refinery utilization ramp up and with high refinery utilization of course distillate production increased.
And then overall unit demand is then weaker than what we anticipated. So a lot of that's been due to warmer weather the warmer weather as somewhat offset a lot of the demand increase we thought we would get as a result of IMO.
In addition to that certainly in the US Gulf Coast, We've had very heavy fog, which is limited our ability to export the diesel to some of the export markets. In addition to that we've had very high freight rates, which again you know hinder our ability to export core South America is a big export market for us they've had a lot of rain.
BRCA, which is delayed the harvest so again, having a hit to demand and then I think you know the final thing is there was a lot of pre stocking of very low sulfur fuel oil that happened in the industry and so so far it's a muted the impact that IMO will have we certainly are confident that that demand will show up but it may be more of a second quarter.
Type demand increased and then what we're seeing so far in the first quarter.
Okay. Thanks, and then my follow ups on and renewable diesel.
No.
[music].
Said on this call already the economics are really strong it scales.
Very accretive Lee on the feedstock side are there any constraints as you'd imagine this business getting bigger there was another operator in the in the business, who recently pivoted a little bit and on the feedstock side and said.
Tightening was as possible in the future you see any of that or is your does that has the strength of your partnership with diamond kind of help you avoid that friction.
Well definitely the strength of our partnership with Darling helps us they process, 10% of the world's meet byproducts.
So we're going to unique position with the JV we had.
This feedstock is tied to GDP growth per capita and that's growing in the world. So it's going to tighten up some we still feel good about made them. The sources and we don't see that is a constraint with what we have on what we've talked about so far.
I think that much.
Thank you. Our next question comes from the line of Paul Chen from Scotiabank. Your line is now open.
Hi.
Good morning, Thank Paul.
I think that the first one is top of the either phone making on.
Gary you guys Historic Tony one.
And 100, I suppose that directly food accrual units.
Yes, okay with it that you will be configuration to one on the high simplicity went directly fluids.
And that.
Yes, you do.
That happens that capacity you may be able to do and also whether you have exposure to any no self.
Big deal in the fourth quarter.
[laughter].
Hey, pauses line I'll start and Gary can around.
As you alluded to we have a history running in 100 don't all in one hundreds are created equal.
During qualities, we had a we had as well we would consider to be for quality window that we historically ran weve widen that we do run the we run those types of long reserves.
There are obviously have a little bit of cutter stock and we typically run them in our crude supply.
As we raised the percentages of them you think about will what we're doing as we're running those the Phil to destroy the reserve and the.
Obviously, it makes the build out the bomb the refiner and then we're running light sweet crude as a supplement to that.
Because that's been an advantage crude really for the past year. So it's really over time, we were optimizing by looking at all.
Optic white suite with these these reserves opening the call but the.
The operating envelope for all the revisit that we can find in the world in and then we are constantly optimizing that versus the heavy sour crude availability.
And Thats kind of how we always run we've just.
Weve worked really hard to characterize some of these that are new to the market and are trying to run more of them.
So.
Well closure second question.
No I in the first one to have you explain any most helpful Miccio.
Yes, so our our economic signals have into pull low sulfur video out of the cat crackers, and we did sell quite a bit of it in the fourth quarter and so far in the first quarter. We're seeing the same economic signals. All in addition to that work.
Paul In addition to that were also exporting a lot of low full for a TV that we'd normally run an RFP fees as well.
And we'll talk economic and how much you have exposure.
I mean is that part of the reason why your margin has been perhaps that better than people thought.
Yes, I mean, we were we were export we were selling those particularly low sulfur ATP than some of the other.
Hydroprocessing reserves at quite a bit above.
Obviously quite a bit above what they historically have been worth.
Yes, and yes. They have wall names that you can share is it say 50000 Boe per day, 100000 Boe per day, and the kind of rough number.
No, we probably don't really want to sure.
Hi.
Okay.
Yes.
Final one you run the 180000 barrels a day updated WCS is there any more room that you would be able to expand that.
Yes, there is so we have.
We primarily run the Canadian at Port Arthur and Texas City, We can also take into Saint Charles and we have.
Hi, a capacity you run more Canadian.
How about supply can you get there.
Yes, we can so today you know a lot of the problem is certainly pipelines coming out of Western Canada, our fall, but we buy off the pipeline and we also continued to take volume by rail. So I think in the fourth quarter. We did a little below 38000 barrels a day of heavy Canadian by rail, we're seeing those volumes ramp.
Up into first quarter and expect them to ramp up even more in the second quarter.
Thank you.
Thanks, Paul.
Thank you. Our next question comes from the line of Neil Mehta from Goldman Sachs. Your line is now open.
Good morning, and let me add make more ideal.
The lane and Gary you're on the promotion.
My first question as we spend a lot more time than we ever have with investors on on the issue of sustainability carbon intensity and it's really be side, yes key and John maybe just talk high level, how you think about valeros framework or talking to investors about yes, Ian inquire carbon intensity.
You'll like you're there where you want to be on RV Park yet.
And then I would think that renewable diesel business becomes a big part of the narrative.
Respond to any.
Merger.
Yes, no Neal that's a really good question and you are right. We do spend a lot of time on this and frankly I think Valeros got a great story, Jason is responsible and John are jointly responsible for our efforts around this and we made a lot of progress what I'll, let those two guys speak to this in some detail.
Yes. This is Jason ill be glad to talk a little bit about it and as you support you made about strategy as force correct. Two of our three segments are now renewable was the largest renewable diesel producer in the us through the second largest producer of ethanol and we continue to look at that area an expanded as as we've discussed.
And we're also looked at other low carbon fuels and white below our carbon intensity in our existing business. So just as a business footprint I think we've been evolving to us as the market expectations have changed I think you've done a good job on that side.
On the environment side, we're very mindful of our environmental impact of always some proud of our record in 2019, we had our best ever performance on environmental scorecard events. The slowest number we've ever had and safety is always been a big focus of ours and 2019, our refining employee into your right was our best ever and the combined employ contract a REIT was a second lower.
As in company history.
We think we have a good governance structure 10 of our 11 directors are independent we have substantial diversity subs are always work at all we have really good risk oversight risk management within our governance structure and then all the disclosure area, which is one of the thanks you asked about we've definitely beefed. It up here in the last couple of years as we put more focus and SNG area.
Our 2018, we published our court all cloud related risks and opportunities and we prepare that alignment with the Tcf de recommendations, which seems to be more and more our investors seem to be coalescing around that as being the standard. They Walt there were a lot of competing regimes out there. So it's good to see some standardization come into play and they were also put out a stuart.
Ship of responsibility report annually, where we talk about some about the carbon stuff, but also about other sustainability oriented areas and we're continuing to work on that every year and shot to make it better and I know theres been some large investors focusing on Saturday is as being maybe that the standard and once again outside of carbon there's been a lot of.
Variability and different disclosure structures and while people pay wall. So we're taking a hard look at Sotheby's this year and compare to what we're doing to see if we need to up fixing things. They are always looking to improve.
I appreciate it and then a follow up question actually relates to renew.
Actively or at least favorite topic, but the there were some headlines.
Recently around the core Keats around that.
And.
Small waiver.
Waivers for sets of the smaller refiners and couple of years ago.
You see any risks that this becomes an issue that could put upward pressure on rates again.
Okay. Yes. This is Jason again, we did see that just start Teekay started Denver last week and what it did was vacated as our age for three refineries to all the different tiers in one of CVR.
And the EPA has several options, including appeal up expect they probably will appeal, but neither appeal and have the 10th circuit at our.
Our kids here the case as a whole or go straight to the Supreme Court and we know they're evaluating their options to see the court took a rating of the statute of fairly constrained view that as far as I know had been backcourt in the past is definitely not in keeping with the view the gates pad the white interpret the statute in the past so really have to see what the EPA does with it.
The good ideas how impactful. This is one important point is because it was assets get circuit said, the DC circuit, which is a decision the plants made and when they fall, but it's only has legal effect within a 10th circuit that only buys EPA within those six states that are covered by the test circuit.
So.
Let's see how it evolves.
It is out.
It's probably too early to give a market signal on rins prices as a result of this case really.
Great. Thank you.
Okay.
Thank you. Our next question comes from the line of Theresa Chen from Barclays. Your line is now open.
Morning, Joe I'd like to touch on your comment earlier about.
Hi, it's difficult because the narrowing of inland Jeff.
As far as developments at Corpus Christi goes.
There has been continued discussion on potential docking stream area and based on one of your competitors released yesterday. It seems that on one of the bigger Doc projects at me.
Laid a bit.
What is your current outlook on the possibility that we might have a glut.
And Im sure would benefit your facilities, there and if there are indeed, Doc conferring with this effect and each person Theres no public corporate price and then effect Midland thing really get doctor or how should we think about that.
Yes, that's a good question Gary Gary is close to this lift let him talk about for a minute. Yes. So were when we look at this it looks like there that there will be plenty of dock capacity available, but there is some periods of time, where it could get very tight and so our focus really has been to make sure that were connected to all of these low.
Lines coming out of the Permian and we can take barrels to corpus or three rivers and then we've also put effort into expanding our dock capacity from our Corpus Christi refinery. So part of that project gets completed.
By early second quarter, we'll have that project.
100% completed and essentially double our export capacity that will be able to put through our system.
The second part of your question, Yes, I would expect it to really affect the EMEA posting first and then the asset probably work its way back in to the Permian is that as time goes on.
Got it.
There's a bit so the natural gas pricing outlook on pretty depressed can you talk about how much of that tailwind could be.
Yes.
Well that's his line yet so that's obviously energy is a big part of the cost structure in our business and that's been depressed for awhile. So it's.
Obviously works not only to our advantage, but really the industry's advantage to compete in the World Me natural gas is that how we run the refineries largely and.
It's a big advantage for us refining in general.
Yes, really all industrial I hope it really all the Fletcher.
Thank you very much.
Thank you. Our next question comes from the line of Benny Wong from Morgan Stanley . Your line is now open.
Hey, good morning, guys. Thanks for taking my question.
Kind of want to follow up on on Paul's question around the Canadian barrels.
More talk up north about building dealer in recovery units just wanted to get your your perspective on that if thats kind of a viable path for more Canadian barrels to reach the us Gulf Coast and just curious if you kind of tested entities on blended bitumen your facilities and if they really to more desirable type of feedstock thats what.
Being tied to that.
Yes. So this is Gary and yes, we took.
Become indirectly in Western Canada, and rented at our refinery at Saint Charles and have ongoing discussions with several producers you can just move a lot more by rail if you take the undiluted barrel and it would fit well into our system and we have plenty capacity to be able to run it.
Thanks, Gary I appreciate that.
My follow up is brand RFS program, and maybe Jason can chime in on does is there seems to be more focus in DC about what that program will look like after at sunsets in 2020 and it seems like.
The thought of offsetting a higher octane gasoline standard is alive again, just wanted to get your thoughts on that and if there is really a path for at this time or and I guess, how do you think about that program beyond 2022. Thanks.
Sure. Yes, this is Jason and you're right to the tables that set the volumes expire and Tony Tony The program falls back into the hands as EPA to set the volumes using certain standards as the guys and.
It's still open they hadn't signal a lot about what they're going to do but we would like to higher octane fuel to be part of the solution. We think thats a great answer is great for the all those unable to meet their cafe, it's great for us it keeps internal combustion engine more viable in this lower carbon world and more of our competitor as great for that.
So there are good choice of low cost octane. So really it's a win win win solution that we'd like to seek attraction and we definitely are are talking it up we think it's a great solution for the country.
Great. Thanks, guys.
Thanks Ben.
Thank you. Our next question comes from the line of Roger read from Wells Fargo. Your line is now open.
Hi, Thanks, good morning, everybody.
Right.
Lot of the good stuff already been hit here, but maybe just to dig in a little bit more on sort of the let's call. It the the north American performance versus the global performance that you've mentioned.
You know some benefits from NAFTA NAFTA, some benefits from natural gas and from you chain. There were also in the last couple of months issues with tanker rates and things like that so as those events, let's call it normalize or in this business, where everybody takes advantage of them pretty quickly we arbor way those.
Advantages what looks more sustainable for you here in the next few months versus what looks transitory not just worried somebody you're thinking hey, we're going to go to summer grade gasoline, which has its own benefits just curious their way what your sand.
Yes, so I think overall as long as.
US production is having to clear to the export market, despite where freight rates go we'll see good advantage running domestic light sweet crude at many of our assets.
We also see that.
Running the heavy sour and the high sulfur fuel blendstocks into our high complexity assets.
It looks to be very favorable for the foreseeable future as well as a result of the IMO bunkers that change.
Outside of that I don't know what else I would add.
Roger I don't want I had one line I'll just add one thing I think what you're really seeing as we as we alluded to we we are marketing local for biggio local for HCV into the low sulfur fuel oil market.
What that does is that really is constructive for FTC forget when because at the fees are going to be continuing we prefer talked about over the past.
I really for the last two years, when we're talking about IMO in that part of it certainly playing out I mean.
We'll see as the gasoline fees enroll them.
You will get in essentially that market's going to have to compete for feed it into the gasoline markets. So should be supportive of both really sort of both gasoline and diesel.
Okay. That's helpful.
No maybe back to trace this question about natural gas.
Obviously cash opex guidance up over force kind of higher than what we've seen over the last few years and I know theres been some changes in the.
Consolidation of VLP and all that but just curious is that something that can be a.
Hi help on the Opex side that we should see or are there other things moving around here, they're going to keep opex on the upper end.
So here right. So if you look this is line again put to compare our guidance to lap.
Basically for the first quarter 20 to first COVID-19 is pretty much flat, but sort of our large turnaround.
Timeframe and.
So I would just sort of say that flat year over year, but when you look at the to the longer term certainly we've had realignment reporting structure as we move the renewable the diamond Green diesel out we've taken all the MLP stuff, which would have been in our for cost of goods and that came into our opex and so as we've realigned all that stuff it sort of resulted in a little bit.
In terms of our Opex, a little bit higher.
And then overall there obviously there is there some inflationary pressures in the world. When you win again when you compare our our overall cash opex performance on a sort of what we would call. Following basis, we are by far in the first quarter, So which means we are the pacesetters in the industry when it comes to costs.
Well, that's pretty well answers it thanks guys.
Yes.
Thank you. Our next question comes from the line of Brad Heffern from RBC. Your line is now open.
Hi, everyone.
A question maybe for laying on throughput. So this quarter there was almost 1.7 million barrels a day of suite.
I think you guys have quoted the capacity historically is more like 1.6. So is there something that's changed is that.
Something that running the result is allowing you to do and then how should we think about that going forward with some of the dislike my widening out.
So what you're kind of touched on it a little bit earlier as we're running more and more resulted the reserve doesn't really have that much light in components. So as a substitute some sort of move.
Other heavy or really the real thing that we're backing out if you look at your over years medium sour. So what's happening is where we're running more and more light sweet which.
And that's what that's doing is it sort of substituting for medium sour, which does have some light into it. So that's a journey, we're on where we've been signaling Max light sweet crude and Max heavy than we optimize between heavy sour crudes and resistance. So I don't know the we can go a whole lot higher, but we'll just be a quarter to quarter and samatar. We can go.
Okay. Thanks for that and then Joe in your prepared comments you were talking about sort of the different things competing for capital and you mentioned M&A as you have in the past I know you Havent done a whole bunch recently, you've done some ethanol deals there was a terminals acquisition I guess can you just put any any meet on that in terms of.
What you would potentially be interested then on the M&A front.
Why don't we let rich talked about that share. This is red tape Hey, Brad. So yes, we continue to look at you know the opportunities as they arise as they arise lot of this stuff tends to be.
Mitch niche markets and we're focused on the Gulf Coast and just haven't seen a lot of things arise there, that's where we live in capturing the synergies and where we would.
Have the.
The advantage. So I mean, we we'd look at everything as a comes up but we don't see any opportunities that compete against the pipeline of organic projects that we that we have.
So I think given the major among enterprise.
Right.
Okay appreciate it.
Thank you. Our next question comes from the line of Jason gave Goldman from Cowen. Your line is now fan.
Hi, guys morning.
I'd like to ask a question about the ethanol and renewable diesel segments. It looks like the indicators have fallen quite a bit.
From for acute year to date and I'm, just wondering what's going on in those two markets and how you see that evolving.
About the course of the year and I've a follow up thanks.
Okay. This martin on the renewable diesel indicator drops.
Yes, the blenders tax credit in place now so we gave up a little bit on the ran feedstock costs got a little higher but you need to tell you need to add a dollar gallons of that indicator to get fairly where market is so.
Again, we're 126 pro forma but thats really to 26 EBITDA per gallon, so that one's not concerned at all fourth quarter ethanol was 14 cents a gallon EBITDA was our performance that's come in and you're correct. There January is always tough in the business mean domestic.
Lean demands low ethanol inventories.
Always built in January I really what's happened in the ethanol space. We've been oversupply. The you asked for several years exports for billing.
30% CAGR.
Up through 18 19, they took a breather and that was really due to low sugar prices in the world. So Brazil made more ethanol.
Right now those sugar prices are up 20% versus where they averaged 2019 in export demand strong we're seeing really good numbers in December January February and March.
So we still you know ethanols into fuel mix to stay in the U.S.
Little bit incrementally 15, and then hopefully this higher octane standard would would really help the industry. Obviously, so we're still optimistic about future.
Thanks, I appreciate those thoughts and then if I could just go back to running resulted high sulfur fuel oil can you just put some numbers around or discuss how much of that lows in intermediates, you're running and and backing out crude as a result, and how much of that is.
Incremental feedstocks.
And in addition to that are there any type of indicative economics that you could give on running those barrels I understand there's a lot of moving parts, but.
Are we talking low single digit dollar barrel high single digit dollar per barrel and the double digit range, just just to give us a sense of what I want the uptick is thanks.
Hey, So this is lineup we were not going to share our detailed volumes in terms of how we do all that and and obviously the relative margins are all a function of what the market is there not fixed off one another there's a dynamic market out there that the function of the crude market cycle for fuel market the low sulfur.
A little market the latter two which are still trying to sort themselves out with respect to IMO 2020. So these things very just like any other feedstock that we run there was not a theres not a.
A guaranteed margin relative to one another and there.
As all the refining capacity looked at all this and Optimizes.
They margins are going to be.
Different overtime. So there's nothing that so there's not anything we communicate that you can hang your hat on per se.
Okay. Thanks.
Thank you. Our next question comes from the line of Matthew Blair from Tudor Pickering Holt. Your line is now open.
Hey, good morning, everyone I wanted to check in on asphalt and pet Coke I know told me about 3% of your products way, but how is pricing and realizations fared on these areas.
Just given all the volatility on high sulfur fuel oil in the recent weakness.
Yes. So this is Gary you know I think overall, we've been surprised that asphalt margins. It stayed relatively strong we thought that there may be an attempt to push a lot of these high silver reserves into the asphalt market you would see weakness, but thus far asphalt margins in our system that remained strong and I wouldn't.
Hey, we've seen much of an impact at all on pet Coke.
Sounds good and then on the sales volumes and renewable diesel were quite strong in the fourth quarter. Just wanted to confirm it was the result of selling down some inventory or the plan to actually run at those levels.
We ran at those levels.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Chris Sick Sanofi from Jefferies. Your line is now open.
Hi, Joe everyone. Thanks for taking my question.
I just want.
Wanted to follow up on Neal's earlier sustainability question and I just have two quick questions. I guess first you have you looked at Cc U.S. investment to capture incremental carbon off.
The facilities and in some of your integrate appears and working on.
That specifically on ethanol facilities to using some of their view our operations.
I'm just wondering if it's something you looked at and with the opportunities that might be.
We are looking at it yes, and Martin and richer they got to team put together and and we're kind of down the road on this.
I think I guess the real question that we're trying to you always or what are both what's the cost of cars are going to be one of the economics going to look like on investment for at a project like this so.
We are looking at it though.
Okay.
And then I guess second in light of the PTC extension.
DGD Jvs may become more valuable.
As noted to keep pillar in your environmental sustainability story, which is clearly set apart from your refining peers, but Joe I'm. Just curious do you think you get appropriate credit for that and the ethanol franchise within Valero and I guess, what or any thoughts or internal evaluation about if or when those businesses might make make more sense being independent.
Yes, well those are two very different questions. You know what is do we do we think it matters from an SNG perspective, but I think it definitely does.
We have a very clear view of what what.
Where things are going and what the world's demanding though and we really believe renewable fuels a key component of that and and the good news is that both happened to be great businesses, and we got great assets and good team driver. So I think as time goes on people see that blur somewhat differentiated perhaps from others out there because these investments.
As far separating them off my view is they are.
Producers of motor fuels and different types of motor fuels, very low carbon intensity motor fuels, but they're they're motor fuels and Valero produces motor fuels, that's what our businesses and we do a really well and these are largely process operations and they integrate well processes that we've implemented on the refining.
Our our scalable to our ethanol plants add to the renewable diesel operations and so I think frankly being embedded in the company. It brings more value to valero than it would split it out.
That's perfect. Thanks, a lot for the time present.
You bet.
Thank you at this time I'm showing no further questions I would like to turn the call back over to home or bowler for closing remarks.
Great. Thank you. We appreciate everyone joining us today and if you have any follow up questions. Please feel free to reach out to the IR team. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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