Q3 2020 Valero Energy Corp Earnings Call
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Greetings and welcome to the Valero Energy third quarter earnings Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Homer cooler Vice President of Investor Relations. Thank you Sir you may begin.
Good morning, everyone and welcome to Valero Energy Corporation's third quarter 2020 earnings Conference call with me today are Joe Gorder, our chairman and CEO Lane Riggs, our president and COO, Jason Fraser, Our executive Vice President and CFO, Gary Simmons, our executive Vice.
President and Chief commercial officer, and several other members of Valeros Senior management team.
If you have not received the earnings release and would like a copy you can find one on our website at Investor Valero Dot com.
Also attached to the earnings release are 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 those we've described in our filings with the SEC.
Now I'll turn the call over to Joe for opening remarks.
Thanks, Albert and good morning, everyone. The third quarter was another challenging period in which refining margins continued to be pressured by pandemic imposed restrictions on global economies. This.
These restrictions have limited individual movement and in person activities across the globe, resulting in lower demand for finished refinery products. This in turn has created less incentive to produce crude oil and has led the narrower crude oil discounts compared to last year.
Despite this challenging environment there were a number of positive developments from the previous quarter as product demand increased with incremental easing of restrictions on businesses and the reopening of some schools relative.
Relative to the second quarter deal, we statistic show the gasoline diesel and jet demand improved by 25%, 7% and 57%, respectively, which is in line with the increase in demand that we experienced across our system are.
Our wholesale volumes remained steady moving over 50% of our total light products production.
Our gasoline and distillate exports to Latin America in Europe were also robust in the third quarter. We exported 316000 barrels per day in the third quarter, which is significantly higher than the 170000 barrels per day, we exported in the second quarter we.
We also saw a steady increase in our wholesale volumes into Mexico, where we have been proactively expanding our logistics network for the last several years in fact Valero is now one of the largest private fuel importers into Mexico.
With the incremental easing of restrictions and higher product demand our refinery utilization increased from 74% in the second quarter to 80% in the third quarter and we increased our ethanol plant production as well from 49% to 81% of capacity.
Our low carbon renewable diesel business remains resilient with another quarter of solid performance, realizing a margin of $2.72 per gallon and setting a record for sales volumes.
In addition, we remain well capitalized we ended the quarter with over $4 billion of cash and almost $10 billion of total available liquidity, while we expect margins to improve as economies continued to reopen and product inventories come down to normal levels. We opportunistically raised another two point.
$5 billion of debt at very attractive rates to ensure that we're able to keep our high return projects on track and to honor our commitment to shareholders. Even if the current low margin environment persist for longer than currently anticipated.
Turning to capital investments, we continue to execute on announced projects that are expected to drive long term earnings growth.
The Saint Charles Alkylation unit, which is designed to convert low value feedstocks into a premium outlet product remains on track to be completed in the fourth quarter.
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.
We're also evaluating a number of other low carbon growth projects that are in the development phase of our gated process.
We continue to strengthen our long term competitive advantage with investments in our renewable diesel business that.
The Diamond Green diesel expansion project at Saint Charles which is designed to increase renewable diesel production capacity by 400 million gallons per year to 675 million gallons per year is still expected to be completed in 2021.
Diamond Green diesel also continues to make progress on the advanced Engineering review for a potential new 400 million gallons per year renewable diesel plant at our Port Arthur Texas refinery.
As we look ahead, we expect to see improvement in margins is product inventories approach the normal five year range us gasoline inventories already in the middle of the five year range and although distillate inventory is higher than the five year range. It's been trending downwards in recent weeks diesel demand should continue to him.
Prove supported by winter heating oil demand and harvest season.
Paul refinery turnarounds, coupled with recently announced and anticipated closures or conversions of less advantage refineries should also further balance supply.
Although there is a lot of uncertainty in the market we remain steadfast in the execution of our strategy pursuing excellence in operations investing in earnings growth with lower volatility and honoring our commitment to stockholder returns are unmatched execution, while being the lowest cost producer and ample liquidity.
Position us well to manage this pandemic induced low margin environment and maintain our position of strength as the global economy recovers.
Lastly, the guiding principles underpinning our capital allocation strategy remain unchanged. There is absolutely no change in our strategy, which prioritizes our investment grade ratings sustaining investments and honoring the dividend.
So with that Homer I'll hand, the call back to you.
Thanks, Joe before.
Before I provide our third quarter financial results summary, I'm pleased to inform you that we recently posted a sustainability accounting standards Board. Our SaaS. We report on our website that aligns with the SaaS the framework for refining and marketing industry standards.
As you'll see in our report we are targeting to reduce an offset greenhouse gas emissions by 63% by 2025 through investments in board approved projects. The targets will be achieved through absolute emissions reductions through refining efficiencies offset by our ethanol and renewable diesel production.
And global blending and credits for renewable fuels.
This is consistent with our strategy as we continue to leverage our global liquid fuels platform to expand our long term competitive advantage with investments in economic low carbon projects.
And now turning to our quarterly performance, we incurred a net loss attributable to valero stockholders of $464 million or.
Our one dollar and 14 cents per share for the third quarter of 2020 compared to net income of $609 million or $1.48 per share for the third quarter of 2019.
The third quarter 2020, adjusted net loss attributable to Valero stockholders was $472 million or $1.16 per share compared to adjusted net income of $642 million or $1.55 per share for the third quarter of 2019.
Third quarter 2020, adjusted results, primarily exclude the benefit from an after tax lower of cost or market or LCM inventory valuation adjustment of approximately 250 million and an after tax loss of $218 million for an expected LIFO liquidation.
For a full reconciliation of actual to adjusted amounts please refer to the financial tables that accompany the release.
The refining segment reported an operating loss of $629 million in the third quarter of 2020 compared to operating income of $1.1 billion in the third quarter of 2019.
Excluding the LCM inventory valuation adjustment the expected LIFO liquidation adjustment and other operating expenses third quarter 2020, adjusted operating loss for the refining segment was $575 million.
Third quarter 2020 results were impacted by narrow crude oil differentials lower product demand and lower prices as a result of the COVID-19 pandemic.
Refining throughput volumes averaged 2.5 million barrels per day, which was lower than the third quarter of 2019 due to lower product demand.
Throughput capacity utilization was 80% in the third quarter of 2020.
Refining cash operating expenses of $4.26 per barrel were 21 cents per barrel higher than the third quarter of 2019, primarily due to the effect of lower throughput rates.
Operating income for the renewable diesel segment was $184 million in the third quarter of 2020 compared to $65 million in the third quarter of 2019.
After adjusting for the retroactive blenders tax credit adjusted renewable diesel operating income was $123 million for the third quarter of 2019.
Renewable diesel sales volumes averaged 870000 gallons per day in the third quarter of 2020, an increase of 232000 gallons per day versus the third quarter of 2019 due to the effect of the planned maintenance that occurred during the third quarter of 2019.
Operating income for the ethanol segment was $22 million in the third quarter of 2020 compared to a 43 million operating loss in the third quarter of 2019.
The third quarter 2020, adjusted operating income for the ethanol segment was 36 million.
Ethanol production volumes averaged 3.8 million gallons per day in the third quarter of 2020, which was 206000 gallons per day lower than the third quarter of 2019.
The increase in operating income from the third quarter of 2019 was primarily due to higher margins, resulting from lower corn prices.
For the third quarter of 2020, DNA expenses were 186 million and net interest expense was $143 million.
Depreciation and amortization expense was $614 million and the income tax benefit was $337 million in the third quarter of 2020.
The effective tax rate was 47%, which was primarily impacted by an expected U.S federal tax net operating loss that will be carried back to 2015, when the us federal statutory tax rate was 35%.
Net cash provided by operating activities was $165 million in the third quarter of 2020 excuse.
Excluding the favorable impact from the change in working capital of $246 million as well as our joint venture partners, 50% share of Diamond Green diesel is net cash provided by operating activities. Excluding changes in its working capital adjusted net cash used by operating activities was $177 million.
With regard to investing activities, we made $517 million of total capital investments in the third quarter of 2020 of which 205 million was for sustaining the business, including cost for turnarounds catalysts and regulatory compliance and $312 million was for growing the business.
Excluding capital investments attributable to our partners, 50% share of Diamond Green diesel and those related to other variable interest entities capital investments attributable to Valero were 393 million.
Moving to financing activities, we returned 399 million to our stockholders in the third quarter of 2020 through our dividend, resulting in a year to date total payout ratio of 165% of adjusted net cash provided by operating activities.
With respect to our balance sheet at quarter end total debt and finance lease obligations for 15.2 billion and cash and cash equivalents for 4 billion.
The debt to capitalization ratio net of cash and cash equivalents was 36%.
At the end of September we had 5.8 billion of available liquidity excluding cash.
Turning to guidance, we expect approximately $2 billion in capital investments attributable to Valero for 2020 about 60% of our capital investments is allocated to sustaining the business and 40% to growth.
We expect our annual capital investments were 2021 to be approximately $2 billion as well and approximately 40% of our overall growth Capex for 2020, and 2021 is allocated to expanding our renewable diesel business.
For modeling our fourth quarter operations, we expect refining throughput volumes to fall within the following ranges.
US Gulf Coast at 1.41 to 1.46 million barrels per day.
US mid continent at 385 to 405000 barrels per day.
US West Coast at 230 to 250000 barrels per day, and North Atlantic at 400 to 420000 barrels per day.
We expect refining cash operating expenses in the fourth quarter to be approximately $4.35 per barrel.
With respect to the renewable diesel segment, we expect sales volumes to be 750000 gallons per day in 2020, which reflects planned maintenance in October.
Operating expenses in 2020 should be 45 cents per gallon, which includes 17 cents per gallon for noncash costs, such as depreciation and amortization.
Our ethanol segment is expected to produce a total of 4.2 million gallons per day in the fourth quarter.
Operating expenses should average 37 cents per gallon, which includes five cents per gallon for noncash costs, such as depreciation and amortization.
For the fourth quarter net interest expense should be about 155 million and total depreciation and amortization expense should be approximately $590 million.
For 2020, we expect GNS expenses, excluding corporate depreciation to be approximately $775 million, which has 50 million lower than our prior guidance.
And we expect the Rins expense for the year to be between 400 and $500 million.
Lastly, as discussed on our last earnings call due to the impact of beneficial tax provisions in the cares act as well as the COVID-19 pandemic and its 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 to questions. We again respectfully request that callers adhere to our protocol of limiting each turn into Q and eight to 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 ask their questions.
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Our first question comes from the line of Phil Gresh with Jpmorgan. Please proceed with your question.
Yes, hi, good morning, everyone.
Just wanted to start off by asking a bigger picture question around how Valero thinks about capacity management.
Obviously, recognizing Blair I was at the low end of that cost curve.
The guidance here for Fourq, you and the results of past few quarters, you've had utilization in the low.
In the low eightys.
We're up to date so.
Just curious how philosophically you think about managing capacity, whether it's from a temporary perspective or from a permanent perspective, just what are the does the decision point to think about or is it more just.
Managing say secondary units.
Given the situation and diesel is more challenging and gasoline are yes, just any thoughts you'd have would be helpful. Thank you.
I was looking more build to plan I'll start by answering it was on a near term label air looks of where you've been running our system is trying to optimize that a lower utilization in measure that we have.
Boom, the very selective on the crudes, we run them, making sure we have the molecule rewalk.
Certainly the emits a challenging time to do that you've got to be very careful we've seen our ability to flex our refinery yields quite a bit you can do a lot of that when you are at lower utilization, we've seen those move gasoline yields roughly 17% and distillate yield up and down 10%, which is little different than when you're full while the near term you know you to sort of try.
China constantly optimize our operations did obviously did too.
Cash flow year loss.
Longer term sort of spoken about this in earlier earlier calls when when a company or Valero looks at an asset.
From a deciding whether we were rather not it's largely driven by a change in trade flow, which need what I mean by that is either a loss of crude advantage or something changes products that fundamentally changes, it's sort of I would say, it's gross margin Competiveness and here is the and combined with obviously the big regulatory.
Sorry.
Spend or Capex those are really the things that in terms of what drives I think companies and companies like up another companies consider refinery closure and when so when you think about that criteria, where it where do you see that you see that in the US is on the West coast and East coast, you've seen companies make those decisions and certainly we've always felt like Europe.
About where Europe. They have a they are bringing all their oil crude oil in there kind of a lot of their products have to export and that's a tough situation. If you don't have a structural advantage on opex.
And so thats where.
That's where my answer on them.
Okay, Great that's helpful.
The second question would just be around the third quarter results in solids, obviously in the book.
In the prepared remarks, Joe you talked about.
Tighter crude differentials.
As a factor that drove the sequential capture rate.
Declines, particularly in the Gulf Coast and mid Con.
But im just curious are there any other say onetime factors in the quarter and picking perhaps multiple hurricanes in the Gulf coast as one that.
That might have led to.
A more challenging performance versus what you would maybe and ordinarily thought of.
Good question, Phil Lane I'll take a crack at this and then Gary can follow on yeah. So you're correct our port Arthur refinery, we had to close for her.
And and.
And our ability to really come back up was impeded by the utility provider got really hit hard.
As a regional or utility provider and they had a difficult time, providing power. They did a great job recovering, but ultimately that followed our ability to bring the refinery back up. So we had some volume during what we would characterize as volume variance look for refinery.
Yes, the only thing I'll add is you know, we pride ourselves to say in the us Gulf Coast system on our ability to optimizing drilling will outline in a lot of these disadvantaged.
His guidance feedstocks and those opportunities really use words, there in the third quarter. It has certainly impacted our Gulf coast operations.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Manav Gupta with Credit Suisse. Please proceed with your question.
Tom.
Joel India in your prepared remarks, you had indicated that the renewable decent margin for the quarter was about two cents.
And and in the last quarter of this number was 222. So there was almost a 50 cents increase quarter over quarter and when I look at the newly decent margin indicate that you provide MTV, which is a handful that was indicating a one cents improvement if you could help Allison I sound a little actual how that one cents an indicator.
Margin actually completed global or 50 cents in actually capture for the renewable diesel business segment.
Good morning lift.
Clifton will let mark take a crack at that so and they the indicator margin as you know as you said is the gross margin, but as a proxy for feedstock we use of soybean oil prices you know, we're obviously not paying soybean oil price for feedstocks for our waste feedstocks, so that fluctuates quite a bit manav. So thats. The biggest reason is the actual feedstock.
Versus the soybean oil.
Okay, and then a quick follow up is.
I'm sure you've already secured the feedstock so the franchise expansion, but again there are a number of announcements out there. So are you in already in the process of securing more feedstock for full time, Tyler if you could help us out Dan a little.
Well, Anthony I think fee back up there is a lot of announcements out there out there and time will tell you know if you look back historically, there's always been a lot of announcements and the announcements came in the projects never came I will it be different this time it might be somewhat different but you know, we're just confident in our ability to source waste fee.
Stop going forward ways feedstock supplies is tied to global GDP growth and our partnership with Darling gives us the benefits of vertical vertically integrated access to low cost low carbon intensity feedstocks.
We also get the benefit of darlings experience in the global feedstock markets. Darling also helps us procure feedstocks from other people. So we just feel like we have a unique position here and thats going to allow us to maintain these superior margins versus the competition.
Thank you for taking my questions.
Hello.
Thank you. Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.
Good morning, I guess, a follow up question on Dec renewable diesel fund and clearly in the energy transition is a big pool on along with PNC investing how could you see. The addition disclosure is consistent with the class B framework and can you talk about how you view your renewable diesel condition on as far.
And defensibility of your projection for turnkey how many of these projects that happened recently announced are you factoring in as well that could come to fruition and also on on the Lcs that prices as well do you see any mix there.
Sure I'll take a stab at that this Martin.
Obviously, we keep track of all the announced projects. We also keep track of all the new policies that are coming in and what we expect to come and you know it.
It's cloudy I mean, it does nothing but cloud in the farther you go out the Cloudier gives you know you're making projections here, but if you just again step back in and look at where we're at a lot of these projects weren't aren't going to get bill.
That's just just a fact and you've got more policies, commenting right now you've got California, you've got Red two in Europe. The renewable energy Directive and then you've got British Columbia, and Ontario, the major markets oil.
Well in the future Oregons ramping up you're going to have a nationwide clean fuel standard in Canada, Sweden, Norway, Finland, or being more aggressive not huge demand there, but a huge percentage of renewable diesel and.
Got the state of Washington that keeps moving east.
These steps forward few steps back and you've got Midwest States, and Colorado announcing policies too and then the biggest one though is the New York, which.
The preliminary information they put out has a lot of renewable diesel in the plan. So we really feel good about the demand.
And then if you look at renewable diesel just a molecule right. It's available and so the drop in fuel is low carbon intensity theres no blend wall. So you.
So you have to think too and if you take California, they've hit the brakes, a few times when feeds when low carbon wasn't available rising slowed down the program. If it is available.
I would expect these regulators to hit the accelerator. So you know at the end of the day.
All that being said is there an advantage to being a first mover, yes, I would think so and were the first mover in the United States. So we feel really good about our position and we feel really good about what we've laid out to do.
Understood and just related to that.
Your statement about and the other no carbon growth projects under development can you give us a flavor of what kind of projects and these could pertain to you are you talking that additional investment in biofuels hydrogen related and color that you can share there.
Evans of land. So what we're really we're looking at right now its carbon sequestration project largely done and really trying to tie those two markets.
Martin was talking about this is where we think that we can maybe we can make investments and lower our CIO.
Of of fuels and make them more competitive for these markets.
Thank you.
Thank you. Our next question comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Hey, good morning, everyone.
Joe you made it pretty clear right from the remarks, and the press release and your remarks on the call that Theres no change to the capital framework.
Or the marketing I think you said in your prepared even if this covered weakness goes on for longer than expected can you just put a little more color around that.
If we see four more quarters of you know less than minus $1.80 asset do you still see everything is being on change or what point you have to reevaluate how you think about thanks.
Well, Brad that's a good question, let me give let Jason give you some insights here and then maybe I'll follow on.
Yeah. This is Jason we basically fill we're a long way from rethinking the dividend at the end of September. We all saw we had little over $4 billion in cash in about 5.7 billion of liquidity available under our committed facilities. We saw positive signs in the third quarter demand improved export volumes picked up so we think things are headed in the right direction. It.
Just a question of how fast the course of vaccine would really accelerate things along but looking bigger picture. This with this pandemic is an isolated event and were very reluctant to revise our long term capital allocation framework that served us well for so many years with our cash.
With our cash and liquidity position and the way things appear to be headed right. Now. This time, we just don't think adjusted the dividend something a step we're going to need to take.
Yeah, Let me just add to this I mean, there has been a lot of questions out there regarding the dividend and I've been in this job a little over six years now and we came out with the capital allocation framework and our approach rewarding shareholders at that at that time, we have done nothing every step of the way, but walk us.
Paul and we've been very clear in our communications and we've demonstrated our commitment to our owners and and we're going to continue to do that.
You know I think one needs to decide when they're trying to determine who they are going to listen to and who really understands what's going on there is going to be a management team that has demonstrated their commitment to their shareholders for six years or is somebody who is taking a puzzle.
Taking a position from a basis, a very little knowledge.
And trying to.
Great opportunities for.
Movement in the equity that certainly affects our long term shareholders. So anyway I would if I were you I would encourage everybody to listen to us and and listen to our messaging and I think we've been pretty clear about it at this time and I think Jasons answer was exactly right.
Okay. Thanks for that and then maybe for liner Gary just on the West Coast Ami.
Obviously as part of the renewable diesel discussion we've seen a couple of closure is out there I know historically, you've thought about that market is sort of being an option value market for Valero you think on the other side of all this.
All this covance stuff that is potentially a stronger market the last like option value or sort of how do you see that playing out.
Oh It was line I would say, we're always going to manage it in the buyer being very careful what we set out there, but we certainly.
We believe ultimately that code will pass through on gasoline and diesel demand will recover.
And you've changed the balances out there so in the near term, it's an improved market for a while and for TG equally we think.
We don't look at it like around oil, our California coast were disappointing well on them.
Take advantage of was weak in the near term looks like a pretty good opportunity.
Okay. Thank you.
Thank you. Our next question comes from Prashant Rao with Citigroup. Please proceed with your question.
Hi, good morning, Thanks for taking the question.
My first one is on the balance sheet, Jason I wanted to ask a couple of follow ups here.
Given the inventory adjustments the LIFO liquidation.
The overtime to liquidity management you've done.
I wanted to focus on balance sheet cash and cash equivalents you need to keep on hand for working cap in the current environment is that lower now going forward I know that we used to think about it is sort of just slightly sub 2 billion dollar.
Bogey for for balance sheet cash but.
Our the need slightly lower does that give you a little room under the color as we think about managing through the next couple of quarters into the recovery.
We still target to be in that range. So.
So I think thats still a good assumption yeah.
Yeah, clearly I think as we go forward I mean, one of the things that we did is took advantage of the opportunity in the market today to reassess it and is laying spoke about earlier.
Watching has changed and so the working capital the inventory volumes essentially that we need are different than they were in the past and so you know we we took the.
No impact this year, but we run our business too.
We try to target proper operating levels for all of our inventories and that's what guidance. This is not so much that Ajay we hate to take a LIFO impact or anything like that is more what is the proper operating level for our inventories and we adjust to that.
So you know we've seen some benefit from the cash side.
Okay. Thank you.
All right.
No you're good go ahead.
All right sorry little bit static on my end here Oh, I don't know the question on sort of the macro.
Pacific on products on jet fuel.
You know, we're sort of trying to get our arms around what would happen on us with a slower chat demand recovery, what does that look like for a sort of refining margins and how does the system.
To cope with that.
It takes you a few more years to get back, let's say in a bear case scenario to normal jet fuel demand can you maybe help us with some color on on what that means for how you run your operations, where where you're sort of comfortable with jet fuel recovery.
Recovering to and maybe staying lower for longer is it 70% of typical demand or 80% of typical demand at what level. It is really not that much of a headwind sort of little bit of color on how to think about that and where we can think about maybe that's stopping pressuring.
Distillate inventories not just in your system, but but but overall globally.
Yeah. So overall guidance you can see we had full flexibility to pretty much not yield any yet.
Right and all of those molecules in the U.S.D. and way really guidance is overall impact on our refinery utilization. So you know the advantage as you know.
Demand improving is that we are all those hospitals out and rationalization, along but I think overall, we've been very surprised and rate recovery in gas markets second quarter to third quarter, we saw 57% increase and so.
So far in the fourth quarter.
In airline Dave.
8% increase in passenger headcount, which is encouraging.
Also goes along with that I would say our nominations from the airlines. This reserving are also up the other.
The other thing is our diseases at jet is now trading at a rate adjusted guarantee to you LSD I think thats. The thing that you would like to see in the market is gen trading around that range.
Adjusted paired he's a jewel SD, which allows us to hold those will all jewels out of the diesel tools and you'll start to see that result, and high refinery utilization.
All right. Thanks, very much for the time I'll turn it over.
Okay fair for so.
Thank you. Our next question comes from Doug Leggate with Bank of America. Please proceed with your question.
Hi, Thanks, Good morning, everyone. Good morning, Joe.
Florida.
Well, let me just say Joe first of all I for one that I think a lot of people appreciate you being on.
Particulate in direct as you've been about the dividend question, because there's too much or responsible investment.
Alice is out there and I think you're right people need to listen to you guys. So I appreciate you making that statement with.
With that I go to two quick questions first one.
First one is on the debt Poland's can you just talk about you've added some debt obviously as last quarter, you position with plenty of liquidity, but what do you see as the debt told her two boys are creating.
Fine it seems.
If you needed to what saw what do you think about the balance sheet here.
Yes, I mean, we you're right the bonds are trading well, we've got a lot of cash given the steps. We've taken we still have our $5.7 billion of untapped liquidity, which we could rely on is if we needed to we don't expect to need any more liquidity and I'm sure. We could there are other things we could do if we needed to.
We feel like we're in a pretty good spot.
Doug look the business, we Jason mentioned earlier I think that you know you finance the business when it's attractive to do that and there's no sense of adding you know any degree of risk to the operation and so you don't get this debt off I was very impressed with the rates. We got the demand is very high for the offerings.
We remain committed to the investment grade rating no question about it but we think theres reveal that we needed to do something else Theres room to do more we don't and don't anticipate that we're going to need to do more but we certainly believe we could if we needed to we do agree yeah. So.
Oh, sorry answers that question Doug.
Yes. It does thank you and my follow up is really more of a housekeeping issue maybe I missed some subtlety in prior calls I don't know about but in your last presentation, you still have the non discretionary spending at only running about 1.5 billion you again.
Your guidance today says culpability twice.
2021 on the sustaining capital is 60% of the US obviously, one point to is that just a low point and is it sustainable about level or has something changed that has reset your sustaining capital and I'll leave it there. Thanks.
Thanks.
The plane. So it you know it so that would say that from a lower side you know when we when we talk about our spend versus standing capital.
We were really talking about is over three or four year cycle. That's roughly the average that we feel like we need to spend we have heavy turnaround year than lighter turnaround here you got to remember in that $1.5 billion.
Our turnaround activity.
So that's really I'll leave it at that.
Right.
Alright, guys. Thanks, so much.
Thank you. Our next question comes from Paul Sankey with Sankey Research. Please proceed with your question.
Good morning, everyone.
Waterfall.
Yeah, Doug kind of hit on what I wanted to its own. So the question really being the extent to which Capex is flexible I think you on very well there.
Separately could you talk about just give us the latest update and I know, it's a difficult question on on the election and what are you.
What do you think of the top risks that you face from the potential.
The potential outcome, we abide and when what are the biggest concerns and uncertainty.
Do you think overblown concerns about a potential for example democratic sweep. Thank you.
Thanks.
This is rich Walton I'll take a stab at trying.
To answer this I mean I think.
You are right you know.
If you look if you look at this if you have a democratic win diary.
Directionally, they're going to they're probably going to want to look at higher taxes, and probably more regulation, but regardless of who wins you are coming out of a pandemic hearings so you've got.
You got a first priority, which is high unemployment rate you're going to need to stimulate the economy. The focus is going to be on those kinds of things and it's really hard to layer on a whole bunch of policies that would smother an effort to recover so I think I think what you're going to see is a lot of campaign rhetoric right now and then you're going to see.
You're going to see a lot of that has to have to run into the wall of reality.
Once they get through the election. The other part of it is if you just look at Midas and his history you know he's not you know one of these real ideologically driven individuals you know he said along.
History of be supportive of manufacturing and supportive of a of union jobs in those facilities and so spoken positively also about the removal industries. So we because you'll be supportive in that area as well so we.
It's never it's never as bad as they say is going to be and it's never as good as they say is going to be and so I think there's a lot of is.
Situtions on structural reasons why these these changes will or will not be as to county to some people.
And so we feel pretty good we think there's going to be demand recovery here as we go through the economy and we don't think that the administration, who do you think thats going to really materially altered.
Yeah. The one thing I think that we see fall is that there's going to be some kind of stimulus package. Following the election, it doesn't matter, which targets flex is rich referred to you they're going to have to get the economy roll yeah. Yeah. So I would say it is rolling along but theres. Our view is there's going to be some kind of stimulus package.
Any type of stimulus package is going to trigger greater demand for products, we produce and so you know were.
All over watching it carefully and we'll we're well positioned in Oregon as a company to deal with whatever comes I think were not as pessimistic as many are about the potential outcome for a change of administration.
Great, Thanks, and I like the wall of reality concept. Thank you follow up so [laughter] Thats, where we try to live all right along that law. So.
Did the follow up is you know there's a lot of talk about further to stimulus about bailout for airlines and stuff can you just remind us how to what extent you've you've been helped out by federal government programs. If any thank you.
Well I'm trying to think.
Yeah, I mean, I think you know there's there's been a substantial effort here to prop up the airlines and provide them with the protections and we think any of the the bills that are coming through you know you're likely to see more support for the airline industry and obviously supporting them helps helps reinforce the demand for jet. So I think thats, where we would we would think we would benefit from that.
Yeah.
I think the primary.
So obviously you respond some places lerro is no receive much.
No no.
Yeah, I just wanted to clarify that thanks a lot.
Thanks, Paul.
Thank you. Our next question comes from the line of Roger read with Wells Fargo. Please proceed with your question.
Yeah, Hello, good morning.
For Roger.
A lot of the stuff has been hit I guess, maybe if we could go back and address a little bit.
The issue with.
You know the way the industry is losing money hand over fist if the current.
Barnett and you know that's likely to continue at least a little bit longer what do.
What do you see even if you don't want to name any particular company a particular unit that would be at risk I know you talked about the regions, but wondering the kind of things that we should pay attention to you from the outside that would indicate some someone to make the decision to shut a unit if not absolutely permanently at least.
For the foreseeable future I mean, everybody is losing cash what is it.
Crude supply changes that had demand concern is it I think.
The high high maintenance costs in the in the very near term been cited previous times, just anything else I suppose that questions for you lane, but whoever wants to jump in there.
You know after the after the preface of losing money hand over fist very Argo runway [laughter].
[laughter] [laughter] sterling that for us.
No other than I kind of spoke earlier about the chain trade flow and when what I really mean by that is you can really see Doug.
Maybe probably demand is falling and they don't have a crude advantage, but obviously a part of it I think and I talked about regulatory has been the other spend that can have some on having a large turnaround you know again I don't know if baby it probably is like an FCC.
Or base turnaround, where you have you yaki and those were building a very large.
And.
And that well that that might be of companies that maybe have a stretched balance sheet or are struggling and you've got to layer on these other issues based on their location that Mike.
That might factor into some of the companies are thinking about whether they are they're just sort of shut part of refinery down or maybe consider.
Donald.
Yeah, well certainly going to be a sort of an interesting will continue to be interesting.
I guess one last question since so much of it has been on.
On the negative from a lot of stress in the system a lot of questions about.
Questions about longer term viability of fuel demand.
But if you.
If you were believing in the long term success of refining our there or would you expect any interesting opportunities to come along.
Particularly in the areas that you already operate in where you can really get some synergies built down there so kind of the M&A wish list question so to speak.
Yeah, Let me let me just start and then we'll see what rich wants to add anything to this but but certainly we do believe in the long term viability of refinery I mean, it is totally impractical to think that we live in a world or certainly I would guess my lifetime.
Which I hope is more than a couple of years are losing money hand over fist [laughter] you know in my lifetime, where we're going to be able to displace a few.
Fuels motor fuels liquid fuels that are produced from fossil fuels I mean, it is just it is part of what is necessary to make the world function that we live in and so anyway. We are believers in the long term viability of refining a cleaner fuels will be a part of it we're obviously, making investors to take or that but.
We do believe that our refining business is going to continue to be strong and successful going forward. So rich anything on the M&A front now there's really nothing to say other than you know, it's hard to justify any kind of an acquisition.
Given that we're preserving cash and with that you know a key live good organic projects that you know we kind of push.
Push backs out so.
No we're not buying back shares so in this environment, it's really difficult.
See any kind of M&A activity.
Oh.
Yes, that's a very good point.
Alright, thank you.
But [laughter].
Thank you. Our next question comes from Paul Cheng with Scotia Bank. Please proceed with your question.
Hi, Thank you good morning, guys Oh are you.
Okay. Good thank you.
Two questions one, yes, Jayson I think that's where to make trick fall when one maybe I maybe longer term.
On for Jason on have you. We see then the cash tax we fund a given your loss and if you are what is your expectation that what percentage of that tax loss, we caught the tax Nols in the next 12 to 18 months that what that sand he would be equal to what we see as cash.
Tax refunds.
A second.
Should I also have you guys. My second question or should I wait until Jason on so Thats best.
[laughter] I'll do my are meeting the question real quick is tough to hear you.
Okay. The first question, yes on that cash taxes will be fine.
You guys, we see thing I need given the tax law and you have tax loss carryforward Falwell, maybe back into 2015, when you are making money and yet you are we seeing cash tax refund from the government.
Oh I thought the next 12 months.
Let's assume yeah, U.S. deals we pulping Lola.
What percentage of that.
And that's that you, we actually we see that that cash tax refund.
Okay. So the first part of it is ahead of Noel Ryan what's the value of the well to US next year they'll get it yeah, Yeah, we expect to get it in the second quarter.
We expect to receive cash related to the revised guidance.
Hi, Jason you said always that the second quarter for the previous year.
Yes, Oh, yes, so I'll tell you another west that the 2021, yet you have a malls are those cash tax refund we received in 2022 and the idea on that.
But then I thought about this autumn or what that is say advantage.
No it to be clear on this this is mark the the tax loss that we're incurring this year, we received the tax refund in April of next year. So.
So that has nothing to do with what our results might be in 2021.
Well I understand I understand that so I'm, just saying that we you have you all.
And you also yeah, we pull up all that tax and that but let's say for this yeah argument say, yes, a $300 million, it's Dan Hi, $300 million you expenses, we say that cash or that is only a portion of that.
Well I'm not sure I really totally understand your question, but if you if you look at the effect.
Effective tax rate that we're running that would probably give you a good idea of what the refund would be next year.
Oh, Okay. So yes, that's all.
Okay. Yeah, I guess my second question is that Joanne and name if we looked at the direct it to you and mom and you up and you can kind of fund that in both every at that that got them and just trying to avoid these that the Cowen <unk> co in all saying that they were banned the sale up there.
Hydrocarbon what that thing to gasoline or diesel.
Hydrocarbon they used vehicle.
By 2035, or so how does that impact your outlook on your game plan fought their facilities in those areas.
And yet also that aren't now along that way some not pick a customs has been talking about and the key transition fan.
Do you think that that is something that will need to have a pain.
Okay. So the first part first you want to go yeah I'll take it all in one so as I alluded to earlier.
Hello on regulatory environment can drive some how are you thinking about asset.
Our.
Today I'll preface it but.
Governments intentions and plans and targets are we live in the aspiration of world tendency to but in what markets that are trying to do that or regulators that are trying to do that.
Okay, and then seek to put a goal out there, but the you know the feasibility the goal has a tendency to push the goal out so I don't necessarily think that either California or did you say or order or you're going to have zero hopefully dual gasoline transportation.
For <unk> now with that said there is there.
They are trying to do and so ultimately I think that.
I said earlier, what are we doing in Wescos, one broker, we're being very very careful and the capex that we.
How we run and we're very careful in trying to manage the cost of those refineries, whether it's through our routine thoughtfully are around.
We're very careful.
You know Paul the question of you know the future positioning the company strategically for the future. We continue to work on that and obviously I think we've been a leader on several fronts. We were early to get into the ethanol business now we're looking at ways to lower our footprint of the ethanol that we produce and.
Marcus out into the market seeking you know and rewarding work hard jewels and renewable diesel business is another example of that we will continue to evolve the portfolio based on what the market is calling for and using the strong refining base that we've got as a basis for the cash flow to do this kind of trend.
Uh huh.
And we I think we put out our start in our documents now what our targets are for carbon reductions over that which we now have 2025 was R&D projects are already approved by the board. So we're clearly working in this direction. We don't have already buried in the sand on that for us by any stretch and and.
Well positioned Blair to be very successful for a very long time.
Thank you.
You bet.
Thank you. Our next question comes from the line of Ryan Todd with tendons and her team. Please proceed with your question.
Hi, Thanks, Good morning, guys, maybe Oh.
A follow up on some of the conversation from earlier on the renewable diesel side, you talked about some of the advantages obviously that the Darling partnership I would love to be dockside.
Can you say if you think about your your your expansion into the one coming in 2021 the possible. One for 2024 can you talk a little bit more about how you see those as being positioned on things like how do you compare you know transport costs in terms of transporting cars.
Product to California versus operational cost of of running a plant like that in a in Louisiana, Texas as opposed to California, how to though the relative economics do you see those in terms of competitive position.
Sure. This is Martin well you know we would just flat out say, we feel like the gift Gulf Coast is the best place to be.
Lower capital cost to Bill.
Lower operating costs and then also when you think about just the logistics.
Rail infrastructure getting into the Gulf coast from from where those you're going to source of feedstock says is great and then the logistics getting out you know, we don't know where the higher the highest price market is going to be in the future and it's going to move so whether we're going to California, Canada, Europe somewhere else, where just the Gulf.
Coast is just tough to be you know we've been at this seven years now and what we always try to do is to build the advantaged low opex and high flexibility plants and what we've learned is that you need to co locate with a large operating refinery it needs to be an operating refinery and by doing that it reduces costs.
Yes.
And again I can't stress the logistics enough that we just have a huge advantage, there and and we intend to keep that by not being in the Gulf Coast.
Great. Thanks, I appreciate that and then maybe just a follow up on the macro side on on refining I mean third quarter differentials were.
Large headwind I mean, even more so than it's been in the second quarter, and particularly the sweet and sour differentials have been tough I mean is there a scenario in which the outlook for suites, our debts or crude differentials on general improved meaningfully without.
Without a doubt.
Without a meaningful recovery in oil demand or absolute prices from here. How do you think about if you look forward over the next six to 12 months.
Yes. This is Gary certainly we saw very very narrow.
Good quality differentials third quarter some of that a lot of balancing the market came from OPEC production.
We got some OPEC production back in August.
Finally had the storms that affected the Gulf of Mexico. The sour production. So again some of that production online is health and so you've seen the ASCII differential.
A little bit wider so far.
Quarter Myos tended to follow it well, we believe you know what really needs to happen is as low oil demand continues to improve a greater percentage of that will be incrementally fill them from OPEC production sour barrels. So you'll have more of a gradual recovery in the following differentials we go along.
Okay. Thanks here.
That's right.
Thank you. Our next question comes from Jason Gammel My with Cowen. Please proceed with your question.
Hey, good morning have on John.
So I wanted to ask about the investment grade rating and kind of the metrics that are critical for determining that that the cap is over 30%. So I'm, assuming that's not what's really driving the conversation between Valero and the credit rating.
Companies, so when we're trying to assess.
Kind of your targets for the balance sheet. What are what are the right credit metrics stuff to kind of look at outside of that the cap.
Yeah. This is Jason I can talk a little bit about that as you know our investment grade ratings, a key top priority for us and and we've discussed this with the rating agencies, we have excellent liquidity, which is really one of their most key factors for them. They also right through the cycle for the long term right, they're not just like.
The next six months and 12 months and they clearly recognize our strengths longer term. If you read their report about our excellent facility to top operators. So I don't think theres any concerns on their part with us being investment grade.
And also the way we structured our debt you'll you'll notice at least our most recent offering a big one was biased towards the shorter term and we did that intentionally we had a lot of maturities and 23 24, 25, 27, and we have the ability to call the 575 million shots or your floaters as early as next fall, we did that to give us a flexible.
Bill do you do to de leverage more quickly if the circumstances are right and the ratios. We look at they look at your age agency looks at all the ratios that they have their own pet ones are ones that they they highlight the most or versions of debt to EBITDA in the retained cash flow and all those doesn't like the thing net cash flow but.
I mean net debt to cap, but they look at kind of the same thing. So we don't think were at all at risk for investment grade rating.
And we did get put on negative outlook. When we did this last offering.
Right and I could tell you a little bit at least about what the way I think they were thinking about that so each of them does their own analysis and has their own separate view, but really think that outlook change was mainly driven by the change in expectations for the timing of the recovery versus assumptions that were made when they last looked at us back in April the view in April was that this would be a one to two quarter.
Her event was pretty full learnings recovery in the fourth quarter. That's what we were looking at I think that was there for you to the day that was before the summer and spent the summer infection spikes hit and you know things clearly going to take more than getting back to absolute normal in the fourth quarter and we really think that view that there's going to be delayed recovery, along with our new debt, which will.
That will all lead to a longer period with elevated credit ratios, that's really what the negative outlook reflects they look out. The next 12 months and are you going to have a higher ratios than what they do.
Like an irregular baseline and the answer is yes, and that is true, but it doesn't affect their view of us as an investment grade credit longer term.
Great that's natural a clear so they're thinking about a recovery one when they're assessing the rating and 2020 Jewish.
Your earlier than that or if that's right I think I can't remember exactly they stated in their reports one of them second second half of next year and they admit that they think valeros thinks is going to happen more quickly and the other one I don't think it was clear, but I think the next 12 18 months generally.
Okay, Great and then I wanted to ask a follow up on lane common on carbon sequestration, which I think you mentioned as one of the low carbon investment opportunities. What's the economic case for that is that driven by.
The U.S. tax credits all part or is there something else driving the potential to generate returns from investing in that and then on that.
On that topic I'm surprised that.
Hydrogen wasn't mentioned just given that there is a lot of interest.
Globally and investing in the hydrogen value chain and refineries produce.
A lot of hydrogen all already so just wondering any any thoughts on that thanks.
Well this is lance I'll add to it I'm sure. Some other people might want to as well. So when we're looking at the project for our first built or are for when you think about them developing them.
Doesn't improve our carbon intensity as well you have a market that's because that's where we see the higher value for them and we can get the biggest bang for our Buck and then we then we for a stress test that with the U.S. tax credit and try to understand what that looks like as well so its power developing in looking at these types of projects.
And Oh my hydrogen you know, we're just we're starting with the other thing I'd again, we're looking at it in the context of some of our existing hydrogen plants.
And their technology, and we have the ability to obviously get the carbon dioxide out of upstream to lower their or intensity not so much trying to them.
Make hydrogen for fuel cells and there is a.
Yeah, there's a lot of things like that if you take a look at the end of the day. The economics, just don't work and like the 45 few tax credit is a key one what you're looking at sequestration going forward, where it says hey, it looks like you're going to earn a return on some of these projects into Oh, it's mark as Lisa.
Barring that lot of these projects just don't have economics.
So you know that's why it's interesting to talk about it it's like the topic Du jour, but is there are they diesel Florida. That's one of the things that we look at and we're certainly not fair to announce at least et cetera.
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Great. Thanks for the comments.
Thanks.
Thank you we have reached the end of our question and answer session. So I'd like to pass the floor back over to Mr. Butler for any additional closing comments.
Great. Thank you and thank you everyone for joining us appreciate everyone's questions. Unfortunately, we're out of time. So if you have follow up questions feel free to reach out to the IR. Thanks again.
Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation and you may disconnect. Your lines at this time.
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