Q4 2020 Valero Energy Corp Earnings Call

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Ladies and gentlemen, greetings and welcome to the Valero Energy fourth quarter 2020 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 call.

Is being recorded it is now my pleasure to introduce your host Homer Buhler, Vice President of Investor Relations. Thank you Sir you may begin.

Good morning, everyone and welcome to Valero Energy Corporation's fourth quarter 2020 earnings Conference call with me today are Joe Gorder, our chairman and CEO Lane Riggs, our president and CEO, Jason Fraser, 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.

You have not received the earnings release and would like a copy you can find one on our website at Investor Valero Dotcom.

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, Homer and good morning, everyone. The COVID-19 pandemic has had an extraordinary impact on families communities and businesses across the globe. The energy business was among those confronted by unprecedented demand contraction, which began in the first quarter of 2020 as Covid nine.

Teen cases accelerated globally, resulting in an increase in crude oil and product inventories to record high levels and response, we Lord our refinery utilization rates to more closely match product supply with demand and disciplined demick related restrictions were eased in some regions in mobility increased product.

Demand increased substantially steadily reducing crude oil and product inventories. We ended the year with U S crude oil and product inventories within the normal five year inventory fast.

Throughout the pandemic our team has been thorough and decisive in its operational and financial response, while maintaining focus on safety and reliability.

In fact, we set several operational records in 2020 recording our best every year on employee safety performance, achieving the milestone two years in a row and the best ever year for process safety and environmental performance and deploying our refining expertise to optimize our renewable diesel segment.

We set records for sales volumes and margin in 2020.

We also made significant progress on our international strategy to expand our products supply chain into higher growth markets with the start of waterborne product shipments to our new Veracruz terminal, making Blair for one of the largest fuel importers into Mexico.

On the financial side, we improved our liquidity by raising $4 billion of debt at attractive rates and we reduced our capital budget by over $500 million.

While keeping our high return projects moving forward in.

And in spite of all the challenges this past year, we continue to honor our commitment to our shareholders by maintaining the dividend and ending the year with $3 3 billion of cash and $9 $2 billion of total available liquidity.

Despite the pandemic and posed challenges in several hurricanes, we completed and continued to make progress on several strategic growth projects, including the St. Charles Alkylation unit, which was brought online in the fourth quarter on schedule and under budget.

Project further increases the competitiveness of the St. Charles refinery and is a testament to the talents and efforts of the refining organization.

Pembroke Cogent project and the Diamond pipeline expansion are on track to be completed in the third and fourth quarters of 2021, and the Port Arthur Coker project is expected to be completed in 2023.

The Diamond Green diesel expansion project at St Charles which we referred to as D. G. D. Two is designed to increase renewable diesel production capacity by 400 million gallons per year and is expected to be completed in the fourth quarter of 2021.

As a result of continuous process improvement and optimization the capacity of the existing St. Charles renewable diesel plant D. G. D. One has increased from 275 million gallons per year to 290 million gallons per year.

With the completion of D. G D to the total capacity at St. Charles is expected to be 690 million gallons per year.

In 2020, we laid out our comprehensive roadmap to reduce greenhouse gas emissions by 63% by 2025.

As part of this goal, we continue to reinvest capital into higher growth higher return low carbon renewable fuels projects.

For that and we're pleased to announce that the board has approved <unk> three a new 470 million gallons per year of renewable diesel plant at our Port Arthur Texas refinery.

We're moving forward with the project immediately and we now expect the new plant to be operational in the second half of 2023.

<unk> three has completed D. G. DS combined annual capacity is expected to be $1 2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha.

Looking ahead, we expect to see continued improvement in refining margins as COVID-19 vaccines are widely distributed in the coming months, allowing people and businesses to get back to normalcy.

We're already seeing encouraging signs with strong diesel demand and with U S. Total light product inventories now in the normal range. In addition, many uncompetitive refineries around the world announced shutdowns or conversions in 2020, and we expect further capacity rationalizations to be announced this year.

In closing.

<unk>, we remained steadfast in the execution of our strategy pursuing excellence in operations investing for earnings growth with lower volatility and honoring our commitment to stockholder returns.

We expect low carbon fuel policies to continue to expand globally and drive demand for renewable fuels and with that view, we're leveraging our global liquid fuels platform and expertise that comes with being the largest renewable diesel producer in North America to steadily expand our competitive advantage and economic low car.

<unk> projects for a higher return on invested capital.

So with that Homer I'll hand, the call back to you.

Thanks, Joe.

For the fourth quarter of 2020, we incurred a net loss attributable to Valero stockholders of $359 million or <unk> 88 per share compared to net income of $1 1 billion or $2 58 per share for the fourth quarter of 2019.

Fourth quarter 2020, adjusted net loss attributable to Valero stockholders for $429 million per $1 six per share compared to adjusted net income of $873 million or $2 13 per share for the fourth quarter of 2019.

For 2020, the net loss attributable to Valero stockholders was $1 4 billion or $3 50 per share compared to net income of $2 4 billion or $5 84 per share in 2019.

For 2020, adjusted net loss attributable to Valero stockholders was $1 3 billion or $3 12 per share compared to adjusted net income of $2 4 billion or $5 70 per share in 2019.

Fourth quarter and full year 2019, and 2020 adjusted results exclude items reflected in the financial tables that accompany the earnings release.

For reconciliations of actual to adjusted amounts please refer to those financial tables.

The refining segment reported an operating loss of $377 million in the fourth quarter of 2020 compared to operating income of $1 4 billion in the fourth quarter of 2019.

Excluding the LIFO liquidation adjustment and other operating expenses the fourth quarter 2020, adjusted operating loss for the refining segment was $476 million.

Fourth 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 6 million barrels per day, which was lower than the fourth quarter of 2019 due to lower product demand <unk>.

Throughput capacity utilization was 81% in the fourth quarter of 2020.

Refining cash operating expenses of $4 40 per barrel were inline with guidance for 47 per barrel higher than the fourth quarter of 2019, primarily due to the effect of lower throughput rates.

Operating income for the renewable diesel segment was $127 million for the fourth quarter of 2020 compared to $541 million in the fourth quarter of 2019.

After adjusting for the retroactive blenders tax credit in 2019, adjusted renewable diesel operating income was $187 million in the fourth quarter of 2019.

Renewable diesel sales volumes averaged 618000 gallons per day in the fourth quarter of 2020, a decrease of 226000 gallons per day versus the fourth quarter of 2019 due to the effect of planned maintenance.

The segment set annual records for sales volumes of 787000 gallons per day and margin of $2.66 per gallon.

Operating income for the ethanol segment was $15 million in the fourth quarter of 2020 compared to $36 million in the fourth quarter of 2019.

Ethanol production volumes averaged $4 1 million gallons per day in the fourth quarter of 2020, which was 197000 gallons per day lower than the fourth quarter of 2019.

The decrease in operating income from the fourth quarter of 2019 was primarily due to lower margins, resulting from higher corn prices and lower ethanol prices.

For the fourth quarter of 2020, G&A expenses were $224 million and net interest expense was $153 million.

G&A expenses in 2020 of $756 million were $112 million lower than 2019.

Depreciation and amortization expense was $577 million and income tax benefit was $289 million in the fourth quarter of 2020.

The annual effective tax rate was 45% for 2020, which was primarily the result of the carry back of our U S. Federal tax net operating loss for 2015, when the statutory tax rate was 35%.

And we expect to receive a cash tax refund of approximately $1 billion in the second quarter of this year.

Net cash provided by operating activities was $96 million in the fourth quarter of 2020.

Excluding the unfavorable impact from the changes in working capital of $113 million and our joint venture partner's, 50% share of Diamond Green diesel net cash provided by operating activities. Excluding changes in <unk> working capital adjusted net cash provided by operating activities was $140 million.

And adjusted net cash provided by operating activities was $955 million for the full year.

With regard to investing activities, we made $622 million of total capital investments in the fourth quarter of 2020 of which $214 million was for sustaining the business, including costs for turnarounds catalysts and regulatory compliance and $408 million was for growing the business.

Excluding capital investments attributable to our partner's, 50% share of Diamond Green diesel and those related to other variable interest entities.

Capital investments attributable to Valero were $458 million in the fourth quarter of 2000 22 billion for the full year.

Moving to financing activities, we returned $400 million to our stockholders in the fourth quarter of 2020 through our dividend and $1 8 billion through dividends and buybacks in the year, resulting in a total 2020 payout ratio of 184% of adjusted net cash provided by operating activities.

And our board of directors just approved a regular quarterly dividend of <unk> 98 per share demonstrating our sound financial position and commitment to return cash to our investors.

With regard to our balance sheet at quarter end total debt and finance lease obligations for $14 7 billion in cash and cash equivalents were $3 3 billion the.

The debt to capitalization ratio net of cash and cash equivalents was 37%.

And at the end of December we had $5 9 billion of available liquidity excluding cash.

Turning to guidance, we expect capital investments attributable to Valero for 2021 to be approximately $2 billion, which includes expenditures for turnarounds catalysts and joint venture investments.

About 60% of our capital investments is allocated to sustaining the business and 40% to growth.

Almost half of our growth Capex in 2021 is allocated to expanding our renewable diesel business.

For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges.

Gulf Coast at one for nine to $1 five 4 million barrels per day.

Continent at 410 to 430000 barrels per day.

West Coast at 170, 290000 barrels per day, and North Atlantic at 245 to 265000 barrels per day.

We expect refining cash operating expenses in the first quarter to be approximately $4 75 per barrel, which is impacted by lower throughput volumes due to planned maintenance activity.

With respect to the renewable diesel segment, we expect sales volumes to be 790000 gallons per day in 2021.

Operating expenses in 2021 should be <unk> 50 per gallon, which includes 15 cents per gallon for noncash costs, such as depreciation and amortization.

Our ethanol segment is expected to produce $3 7 million gallons per day in the first quarter operating expenses should average 39 per gallon, which includes <unk> <unk> per gallon for noncash costs, such as depreciation and amortization.

For the first quarter net interest expense should be about $155 million and total depreciation and amortization expense should be approximately $575 million.

For 2021, we expect G&A expenses, excluding corporate depreciation to be approximately $850 million.

And the annual effective tax rate should approximate the U S statutory rate.

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&A to two questions if.

If you have more than two questions. Please rejoin the queue as time permits and please respect this request to ensure other callers have time to ask their questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is from our question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your hand.

Set before pressing the star keys.

Our first question is coming from the line of Doug Harrison with Evercore ISI. Please proceed with your question.

Good morning, everybody.

Doug.

Regarding refining fundamentals, Joe you mentioned a minute ago that inventories are starting to shape up a little bit.

Five year levels.

From an absolute basis, but they look like there.

Going to the same range adjusted for demand for both gasoline and distillate, which is which is a good thing margins are near year ago levels in most U S markets and we're starting to see feedstock differentials widen too.

So my question is have you been surprised by the pace of the recovery that we've seen do you think there is reason to believe that it's sustainable and either way whats. Your overall view for the recovery and refined products market for 'twenty 'twenty one what's your what's your outlook at this point.

Hello, Doug that's a good question and we will let go.

<unk> latest speak to it in some detail, but I mean, we've been pleased with the pace of the recovery so far.

And frankly, I think youre going to see it accelerate as the vaccine rolls out more aggressively that's kind of an obvious statement, but I think sometimes we do take it for granted.

And really get the government.

Functioning appropriately on the distribution I think we're going to be in much better shape, perhaps quicker than we all realize.

We've got a member of our board of directors, who thinks that theyre, such pent up demand certainly in the east coast, where he is in other parts of the country.

When we do get the vaccine rolled out and we get a herd immunity.

In place Youre going to see this look a little bit like the roaring twenties.

Point of view and I would tend to agree with that so with that I will let Gary and lane provide a little more color specifically regarding the.

For inventories and demand.

Yes. This is Gary certainly getting total light product inventory, we built a significant surplus, especially early on in the pandemic. So seeing net surplus essentially gone in getting back into the five year average range is very encouraging as you know as demand starts to pick up it will allow margins to recover much quicker.

Encouraging another encouraging sign is the fact, despite the fact that we've had a surge in COVID-19 cases gasoline demand for the dome is still.

A little bit above 90% year over year, where it was last year at this time, our wholesale volumes are showing to be pretty close to that and so the combination of reasonable gasoline demand and relatively low gasoline inventories has caused the market to be a little stronger.

I think one of the key things there is the stronger product market has really flattened the curve on gasoline and so it's taking away a lot of that incentive to store summer grade gasoline and that's certainly sets up for a stronger driving season in terms of gasoline margins as Joe said I think we viewed it will see gradual.

<unk> second quarter, you'll start to see things pick up and then we expect things to be fairly normal by the third quarter with the exception that we do see that there could be a lot of pent up demand and people that are spending disposable income largely buying things that theyre ordering are going to spend their disposable income getting out and on an <unk>.

<unk> family vacations, which could cause a surge in gasoline demand.

On the diesel side.

As you kind of mentioned diesel demand is really hung in there pretty strong.

<unk> are showing over 98% year over year diesel demand.

Truly the seven day average in our system, where we were at 111% year over year, so actually showing diesel demand growth in our system I think some of that heating oil demand has been strong a little bit.

Older Winter. This this year starting to see some drilling activity pick up which of course helps diesel demand and then of course with people spending disposable income ordering things freight on road freight trucking and rail has been strong as well as we move throughout the year, we expect to see some incremental diesel demand coming from AG as you saw.

Start to plant crops, and then moving throughout the year. We also see that as jet demand begins to recover it will lower diesel yields and help bring supply and demand into balance, which will set diesel up nicely longer term.

Okay. Good point.

So that kind of covers it for me it sounds fairly encouraging.

Yes, Doug I mean look we are encouraged I mean, I think we're through the worst for this and we're looking forward to getting back to more normal lifestyles here and certainly a more normal business climate.

Let me let me just say one thing before you get off I understand that.

That youre going to be a repositioning this spring.

We've known each other for a very long time.

And I'd be remiss, if I just didn't say that without question your wisdom and insight in this sector is unsurpassed.

More importantly, the net Doug.

Good man and we're all better people for having had the opportunity to get to know you and to work with you over the years.

And I for one I'm going to Miss you greatly so.

I know, we're going to have a chance to visit here sometime in March but yeah.

On behalf of the whole Valero team I think we just want to wish you the best.

Tell you thanks for everything you've done for the industry over the years.

Well, Joe. Thank you too I mean, you guys have been capital management leaders, especially in this industry. You are stock reflects it overtime and you all have a good guys too and so <unk> been a really easy management team for me to support over the decades, and so I just want to thank you for your leadership and <unk>.

Really enjoyed our time together until you guys Pat yourselves on the back because you deserve the performance. It has been demonstrated in the stock market for sure. Thanks.

Thanks again Gerry.

Bless you Buddy.

Thank you. Our next question is coming from the line of Phil Gresh with J P. Morgan. Please proceed with your question.

Hey, good morning tough follow up.

Okay.

Yeah.

Hey failure is still a young guy Youll get your debt.

But it probably won't be for me.

Yeah.

Yes.

I guess I'll follow up on one part of Doug's question there just.

On the differential side, you talked a lot about the product margin.

Element differentials, obviously still pretty tight here, especially like on light heavy so how do you guys see that playing out for the rest of the year.

Yeah. Phil This is Gary I think we have seen very narrow crude quality differentials.

In order to get those widen out we need more OPEC barrels on the market. If you look at most consulting forecast theyre showing global oil demand growing to the point, where you'll need at least 3 million barrels a day of additional OPEC production online by the end of the year and so I think our view is probably the back half of the years, where youll see.

Quality differentials begin to widen out I think that's further supported by if you look at the high sulfur fuel oil forward curve.

We're a high sulfur fuel oil have been trading around 90% of Brent you look to the back half of the year and it gets more to 80% of Brent which is more indicative that we will see those quality differentials widen out again kind of second half of the year.

Got it okay.

And then second question just trying to think through the capital spending cadence Avi. Thanks for two years with with phase III of Diamond Green diesel.

Obviously, you talked about a $2 billion spending level for 2021 being able to hold.

Despite still.

Some spending.

For phase II. So as you look out to 'twenty, two and 'twenty. Three do you think you can do the phase III project within the $2 billion or so of capital budget as well I'm just trying to gauge the free cash flow potential as we see the refining margins recover in TGE to EBITDA come on.

Hey, Phil from lining so we did about $2 billion left direction, a little bit lift from that we maintain our pace on spending on.

On Diamond two in developing diamond three.

We believe that we can continue to do that.

If for whatever reason.

World the cash the cash is a little bit lower obviously, we want to get back from some other things at some point, but we can certainly maintain our spend on renewable diesel at our capital budget for the $2 billion level, yes, Phil just to just to I mean from a broader strategic perspective, this $200 billion to $2 billion number.

Our target going forward. Okay. I don't think you should expect that we're going to go out and spend $3 billion.

In a year so.

We've said that timing of capital spend isn't necessarily calendar year spending and so some years it might be less than $2 billion. As it was this year in some years, it's going to be a little bit more than 2 billion, but the target range for us remains a net two to $2 5 billion range and I think it will stay in this $2 billion range through 2000.

'twenty one yes.

Got it okay. Thanks, so much.

Thank you. Our next question comes from the line of Prashant Rao with Citi. Please proceed with your question.

Hi, Thanks for taking my question good morning, all.

For them.

Yes.

I had I just wanted to follow up on on the R&D market.

In its evolution.

Particularly.

Outside of BTC outside of before rents, which I expect for other people are going to ask about but I'm curious about the <unk> market in California, and some of the other provincial and regional opportunities that we've talked about.

I wanted to get your thoughts specifically in California.

It seems like there's a bottom.

Competing sources of capital.

Pandemic has progressed capital towards sort of emerging energy and while there are small now.

The possibility for a little bit more electrification more renewable.

Renewable gas so the other competing sources for that credit for more for diesel substitutes in California. I was just wondering given the supply coming online with port Arthur and your longer term plans. How do you see that playing out in California is it fair to say that by the time P. J D frees up online, but there might be a more meaningful opportunity outside.

For the California, CFS and how do you see the pace for that over the next few years. The other part of that also being do you expect that California could could reduce it could increase the emissions reduction target, which would just been moving goalposts and create a greater opportunity. So there's a lot of pieces moving there but.

The market has changed quite a bit since we were talking about this pre COVID-19. So I just wanted to get an update on how you see that with some of those moving parts playing out.

Yeah.

Sure Prashant. This is Martin on the on California, obviously, the market's been pretty stable as far as the carbon price for last few years.

And then the.

Renewable diesel is the largest carbon generator.

Step outside California, I'll ask answer that part first what we expect to happen in the next few years as a clean fuel standards.

In place in Canada by the end of 2022 that will bring incremental demand in 2023.

Also got legislation in New York State and Washington State for El CFS programs.

And we think those states will implement enel CFS over the next few years timing of that is hard or impossible to predict but we expect that's going to happen today.

Today, we sell to California, but we also sell for Canada and Europe.

So I mean youre right there is some.

Electricity penetration there is renewable natural gas is still renewable diesel is the largest carbon.

Credit generator, we don't expect that to change in the foreseeable future.

As far as the trucking.

So that's going to continue renewable diesel obviously is huge in that.

California, if you look at their projections are heading for in <unk>.

30 day, or internal projections or like a 40% blend rate for renewable diesel we honestly think it might even be higher than that so there's really there's no blend wall there's nothing for.

For stopped as well.

We are optimistic about demand in California, and more optimistic about demand in other parts of the globe.

Thanks, Martin and then just to follow up on that recently, we've been hearing from the headlines theres been some in the financial community who talk about.

I'm advocating for a need for a higher carbon price in order to incentivize.

The move to emissions reduction and obviously, California has had a higher per ton price in other parts of the developed world but.

Do you think that it's too early to say that theres. So maybe that gives you the $200 per ton.

Carbon price in California, a little bit more legs to be sustainable, but the rest of the world is going to come up or do you see sort of a meeting in the middle of how how do you see that evolving.

Given where the narrative and where the discussion is right now.

Yeah, I'd say first thing you have to be a little careful looking at the absolute price because it depends on whether its low carbon fuel standard or a carbon tax.

You get a lot different carbon prices.

And those different regimes.

But I think what California, they've obviously single narrow okay with $200.

They are okay with that escalated by the CPI each year.

As happened where that price started going down I would I would expect California to two.

Moving the goalposts and make it harder where we're looking at a corporate reduction of 20% by 2030 now but if.

You started having a carbon price go down a lot of credits I think they're gonna moving goalposts.

The objective right.

Okay makes sense. Thank you I appreciate the time.

Good day.

Thank you. Our next question comes from the line of Manav Gupta with Credit Suisse. Please proceed with your question.

Oh, Hey, guys in the energy industry. What can you generally see is projects getting delayed by six months 12 months.

Youre doing something unique DGB is talking up six months day 40 expectations the strength.

I understand from the perspective of engineering feedstock particular length of haul.

Are you able to achieve a startup before time in this case.

Well the honeymoon albums away. So we obviously are very very focused on this project and we did accelerate this if you were to look at our spend we spent more on actually budgeted to try to keep to try it for.

Executing that project to find every step we can optimize on an accelerated schedule.

And not do so by accelerating the cost for the project either so as you as you mentioned we are we have worked it really really hard because it is such a good project.

A big cash flow generator for us. So it's really we have expertise in terms of project execution, we understand and diamond III essentially duplicate of diamond too.

A few revisions here and there, but it's largely but we've been able to accelerate that project as well.

And because of our focus we put our best people on making sure that project moving along as fast as we can.

Okay.

Yeah.

The scope for El pen is.

Obviously when prices have moved up and paint all understand how the startup of D. J D.

And then following up P. GDP actually got you on all of the obligations, which would give us some idea what the RVO obligation is right now and then how much does it go once both the BTG pieces that online.

Alright, so we're looking for modest to say, a Martin or Gary I think you have to think about there.

You've got the obligation that you've got a lot of factors right now in RIN prices right now and probably more influenced by the sorry in the Supreme Court the EPS.

It's going to do and I don't know that its really so much about the fundamentals as uncertainty at this point.

It doesn't change our earnings.

Yes, that's right.

Yeah. So it doesn't change our renewable volume obligation at all and I agree with Martin you know the uncertainty around <unk> and yes, what will happen on the buying this administration is really what's causing the rins prices to surge.

Thank you for taking my questions.

You bet.

Thank you. Our next question comes from Theresa Chen with Barclays. Please proceed with your question.

Good morning wanted to follow up on the renewable diesel side. So in terms of feedstocks and a quarter, where feedstock costs seem to have with me sharply and with planned maintenance at the facility in your capture was still very high.

Can you talk about how you were able to achieve that and is that sustainable if there are any.

One time factors that might've benefited the quarter and going forward as you think over the long term about feedstock costs, just given the onslaught of projects that are under development and achievement I was pointing out not all of them will meet the timeframe for capacity as originally planned absolute supply.

When a booking from will likely increase and that increase in competition for feedstocks and as such do you see a shift in the type of pizza versus what you're currently using.

Okay sure soybean oil was up 17% in the fourth quarter versus third quarter, but as you noted our EBITDA per gallon margins were flat quarter on quarter.

If you look back in the past three years net.

On renewable diesel we've experienced wide swings in feedstock costs and prices D. For rens, you OSB prices, obviously, a huge swing. There. However, our annual margins have been very consistent ranging from $2 19 per gallon in 2018 is a low to a high of $2 37 per gallon in 2020.

Yes.

So you can see that the the earnings power is there and consistent regardless and thats because of the market works to compensate.

Fat prices go up ran goes.

So it all kind of works in concert there.

So long term in the next foreseeable future, let's say, we're not concerned with sourcing feedstocks. We believe our margin industry is a good indicator of what to expect over time.

Any one quarter can be plus or minus but over time Joe.

Good about this margin indicator.

Then if you look to sort of what happened with the soybean price for soybean price is driven by global supply and demand in veg oils.

Palm oil prices were first to move up because production growth slowed in Indonesia, and Malaysia due to the drought and COVID-19 lack of labor to harvest.

Now you've got soybean production is pretty tight this year.

Worry about a lower crop down in Brazil, soybean oil production is going to be impacted you've got the kind of the whole lag commodity index moving up so that's moving up soybean oil too.

And then finally veg oil pricing was low as compared to the USD 2018, and 19, so we expected some upward movement.

Relative to USD.

In response to this more vegetable oil will be produced in response to higher prices and we don't see a long term sustainable shift and vegetable oil pricing relative to loss for these.

Thank you.

And on the broader topic of <unk>.

Energy transition thanks Bye.

By the New administration took office and we had a series of very aggressive climate related policy announcements can you talk about how this plays out how you think this plays out for the industry in general from them.

Prospective debt cafe standards admissions penetration renewable fuels et cetera, and particularly what you think the next step will be.

Yes, sure and we'll tag team. This I mean rich wallet can cover kind of the policy side of this but I mean, you know.

We have seen.

And we've seen it for some time now the headlines are all focused on Evs right and everyone takes that into consideration when they're looking at the long term outlook for oil demand going forward and we just need to continue to look at the facts and keep it in perspective.

EV sales last year made up slightly less than 2% of domestic car sales and just around 4% globally and.

I think if you look forward to developing countries. Their focus is a whole lot less on climate change and evs and it isn't feeding their people and providing safe and affordable housing for them. So.

There's a lot going on politically but the reality is that cleaner fuels are going to be part of the future Evs will be part of the future, but it's far from.

The internal combustion engine is far from being extinct and so.

That's one thing that we have to all keep in mind I think as we go forward, we're still selling a tremendous amount of internal combustion engines that are more efficient in our industry has done a fine job of.

Working projects and and adjust.

Adjusting operations to reduce the carbon intensity of the products that we're producing and frankly Valero as you know is doing a lot of that with the renewable diesel projects that we've undertaken.

Also doing it.

With carbon sequestration around our ethanol business, we're looking at hydrogen and so on so anyway, there's a lot going on here and I think we'll continue to see overall the carbon intensity of traditional fuels liquid fuels go down.

And honestly you can tell from our IR deck that already we're very competitive from a renewable diesel perspective, with an EV and I think youll see that continue to increase so I'll stop there rich on the policy side.

Yes.

Joe's right I mean, we of course, you see a lot of headlines on it I mean yesterday they came out with an announcement on.

Uh huh.

Moving the federal fleet to Evs, but we point out that very similar to the order that the executive order Obama issued in 2015 mandating that half the fleet become Evs and we didn't we didn't see a lot of movement in the federal fleet to Evs under that order in and it's a lot more difficult than.

Than you think to do that the other thing that I would really like to emphasize is.

Our renewable diesel can drop in today.

On a lifecycle basis, outperforms and equivalent diesel electric truck.

So.

We can we can help the administration addresses climate issue you know straight away is order did call for clean and zero emission vehicles and Ars are certainly clean the other thing I'd point out even in that order.

Read the fine print it requires that it would be made in America and meet the federal procurement standards.

I'm not sure there's a lot of electric vehicles that can meet those requirements, but our renewable diesel is 100% of American made and it's ready to go now so we actually think that a lot of this will be in the end the economics are overwhelming for our products and.

And they are ready to go now so we think we can work with the administration. We think there is going to be demand and policy drivers for lower carbon fuels, but we think that's a good thing for us so.

Thank you.

Thank you. Our next question comes from the line of Doug Leggate with Bank of America. Please proceed with your question.

Thanks, Good morning, everybody and the Joe Happy New year I think it's the first time you spoke and this year.

This is Doug.

Yes.

Well when I have dug in repositioning.

I was looking more for muscle, we're thinking someone had told me something but.

Maybe a little margin.

Hi, David.

Thank you Doug.

We've passed our king gross along to Doug East West Marine is the oldest almost in the sector. So I'm not sure I'm grateful for that but some of it.

Reserves.

So guys two questions. Please I actually just wanted to start with a quick housekeeping question <unk> mentioned, the $1 billion cash tax refund.

Cereal, obviously I just wanted to double check is not a one off or any other retrospective.

Cash tax losses, you can bring forward.

No. This is mark smelter costs that is.

One off item, obviously, it relates to our 2020 tax Nols, that's being carried back to 2015 and Thats the only significant item.

Okay I just wanted to double check. Thank you my follow up Joe is probably a little bit more I guess, it's a more high level.

You've talked a lot about evs I love that slide in your leases back about the mess.

I'm, just curious with carbon sequestration on your ethanol business will do.

Does not sit.

On the potential carbon capture on the refining business is that something you're pursuing will pursue as a part of the discussion I'm just curious as to how you address what your next steps.

And what's already been some fairly significant moves to reduce the carbon footprint of your fields.

What should we expect from Valero next in that regard.

But for Doug This is lane.

Take a shot at that so the reason we choose some of these projects like the ethanol plants that hasnt been that day.

The cash that's coming off debt plan largely carbon dioxide.

Our current having to further treated before we find a way to sequester and so we're.

We're trying to understand that how that we're trying to understand the technology and not certainly all of the.

Policy and all the other for the regulatory regime theres going to be around carbon sequestration. So it's a good place for us to really start develop projects.

The other point that we can do this is with our blue and green hydrogen.

We're gaining project from that but also effect the carbon intensity of our transportation fuels some of which we've done smaller ones, but we are certainly getting some larger ones that will make our transportation fuels.

Depending on what market, we can target them and we will obviously be a.

What the what the overall our competitiveness from a carbon intensity perspective that will help overall those are the things we're looking at.

But I think again, we are trying to hit from a carbon sequestration perspective, we're trying to hit the strength that we see that are lower carbon dioxide will net on net GAAP and maybe.

It's been.

It's something that's been from both of that have a lot of other stuff and it basically nitrogen and some other things.

Alright, guys unless my two so be respectful to everyone else I'll see you all in March Thanks again.

Thanks, Doug.

Thank you. Our next question comes from Roger read with Wells Fargo. Please proceed with your question.

Yeah. Thanks, good morning.

Hi, Roger.

Yes.

I guess two questions one to follow up on your introductory comments, Joe and the second one is a follow up because some of the questions Teresa was asking about.

Renewable diesel feedstock. So the first one on the global capacity kind of expectation of future shutdowns just curious.

How you see that unfolding, maybe where you see that unfolding.

Any particular trigger points and then on the renewable diesel feedstock specific to your phase two in your phase III plans here middle rollout in 'twenty, one and 'twenty three or into 'twenty, one and then in 'twenty three how comfortable you are in terms of your line of sight to the necessary feedstocks.

In terms of the geographic Gulf Coast focus you had.

Okay, So which one of you guys want to talk about the first one the closures I guess that'll be me Hey, Roger Duane.

Talked about hey vote, we've talked about this a little bit on from our prior earnings calls we've.

We've seen about 3 million barrels a day of a refinery closures I think that we've been I don't know what I don't want to say pleasantly surprised and certainly surprised.

The acceleration of some of these closure interestingly a lot of it has occurred in the United States I think thats, a little bit of a surprise for us.

But we've kind of done I would say our share or at least.

It doesn't mean that you won't have further closure potentially in the Atlantic Basin.

On this side of the pond or maybe on the west coast, but certainly for.

For now in the United States from John I'll think about 800 900000 barrels a day.

In closing I think and when you look at trade flow, though where the closures.

For the closures going forward is primarily Europe.

Particularly southern Europe, Hasnt really have access to advantage crude they're more aggressive on with respect to their transition away from transportation, you'll fossil fuel, but I think thats, where youll see more and more that'll be where youll see more closures going forward.

Yes.

Mark you want to take the secondhand or on the day.

Feedstocks Roger.

Right now we're looking at line of sight for 2023, we feel very good about.

Procuring these waste feedstocks that we need if you look at it now in the United States as far as used cooking oil production.

And the tallow production they are large.

As the biggest around that.

And that comes with GDP per capita was to establish reengineering operations and everything else.

So we feel good about debt into the future.

Look.

This is the place to be the installed base of renewable diesel is still pretty small, especially the guys that are running the waste feedstock pretreatment unit and there is.

Funding of waste feedstocks for sure as you look farther down the road you get past 2025, 2030, we expect to see quite a bit of growth.

Oil production in the animal rendering and a lot of that is going to come from Asia at that point, because thats, where the population growth is but historically these waste feedstocks growth decreased significantly and we expect that to continue so minus sign up through two and three we don't see a problem.

Okay, great. Thank you.

Hey, Roger we just I wanted to compliment you on your recent piece of work on the EBITDA expansion in oil demand that was well done very thoughtful and well done.

I would encourage everybody if you haven't seen it to take a look at it.

I appreciate that and sometimes when people refer to me as a piece of work and it wasn't a top of that so.

Yes.

Okay.

Oh.

Thank you. Our next question is coming from the line of Paul Cheng with Scotiabank. Please proceed with your question.

Hey, guys good morning.

Paul.

I have two question.

Maybe this for Joe I mean linguist earlier talking about Europe, maybe more for 17 years go into cash so.

How we should look at the government policy and everything and put dig into Penn books and that how are we going to put position on the longer term. So thats. The first question.

And second question debt.

At some point the pandemic a little thin.

I generally think cash a gain.

And at that point when they are looking at your funding so surgery.

You have at.

<unk> been in doing it that for with this pandemic I assume debt you go into first trying to pay it down but I'll put the pen down making it went looking for with.

The company took a more conservative approach and even July sounds good debt ratio much below the peak pandemic Michael Thank you.

That's good color, Okay, I'll, let Jason take the second part you directed the first one for me relative to Pembroke and Lane you chime in on this too and rich wells, but.

When you look at Pembroke it supplies domestic demand within the U K and it also supplies.

Ireland and other countries. So we do export out of Pembroke, we bring fuels to Canada, when we need him out of Pembroke and so on and so.

One thing for politicians to come out and laid out a hard line and say that they're going to do something but they are human beings.

In that country as there are in our country, who have purchased internal combustion engine vehicles.

And they have an opportunity to weigh in on these issues and these decisions going forward. So.

Paul I think we all get.

Very concerned when we hear these things, but if you just go back historically and look at how things play out they don't always turn out exactly the way that we fear okay. It's usually never as bad as we think it can never as good as we think and I think that's certainly the case here, but we have.

We have a clear focus on Pembroke and lane and his team are working on.

Current options and different projects that are going to continue to make that a more efficient operation.

So rich anything you guys would add to that.

I think you said it really well and if you look at like if you just take a look at say, California. You saw when they were early announcements that were very aspirational about how they were going to.

Drive down carbon and we will see a directionally efforts to move in this way and Youre going to see increased electrification in these countries, but as you get closer to these deadlines. What you tend to see is that the practicalities of this start to have an effect and then they tend to move the target.

And reset the goals and so.

You're right now Theres, a big drive on this and the cost and the consequences of it will start to play out and it will influence the policy going forward.

I think that's the best way I can describe it.

Hi, Paul This is lane I'll add one thing.

Key to that trade flow and what we've always thought of more southern Europe is going to be more exposed to it.

Good closures to be just because of where they are located in Europe, and where the trade flow accretive.

Jason you want to take the financing.

Yes sure.

Correct one of our.

More immediate goals, we pay downs for the extra debt we've taken on during the pandemic.

As far as like.

Our base assumption on debt to cap is 20%, 30% debt, but we are in a very dynamic time right. We have the energy transition going.

Growing our renewable diesel business, we are aggressively looking at other technologies. So exactly how we end up participating in it and the capital needs of these new businesses will they dictate a different structure. We are open to looking at things and we recognize we're in a very dynamic time, which is exciting.

So we're not wedded to that we will keep our minds open and see as things evolve.

Thank you.

Okay take care Paul.

Thank you. Our next question comes from the line of Ryan Todd with Simmons Energy. Please proceed with your question.

Okay.

Great. Thanks.

Maybe one quick follow up on the renewable side.

Stable.

Alright.

Sustainable aviation fuel.

It's clearly going to play out I think a large role.

And in this mix going forward over the longer term. It is very small at this point.

Can you talk a little bit about what you see as kind of the necessary steps to ramp up.

The sustainable aviation fuel market and how your renewable diesel facilities are positioned to be able to produce it.

Sure. This is Martin I think the necessary step to ramp it up as really some youre going to have to get some mandates to require the use of it across the globe.

Right now.

It's out there.

Moving to happen, we feel pretty confident it's coming but it's a big question of.

When.

The modifications required at a plant that's producing renewable diesel to produce sustainable aviation fuel.

<unk>, but they arent huge so.

Could pivot there when we need to pivot there, where obviously keep paying close attention to that and and doing engineering on options, but it's really about getting some mandated volume out there.

Okay. Thanks, and then maybe.

Just one.

From parts of this earlier, but maybe just an overall follow up on refining capture I mean, you've talked about how.

Headline margin.

Have bounced here recently.

Does that capture day kind of stuff.

<unk>.

Low on the refining side for.

For the entire industry can you talk about how you see some others trends playing out over the course of the year. It sounds like maybe you expect RIN pricing soften up some in.

Differentials to widen out a little bit any thoughts on how the timing of that recovery over the course for the year.

Sure Ryan This is Gary I think the key for US as you know, we pride ourselves on our ability to optimize our refining system, especially on the feedstock side of the business and with the very narrow crude quality differentials. It's been it's been challenging to do that so you get to the second half of the year and more OPEC production.

The market.

Potential easing of Venezuelan sanctions potential easing of Iranian sanctions all of those things.

Allow us to do more optimization on the feedstock side and as we do that our capture rates would go up.

Yeah.

Great. Thanks, guys. Thanks.

Thanks for that.

Thank you. Our next question comes from the line of Benny Wong with Morgan Stanley. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my question and I Hope you are all well Hey, Joel.

In your prepared remarks, you highlighted your international strategy is moving forward with the Veracruz terminal started just curious if you can give us an update on the demand and margin.

Look you are seeing in Latam generally in and maybe in Mexico, specifically wanted to get a sense in terms of where they are in demand recovery and theres any notable differences across regions that youre able to see.

Yes. So this is Gary as Joe mentioned, we did put the Veracruz terminal online at the end of the year, we have both gasoline and diesel and tankage and Veracruz today, we're still doing some commissioning activity. So we expect to have the truck rack operational in the next couple of weeks.

Overall, our volumes for the quarter in Mexico, we're little over 40000 barrels a day.

That's an increase of about year over year, 145%. So good growth in the country. However.

From the third quarter, the fourth quarter, we were down about 10% the mobility data, we see in Mexico as mobility was down about 20%. So still indicates we're continuing to gain market share, but we did see a big hit in mobility in Mexico, and we saw that reflected in our volumes.

Moving forward.

We anticipate that the inland terminals associated with the Veracruz Marine terminal probably come online early second quarter wanted Puebla, and Mexico City, and that's really where you'll start to see our volume ramp up as those inland terminals come on our goal is to get to about 80000 barrels a day in that central system. The other thing is severity.

For US terminal does is it takes a lot of cost out of our supply chain. So in addition to the ramp up in volumes. We would also expect to see seawater margins on the volume for selling in country.

Great. Thanks, guys debt that was all my questions I appreciate the time.

Thanks Ben.

Thank you. Our next question is coming from the line of Sam Margolin with Wolfe Research. Please proceed with your question.

Hello, Good morning, everyone.

My question's on the operating side.

Our first quarter throughput are sort of flat quarter over quarter at least in the in the Gulf coast and so on.

I'm just wondering as we kind of enter this recovery phase in.

You said crack spreads are even starting to pick up a little bit here.

Concurrently with demand how do you balance.

What you see on the commercial side with your operating rates.

How much you want to ramp utilization.

This is what your assessment is what the market can tolerate.

And in various sort of commodity scenarios.

Curious how you worked through that.

As you think about utilization.

Okay.

Hey, Sam This is lane I'll take a shot at and maybe your Jim follow up with anything.

We're certainly positioned in the Gulf Coast.

<unk>.

Recovery.

If things recover quicker we are rates could be higher.

But we're trying to you know, we're obviously being very careful and trying to not get our supply line change very extended so we have strategies around that try to think about.

Make sure that we don't have a lot of pricing exposure and trying to position our assets sort of in a conservative posture just to make sure that we were well positioned.

Now going into this but we can certainly raise rates.

If we see things getting better.

Yeah, and I would just tag onto that I think the key for US is looking at net working hand in especially if we're able to ramp up utilization and it results in higher exports and we have good margin to do that we feel comfortable raising utilization.

Okay. Thanks, and then one follow up if I might just on an energy transition theme.

And specifically Evs there's.

A certain amount of petroleum products that are in movies, along with sort of other materials.

Processes that are associated with the energy transition.

So the question is you guys can make anything that they might not be things you're focused on today, but you weren't necessarily focused on renewable diesel until you figured out the right way to build and structure of that business. So looking out.

Over the horizon, maybe not necessarily over the immediately addressable horizon, how do you think about the potential to kind of remix your.

Product streams into into things like specialty chemicals or other materials that are sort of more thematic.

It's not necessarily today over your investment hurdles. Thank you.

So a simple.

We've looked at quite a bit of diversifying in the petrochemicals. We continue to look at it we have a we have a it's just.

But met our gating thresholds, so we would but we're going to continue to look at it because obviously, it's something that we could do it it's not too far out of our wheelhouse to do but so far when we do a lot of these things we are.

Haven't found them to be better than some of our other project for example, renewable diesel projects.

In a world, where we're going to put money.

The day, that's where we put our money instead of sort of petrochemical path, but it doesn't mean that we are not we're close to the idea, but certainly we like our investments.

Sort of.

Lower the carbon transition in terms of front in terms of trying to lower the carbon intensity of transportation fuels.

Thanks, so much.

Thanks Sam.

Thank you ladies and gentlemen, we have reached the end of our allotted time for the Q&A session. At this point I would like to turn the floor back over to Mr. Boiler for any additional concluding comments.

Great. Thank you I appreciate everyone joining us and for those that didn't get a chance to ask a question. Please feel free to contact me and happy to chat with you. Please everyone stay safe and healthy and have a great day. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.

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