Q2 2020 Valero Energy Corp Earnings Call
[music].
Greetings and welcome to Valero second quarter earnings Conference call.
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A question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded I.
I would now like to turn the conference over to your host overview, our Vice President Investor Relations.
Good morning, everyone and welcome to Valero Energy Corporation second quarter 2020 earnings Conference call.
With me today, our Joe Gorder, our chairman and CEO Lane Riggs, our president and COO, Jason Frazier, our executive Vice President and CFO, Gary Simmons, Our executive Vice President and Chief Commercial Officer, and several 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 web site 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 and.
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 are different from our expectations, including those we've described in our filings with the FCC.
Now I'll turn the call over to Joe for opening remarks.
Thanks, Homer and good morning, everyone. This year has been challenging in many aspects. The cobot 19 pandemic and the ensuing global economic downturn has affected the health and livelihoods of so many people and has had a severe impact on all businesses, including ours is troubling is our circumstances.
May be from time to time, it's gratifying to see individual stepping up selflessly, helping those indeed, whether it be by providing health care to those that are sick our food to those that are hungry in this regard our team is doing its part.
As you probably know Valeros part of the country's critical infrastructure as such our team continues to operate our plants, providing the fuel that our country needs to keep critical supplies and first responders moving.
I'm proud that we have not laid off furloughed are reduced the compensation of any of our 10000 dedicated employees, who continue to give generously voluntary and their time and working courageously and tirelessly through this difficult period.
Our employees our greatest asset in the heart of our company.
Their health safety and well being remain among our top priorities and we'll continue to take the steps necessary to keep them say, whether they work in the field or at our headquarters.
In response to the Cobot 19 pandemic impose shutdown, we had to make important operational and financial decisions. When the stay at home orders were first issued we reduced our refinery in ethanol plant throughput rates to match product supply with demand.
We saw demand in April bottom out at 50% of normal demand for gasoline, 70% for diesel and 30% for jet fuel relative to the same period last year.
As a stay at home orders and travel restrictions ease through most regions of the U.S. during the second quarter, we saw a gasoline and diesel demand recover to 85% to 90% of normal and jet fuel recovery to 50% of normal.
We also saw recovery and product exports to Latin America in Europe in June.
As a result, we prudently increased refining and ethanol throughput rates in step with increase in product demand.
We also took prudent actions to maintain our financial strength.
We lowered our 2020 capital budget by $400 million raised $1.5 billion of debt at attractive rates secured an additional credit facility, which remains undrawn and temporarily suspended the stock buyback program beginning in mid March this year.
And through all of this we've ordered our commitment to capital discipline and maintained our dividend as demonstrated by our board of directors approving a quarterly dividend of 98 cents per share earlier this month.
Notwithstanding project deferrals. This year, we continue to invest for earnings growth and are making progress on strategic projects under development.
The same Charles Alkylation unit, which is designed to conferred low value feedstocks into a premium outlet product is on track to be completed in the fourth quarter of this year.
The diamond pipeline expansion and the Pembroke Cogen project are expected to be completed in 2021, and the Port Arthur Coker project is expected to be completed in 2023.
And we remain committed to the expansion of our low carbon renewable diesel business. The Diamond Green diesel expansion project is expected to be completed in 2021. This project is expected to increase annual renewable diesel production capacity by 400 million gallons per year, bringing the total capacity to serve.
875 million gallons per year.
In addition, the Diamond Green diesel continues to make progress on the advanced Engineering review for a potential new 400 million gallons per year renewable diesel plan at our Port Arthur Texas facility.
As we focus on the path to recovery with improving product demand, we remain steadfast in the execution of our strategy pursuing excellence in our operations investing for earnings growth with lower volatility and honoring our commitment to stockholder returns, we continue to prioritize our investment grade credit rating and non disk.
Freshener uses of capital, including sustaining capital expenditures and our dividend.
This uncompromising focus on capital discipline and execution has served us well in the current pandemic impose downturn and it should continue to position Valero well through the recovery and beyond.
So with that Homer I'll hand, the call back to you.
Thanks, Joe.
For the second quarter of 2020 net income attributable to Valero stockholders was 1.3 billion or $3.07 per share compared to net income of 612 million or $1.47 per share for the second quarter of 2019.
Second quarter 2020, adjusted net loss attributable to will narrow stockholders was 504 million or $1.25 per share compared to adjusted net income of 665 million or $1.60 per share for the second quarter of 2019.
Second quarter 2020, adjusted results exclude the benefit from an after tax lower of cost or market or LCM inventory valuation adjustment of approximately 1.8 billion.
A reconciliation of actual to adjusted amounts please refer to the financial tables that accompany the release.
Operating income for the refining segment was 1.8 billion in the second quarter of 2020 compared to 1 billion in the second quarter of 2019.
Excluding the LCM inventory valuation adjustments the second quarter 2020, adjusted operating loss for the refining segment was 383 million.
Second quarter 2020 results were impacted by lower product demand and lower prices as a result of the Covance 19 pandemic.
Refining throughput volumes averaged 2.3 million barrels per day, which was lower than the second quarter of 2019 due to lower product demand.
Throughput capacity utilization was 74% in the second quarter of 2020.
Refining cash operating expenses of $4.39 per barrel were 59 cents per barrel higher than the second quarter of 2019, primarily due to the effect of lower throughput rates.
Operating income for the renewable diesel segment was 129 million in the second quarter of 2020 compared to 77 million in the second quarter of 2019.
After adjusting for the retroactive blenders tax credit adjusted renewable diesel operating income was $145 million for the second quarter of 2019.
Renewable diesel sales volumes averaged 795000 gallons per day in the second quarter of 2020, an increase of 26000 gallons per day versus the second quarter of 2019.
Operating income for the ethanol segment was 91 million in the second quarter of 2020 compared to 7 million in the second quarter of 2019.
Excluding the benefit from the LCM inventory valuation adjustment the second quarter 2020, adjusted operating loss for the ethanol segment was 20 million.
Ethanol production volumes averaged 2.3 million gallons per day in the second quarter of 2020, which is 2.2 million gallons per day lower than the second quarter of 2019.
The decrease in adjusted operating income from the second quarter of 2019 was primarily due to lower margin, resulting from lower ethanol prices and lower throughput.
For the second quarter of 2020 general and administrative expenses were $169 million and net interest expense was 142 million.
Depreciation and amortization expense was 578 million and the income tax expense was 339 million in the second quarter of 2020.
The effective tax rate was 20%, which was affected by the results of certain of our international operations that are taxed at rates that are lower than the U.S statutory rate.
Net cash provided by operating activities was 736 million in the second quarter of 2020.
Excluding the favorable impact from the change in working capital of 629 million as well as our joint venture partners, 50% share of Diamond Green diesel to net cash provided by operating activities. Excluding changes in its working capital adjusted net cash provided by operating activities was 38.
Million.
With regard to investing activities, we made 503 million of capital investments in the second quarter of 2020 of which approximately 240 million was for sustaining the business, including cost for turnarounds catalysts and regulatory compliance.
Approximately 262 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 448 million.
Moving to financing activities, we returned 400 million to our stockholders in the second quarter of 2020 through our dividend, resulting in a year to date total payout ratio of 96% of adjusted net cash provided by operating activities.
As of June 30, we had approximately $1.4 billion of share repurchase authorization remaining.
And on July 16, 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 balance sheet at quarter end total debt and finance lease obligations were 12.7 billion and cash and cash equivalents were 2.3 billion.
The debt to capitalization ratio net of cash and cash equivalents was 33%.
At the end of June we had 5.7 billion of available liquidity excluding cash.
Turning to guidance, we still expect annual capital investments for 2020 to be approximately 2.1 billion, which includes expenditures for turnarounds catalysts and joint venture investments with about 60% allocated to sustaining the business and 40% to growth.
Approximately 30% of our overall growth Capex for 2020 is allocated to expanding our renewables business.
For modeling our third quarter operations, we expect refining throughput volumes to fall within the following ranges.
US Gulf Coast at 1.4 to 1.45 million barrels per day.
US mid continent at 380 to 400000 barrels per day.
US West coast as to at 215 to 235000 barrels per day.
And North Atlantic at 375 to 395000 barrels per day.
We expect refining cash operating expenses in the third quarter to be approximately $4 in 40 cents per barrel.
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.
Our ethanol segment is expected to produce a total of 3.8 million gallons per day in the third quarter.
Operating expenses should average 38 cents per gallon, which includes six cents per gallon for non cash costs, such as depreciation and amortization.
For the third 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 expect the Rins expense for the year to be between 400 $500 million.
Lastly, as discussed on our last earnings call due to the impact of the beneficial tax provisions in the cares act as well as the coated 19 pandemic in it.
Impact on our business, we're not providing any guidance on our effective tax rate for 2020.
That concludes our opening remarks before we open the call. The questions. We again respectfully request that callers adhere to our protocol of limiting each turn into Q and 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.
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Our first question today comes from Prashant Rao of Citigroup. Please proceed with your question.
Good morning, Thanks for taking the question are you bed Hey, Joe.
Good.
I wanted to start on the demand recovery, Joe you mentioned, the rapid recovery in product demand through to Q.
We get a sense of the strength of product demand as we entered the current quarter and how it's been trending sense.
And if you could any color on how to think about that in terms of.
Buckets of gasoline versus jet versus diesel and everything else.
Yes, sure Gary you want to.
Yes, sure I'll walk you through its I'll start with gasoline as Joe mentioned.
We saw demand fall off to about 50%.
What we would normally have.
Our export volumes fell to about a third of where they would typically be in the second quarter, but as you mentioned you know demand has certainly recovered faster than than most people have expected by may we were at 77% normal gasoline demand in our system in June 88% normal.
We need to see recovery as we transition into July on the export side.
I mentioned, we bottomed out at about a third of the volume we typically export in the quarter.
By June we are back to 70% of our normal export volume July with the with the base. The estimates we have today, we'd be about 76%.
Normal on our export volumes. So gasoline demand is recovered much faster than that certainly most would've expected in appears to be pretty strong on the distillate side you know the magnitude of the demand destruction wasn't nearly as great. As we mentioned we fell off to about 70% uptick typical demands on the diesel demand.
And recovered pretty quickly back to about 80% of normal.
In our system, we've remained about 80% to 85% of normal demand. However, that's below what the deal we reported the deal we is closer to 94% diesel demand I think this difference there is certainly in our three rivers and Mckee system, we had a lot of diesel going into the upstream sector and with lower drilling activity, we're seeing a low.
Less diesel demand and maybe we're seeing nationwide.
Also just like gasoline in the export market, we sell off to about a third of our typical export volume and May just like gasoline has recovered at a pretty good pace I actually stronger.
In June we were back to about 45% of our normal export demand and things have really picked up for diesel export demand in July.
Our current estimate for July which showed July export volumes, 107% of where they were in July of 2019, I think the other thing it's really interesting when you look at the export numbers is is looking at those export numbers in light at the Us Gulf Coast.
Diesel production. So if you look at our export volumes last year in July we export it about a third of what our refineries produced the diesel they produced July of this year with our estimate on exports it would be 47%. So almost half of what our refineries are making are going to the export markets.
On the jet side, we can.
Also seeing recovery in demand.
This week steel East adds would show jet demand about 60% of normal I think the OE data really highlights the importance of the recovery ingest demand because as just jet demand has recovered using diesel yields from refinery fall off significantly so where we peaked at about 39% diesel yield that's come down.
It's about 32% diesel yield as you continue to see jet demand recovery, you will see diesel yield falloff from the refineries, which will really help the diesel supply demand balances I think on the jet side that would be the only sign that we're saying thats a little bit traveling certainly with some of the renewed efforts to slow the spread of the pan.
Demick and many of the state shutting down.
We don't have a lot of good line of sight into jet demand, but some of our nominations for August demand are down a little bit from what we saw in July.
Excellent straight answer thank you for all that color Gary.
My follow up just on the balance sheet.
Net debt to cap held in pretty well sequentially and free cash flow, including the working cap.
Tailwind was positive in the quarter, given what we're seeing demand recovery and the commentary around where we are in three Q. If we can hold at these levels if not improve slowly from here does it feel like you're already starting to turn the corner a bit on the balance sheet.
That is to say the defensive measures that you've taken so far this year feel sufficient to ride out this downturn absent another pull back in demand.
Yeah, what do we let Jason take a shot at that.
Yes, Hi, this is Jason yes. Thank you are right with the liquidity. We have now 2.3 billion in cash and 5.7 billion of other liquidity available. We do think Thats that's adequate for what we see this how we see it playing out right now.
Okay fantastic. Thanks, Thank you, but Jason congrats on a on the promotion in the stepping into the new roll out for to talk anymore on that front.
Thanks appreciate that thanks for Sean.
The next question is from a Theresa Chen of Barclays. Please proceed with your question.
Good morning, Thanks for taking my question just that.
Quick follow up on your last question relating to the demand side in your commentary about Latin the current.
Estimates I think it went from one of 7% on that first is normalized levels that you're seeing how much of that do you think pent up demand or is it sustainable and related do you think that any of the refineries that were previously maybe not optimistic.
Optimal operating at optimized capacity.
Linda perhaps permanently shutdown on already permanently impaired economically in that region, such tight perhaps you can take some market share going forward.
Yes, so I think what we've seen at least for the export markets. We go to in Latin America. Their demand recovery has been very close to the same pad demand recovery we're seeing.
In the United States I do think you may have some pre filling of inventories getting ready for winter, which you know could cause caused exports, despite a little bit but in our system, we see us pretty steady slow.
Of diesel volume to Latin American the volumes are fairly constant where we really get a spike in our export volumes is when the art to Europe is open and that Arb is currently open as it has been much of July and that's where a lot of that incremental volume is going.
Got it and and then switching to on the differential try and so we seem to have several pipeline probably more projects and regulatory purgatory and just given your expansive commercial presence and I'd be interested hearing your views on how we differential could react.
Typically to DAPL. So if the pipe it shut down how do you think that will impact not only Bakken differential but also that the T.I. I was in detail.
Great crops like a pull on Cushing.
What are your thoughts here.
Yes, so so definitely.
Dapple isn't allowed to operate it certainly will pressure the Bakken differentials.
We could see that moving weaker ambridge came out yesterday, they have some efforts to to improve their capacity to help clear the Bakken course through that Enbridge system. We are connected via our line nine to go back so we'd have an opportunity to bring that back and volume to Quebec, which would be at a benefit for us in terms of the data.
BTI differentials I think where we are on the forecast for production and where pipeline capacity is I don't see it really having a significant impact on the diabetes differentials I think we're kind of in a mode, where Brent Ti I probably is in that two to $3 range based on the incremental cost to get it to the goal and clear.
Sure.
Understood. Thank you very much in congratulations to Jason as well.
Thank you.
The next question is from monarch Gupta of Credit Suisse. Please proceed with your question.
Hey, guys. Thanks to the model policy question at this point, Montana, we can barely hear you Matt.
Oh.
[laughter].
Oh, sorry.
Yes, yes, so on the policy size.
At this point President Joe Biden clean energy agenda does not have the newbuilds diesel payment, but then at the school enough talk that Yukon.
The big trucks and buses to go on electric dependent got extend to go on renewable diesel do you see a chance that the clean energy agenda of the Democratic nominee expands and even coolers includes renewable diesel at some point of time.
Most of everybody fainted when you made your first proclamation.
[laughter] well that rich Wallace take a shot at the answer okay.
So we have some familiarity with with Biden and in some of his priorities and one of the things that I would point out is that.
Nobody is going to want to take the union jobs away that are associated with the manufacturing that we have out there there's a huge amount of infrastructure in the country. That's that's based on that same thing with the renewable fuels. You know I don't think any administration of the comes in is going to want to you know.
Pull the rug out from under the farmlands in so we see the renewable diesel having.
Big role to play a significant role to play and I know, there's a lot of aspirationally.
Statements and positions out there about electrification, but.
Theres there is a big marketplace for renewable diesel and we think it fits strongly in the is agreed agenda Martin anything you want to add to that but I would just just echo that when you look at the when you get the true numbers. If you look at the carbon intensity renewable diesel competes very well with the with the so called zero emission.
Vehicles.
You are already up to 16, 18% renewable diesel in California, you've got mandates out to 2030 in California in Europe.
The clean fuel standard coming in Canada.
New York proceeding so we just as rich said, we just feel really good about the future and the growth and.
And just see this worldwide globally as into fuel mix for a long time to come.
And then he has put one quick follow up to the Mondays warning indicators in Chicago, which has vending pocketbook.
Basically indicating that they knew it all the regions list is me every region is showing some improvement.
Got it of course, there must have had capacity is actually showing that keyed on an island bottle improvement. So im just trying to understand on the margin front why is the need to have changed on the Gulf coast showing the beta positive variance, let's just some of the other regions.
You know probably the biggest variances due to the crude differentials so.
Crude differentials had been very tight, but we've seen medium sours move 60 cents in the last few days than we've seen the Canadian heavy move a dollar and so on our Gulf Coast, We run a lot more of the medium and heavy sours and so that would have the positive impact on on the margin indicator versus the other regions, which are.
Primarily suite.
Thank you so much for taking my question.
The next question is from Paul Sankey of Hubbard. Please proceed with your question.
Good morning, everyone can you hear me Hi, Paul.
Yes.
List hub actually no hub, but but anyway.
Got you will.
Joe It's been a long six month full months since we last spoke and I was wondering.
The expense, which you feel the world has changed won a secular basis.
So you've you've referred to the demand side and we can debate.
How that travel and what the suburbanization is well gasoline intense but.
But clearly you've you've access capital you seem very clearly to be restating the dividend commitment that you've had since he became CEO I.
I guess, one question would be where you think would going in terms of how U.S. crude markets change. It does seem that we're in for a very different outlook now in terms of how much debatable crude there is in the U.S. and how the balance will shift.
Finally, we've heard of reference iridium things for the love about how the election May change things got any further comments you have on that would be would be very interesting. Thanks.
You bet you know Paul I mean, just looking back over the last six months, it's been a bit of roller coaster ride and when we started off the year and pretty decent shape and then we had the incredible trough.
So most of US in this room have been in this business for very long time, and you know you got to look back a lot of quarters before you see a quarter like the second quarter. This year. It was it was brutal I mean the margins were.
Just horrible and so anyway.
The one thing that we're focused on really is that we're going to run the business for the long term and we need to have a steady hand, right now and just continue to focus on on doing what we do and doing it well we're dealing with.
News its barrage ignace everyday with negative commentary and people are fearful and.
We've got an election coming on and you and I, probably could have a lively conversation about the impacts of that but frankly.
We're coming out of this and I think if you look at our country and the way the people want to live it is not the way that they've lived over the last quarter. So.
Anyway, I'll stop there a little Gary talked a little bit about.
About crude situation, yes, I think most forecast we see.
And from what you're talking about.
As total oil demand picks up I think a greater percentage of that gets filled with more sour production.
Our view is that the us will still be a net exporter of crude oil and as long as the U.S. as exporting crude oil will continue to have advantage on the light sweet barrels were bringing into our system and of course with the flexibility that we have especially with our complex Gulf coast refining assets in of getting some more medium and heavy sour barrels on the market.
We will help us as well from that aspect.
And then it so as far as you.
No Paul on and you mentioned the election.
We don't have a crystal ball on what's going to happen.
But we do know that if you just look fundamentally where we are the products that we produce are necessary for life as we know it and so.
You can have a lot of conversation around what we're going to do and what needs to do but in reality.
Fossil fuels are going to be was for a very long time and demand.
Forecast continued to be or.
Increased crude oil consumption going forward as countries continues to develop and saw it so.
We just need to not get hung up in the think we're going to be of this Doug did that we're at now forever.
Yes, I mean, obviously vaccine to change that I think I'd read from your comments very clearly that the strength of demand is really impressive. If you think we've just printed minus 30% GDP and with good yesterday gasoline demand down 8%, it's actually quite incredible.
Yes.
Take care.
The next question is from Doug Terreson of Evercore ISI. Please proceed with your question.
Good morning, everybody.
Hey, Doug.
So my questions on supply and specifically, how you guys just thinking about closures of refining capacity over the next several years and the reason I ask because because I think a yeas final tally of closures last cycle was six 7 million barrels per day.
Supply.
Between recent closure announcements that we've seen in Asia about related factors and.
Current refining economics, it seems like we could be on a similar track for the next couple of years as well. So just want to see how you're thinking about the simple how the supply side could be affected by this factor in coming years and is it really any reason to believe it will be much different from the trough in the last cycle.
Hi, Doug. This is lane. So you know we've always sort of had the view that really what shuts refineries down obviously they have to have some sort of fundamental issue, whether it's a reconfigured incorrectly for where the market is or some other structural thing, but also a closes on them as either a big environment. The big regulatory change were.
Part of a lot of capital and it just becomes like you look at the whole sort of scenario of cash flow and it becomes insurmountable and you start trying to.
Normally try to sell them and ultimately a shuts down the other one of those that if you could be like a big turnaround we visited a refinery peers and get back in the in the UK and as essentially what got them ahead to they'd put off a turnaround I had kept doing that and ultimately that it was a big FCC alky cracking complex around the cost of which got to be where it was solars. They chose.
So to down look it's really big.
Binary, but can you sort of kind of move along and manage expenses and things like that but it's when refinery have an outlook based on configuration or fundamentals that makes a negative to begin with and then they have there's a large cash outflow due to some something changing but generally what what gets these refineries.
Okay. Thanks, a lot.
Yes.
The next question is from Phil Gresh of JP Morgan. Please proceed with your question.
Hi, Yes, hey, good morning.
First question here, just obviously you've referenced the demand picture improving.
In the July quite a bit.
That said the crack spreads are still pretty soft here in July and as we head into August so.
As you look at the second half at the year and look to balance the supply against the demand in the current inventory picture you think demand is going to be able to take care of.
Inventory situation do you think current situation, where we need to under produced in the second after the year.
In the greater extent ticket inventories lower.
Hey, those land again, so we.
We ultimately we believe to get back to more normalized economic sort of driver for our business, we need to get back into for the five year range, where inventories are three passive you talked about there is really what kind of the man look and how how disciplined our refineries with respect to utilization rates and then.
And then.
Of course finally is just a matter how many closures there are in our view is that we've been really impressed so far with industries response to this in terms of being disciplined.
And been encouraged by that but certainly as we move for seeing how jet demand works and obviously the seasonality.
Butane going in the pool.
We expect that utilization rate full floor be commensurate with where the economics are and the somewhere.
You know somewhere and then I'm going to say early next year, we our views will give sort of back into the five year range of inventories.
Okay got it so I guess, what your view then just extrapolating that a little further to kind of the medium term outlook.
Would you think by the Middle of next year, you can that would imply margins could get back to some kind of normalized level if demand.
Can you just improved or just how are you thinking about things in terms of.
Structurally a normalized interim moving forward.
We have a normalize world looks like to the inventories are basically back in the five year five year band, that's how I don't know for a few but thats, how we sort of look at it. We've we've spent more time next year, but we should be back into that sort of market.
Okay.
All right. Thank you.
The next question is from a Sam Margolin of Wolfe Research. Please proceed with your question.
Good morning today, Thanks for taking my question.
So my question is that add to the next potential DGD expansion, you mentioned, you're in and engineering.
At this point.
The kit seems pretty well established.
Underlying fundamentals are good I think when you said at reasonable that there is.
Hi probability that.
Other markets that had a credit sitting a carbon credits that are comparable to California. So this.
This is growing so I guess my question is on this evaluation unit, where the inputs that you're watching that more commercial or if you really evaluating in design changes or some other aspect of the ration and.
Kind of this idea here.
Hi, Sam This is mark we're really just going through our gated process and the work you know this is a new location. So there's other things you have to take care of the off sites.
The.
Integration with a refinery so it's really not I wouldn't say I think commercially and operationally, where you feel pretty good about where we're at its just really doing the work do you have to do to to get to a cost estimate and the rigor that we apply to these things. So we're still on track or.
We expect to make a final investment decision in early 2021, and if we go forward, we would expect to start construction in 2021 and operations commencing in 2024.
Okay.
Okay I appreciate it.
Okay.
Thanks Sam.
The next question is from Doug Leggate of Bank of America. Please proceed but your question.
Thanks, Good morning, everybody I hope I hope everybody sitting well out there.
Thanks, Jason Your Keith Let me add my congratulations on your jumping into the fire it pretty interesting time, so good luck with other than that.
Thank you.
Joel.
The beginning of this at the beginning of March one so the launched as full tilo crude to the United States seem to the coal you're talking about.
Getting kohl's relating to.
Our ability to absorb that could.
And obviously, we saw a huge increase in ECS and exports and then portfolio from Saturday essentially at the end of May.
The appears to have tailed off now and I'm. Just wondering if you can walk us through your prognosis for heavy availability on crude spreads in light of what I just suggested.
Yes, Doug Gary can speak to this really well.
So I think you know for US we've certainly seen spreads about as narrow as we've ever seen with our margin for light sweet medium sour and heavy sour all right on top of each other as we look forward.
OPEC has 2 million barrels a day coming online in August.
It looks like Canadian production will ramp up somewhere in the two to 300 barrel a day range and so we're already starting to see that have an impact on the market I mentioned medium sour discounted widened about 60 cents in the last week.
Canadian Heavies moved about a dollar barrel weaker longer term you know the forecast we see show that as total oil demand increases a much larger percentage of that total demand, we filled with sour type production rather than in the light sweet which came off the mark and so we think all of that could lead to.
Wider quality differentials as we move for longer term.
Okay I appreciate it I mean, I want to make us and my second question, but just a footnote to that Gary.
Our understanding from oncology.
Associated with that we use of the center of energy studies in Russia.
He suggested the increase from Saturday on Russia would be absorbed domestically. So do you believe that those balls are actually hitting Walter.
You know we have we have seen some barrels.
From the Middle East show up in the U.S. golfer on offer in the us Gulf, which we haven't seen in quite some time. So Barbara has been on offer which we haven't seen in quite some time. So I think some of the barrels are making their way on the water and as to the market. It's some of that is also due to the fact that looks like far east buying is down a little bit as well, which is which is also help.
The pressure that crude differentials and make a barrels available to us.
I appreciate so Joe My second question I apologize in advance so there's a policy question.
In light of both.
We're seeing in the polls and so on on its really just.
Ask you a few with a few with mind articulating the laterals position on carbon tax and I'll leave it there. Thanks.
Okay, No that's great.
I mean.
Again, we'll get rich walls rich is responsible for our government affairs activities because of the comment on this but you know Doug.
We're seeing.
Different proposals coming out right I mean, bidens got to position is taken in the houses looking at things and so on we don't know what's going to come out of this yet okay. We just really don't and because it nothing seems to have been settled on but that being said it rich just want to kind of share what our thoughts are yeah.
It's it's a little bit hard to respond to it in the abstract right because it all depends on how the tax structured right. If you're you're looking at a properly structured carbon tax you got to you got to consider you know is a carbon tax going to drive.
Carbon offshore.
Unregulated environment, you'll need to structure around that it needs to be market driven you need to think about affordability speak about complexity in structuring it.
And not picking winners and losers just by virtue of and letting it actually allow all carbon reduction options to play into the market.
Is really is really important the other thing I think you should always Tim for all of this with is considering the state of the economy right. Now I mean any administration that gets elected is going to be dealing with a coated recovery economy and you need energy to drive the economy, you can't you can't really.
Want to drive stimulus in the economy, and then layer a bunch of taxes on and completely restructured energy format for the for the nation is it's really not feasible. So I think you're going to the next administration is it's going to be about the economy and the economy is going to need energy and so while there is a lot of.
I probably in the campaign in a lot of Aspirationally statements. The reality is that unit theyre going to need they're going to need.
Strong strong fuels to keep the economy going.
So I guess in summary, we just need to see what they're going to do before we can say, what our position would be audits.
Understood and I appreciate you on streaming at least how you're thinking about a thanks Hello, guys. Good luck.
Thanks.
The next question is from Roger read of Wells Fargo. Please proceed with your question.
Hey, good morning, everybody.
Roger.
A lot of still has been hit here, but I guess, one question I'll throw at too on the refining side, we've heard talk in some of the.
The other companies about delays and deferrals on maintenance and how that may affect.
What's available to run, meaning maybe a little higher those fall and winter, but maybe lower next spring as people get.
Now, let's say, we get past the worst independent I can all that.
As you think probably late in his questions for you as you think about getting inventories back to the five year average is that something that we should factor in as an additional help or there is enough surplus capacity everywhere if demand stays kind of soft that maybe we won't really notice.
Anything on the maintenance deferrals side.
Hey, Roger So I think it's a really a function of how the off how about operator responses. Some of the so for example, one of the things that we did when we thought when this all first started as we took the opportunity and Brook FCC down.
And counted fractionator right. So we actually incurred additional maintenance expense to deal with what we've always on acute issue around its operation. We could have tried to get through that and get it to its turnaround.
Last year, when we go in oil, which is good and get that cleaned out and also help with is sort of just sort of structural demand destruction that was you know early on but I think it all depends on the operator, and operator, who stress or they have their balance sheet stress or access to capital as you know and debt is a little bit thrift. They may in fact besides.
The for a lot of maintenance or some other point because they got to get through they've got to liquidity issue and they've got to get to it you know they got to push it out to a point at which they hope that the they're going up recovery. They can afford to do these things the risk in that is the unit. The unit doesn't really know how good your balance sheet is or how the world is it just sort of side and it.
That point about unit goes down.
It's an unplanned events it becomes a much larger event so much more expensive event and that's the risk and operator in that condition have to deal with the Valero specifically, we didnt have a lot of turnaround work going into for given planned turnaround work in the third and fourth quarter.
We will still address where we think we have operating issues and then in software and the other general comment office, Yeah, we reduced expenses one of those novels I would call white maintenance you can sort of tell from the way I talk we have a you know just sort of core value of ours is that we will never ever cut our maintenance capital such as the puts our reliability.
The at risk because we believe that the pathway to get even higher expenses and more cash outlay in the future of where we believe in being in this and the law firm. So we don't operate that way, but we did you know flux lightly on some of what we consider to be a little bit of discretionary maintenance Oh.
But that does that answer your question.
Yeah, I think so I mean, it's it's obviously a lot of moving parts to it I'm just trying to where we can understand some of the things that are going to become an atmosphere other than what I'm trying to say is really just very very operator specific if you think you like to look out there or the catheter the people who were in the business you know some people respond but.
Being careful and some people might have to take additional risk in it all and then then then it's just a matter how although how it all unfolds.
No I appreciate that I guess the other question I have just a follow up on the earlier comment about.
The diesel yield going from the high Thirtys to the low Thirtys is jet fuel demand comes back up.
As we look overall at what's been coming in the last several weeks on that on the deal we've seen gasoline draws a little bit on that diesel has actually been continuing to build.
Are we at a point here, where you know jet fuel demand has recovered enough that we should see the lower diesel yields feed into no longer building diesel margins or kind of maybe.
Keeping on Phil's question are we in a situation here, where maybe we face.
I don't know overall lung cancer or a further cut in diesel yields in order to kind of balanced the market and one of the reasons I'm asking that is as we roll late September and October we go from summer grade to winter grade gasoline and so that tends to make it easier to make gasoline and I was just curious if that further accomplish.
Thank you we don't see continued improvement in jet fuel demand.
Yes, So I think our view is we don't see where jet fuel demand fully recovers to where we were and that get fuel demand picks up enough to really correct yield issue, which is where it gets really to mind point for us to really see diesel inventory get back to that five year average level sort of life product inventories in that five year average rate.
We really need to see discipline on the utilization and to keep utilization down is probably the biggest keep getting inventory.
So stay tuned alright, thanks, guys.
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The next question is from Paul Chang of Scotia Bank. Please proceed with your question.
Hi, good money and Guy Milan, two question seems that James and is now to CFO. So Jason you have any pin nimbly I'll fall 2021 Capex.
Not if not a set amount, but that's what that gets going to be flat.
Well with them campaigns that this year.
Yes, Paul Hey, So we haven't given the guidance as you will know.
[laughter], that's why outside let's say NIM Murray I would like.
[laughter], so I would I'm going to say this right now okay. The high end it'd be too and a half billion and then probably 2 billion on the low end. Okay. I think we just need to wait what happened lanes got its really well positioned on the execution of the capital plan.
That you know if we need to delay a project or continue to too.
Slow some of these projects will do it.
I think we're very highly copper is going to continue to proceed with the Diamond Green diesel project, we haven't flow that now yeah, we're not going to slow that down so Paul I'd say 2 billion and if we see the as the guys have talked about to get to get really back to a really strong margin environment, we need to see inventories.
We've done some that could happen sooner than later, but we just don't know.
But I think if to the extent, we could restart capital projects, we'd like to do it. Okay. I think we've talked for Jason We've talked about is that if you're going to prioritize your use of funds. The company one of the first things we'd like to do is go ahead and restart these high return projects like the Coker then we're going to look at balance.
Be sure that we reduce our debt and that we build cash.
And then ultimately Paul we would look at share repurchases. So anyway, that's kind of our sequencing around these cash that JNJ just to is it was that Joanne and Jason.
Walk you said that landfill unique things back to the pool.
You were kind of seat that the yet there may be shale w. 10 options.
Great capital down to eight Reis se, but due to.
Yeah, Jeff, but snapple, you want to find yet tied to.
Because I imagine that Glenn just stop generating free cash.
Maybe one off their priorities that you want to think Danya. That's correct me, if I'm wrong, but yet that yes.
That's quite lucky and at what palms at that level, you would say, okay. Wow that was the one yet to be down more that it's natural that we could have multi comments between.
Increasing the that we tend to show with that and we think that at the same time.
Okay.
Yeah, I know our guidance on our capital allocation framework as we target 20% to 30%. So that's a good guideline theres not a you know absolute hard fast rule.
That's a good though.
But Paul and you know you know what kind of debt. We've got out there I mean in the past and will continue to look at it we do regularly but it's been prohibitively expensive for us to go out and call debt, Okay and so.
We look Jason seem looks at it all the time it just doesn't make sense to do in the past and we'll continue to look for going forward at a going forward.
Okay final question from me a knife fight them that you Ben Yep.
Yes, being shot a function pexip supply alternative Gary can you, maybe you're not only on the open.
Yes. So you know we do have history, we've really supplied to Quebec refinery over the water and can fully supply qubec with waterborne barrels.
Slide nine is an optimization for us is provided a nice economic.
Benefit to us, but we have the ability to supply, Quebec, either west African barrels were barrels of us Gulf coast over the water.
Got you at the end the ups and all opportunity.
Two upon the addition, though a north American demand supply or that that's where the ones nine nine shut that that's when is that no additional while we'll be able to get more.
Local supply on what that Calgary or that back in supplying into that.
But so the line, it's really closed his line five and and not all his line nine is fed from line side. So even if line five is close we still believe we'd have access to western Canadian barrels.
Pete line nine.
Oh, how stuff web actuate, yet say the pool right either.
Yes, I am I find a shot and that's assumes that the total available in nine might become say call called yet hop if that you would get hop off your normal application allows that work that process.
Thats close to how it would work so there would be a proration that goes into effect based on your your shipper history, and so where we would fall out on that I'm not sure, but you know assuming line five is half of the volume and everyone was promoted to 50% than we would be 50% of what we normally shipped through line nine.
Okay. Thank you.
Thanks, Paul.
The next question is from Brad Heffern of RBC capital markets. Please proceed with your question.
Hey, everyone. Thanks for taking my questions.
You know Joe you've had this 40% to 50% cash return target from a long time now I'm curious if we end up in a sort of longer margin recovery environment, maybe like me softer the financial crisis.
How long you are comfortable sort of paying above that target as you are now before potentially the dividend could you address.
Okay, Hey, we will let Jason talked generally how we're thinking about you know cash flows in the dividend here okay.
You're right you know were well above it now bank Homer said, we're at 96% year to date on payout, but with this being an extraordinary and short term event, we're not going up we don't adjust set based on on this type of situation. So we stick with our guidance we will vary from.
From it I don't know if we have an exact number on how long we would be comfortable with that in a way to us.
Yes, Okay, and then I guess sort of along the same lines.
Hi, your thoughts changed at all about the repurchase program just given what we've seen I mean, obviously the historical criticism has done that when you have my other debt repurchases obviousness stock prices higher.
And that certainly proven to be turn this time. So is there a chance that on the other side, we see Valero Wes.
You know sustain a higher cash balance on a lower overall about level then maybe we thought previously.
Anything like that be great. Thanks.
You want to our volume into uncle, Yeah, I'll tell you. It's again I think the key to remember here is we're in kind of a funky short term what we consider to be a short term period, okay, and we're going to evaluate it we don't know what next week's got a whole or what the next.
Well, it's going to hold or the next year and so what we're doing is sticking to what we've done in the past and we're comfortable where there right now we are well positioned going into it you know we've looked at how we position today versus where we were back and own died when we had a previous downturns, we stress test everything so.
We're not willing right now make.
Log decisions were long term applications based on what we consider to be a short term set of circumstances. So we're just going to play this out we'll see what happens.
Okay fair enough Jeff Thanks.
The next question is from Neil Mehta of Goldman Sachs. Please proceed with your question.
Good morning team and thanks for taking the question, but the first question I have is just on EGD margins you've been following the indicator margins.
On your website and they came in a little softer than we expected in the second quarter volumes looks good but.
But just any thoughts on 2020 EGD margins would be helpful.
Yeah. Now this is Martin I can tell you know the second quarter was $1.93 a gallon EBITDA, which we actually feel pretty good about if you look now where we're at relative to second quarter diesel prices up 27 cents a gallon. The defore ran component with the multiplier is up 12 cents a gallon.
So you know you're close to 40 cents a gallon better on the indicator margin than we were in the second quarter with those components. So looking out for the rest of year, we feel though.
We feel really good about where DGD is going to be for the rest of the year and.
Foreseeable future.
Okay, Great and then that's that brings to the follow up with just just your thoughts on Rins, and particularly but the six rent and how it could play out from here and a kind of ties back into some of the election here at me earlier.
Well I you right now we expect Rins to remain supported in the near term. There's a lot going on you got low energy prices relative to agricultural prices and that makes the biofuels less competitive which typically means a higher rent you've got uncertainty around the small refinery exemption program.
Obviously affects of covert 19 on gasoline you just don't know if you can.
The gasoline pool absorbed the mandated ethanol volumes next year. So that's risk and then the EPA to 2021 RV show itself has been postponed.
Indefinitely. So there's just a lot of uncertainty around the RIN right now so as a result is higher now once we turn the corner on the pandemic, we get lower energy prices and energy prices excuse me recovered a higher levels. We expect the rins are drift lower.
Thanks Keith.
The next question is from Chris Sighinolfi Jefferies. Please proceed with your question.
Hi, Joe Good morning, everybody.
Hi, Chris.
Thanks for the out of color today I do have two questions I guess.
First following up on her on Rogers earlier question with changes in product slate and unit configuration, and perhaps the swing in the winter grade how high could you push gasoline yield if demand there continues to rebound and for jet and distillate, maybe it doesn't and on a related now are you changing at all the.
Crude procurement processes, just given the pace in degree of change in uncertainty with regard to individual product demand over the last couple of months and maybe continuing for the next couple of months.
Yeah, absolutely meal. The notes covered to give you are really good answer in terms of you run up in a mode of trying to maximize gasoline and minimize distillate it would be if it's probably in the order book.
The low 50% sort of yields.
Overall, it's obviously a function of different refinery urban issue refinery makes ultimate like 60% gasoline and sort of our mckee refinery some of the more heavy refineries are a little bit different. So it's really a function of the refineries and if the world works out the way you know this we're definitely recovered and just doesn't recover and consequently.
You got to be careful it will certainly test the limits of that probably going in the.
Probably first quarter in going in the second quarter, depending on again, how disciplined refiners are are for the rest of the year.
Oh, yeah on crude I, you know I guess early in the second quarter than gasoline got very we pushed a little bit more medium sour so our system.
Try to promote hotter Vista.
Since then we backed off and where the real similar crude diet to what we typically run and I don't see that changing in the near future.
Okay, Great and land I, you know I appreciate the early discussion of product inventories and sort of you weren't expectations as we move in to next year for my own edification. When you think about recapturing five year inventory ranges and the signal that that inventory normalization might send to prices in cracks do you think about that.
In an absolute sense or do you think about it in terms of it days of demand ratio. It's a conceptual question about I guess when all the shadow inventory represented by the lower refining utilization rates I'm. Just curious how are you in your team think about those components.
That's an excellent question you know we always because obviously there is just different demand.
Through time, and so it's not just as we look if we look at where inventories are in the five year range as sort of where we start and then we certainly start looking at they from supply and then we look for the our their inventories that maybe the deal we've not capturing that somewhere else out there and so we look at all those things for sure.
You know I, just had sort of a at a high level words, and there's been a front end to be disciplines that needs to and theirs and obviously demand on its way back, but we want we want to see what is normalized inventories would be in the five year range and then then we start looking at data supply and.
Our their inventories an unusual places that we will take into account.
Okay. That's really helpful. Thanks, a lot guys. Good luck.
Right.
Last question today comes from Benny Wong of Morgan Stanley. Please proceed with your question.
Hey, good morning, guys. Thanks for squeezing me and.
I'll give it to one I just want to be mindful of your time.
Just kind of looking at your renewable diesel your business margin there came in at like $1.95, which.
With little bit better than what we expected, but when we look at spot prices.
Imaging business margin looks like could be much better maybe give me the closer to 50 to 75, we kind of put aside movements in commodity prices is there any reasons or factors that we should not expect that same magnitude of index price recovery to flow into your business margin in Threeq, you and the back half of the year.
Hey, This is mark you know as I said earlier, we've seen quite a bit of recovery since the Twoq you average numbers in both the diesel price in the region.
CFS prices flat, so I would say you ought to expect kind of what we've guided to before that we feel pretty good about a third for third and fourth quarter for renewable diesel.
Okay. Appreciate I appreciate that so there's there's nothing within like movements and capture rates and costs.
That we might have to increments I think of on the back half of here is that right.
That's correct.
Great. Thank you very much.
Thanks Betty.
That's all the time, we have for questions today, I would now like to turn the call back to home or bar for closing remarks.
Thank you we appreciate everyone joining us today and if you have any follow up questions too. Please feel free to call. The our team. Thank you.
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This concludes todays conference you may now disconnect your lines at this time. Thank you for your participation.
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