Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Valero Energy Corporation first quarter 2020 earnings call. At this time, all participants are not listen only mode. After the speaker presentation. There will be a question and answer session to ask a question during the session. Please press star.
In one on your Touchtone telephone if you require any further assistance. Please press star zero I would now like to him a conference over to your Speaker Mr. Homer Butler, Vice President of Investor Relations. Please go ahead Sir.
Good morning, everyone and welcome to Valero Energy Corporation's first quarter 2020 earnings conference call.
With me today, our Joe Gorder, our chairman and Chief Executive Officer Lane, Riggs, our president and COO Donna Titzman, our executive Vice President and CFO, Jason Frazier, Our executive Vice President and General Counsel, Gary Simmons, Our executive Vice President and Chief commercial officer and self.
No other members of Valero Senior management team.
If you have not received the earnings release and would like a copy you can find one on our website at Valero Dot com.
Also attached to the earnings release or tables that provide 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 goes we've described in our filings with the SEC.
Now I'll turn the call over to Joe for opening remarks.
Thanks over and good morning, everyone well, we've all had a very challenging start to the year with significant impact to our families communities and businesses worldwide brought on by the covert 19 pandemic.
The ensuing collapse of economic activity due to stay at home orders and travel restrictions has driven down demand for our products, particularly gasoline and jet fuel.
Despite these extraordinary challenges, we're blessed to be able to continue supporting our community partners and organizations on the front lines that help people most in need in response to the Kogut 19 pandemic.
Across the country, we see neighbors and strangers, helping one another and demonstrating genuine humankind. This with that in my our ethanol operations produced hand, sanitizer for distribution to hospitals emergency responders and other organizations and I'm proud of our employees for their innovation and.
First to make this possible.
Calero entered this economic downturn in a position of strength and our team has been thorough decisive in swift and our operational and financial response to the current environment.
Operationally, we've adjusted the throughput rates at our refineries to more closely match product supply with demand to ensure that our supply chain does not become physically in feasible. We also temporarily idled a number of our ethanol plants and reduce the amount of corn feedstock processed at the remaining plants to it.
Dress the decreased demand for ethanol.
Financially, we remain well capitalized we started the year with a solid cash balanced due to the uncertainty in the markets and attractive rates available to us we thought it'd be prudent to strengthen our financial position further.
We entered into a new $875 million revolving credit facility, which remains undrawn and we raised $1.5 billion of debt for additional liquidity.
We also temporarily suspended buybacks in mid March.
In addition, we decided to defer approximately $100 million and tax payments that were due in the first quarter, along with approximately $400 million in capital projects for the year, including slowing the port Arthur Coker, and Pembroke Cogen projects, which pushes out there mechanical completion by six to nine.
Nine months.
That being said, we continue to make progress on several of our strategic projects.
We completed the Pasadena terminal project, which expands our products logistics portfolio increases our capacity for biofuels blending and enhances flexibility for exports.
And the Saint Charles Alkylation unit remains on track to be completed in 2020.
And we're continuing to make progress on the diamond pipeline expansion and the Diamond Green diesel project, both of which should be completed in 2021 subject to cope with 19 related delays.
The Diamond Green diesel joint venture also continues to make progress on the advanced Engineering review of a potential new renewable diesel plant at our Port Arthur Texas facility.
So the actions we've taken are consistent with the capital allocation framework. We've had in place for several years, we continue to prioritize our investment grade credit rating and Don Nondiscretionary uses of capital, including sustaining capital expenditures and our dividend.
And you should continue to expect incremental discretionary cash flow to compete with other discretionary uses primarily organic growth capital and buybacks.
Our framework has served us well and we'll continue to adhere to it in the future.
In closing the health safety and well being of our employees and the communities, where we operate remain among our top priorities are prudent management of operations has allowed us to whether a global shutdown like this without layoffs and while a tremendous amount of uncertainty remains in the near future our operational.
And financial flexibility allow us to navigate through today's challenging macro environment.
Our advantage footprint with the flexibility to process a wide range of feedstocks, coupled with a relentless focus on operational excellence and a demonstrated commitment to stockholders physicians, our assets well as our country and the world return to a more normal way of life.
So with that Homer I'll hand, the call back to you.
Thanks, Joe.
For the first quarter of 2020, the net loss attributable to Valeros stockholders was $1.9 billion or $4.54 per share compared to net income of $141 million or 34 cents per share for the first quarter of 2019.
First quarter 2020, adjusted net income attributable to Valero stockholders was $140 million or 34 cents per share compared to $181 million or 43 cents per share for the first quarter of 2019.
First quarter 2020, adjusted results exclude an after tax lower of cost for market or LCM inventory valuation adjustment of approximately 2 billion.
For reconciliations of actual to adjusted amounts please refer to the financial tables that accompany this release.
The refining segment generated an operating loss of 2.1 billion in the first quarter of 2020 compared to 479 million of operating income for the first quarter of 2019.
First quarter 2020, adjusted operating income for the refining segment, which excludes the LCM inventory valuation adjustment was 329 million.
First quarter 2020 results were impacted by lower product margins related to the covert 19 pandemic and the rapid decline in crude prices.
Refining throughput volumes averaged 2.8 million barrels per day, which was inline with the first quarter of 2019.
Throughput capacity utilization was 90% in the first quarter of 2020.
Refining cash operating expenses of $3.87 per barrel were 28 cents per barrel lower than the first quarter of 2019, primarily due to lower natural gas prices.
Operating income for the renewable diesel segment was 198 million in the first quarter of 2020 compared to $49 million for the first quarter of 2019.
After adjusting for the retroactive blenders tax credit adjusted renewable diesel operating income was 121 million in the first quarter of 2019.
The increase in operating income was primarily due to higher sales volumes renewable diesel sales volumes averaged 867000 gallons per day in the first quarter of 2020, an increase of 77000 gallons per day versus the first quarter of 2019.
The ethanol segment generated an operating loss of 197 million in the first quarter of 2020 compared to 3 million of operating income in the first quarter of 2019.
The first quarter of 2020, adjusted operating loss, which excludes the LCM inventory valuation adjustment was 69 million.
The decrease from the first quarter of 2019 was primarily due to lower margins, resulting from lower ethanol prices and higher corn prices.
Ethanol production volumes averaged 4.1 million gallons per day in the first quarter of 2020.
For the first quarter of 2020 general and administrative expenses were 177 million and net interest expense was 125 million.
Depreciation and amortization expense was 582 million and the income tax benefit was $616 million in the first quarter of 2020.
The effective tax rate was 26%, which was impacted by an expected us federal tax net operating loss that can be carried back two years. Prior to December 2017 enactment of tax reform in the us.
Net cash used in operating activities was 49 million in the first quarter of 2020.
Excluding the unfavorable impact from the change in working capital of 1.1 billion as well as our joint venture partners, 50% share of Diamond Green diesel net cash provided by operating activities. Excluding changes in its working capital adjusted net cash provided by operating activities was 954 million.
With regard to investing activities, we made $705 million of capital investments in the first quarter of 2020 of which approximately 468 million was for sustaining the business, including costs for turnarounds catalyst and regulatory compliance.
Approximately 237 million of the total was for growing the business.
Excluding our partners, 50% share of Diamond Green diesel capital investments Valeros capital investments for approximately 666 million.
Moving to financing activities, we returned 548 million to our stock holders in the first quarter of 2020.
401 million was paid as dividends with the balance used to purchase 2.1 million shares of Valero common stock.
The total payout ratio was 57% of adjusted net cash provided by operating activities.
As of March 31st we had approximately $1.4 billion of share repurchase authorization remaining.
And last week, our board of directors approved a quarterly dividend of 98 cents per share further demonstrating our sound financial position and commitment to return cash to our investors.
With respect to our balance sheet at quarter end total debt and finance lease obligations were 11, and a half billion and cash and cash equivalents were one and a half billion.
The debt to capitalization ratio net of cash and cash equivalents was 34%.
In April we closed on a 364 day $875 million revolving credit facility, which remains undrawn.
Including this credit facility, we had over 5 billion of available borrowing capacity.
Turning to guidance, we now expect annual capital investments for 2020 to be approximately $2.1 billion, reflecting a reduction of 400 million from our prior guidance.
The $2.1 billion includes expenditures for turnarounds catalyst and joint venture investments.
For modeling our second quarter operations, we expect refining throughput volumes to fall within the following ranges.
US Gulf Coast at 1.3 to five to 1.375 million barrels per day.
US mid continent at 315 to 335000 barrels per day.
US West coast at 215 to 235000 barrels per day.
And North Atlantic at 315 to 335000 barrels per day.
We expect refining cash operating expenses in the second quarter to be approximately $4.50 per barrel.
Our ethanol segment is expected to produce a total of 2 million gallons per day in the second quarter.
Operating expenses should average 49 cents per gallon, which includes 12 cents per gallon for non non cash costs, such as depreciation and amortization.
With respect to the 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 second quarter net interest expense should be about 145 million and total depreciation and amortization expense should be approximately $580 million.
For 2020, we expect GSK expenses, excluding corporate depreciation to be approximately 825 million.
And we still expect the rins expense for the year to be between 300 and $400 million.
Lastly, due to the impact of beneficial tax provisions in the cares act as well as the cobot 19 pandemic and its impact on our business.
Small changes in assumptions yield a wide range of outcomes, resulting in a low degree of confidence in any estimate of the effective tax rate.
At this point, we're not providing any guidance on it.
That concludes our opening remarks before we open the call to questions. We again respectfully request that callers adhere to our protocol of limited each turn into Q and eight to two questions. If you have more than two questions. Please join the queue as time permits. This helps us to ensure other callers have time to answer questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
So with John Your question. Please press the pound team.
Our first question will come from Doug Peterson with Evercore ISI. Please go ahead.
Good morning, everybody.
Right.
So global refined products supplies falling in response to the declines and demand that we're saying was more competitive plants, probably reducing output lists and others.
This point I wanted to get your insights on Atlantic Basin in global storage levels. What do you think we're nearing capacity and if so when might we get there. So just some fundamental color on these market areas. If you have it and then second because refiners are completely shut down often face challenges when a restart if there.
Restart I wanted to see if you kind of frame the pros and cons for us of those decisions and also whether the new fuel specs might affect restarts in the current scenario. So the questions are on market fundamentals and potential capacity outcomes.
Got it Okay does this is Gary on your question on market fundamentals North Atlantic Basin, we were staring at that pretty pretty hard a few weeks ago and thought we were going to have an issue with that region filling up with products, but really been encouraged by the reaction to the industry to cut rates intends to make less gasoline and diesel.
[music].
At least the eyes yesterday show that pad. One had has had a small drawn gasoline which is encouraging but at this stage. It looks like the industry has done a good job to balance supply with demand and were not as concerned about filling up on inventory.
Okay. Good.
Hey, Doug Lane I'll answer the second question, so you're exactly right whenever the risk of everybody I'm sure. Most refiner credit push their refinery utilization was down in somewhere near minimum which nominally 60% to 65% for given unit, but you know.
When it because the risk of shutting down very much puts you at risk of when you try to start back up it's not going to start up and you have to go into a full blown turnaround now with that said, we actually did shut down our financials FCC, it's a big FCC and it was because we had just finished to turn around but we saw that as being a way to take off some you know gasoline per day.
Using capacity for our system and not take that risk.
Sure in terms of high quality, it's just.
There's a lot of investment out there in terms of lower sulfur. It just depends on it for some reason a GPU or you'll have the unit has a problem on startup, but other than that I.
I don't.
Because I think about that for us I havent seen the it's a big problem for us.
Okay. Thanks, a lot guys.
Thank you Sir our next question will come from Theresa Chen with Barclays. Please go ahead.
Good morning, Thank you for taking my question.
First question, just on the depth and duration of bit demand shock on gasoline margin seems to be responding to the industry lowering utilization Ben margins have proved that the diesel side has seen some volatility recently I'm not sure. If you just reflecting real economic contraction on the activity can you just talked about what's happening.
They're on the diesel side.
Yes. This is Gary is I think you know that as we talked about the industry did a good job balancing supply and demand on the gasoline side.
For the most part you know along with that we were cutting refinery crude runs.
The expectation that would bring diesel balances pretty close to comply being in balance with demand. However, the jet demand destruction was yes, so severe and everyone started blending get into diesel on that caused the diesel yield from refineries to be really at record levels and even despite the lower.
Refinery utilization, we've seen diesel production outpacing.
Demand, causing the inventory build.
Yeah, I think we are seeing at least this week starting to see some indications in the market that.
That people in the industry, including ourselves are making some adjustment to their operations to bring the diesel yields down we should be supportive to the diesel fundamentals moving forward.
Got it.
And in turn the recent forced Miss you weren't declarations on whether it be Flint Hills. Your refining neighbor incorporates our Angela you Cerro appendix clearing fourth mr. on gasoline imports.
See an acceleration of this do you think the reasoning would likely clipping Corey and and can you just talked about how you see these developments evolving as open that can declare force majeure, the counterparty on which forced me to it could be declared again.
And so Teresa were drawn.
Okay.
Are you asking kind of a legal perspective on force, Missouri are you asking kind of do we expect the market to continue to do this.
The latter more.
Okay.
Yeah.
Yes, I can tell you most of our certainly on the crude side of the business most of our contract have a 30 day cancellation and we've been trying to tell our suppliers, we expect that hold them to that.
And so so far we haven't really seen much of a disruption and crude supply as a result as of the fourth New Jersey reading about in the press.
Got it.
Thank you for taking my questions again, I hope you all state by state safe and well be challenging time.
Likewise likewise, thank you.
Thank you. Our next question will come from Manav Gupta with Credit Suisse. Please go ahead.
No at the start of the volumes.
No retailer.
Gasoline demand.
What I'm trying to understand is.
Texas is lifting the order on Friday slaughtered has minimum number of cases, so those two big demand states and looks like being alternatives.
At Easter Boston, New York, one by end of this week and then there of about 16 states that have come behind them. The debt perspective. The open plan. So what I'm trying on side is yes gasoline demand. This is bag right now like as one off from all of these states do start opening like when do we start seeing.
On a rebound in the gasoline demand as these states do start coming online.
That's a good question, let me, let me give you anecdotal lantern and Gary can give you what we're seeing in the system hand lane, but I mean.
In San Antonio proper, we have because I'm serving on some committees that are working on some issues here, but we've seen it or 14% increase in traffic over the last couple of weeks. So people are starting to get out more and as you said, we're going to be opening up and I think there probably is a pent up demand for folks to get out of their houses and gift mobile into shop again.
To go to restaurants again, so I do think we're going to see.
More activity and not only here, but much more broadly, particularly through the south.
Gary within the system. We've also seen some change in demands yes, we have so we saw very sharp falloff in demand really the last two weeks in March kind of got to the point in our system, we're already seeing demand about 55% of what we would call normal.
For the first couple of weeks in April it seemed as stabilized around that level, but now we're starting to see demand pick backup already. So if you look at a seven day average and our rack systems, it's about 64% of normal so already about a 9% increase of where we were kind of early April and as you mentioned, you know where you're really seeing the pickup is in.
In the mid continent, the Gulf coast regions by some of these stay home orders are lifted we're seeing a fairly significant sharp increase in demand.
Oh. Thanks quick follow up you are benchmark indicated on the new build decent side was almost down 45 cents, but then realized margin actually went up quarter over quarter I'm fine gone on how can you tell assessments of the managed weekend on benchmark and deliver a beat on the renewable.
These insight.
[music].
And the now this is more non the benchmark you have to realize we're using the soybean oil price or actual feedstock costs are going to differ from that.
Theres other impacts to contractually what we're doing this year versus last year, So I'm not going to give you a hard and fast answer on that but.
We just you kind of seeing the strength of renewable diesel in the and the strength of Diamond Green there.
Thank you for taking my questions.
The take care.
Thank you. Our next question will be from Roger read with Wells Fargo. Please go ahead.
Hey, Thanks, good morning.
Roger.
Well tons of stuff to ask here, but I guess, where I'd like first question really what are you seeing in terms of the crude side of the market.
How has that been flowing through in terms of yes, we had negative crude prices for a day they'll ability of different lights, and heavies and maybe how that's flowing through maybe.
Some guidance on what captured can be and secretary uncertain market conditions.
Yeah, Roger and lot of volatility in the crude markets and we certainly been changing our purchased signals from week to week, you know kind of moving throughout the quarter. I think you know for quite some time now we've been signaling really.
Maximum light sweet along with heavy sour and we haven't seen the economics of the medium sours is much now we got into March and medium sours became economic and we ramped up medium sours. However that I would say, we've kind of return back to the place where we were before to where we're back kind of maximizing light sweets and heavy sours in our system.
And certainly in some regions, you're seeing real wide market dislocations on some of the light sweets. It we're buying especially in the mid con the region.
Line nine through Quebec, providing us with the big benefit and then we're balancing those light sweet purchases with a lot of different heavy sour feedstocks, so kind of step back into some of the ISO for fuel blend stock along with some heavy sour crudes that we're sourcing from Canada in South America.
Yeah, I'm going to go out 11, so you're not have any trouble signing crudes at this point.
No no trouble in that area at all.
All right, that's not wanting to get Joe to laugh a second question.
[laughter] second question on the regulatory side and a couple of parts here, but we're going to have a real issue is hitting any sort of ethanol blending.
Volumes this year, so where do you stand on or what do you think the market stands maybe on getting some relief there and then I was.
Curious if theres any other regulatory headaches in front of you at this point stuff, we don't normally think about but whether it's the winter grade to summer grade exclusions, even into the to may or any other sort of headwinds we should think about on the regulatory side.
Okay, Jason you want to speak to the yeah, Yeah, I can definitely talk a little bit about RFS course, with the large drop and gasoline and diesel demand and the harm our industry. The compliance costs for the RFS does take down a little more is definitely not not help and things and rents are still pretty hot I didn't really drop the price our product.
So Bob Governors recently sent a letter to the EPA request and they exercise their severe economic harm waivers already to reduce Argos for 2040, we definitely getting with those governors and Blaze EPA has the authority in the basis, the grad those waivers and lower volumes.
As for other regulatory headwind I think if any.
Right now.
The other guys can.
The second one of the time Roger.
I appreciate that thanks, guys.
Take care.
Thank you. Our next question will come from Phil Gresh with JP Morgan. Please go ahead.
Yes, hi, good morning.
Builders question Hi, So first question you had mentioned demand at about 64% of normal and your utilization guide for the quarter. It looks like it's in the low seventies.
Would you say that today, you're operating below that midpoint and the expectation, but that guidance is that utilization would have ramp over the quarter over would you say that you intend to.
Have a more stable utilization and its demand gets better we start to see inventory draws.
Hey fulfilled line. So if you think about the low seventys throughput basis, not all of which goes into gasoline and diesel we're trying to make sure that that we're careful to match our feedstock plans with where we think demand is now pins into that as they were the flood some recovery towards the end of it but are buying our buying.
Habits right now have to be beyond the you know assumption that crude will be available and then we're going to run our assets to meet demand.
Not necessarily lift structure drivers to maybe out run demand or anything like that.
Okay, and just broadly how do you think about.
If you think about the macro on the gasoline and diesel side.
The next call it a one to two quarters, how do you think about the inventory progression for the industry based on the way you've been modeling it.
Well here just talked about earlier I guess I can take another shot and then Gary can tune whatever have say here I think the industry has done a really good job with respect to gasoline on we were you know that first started that was our primary concern and I think the industry responded with appropriate rate reductions and.
Including us and where we are today is you have like Gary mentioned, just dropping into diesel.
So how I think that will play out of there are signals right now out there to essentially drop diesel in the gap little which will replace some biggio purchases into these conversion units. So you should see some diesel disruption and then everybody is going up is there how much crude they really think there they need.
To meet demand and so ultimately is ultimately it comes back to.
Demand versus how we know how does this crude supply obviously there is a lot of crude so you don't have to reach out very longer far get your supply chain very committed then you can ramp up a quarterly or cut accordingly, depending on how that plays out.
Okay, Great and then my follow up is just on Capex, how much let's do you see in your capital spending as you move into 2021, it sounds like most of the Capex that you're cutting back on this year was more related to growth projects, but just want any color as you look out thanks.
Yes, we would expect that we needed to be something commensurate with the 400 million that we talked about and.
David guidance for this year.
Okay, great. Thank you.
Thank you. Our next question will come from Doug Leggate with Bank of America. Please go ahead.
Hi, Thank you and good morning, everyone.
Hey, Joe seems like a long time since we had our virtual dinner so.
You guys it all doing well.
Sure as Adnan Thanks, Doug.
So.
Two quick questions first of all.
And then we'll have gone is there, but I wanted to ask about working capital that mechanics of.
Any potential unwind.
And how you would expect your working capital to.
The trajectory through the year on was a bit of a moving feast on I guess a related question, which is my second question also financial and the balance sheet.
34% net debt to cap I think that's pulled live at the highest level you hadn't quite a while obviously theres more liquidity issues, but I'm just curious as Doug, where we where you see the balance sheet hedges over the medium term on well how would you how would you move how would you want to move that back in I guess, what I'm really trying to understand.
Yes.
So if and when things normalize would you tend to run was.
Youre more robust balance sheet going forward after this.
I would your behavior change as it relates to this treatment of buybacks balance sheet dividends things about nature and I'll leave it there. Thanks.
Great all.
All right well I'll start with the working capital now you're correct as we've seen prices level off the bat and then hopefully now if they start to recover with economy waking back up we would expect to see that working capital draw reversed itself.
I can't tell you how quickly that will happen that it's really all dependent on how quickly we see these prices.
Recover.
And so to answer that the balance sheet question.
Obviously, yes.
Cap has has gone up a bit here of late.
Our intentions would be as as everything gets back to normal to kill also normalize that balance sheet a bet. When we raised the one and a half billion dollars. We did that in short term maturities and not in tens and thirtys with the idea that that would become repayable much quicker than a longer term issue and so our intent.
Beat you to kind of get back to.
Where we were pre pre all of this as quickly as as we can and you know again no liquidity as you mentioned is absolutely key today. So we are definitely in the cash preservation mode right now that we have a very strong liquidity level in a very comfortable with where we're at today.
Can I just asked for some clarification on the working capital you'd want to assume on net tables position I was really more interested in the mechanics I understand before the big drop prices. So obviously that hurts you, but do you anticipate.
The big moves in Q1 would be you anticipate any additional moves.
I would use of cash out of working capital after the show before the oil prices or do you think of course is kinda binders there.
Well you know I think you can expect that.
A lot of this started in mid March and continued through the April timeframe. So you should expect probably expect some of that should have carried into April but as I mentioned things are leveling off and hopefully now we're looking at improvement from this point forward.
So we shouldn't see.
That same kind of.
Level.
As as caffeine consumed.
Alright appreciate it obviously from you guys. Thank you very much good luck.
Take care bye.
Thank you. Our next question will come from Neil Mehta with Goldman Sachs. Please go ahead.
Hey, Steve Good morning, and hope well, if you are doing well and I just wanted to follow up on on this question of demand we've talked a lot of down on this call 2020 demand conditions.
Hey, Joe team I want to get your perspective on sort of the structural questions of demand, particularly for two products.
Yes, we did Jed so gasoline.
It's around work from home and does that create a change in social behavior that has an impact on low gas demand and yet that the willingness to the consumer to travel.
Like all bets are just trying to figure out.
Whether there is a long term impact from some changes that we've seen here over the last month, where do you view this as more cyclical.
Yes. This is Gary I think you know we are taking those things into account, so where we saw fairly sharp decline in demand to this 55% level, we would expect the recovery to be more gradual on the demand side is as people continue to work from home, we see some offsetting things.
Certainly people working from home, but then you're going to have people driving more and probably using mass transit less going forward is just because the social different things hard when you when you're on mass transit. So overall, we see a fairly gradual recovery in demand gasoline demand getting back close to where it was pretty cold it on the jets.
Hi, I think you know we believe that there's lower jet demand is probably here with us longer and a you know it probably is a a late year type recovery will for people are going to get back and start applying again or requires a vaccine or something on the medical side to happen where people start to feel comfortable flying again.
Yes.
Great. Thank you that the follow up is just on the dividends I think the message you're trying to deliver here is that the dividend is is a core priority.
And something that you're committed to but just want to get your perspective on that.
Here are you guys are thinking so yes, there could be if you're giving them.
Okay, Neil I'll take a first crack and then I'll, let Donna.
Also have a shot at this but you know with the situation we're dealing with right now with a pandemic, we consider to be fairly short term and nature and obviously our team is running the business for the long term. It is the guys have mentioned, we're already seeing improvements in demand, which we think are going to continue as people returned to more normal.
Activities. So let's look at how we manage the business what we've said for several years now and how we're managing a going forward. Okay. We've got this capital allocation framework in place that weve adhere to for years and within that framework. We consider the use of cash for sustaining capex and turnarounds and then the dividends to be non digital.
Sorry, and then the discretionary uses or you know acquisitions growth projects and share repurchases and there's the competition that we have for those dollars within those three categories. So with that in mind to think about what we've done in the actions that we've taken today, okay, we've reduced our discretionary capital spend.
And our share buybacks and we're not considering any acquisitions until there's you know certainly further improvements in the market. So those three things are playing out the way they should within the context that capital allocation framework, but if you look at additional actions. It has been taken you know we have a very capable proag.
The board of directors and they declared the dividend last Friday.
And they have the same confidence in our business and his team that I have so the things that we've talked about for years are the things that we've implemented and that we use both when margins are really strong and when margins are weak like they have been here over the last six or eight weeks and so in my view relative to the.
A dividend, we got a long way to go before we need to take any action there.
Done anything you'd like to add no changes all along we have maintained a conservative balance sheet for the purpose of being able to step change survive in times like this.
Great guys are clear.
Thanks Neil.
Thank you. Our next question comes from for Sean well with Citigroup. Please go ahead.
Thank you and good morning, Thanks for taking my question.
My first questions on the on the balance sheet and specifically on that I wanted to sort of touch back on that you guys have good advantage of the low interest rate environment and the strength of your financial position at that one and a half billion dollars and recently issued debt I'm just wondering in a depending upon how the recovery here goes economically are there further opportunities.
The take advantage of these low interest rates, maybe potentially re fi or retire retire other parts of the current debt structure lower your overall interest expense Donna you meant made a comment about sort of the appetite for longer tenor versus shorter tender dad. So perhaps that plays into this as well so any color there would be appreciated. Thanks.
Sure.
So the problem with refund now this is something that we look at all at the time not just in this environment they on a regular basis.
The issue typically with retiring refinancing current data out there is we have make whole provisions that all of our agreement. So effectively what we're doing it is paying the investor the impact of the current low prices anyway. So from an economic perspective that rarely worked out.
To be a good deal that being said, we continue but we're always looking for odd moments in the market, where things may not trade as efficiently as others. A many times that those are smaller opportunities are not larger opportunities but.
Again, we'll continue to look for those ideas, but I wouldn't say that that would happen any big way.
Okay. Thank you that's clear.
My follow up in sort of Oh crude differential question.
We've seen a lot of disparity sometime disconnects between.
What we see on the screen in the physical market I guess the financial in the physical market, we get some questions on the ability to.
Hey that disparity and what that means for the ability of refiners to capture.
Some of those dislocations and you know how to how cautious should we be in thinking about that as we look forward and as we model here and good some of those crude differential advantage and maybe preserved into you know further quarters or months ahead, given that utilization rates are low right now so sort of wanted to get a sense of those there's a lot of working parts in there, but get a sense of.
So those of us who aren't [laughter] operating experts.
I'd be able to think about side and then from a modeling perspective.
Sure. This is Gary you know kind of a couple ways on the crude side.
Some of our contracts some of our supply contracts on the crude side. You know are based on a monthly average price. So obviously a you know when you had the dislocation that happened at the end of the month. It does figure into the monthly average and will ultimately make its way to our delivered crude costs and then we also you know I can't say that that we anticipated the crude.
Going negative like it did but we certainly saw the potential for weakness as you've got to contract expertise. So we did you know probably go into that period of time, a little on the short side to give us the opportunity to go out and by some of those discounted barrels and we've done that and then to your point, if we had room to absorb our system will run.
Those barrels if not you know, there's places where we're putting those barrels into storage and you'll see that benefit in months to come.
Thanks.
Thank you. Our next question will come from Paul Chang with Scotiabank. Please go ahead.
Hey, guys good morning.
Good morning, also onto which first wanted to wish everyone and the team and your family safe and happy.
That Joel and Gary can you talk a bit about the export market.
Because I think that freight in holding up reasonably well use the first quarter, but seems like they start to be having some correct.
I'm actually quite concerned because I think Latin America, probably have a lucky and sector can you just that they probably didn't know yet so maybe you can help us understanding.
That's what you're seeing particularly in the last two or three weeks have you seen train.
Okay. If all this is Gary So you know really our April volumes, we don't have the final accounting volumes done yet of course, but our April export volumes are down about 10%.
From what we did in the first quarter or more typical type numbers, so you're not really seeing it in April but in may.
You know with what we're selling for where you're seeing a far lower demand in the Latin American countries than what we've typically seen kind of support on the distillate sites now we did see a fall off and diesel exports. Some of that has just been because at the U.S. inventories were very low and add to the U.S. market with stronger and we were better.
To keep the barrels in the domestic markets into ship them abroad, but on the distillate side. We saw exports you know falling off around 60% of normal gasoline has been more 10%, where we're selling wholesale barrels like into Mexico, we've been surprised at how well those volumes has held up so yes.
After day in Mexico, we moved 85% and what we're moving in the first quarters, our wholesale volumes of barrels that we're selling in country are holding but we are seeing the export markets a falloff.
Thank you and Gary you talk about the cats. This already it's not going to which the 10 probably in that Atlantic Basin.
Can you talk about in the three oriented in that market.
Yes, so that was that was the other areas that we had a lot of concern on and again you know you could see in the mid continent.
Refiners adjusted and it looked like you know we may fill up in a couple of weeks and now they kind of adjusted gasoline balance with them demand and we're seeing inventory draws and the mid continent is one of the areas that we've actually seen the best recovery in demand out of all the regions.
Okay can you talk about California, because we've seen a stop improvement.
In the margin over the last a couple of weeks.
Yeah. It then they could get a reason to I think that.
Yes, so that really is more driven I would say from the production side I think the refining industry has done a good job.
Bringing units off line and getting production balanced with demand, we've actually seen some inventory draw on PADD five and so that's led to the strength in the gasoline market.
Alright, thank you.
Thanks, Paul.
Thank you. Our next question will come from Benny Wong with Morgan Stanley. Please go ahead.
Hey, good morning, guys. Thanks for taking my question any hope everybody.
Everybody on the line as Steve Unhealthy. My first question is is really on them planned maintenance.
We've seen a lot of facility the for maintenance work.
Just given the challenges of cold did.
Just looking a little bit further out when we're back to more of a normal environment I'm would you expect a little bit of pent up maintenance activity.
That needs to be had by Dan.
Where do you think there's no flexibility for guys you kind of due to work during this period reduce wise and shutdowns right now.
So then the obviously is this is why and I'll just give you our behavior as a proxy for that we were fortunately good position into the second half a year, we had a low sort of planned turnaround basis. So we didnt have a lot of planned turnarounds.
And so when we look to all of our so we'll get our turnaround we look at the our maintenance we were were making sure that we maintain our plants just like we do and our and our framework and very carefully but we did so we're close some discretionary maintenance into next year and I'm sure a lot of people are going to do that.
At some point peak, obviously people have to do turnaround so people, who are deferring turnaround and doing a lot of that at some point that does catch up and we'll just have to see and at some point you'd have to take a turnaround and there was a question earlier that I would answer to somebody shudder unit down that there's a long you know somewhere near the end of it run cycle there, while there will be some risk.
Parting enough, which May force, so forced them to take the turnaround early.
Got it thanks, Linda that's Super helpful. My second question on the renewable diesel side, just just curious with this economic shutdown.
Impacting pad on on demand and even on the feedstock side and just taking a little further out any any risk that these events might cause some of that.
Here is that she has got looking adopting LCF that's to maybe those plans being delayed.
Okay. This is mark I think if you step back and put DGD in perspective, right. We've got to Greg first quarter in the book or running at full capacity in our outlook hasn't changed as we're committed to the long term strategy a growing the business.
Oh with covert 19 carbon prices drop slightly but the ran as escalate entirely offset that and the gallon blenders tax credit a dollar for gallons in play.
On the feedstock availability you have to understanding and we're running 275 million gallons a year now we have plans to go up to four times that amount and we still believe we can secure the feedstock for that so this is kind of a you know there's disruptions, but it's not significant or we're not concerned about keeping.
Feed in front of the Union.
As far as what it does for the L. CFS I think all this is really rather temporary and I'd characterize it as a bump in the road, but I don't think it's going to slow anything down materially and certainly in the rear view mirror I don't think it's going to me that significant.
Yeah, I don't know, Jason I don't know when you think but I don't think any body is going to back off of L. CFS type regulations.
I think so you may say, a little bit of slowing them actually enacting.
Root laws and then bills, just because they've taken a lot of recesses was a social business thinks of the legislature. The laws staples early slowed down over the last couple of months. So we're starting to see I'm talking about coming back and get back into session I think Arizona, California backers talked about it yesterday, but you could see that a little bit of delay in Abbott I'll take it changes the long term.
Our trend there their views.
Got it thanks, guys appreciate the thoughts please state that.
You too.
Yes.
Thank you. Our next question will come from Brad Heffern with RBC capital markets. Please go ahead.
Hey, good morning, everyone.
Another question on capture I think some of the things that then discuss so far have been around crude discounts and sound like they're positive recapture I'm just wondering with these refineries running any sort of unusual constrains loaded utilization and maybe fccs being shutdown our their decrements, we need to be thinking about to capture as well either is it really.
It's too how much you can optimize the system or maybe you know the production of intermediates or something along those lines.
So hey, Brett Lance I'll, just say on and with respect to anything that might be something to think about the conversion units create volume gain.
Whether hydrocrackers or FCC, so to the extent that we're cutting FCC hydrocracker.
To meet the demand that we think there are really you'll have a you could have a you know a negative you know your volume gain isn't there that helps in your margin capture obviously outside of that I don't know better than anything else with Rick you know with how our operating with directly impact that.
Okay got it thanks, and then maybe one for Martin just on the ethanol business you guys gave the guidance of 2.0 for this quarter in our down a little bit more than 50% is the reason that you're not running at lower than that just you know given that we're seeing negative margins on the screen here, even even before opex. Thanks.
Okay sure well as you know we've got eight of our plants down and six running so we're actually running lower than 50% today.
This demand destruction.
Really at home and ethanol right significant cuts have been made across the industry. We cut if you look at the April Yeah information. It would tell you is that demand is implied demands less than 50% of last year. So we think we're in the right spot.
Ultimately this this will recover right and global renewable fuel mandates will drive export growth domestically will get going again ethanol is gonna be into gasoline pool, and we'll see incremental demand as a result of fuel efficiency standards and you around the 15 sales.
Okay. Thanks, I'll stay healthy.
You too.
Thank you. Our next question will come from Sam Margolin with Wolfe Research. Please go ahead.
Good morning, everybody football as well.
Hi, saying I've got I've got a sort of outlook question.
Gary You mentioned that you are light sweet throughput, we got in the quarter, that's probably because crude production was up in the U.S. still.
In the first quarter that it doesnt look like it's going to continue I mean in the environment, where you as crude production.
Declined and really hasn't returned to levels that at that today for three or four years, how do you think that affect your business and your capital allocation decisions do you think we're going to reenter.
Environments, it's very complexity oriented or do you is there something else that might be less obvious that you're paying attention to anything around that the would be would be helpful.
So I blame, saying and I would say from a capital allocation to think about the things that we're investing in on the refining side. It's over right. There is other small cap that always we work in our feedstock flexibility, but to the extent that but they are something that have a feedstock.
You know feed element to you know it would that's really more about positioning yourself to continue to run for heavy sour.
We we built the two crude units to the run domestic I think we think obviously you have to destock, even though there's some production losses going in this you're going to happen destock domestic crude for a while his or her recovery. So we're not making big investments to run additional domestic crude we think we've done that so and so we don't have.
We don't have them, we will have the sort of.
Project.
And the future to try to take more advantage that we think we've done it.
But we don't really have a lot of project big projects that are even pointed to trying to take advantage or do something different our feedstock collection.
Thanks, and then just a follow up on piece that you know you mentioned that.
You know high sulfur fuel oil.
Kind of components still look attractive certainly on a percentage to Brent basis. The discount is is pretty wide. How do you balance that sort of your throughput utilization decision I would imagine there's some.
There's at least some incentives across the board to to maybe run ahead of demand, but where do you sort of draw. The line between you know regular way business and what might cross into trading or something that you don't want to be involved.
That's a really good question. So what I would say is we you know all of our refineries are essentially this open capacity right. It's a little bit if an interesting place to be when you're trying to to the you're planning and doing relative value. The feedstocks into it is open. So we are.
Pretty but pretty basic we're doing our best to try to.
Optimize our feedstock lesson into matching demand and trying to be very careful not to run ahead of demand, even though there will be structure that might try to incentivize them to do so we're being very paying particular attention to doing that but we're doing but Gary mentioned, we started out we were through a lot of domestic.
Crude and heavy and then if this thing unfolded, we saw gasoline get week, which would have disadvantages domestic crudes, we sort of went to medium sour and really wouldn't want heavy.
As we've seen gasoline start to pick up and it looks like that's in line you know you're seeing us sort of work back I think to sort of our traditional posture. It's just we're going to be running less of it.
Right. Thanks, so much.
Thank you. Our next question will come from Ryan Todd with Simmons Energy. Please go ahead.
Great. Thanks, maybe just one.
Level strategic one for me I.
I know, it's hard to speculate at this point, Joe but a few.
If you're looking at the Crystal ball are there any structural changes you down the line that are likely to impact your business and may impact. The way you allocate capital I know you've talked a little bit about depends a longer term impacted demand, but as you think about overall you any business operational practices regional preferences within the portfolio.
Long term cauldron capital are there any structural things coming out of that you think.
So you're thinking about in terms of Valero down the line.
Yeah, I know, we're well we're always thinking about it right, but you can't run and I said. This earlier I think you can't run the business.
You know based on a short term set of circumstances and so we're reassessing our long haul our long term strategy all the time and we meet with our board on it too to review it every year, but if you look at what we've done okay and in kind of our approach to the business I don't know that anybody sitting in the room here with me a would consider.
Refining to be a long term growth story, okay. It's really it's a business where I think the industry has set itself no to basically match supply and demand going forward and show the way we look at it as we run the business to maximize the margin that we can capture within the bid.
Business and so our capital is focused on optimization projects and logistics projects, which allow us to lower our cost structure of things coming into the plants and going out of the plants and that just how do we get a little more value out of every stream. It is that we process. That's a view that weve adhere to now for several years that I think it's the view that we're going to it.
Year to going forward so.
It's a little early right now for me to say that Theres any fundamental changes other than those that we've already implemented around capital a greater focus on the renewables the greener fuels going forward, which we've done with the ethanol business and with the Oh renewables renewable diesel business, but other than.
That I, just don't envision anything any major change of direction right now.
Great I appreciate it. Thank you so for me.
Thank you. Our next question will come from Jason Gammel men with Cowen. Please go ahead. Thanks.
Thanks for taking the questions I wanted ask about.
Regional guidance you provided you mentioned that mid con demand has been getting stronger regional.
Utilization Guiness is kind of at the lower end of the range.
North Atlantic also and then U.S. West coast looks like those assets are going to be.
Hi is running at the highest utilization rates in Q2. So can you just discussed some of the puts and takes by region.
That results in that dispersion of run rates. Thanks.
Okay.
Well I'll take a stab at a you know our view when you're talking about the mid con and it's getting better. It you know when you think about refinery operation when you have a refiner setting in the mid Con if you get out of balance it 50, it can become.
You know you might end up shutting refinery down so we we've taken the position on where we are essentially landlocked I'd be very cautious on our our feedstock plans with the assumption there is plenty of oil to go get it if we made it to whatever reason, we we believe that demand picking up so it's really around world demand versus expectations and where our concerns.
About.
You know sort of the the feasibility as you know of our operations, where we are landlocked is as all these policies around period of Cove. It impacted you know demand. So that's really where I think Gary Thoughtworks. Just now we see that you know the mid continent has sort of bottomed out seems to be recovering a little bit better if.
So we have a run we are our but our plan to make sure that we have we we are shortening our supply chain and that we can manage it and respond to it quickly and not get ourselves to were overcommitted on supply chain event that you know we have the that creates a problem for us if something doesn't quite happened the way that we hope it does.
And that's really the narrative all the way across every system that we have we're just being very careful trying to match the demand with that region with an understanding that the west coast the mid continent.
Not you'd have to get that right. If you don't get if you get it wrong you get into some having to do very uneconomic things to fix the those problems the Gulf coast as it is a big system.
Can go into a lot of different pipeline servicing a lot of different parts of the country and then ultimately export to sort of satisfies balance, but even there were being very cautious.
All right.
Our North American I mean, the Atlantic is really we have we were doing some work in.
Both of those refineries in the second quarter.
Got it thanks, and just a follow up on all long longer term margin outlook clearly it looks like demand is starting to improve from the bottom, but there's a lot of global refining capacity out there that's not being utilized right now and historically refiners.
Have reacted pretty quickly.
Changes in demand. So I'm just wondering what your outlook is over the next year, even if demand recovers if it doesn't come fully back is the risk that their slack in the global refining system that could limit.
The gains in.
Refining margins until demand more fully recovers thanks.
Yes. This is Gary I would say certainly there is at risk, but again, you know I would point to it we've been very encouraged by the discipline the industry shown and we're hopeful that you know maybe what you saw in March in the case that a demand fell off sharply and it took a couple of weeks for refineries to modify their operations to come back close.
Certainly being in balance with demand you see a reverse of that is demand picks up and we set our operations to run at lower production rate, maybe you get some big draws but theres no way for us to really speculate how the industry is going to respond there's demand recovers.
Got it thanks for the time.
Thank you. Our next question will come from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning, Joe glad to hear everyone and safe.
Thanks.
Yeah.
If I take midpoint refining throughput guidance against your Fourfifty Opex guidance. It looks like your projected total opex will be coming down by about 90 million.
Versus Q1 levels is that 90 million simply your energy savings on running the boilers at lower rates or are there other areas, where you've been able to cut cost as well.
Absolutely and again, so you know if you think about our cost structure and refineries have variable comp of fixed costs and the variable costs. You know in its interesting thing to think about because in $1.80 sort of Henry hub pricing environment variable cost.
Which for US includes FCC catalyst chemicals, and natural gas fire boiler than our heaters, there's really been we're now down between 15 and 25% worth maybe in years past for natural gas was much more expensive we've been a bigger component.
So yeah natural gas purchases as a part of that it's not it's really if you look all the way down the line. We for we've we have our variable costs, which weve could it be FICO, if we've cut natural gas, but we've also.
He also see our we've we've reduced our contractor head count foam and.
Looking at very carefully our for discretionary maintenance also bring that down and again try to be very careful of operating costs.
Sounds good and then can you also talked about your ability to capture contango in this market.
Both for U.S. barrels as well as for your offshore barrels theres been some reports that refiners are looking to procure additional storage you know maybe even like renting out Jones Act tankers. So can you just walk through all that.
Yeah, well certainly if you know the market structure, such that if you can put barrels and tankage cooler weather, that's floating storage or tankage in Cushing or you know the market pays you to do that in terms of our everyday purchases a lot of the market structures built into the prices you see and you don't necessarily get a big.
Benefit from from market structure, except for mid continent barrels that we purchase.
And we tend to see a.
When weren't contango versus when the market structures and backwardation, it's a pretty complex discussion and I would ask if you want to go into that and detail you can call home or and and we could set up a discussion to go into more detail about that.
Sounds good thanks, guys.
Matthew.
Thank you ladies and gentlemen, thank you for participating in today's question and answer session I would now like to turn the call back over to management for any further remarks.
Thanks, Trey we appreciate everyone joining us today and hope everyone stay safe and healthy you have any follow up questions as always don't hesitate to reach out to the IR team. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
No.
[music].
[music].
[music].