Q1 2021 Valero Energy Corp Earnings Call
[music].
Greetings and welcome to Valero Energy Corporation's first quarter 2021 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Homer <unk>, Vice President Investor Relations.
Good morning, everyone and welcome to Valero Energy Corporation's first quarter, 2020 One earnings conference call with me today are Joe Gorder, our chairman and CEO Lane Riggs, our president and C. L O Jason Frazier, our executive Vice President and CFO, Gary Simmons, our executive Vice.
President and Chief commercial officer, and several other members of Valero Senior management team.
If you have not received the earnings release and would like a copy you can find one on our 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 Jill for opening remarks.
Thanks, Homer and good morning, everyone. The refining business saw a strong recovery in the first quarter as various pandemic imposed restrictions were eased or withdrawn and as more and more people receive vaccinations. However, winter storm Yuri disrupted many U S Gulf coast and mid continent facilities in February.
Due to the freeze in utilities curtailments, although our refineries in plants in those regions were also impacted they did not suffer any significant mechanical damage and were restarted within a short period after the storm.
While we did incur extremely high energy cost I'm very proud of the Valero team for safely managing the crisis by idling or shutting down the affected facilities.
Zooming operations without incident.
With many other countries Gulf coast and mid continent refineries offline due to the storm there was a significant 60 million barrel draw down of surplus product inventories in the U S.
Bringing product inventories to normal levels.
Lower product inventories, coupled with increasing product demand improved refining margins significantly from the prior quarter.
Crude oil discounts, we're also wider for Canadian heavy and W. T. I in the first quarter relative to the fourth quarter of last year, providing additional support to refining margins.
In addition, our renewable diesel segment continues to provide solid earnings and set records for operating income and renewable diesel product margin in the first quarter of 2021.
Our wholesale operations also continue to see positive trends in U S demand and we expanded our supply into Mexico with current sales of over 60000 barrels per day, which should continue to increase with the ramp up of supply through the beer cruise terminal.
On the strategic front, we continued to evaluate and pursue economic projects that lower the carbon intensity of all of our products in March we announced that we were partnering with Blackrock and navigator to develop a carbon capture system in the Midwest, allowing for connectivity of eight of our ethanol plants to the system.
In addition to the tax credit benefit per C. O two capture and storage Valero will also capture higher value for the lower carbon intensity ethanol product and low carbon fuel standard markets such as California.
The system is expected to be capable of storing 5 million metric tons of cotwo per year.
Our Diamond Green diesel II project is St. Charles remains on budget and is now expected to be operational in the middle of the fourth quarter of this year.
The expansion is expected to increase renewable diesel production capacity by 400 million gallon per year, bringing the total capacity at St. Charles to 690 million gallons per year.
The expansion will also allow us to market 30 million gallons per year of renewable naphtha from D. G D. One and D. G D two into low carbon fuel markets the.
The renewable diesel project at Port Arthur or D. G. D. Three continues to move forward as well.
As expected to be operational in the second half of 2023.
With the completion of this 470 million gallons per year capacity plant D. G. DS combined annual capacity is expected to be $1 2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha.
With respect to our refinery optimization projects, we remain on track to complete the Pembroke cogeneration in the third quarter of this year.
And the Port Arthur Coker project is expected to be completed in 2023.
As we head into summer, we believe that there is a pent up desire among much of the population to travel and take vacations, which should drive incremental demand for transportation fuels, we're already seeing a strong recovery in gasoline and diesel demand at 93% and 100% of pre pandemic.
<unk> respectively.
Since March Air travel has also increased as reflected in TSA data, which shows that passenger count is now nearly double of what it was in January.
We're also seeing positive signs in the crude market with wider discounts for sour crude oils and residual feedstocks relative to Brent is it incremental crude oil from the middle East comes to market all.
All of these positive data points, coupled with less refining capacity as a result of refinery rationalizations should lead to continued improvement in refining margins in the coming months.
We've already seen the impacts of these improving market indicators with Valero, having positive operating income and operating cash flow in March.
In closing, we're encouraged by the outlook on refining as product demand steadily improves towards pre pandemic levels, which should continue to have a positive impact on refining margins. We believe these improvements coupled with our growth strategy and low carbon renewable fuels will further strengthen our long term competitive.
Vantage, so with that Homer I'll hand, the call back to you.
Thanks, Joe for the first quarter of 2021, we incurred a net loss attributable to Valero stockholders of $704 million or $1 73 per share compared to a net loss of $1 9 billion or $4 54 per share for the first quarter of 2020.
The first quarter 2021 operating loss includes estimated excess energy costs of $579 million per $1 15 per share.
For the first quarter of 2020, adjusted net income attributable to Valero stockholders was $140 million or <unk> 34 per share.
The adjusted results exclude an after tax lower of cost or market or LCM inventory valuation adjustment of approximately $2 billion.
For reconciliations of actual to adjusted amounts please refer to the financial tables that accompany the earnings release.
The refining segment reported an operating loss of $592 million in the first quarter of 2021 compared to an operating loss of $2 1 billion in the first quarter of 2020.
First quarter 2021, adjusted operating loss for the refining segment was $554 million compared to adjusted operating income of $329 million for the first quarter of 2020, which excludes the LCM inventory valuation adjustment.
The refining segment operating loss for the first quarter of 2021 includes estimated excess energy costs of $525 million related to impacts from winter storm here.
Refining throughput volumes in the first quarter of 2021 average $2 4 million barrels per day, which was 414000 barrels per day lower than the first quarter of 2020 due to scheduled maintenance and disruptions, resulting from winter storm Yuri.
Throughput capacity utilization was 77% in the first quarter of 2021.
Refining cash operating expenses of $6 78 per barrel were higher than guidance of $4 75 per barrel, primarily due to estimated excess energy costs related to impacts from winter storm Yuri of $2 21 per barrel.
Operating income for the renewable diesel segment was a record $203 million in the first quarter of 2021 compared to $198 million for the first quarter of 2020.
Renewable diesel sales volumes averaged 867000 gallons per day in the first quarter of 2021.
The ethanol segment reported an operating loss of $56 million for the first quarter of 2021 compared to an operating loss of $197 million for the first quarter of 2020.
The operating loss for the first quarter of 2021 includes estimated excess energy costs of $54 million related to impacts from winter storm Yuri.
First quarter of 2020, adjusted operating loss, which excludes the LCM inventory valuation adjustment was $69 million.
Ethanol production volumes averaged $3 6 million gallons per day in the first quarter of 2021, which was 541000 gallons per day lower than the first quarter of 2020.
For the first quarter of 2021, G&A expenses were $208 million and net interest expense was $149 million.
Depreciation and amortization expense was $578 million and the income tax benefit was $148 million per the first quarter of 2021.
The effective tax rate was 19%.
Net cash used in operating activities was $52 million in the first quarter of 2021.
Excluding the favorable impact from the change in working capital of $184 million and our joint venture partner's, 50% share of Diamond Green diesels net cash provided by operating activities excluding changes in <unk> working capital adjusted net cash used in operating activities was 344.
Million.
With regard to investing activities, we made $582 million of total capital investments in the first quarter of 2021 of which $333 million.
As for sustaining the business, including costs for turnarounds catalysts, and regulatory compliance and $249 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 or $479 million in the first quarter of 2021.
On April 19, we've sold a partial membership interest in the Pasadena Marine terminal joint venture for $270 million.
Moving to financing activities, we returned $400 million to our stockholders in the first quarter of 2021 through our dividend.
And as you saw earlier this week, our board of directors approved a regular quarterly dividend of 98 per share.
With respect to our balance sheet at quarter end total debt and finance lease obligations were $14 7 billion and cash and cash equivalents were $2 3 billion.
Net debt to capitalization ratio net of cash and cash equivalents was 40%.
At the end of March 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 over half of our growth Capex in 2021 is allocated to expanding our renewable diesel business.
For modeling our second quarter operations, we expect refining throughput volumes to fall within the following ranges.
Gulf Coast at 165 to $1 7 million barrels per day.
Mid continent at 430 to 450000 barrels per day.
West Coast at 250 to 270000 barrels per day, and North Atlantic at 340 to 360000 barrels per day.
We expect refining cash operating expenses in the second quarter to be approximately $4 20 per barrel.
With respect to the renewable diesel segment with the startup of <unk> two in the fourth quarter. We now expect sales volumes to average 1 million gallons per day in 2021.
Operating expenses in 2021 should be <unk> 50 per gallon, which includes <unk> 15 per gallon per noncash costs, such as depreciation and amortization.
Our ethanol segment is expected to produce $4 1 million gallons per day in the second quarter.
Operating expenses should average 38 cents per gallon, which includes <unk> <unk> per gallon for noncash costs, such as depreciation and amortization.
For the second quarter net interest expense should be about $150 million and total depreciation and amortization expense should be approximately $590 million.
For 2021, we still 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.
Lastly, as we reported last quarter, we expect to receive a cash tax refund of approximately $1 billion later this year.
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 in the Q&A to two questions.
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One moment, please while we poll for questions.
Our first question today is from Roger read of Wells Fargo. Please proceed with your question.
Yes. Thank you good morning.
Roger.
I guess I'd like to take into account your outlook.
It's about where we are in terms of demand in your outlook in terms of volumes for Q2, and then look at the crude runs that you've had Q1 of 'twenty one versus Q1 of 'twenty. It seems like all of the decline came out of light sweet crudes and kind of residuals and the other.
I was curious as we go forward your comment about a little more crude coming from OPEC should we anticipate more of the volumes likely to be on the medium and heavy side. The salary side, where you tend to get a little more advantage on crude differentials or is it really that the opportunity lies on the light sweet crude.
Side, just because thats whats come off in terms of the system.
How many questions was that runs.
Yes.
Cash and rule, but it's a way of trying to add a rig I already got it per units out of which crude youre going to run.
Gary Gary's prepared for this so far away.
Roger.
I mean, our view coming into the years, and we would see fairly narrow crude quality differentials for the first half of the year, but as global oil demand picked up a great percentage of that would be filled with additional OPEC production, which would cause the quality differentials to widen back out.
By and large that view is still holding.
For cash show about 4 million barrels a day of additional OPEC production coming on the market in the second half of the year fact that the last OPEC meeting they are saying, we could see as much as $2 1 billion barrels of that as early as July.
I think the only thing that's different is the quality differentials have widened a little bit faster than what we thought and it's for a number of reasons. The winter storm brought down a lot of high complexity refining capacity that pushed medium and heavy sour crude back to the market and help widen those quality differentials.
After the winter storm, we had the release from the strategic Petroleum reserve per 10 million barrels of medium sour on the market, which again pressured net ASCII differential we're seeing more Iranian and Venezuelan barrels on the market, whereas not flowing to the U S that flow into the far east and it's taken some of the pressure off the the medium sours and the U S Gulf Coast and then <unk>.
Recently, we had the refinery fire in Mexico, which has put more my out in the market. So we think the combination of the event. That's happened recently additional OPEC barrels on the market. We also think youll see more heavy Canadian with a recovery in flat price and production quotas being lifted there that the differentials will continue to widen.
To your question, we have seen a switch in economic signals of course, it's very dependent on location and refinery configuration, but some of our refineries today. The economic signals are pointing us to run more heavy sour and we're seeing fairly equal economics between medium sour grades and light sweet.
Alright, guys I'll leave it there since I did ask the.
Okay.
Roger Thank you.
Thanks.
The next question is from Theresa Chen. Please proceed with your question.
Good morning, everyone.
I would like to dig a little good morning, I'd like to dig a little deeper on your comments about your carbon capture strategy.
Maybe beginning with how your partnership with navigator came about.
And what can we expect in terms of the economics net to Valero and if you intend to do something similar from your other facilities from the Gulf Coast for example, especially on the heels of a competitor announcements.
This type of infrastructure out in a major way along the Houston ship channel.
No. That's a good question and rich and Martin work together enrich what's kind of the architect behind this so we will let him take a crack at this.
I'm just kind of backup so valero is going to be the anchor ship revenue.
Blackrock.
And navigator is leading the engineering construction and operations.
Carbon capture and sequestration.
Whereas we're seeing that.
By doing this we'll lower the carbon intensity of the ethanol that we produce from a kind of a certain dci down to a 40 Ci and I'll, let Martin talk about the value creation, there, but today the Ci ethanol carries a premium into the California market and the economics are supported by the California market.
And the <unk> 45.
<unk> tax credit.
We expect that further.
Markets will develop for the low carbon fuels incur.
Increasing demand for this premium product today.
Navigators out there they've launched their non binding open season.
Which is basically to kind of determine what kind of demand will be for this project. So that they can right size the project and so kind of optimize on the.
Routing the other.
<unk> is going very well and we're seeing strong interest from ethanol producers and other industry players, but were especially surprised by the strong interest from the fertilizer plants and given the strong interest in the project they will be moving forward with a binding open season.
This summer and if you wanted more information they've got a website out there its just navigator.
<unk> dot com, which kind of goes over the.
Kind of the open season process and kind of a preliminary mapping.
Hadley.
Pipeline system is going to kind of work.
Thanks, Rich so smart.
Yes.
70, 240, Ci reduction in ethanol Thats worth right now 47, a gallon at $200 a ton and even out into the future. It stays right net range about 50 a gallon.
$200 per ton carbon price as rich said, we've got California, and Oregon with programs now we expect your new Mexico, Washington, They all have legislation in place for low carbon.
We expect those to happen over some time in the next few years. So is this project's got timeline to completion we.
We expect.
No slowing down in low carbon mandates are clean fuel standard mandates, so I'd say additional.
Demand for the product there.
Yeah.
Very helpful. Thank you.
And then within the broader L. CFS framework I wanted to ask about your renewable diesel business given the strength in margins as well as volumes.
Maybe just on the impressive margin per unit per itself.
Can you explain what drove that this quarter, especially with the backdrop of rising feedstock Hoffman at these high margins are sustainable.
Sure I'll take I'll take a stab at that one it was a good quarter at $2 75 per gallon EBITDA and if you look.
Versus first quarter of 'twenty.
Soybean oil price is up one six times, but the day for RIN prices up two six times. So the day for brand has done a lot of lifting and that's that's provided margin. So.
We're looking I think if you look over history, we've had a pretty good stress test for the last three years, we've had a wide variation in RIN prices wide variation in feedstock prices low.
Variation in USD prices and our margin has only varied from $2 17, a gallon EBITDA in 2018 to $2 37, a gallon EBITDA in 2020 and now.
Last first quarter of 'twenty first quarter of 'twenty, one about the same in this 270 EBITDA range. So again, a pretty good stress test. So we feel pretty comfortable about those kind of margins going forward for the foreseeable future.
Thank you.
The next question is from Phil Gresh of Jpmorgan. Please proceed with your question.
Yes, hi, good morning.
Good morning, Phil.
My first question is on the second quarter utilization guidance.
The mid point, there was about 87%.
With 91% I think in the Gulf Coast, and the mid Con and obviously, that's a bit above.
The April <unk> in there.
There is obviously seasonality benefits as we move into the summer. So I'm just curious how you expect demand and utilization to progress into the summer.
Yes.
Do you think the crack spreads today.
Werent running that high of a level of utilization or is it an expectation of even higher cracks moving forward. Thank you.
Hey, Phil This is lane, so really if you look at our guidance somewhat.
Consistent with where we are kind of running a day, but there is we have turnarounds from some other refineries, but the current crack there's a call on refining.
Toronto reasonably high rates the matter, how youre on a posture yourself in and looked at your supply chain.
Sort of interesting up as an industry, but certainly where margins are day in our margins going forward are.
You'll see increasing utilization in the industry.
Okay got it.
And the second question would be on.
The balance sheet, obviously, you have the tax refund coming there as the Pasadena <expletive>et sale here in April so I'm curious, how you're thinking about the leverage targets and whether there might be other <expletive>et sale opportunities like Pasadena is some low hanging fruit out there that could help accelerate any debt reduction objectives. Thank you.
Yes. This is Jason I can talk a little bit about how we see in the next 12 months with regard to debt reduction and capital allocation and then Joe If you want somebody else to talk about other potential opportunities.
Okay like Joe said in March we had our first month with positive operating income and cash flow and the demand in our markets are looking good so things are definitely improving.
And to tell the exact pace at the margins and cash flows are going to recover but we're certainly headed in the right direction.
So some of the things we'll be looking at us as margins start normalizing and cash flow starting all normalizing as first thing. We wanted to do is build our cash balance will likely take our target up from the $2 billion range to the $3 billion plus range that will help our net debt to cap come down naturally as we do that and as you asked about on the <unk>.
Average side the additional debt we took on was relatively short term. The vast majority of it was three to five year five years in the base case, but we are going to look to pull some of that back in early in the first thing. We will look at is $575 million of three year floaters that are callable beginning in September so I imagine that's the first thing will take up.
And then Phil just as it relates to the <expletive>et sales. So we don't have anything else in mind and frankly, we didn't do this because we were.
And any kind of desperate need for cash we did it because it was a.
Smart thing to do financially and when we develop this project and a few others that we developed and then kind of base loaded.
The plan was that we would.
One use of the <expletive>et, but not necessarily need to own the <expletive>et and so this was part of the plan all along.
It's not something that I would consider it to be.
Hum abnormal but at the same time the motivation for it was it was an attractive business transaction.
Rather than the need for cash.
Okay, Great can I, just clarify is the $1 billion of tax refund still a <unk> target or just latest thoughts on magnitude and timing. Thank you.
Yes.
That is what we were thinking before.
Talk a little bit more about that we followed our tax both our return in our refund request back in mid January was a really big accomplishment for our tax Department, we've never fall debt early before and I think most people don't but unfortunately, it looks like the IRS is experiencing significant delays in processing these returns and the refund request.
My understanding was that they normally turnaround in a 90 day 120 day timeframe, but with these COVID-19 impacts the timing is uncertain. This year, we certainly still expect to receive the full tax refund, but it may slip from the second quarter.
Thank you very much.
The next question is from Ralph of Citigroup. Please proceed with your question.
Hi, good morning, Thanks for taking the question.
From a personnel.
I wanted to just I have two partnered and I'll leave it with my compound question here on D. G D on the feedstock side.
Martin I think you are being a bit humbling, Sam the RIN was doing a lot of a lot of looking I mean, it was but you guys also have advantage feedstock in the way you've set up that project. So I'm curious about your outlook going forward.
One.
It looks like I know soybean is not something you would that exposed to but the curve is showing some backwardation had but really not a full mean reversion. So curious about what gets us going in terms of some some deflation reversing some of these inflation trends we've seen over the last couple of quarters for the overall complex.
I guess soybean kind of the key that people key off of when they're making their <expletive>umptions and then second as we see that happen.
How should we think about divergences or the debt.
The advantage in your feedstock slate desio animal fats Yuko other other feedstocks that using the non soy versus spo as we start to see things deployed.
I'll leave it with that one thank you.
Sure Prashant. So I think what you have to do is if you kind of step back and look what's really soybean oil gets the attention in United States, but what's really going on is the worldwide veg oil price and it's just it's up and why its up first of all it was really low in 2018 in 2019 so.
We had some periods, where it was low versus history.
By that I mean relative to the U S D.
So soybean oil price driven by the global supply and demand of veg oil soybean oil palm oil and rapeseed oil are all up 60% to 95% year on year.
Palm oil production in Indonesia was off because of a drought in 2020 and labor shortages due to COVID-19, you also had U S. Soybean oil production in the 1920 crop year was or just soybean production was like 80% of the previous year. So you also have to remember you had the trade sanction.
So China wasn't in China pulled down stocks a lot.
They werent in the market for the soybean oil prices dropped not as much was produced will now China is back in the market the world's recovering so you've got a big demand.
Demand now out there for veg oils. So we kind of got into this place because of low prices and we will get out of it because of high prices. So all of these can be grown on demand. So the cure for high prices is high prices. So eventually work our way out of it that's going to take a little while now obviously.
D. G DS advantages, we're not we're not running the veg oil the other than the distillers corn oil which is in <unk>.
Animal veg oil.
So we expect to continue to see those feedstocks price at a discount to soybean oil, but the biggest advantage is the Ci score of those oil those waste oil as compared to two <unk> oil or compared to the soybean oil in most jurisdictions. So thats really what drives D. G D and.
By having a robust pretreatment system or location or our ability to run anything is just a huge advantage.
Okay.
Thanks for that that's Super helpful. I'll leave it at that.
Yeah.
The next question is from Doug Leggate of Bank of America. Please proceed with your question.
Doug you might be on mute.
Is that any better guys can you hear me.
You bet good morning, Doug Good morning, Joe Joe I wanted to ask also about the broader.
Carbon footprint of the lateral I'm looking at slide five.
On your debt can I'm, just wondering with the latest announcement.
The carbon pipeline.
And with obviously the potential for additional.
DVD funds.
What is what is your objective for for Valero overall is it basically to get that.
Carbon neutral.
Neutral negative what's the general strategic objective.
How youre building up your.
Green credentials if you like.
That's a good question Doug can.
And obviously you can tell from the chart and you can tell from where we're spending our capital that we have a clear recognition here that.
Low carbon fuels are going to be in.
Much greater demand going forward.
The interesting thing here from our perspective is that we've been able to come up with.
Low carbon fuel projects and projects that have enabled us to reduce the carbon intensity of some of our other fuels.
With projects that have significant returns also I mean, it's one thing to try to have that drive to file.
<unk> compliance with tariffs to go to carbon neutrality and so on that's all fine and good but it's also critical that when we're on that path that we do it in a way that continues to deliver financial returns for our investors and so while we continue to look at not only the projects that are list.
Here I mean, obviously the.
Carbon sequestration pipeline is index extension and after we were at ethanol first and then renewable diesel.
And there is other projects that we're taking a look at two theyre going to help us on this path going forward.
The targets, we've set for ourselves to hit by 2025, we think are very achievable.
I don't think that you should expect that our goals are going to continue to to be pushed forward from there. So.
We want to be viable for the long term, we believe that liquid fuels are going to be part of the energy energy mix going forward.
Feasible to think that they wouldn't and we just wanted to do our part and continue to provide low carbon products.
I appreciate the answer I do have a quick follow up and its related specifically to <unk> and.
I guess I'm going to be very honest with you Joel we were having a tough time.
Modeling the sustainable.
Discounted free cash flow if you like for.
Diamond Green diesel because we don't know what the <unk> going to <unk>.
So I just wonder if you could.
Whichever one of you guys wants to.
Answer this how do you think about when you look at the economics of the project how do you guys think about forecasting.
Scenarios for how else CFS can evolve because obviously everybody in there.
The adult now just kind of coming up with projects, including electric vehicle charging stations, which are another offset.
Which can start to bite into that L. CFM. So Henry how are you thinking about.
Modeling the payback and the <expletive>umption of Lcs asking your projects non I'll leave it there. Thanks.
Okay. This is this is Martin I mean, the way we're looking at it is.
Obviously, California's there with the program.
We think if.
Oregon is there with the program, Canada has got a clean fuel standard is going to be in place in the Canadian demand on diesel is about twice as high as California demand and then you've got all these other programs you've got the EU now with Red to out to 2030, California out to 2030, so while theres a lot of projects in <unk>.
<unk>, there's also a lot of incremental demand announced and if you look at generation to day, what's carrying the load for California is renewable diesel biodiesel and ethanol at 70% of the credits generated.
So when we look at the timeline for for the economics.
Looking at from the Diamond Green projects.
It.
They pay out pretty quick right, so, but we're not and we don't see anything changing materially.
Certainly through 2025 type timeframe, but even beyond that.
We don't see this this changing that much so we we feel pretty good about that.
I think carb, if you have a carbon price go down.
To adjust that out.
They are pretty well signaled that this $200 a ton is kind of the sweet spot for them in 200 200 plus in.
So we feel pretty good about demand and I think the flip side is a lot of these projects that are announced if you go back in history. They just don't happen and we don't see anything thats going to change that trend.
Hey, Doug you may recall.
Doug you may recall, when we issued guidance on the <unk> two right like our portion of the cost was $550 million and our EBITDA guidance was 250 and that was based on $1 26, EBITDA right and you compare that to the $2 75 that would be generated last quarter. Just gives you some context.
How much how much room there is.
Very very quick payback guys, maybe just tanker and one last one real quick Valero is view on <unk> positive or negative and I'll leave it there. Thanks.
Who wants to take that one.
<unk>.
<unk> carbon tax.
So.
C.
Various discussion points out there as you've got some trade groups, you've got other folks talking about carbon tax.
It will be.
Generally speaking in terms of.
Best ways to reduce carbon emissions, the most efficient way to do that and the economy is with the tax we would say the key components to this is the tax has to be applied.
Rob Lee abroad across the entire economy, you need to make sure. It doesn't result in.
Exporting the emissions outside the country, so you're going to have to have some kind of border adjustment process around it but yeah, I think our carbon taxes and efficient way to address some of these issues and to help lower carbon I'd point out that we do quite well.
And this low carbon fuel environment. So.
Think we would be advantage under that regime as well.
Thanks very much growth.
Okay.
Yeah.
The next question is from Sam Margolin of Wolfe Research. Please proceed with your question.
Okay.
Good morning, everybody John.
Hi, Sam well and you.
Good thanks, Thank you Sir.
To start off about returns.
And I guess it affects both D J D in the refining business.
We're starting to see some companies emerge that are better returns generating <unk>.
Businesses that are selling forward, there and in some cases, not even to obligated parties.
Price and then.
The off taker.
It takes the risk of the RIN price is that something thats interesting to you either at D. J D. Two kind of smoothed out variability in results or even in the refining segment.
I had some visibility there.
But other high bandwidth Atlanta, we obviously earn a net position of buying rins so anyway.
Any counterparty that of a normal way it again room from the market. We obviously could be on the other side of that is related to renewable diesel and other kick it over.
Martin.
Yes, Sam So I think when we look at our margin structure. There is probably no need I mean, we think what the Rand if you step back and look at this.
Price of the day for rent is based on the spread between biodiesel and new OFC and then the driver for the biodiesel price is almost entirely soybean oil because that's the marginal fee for the biodiesel producer.
So then therefore, if you have at a given USD price the D for Rins high if soybean oil is high and the D for Rins low of soybean oil is low.
So as renewable diesel.
Feedstock prices move with soybean oil renewal renewable diesel margin does not necessarily higher with deep for brands.
As they appreciate.
<unk> are a whole different story there are dependent on the renewable volume obligation and whether <unk> are needed to satisfy the total renewable fuels obligation. If D. For reasons are needed. The 96 price is going to approach the day for price and Thats. The case, we're in today the <unk>.
<unk> is right up against the Knicks.
So <unk> are tied to the production cost of biodiesel.
See that fundamentally changing and then the day six just depends on the total renewable fuel obligation.
Whether additional biodiesel is needed to balance that equation. So a day six can be about anywhere ceiling of D. Four down to zero, but a day four has got some fundamentals behind it. So we don't really see the need to protect that.
Okay.
Okay. Thank you and this follow up is about carbon capture it sort of relates to Doug's last question on a carbon tax but.
Just because of your experience in the CFS.
And now as a shipper.
Ccs project Valero is very far ahead of the industry in terms of understanding the impact of the price of carbon or cost of carbon on energy markets and how it flows to the consumer and there is a debate now about.
Whether that is a <unk>.
Restriction on the potential scale of carbon capture.
The solution. So I'd ask you just to kind of comment.
<unk> are specifically about how you see the world with the carbon price and whether it's even applicable to say outfit an entire refining system with with some kind of carbon capture solution. If that makes sense based on the way.
It interacts with consumers. Thank you.
Yes, Theres a lot of facets to that question I mean.
I wouldn't I wouldn't presume to say that we're ahead of anybody in and looking at this perhaps we are but but thats not a claim I don't think that we would be willing to make.
Lane can speak hear about potential things that we could look at in the refineries to continue to do this.
But the projects that we've looked at thus far all related to our core business. There is no particular step out that we've had here.
We are in the ethanol business, we've been in the pipeline business for a long time and were in the refining business.
So you want to speak at all about.
I'm not sure I can provide a lot of it.
Tremendous insight in there, but I would say that we we got where we went around and looked at all of our sort of our stack for carbon dioxide, obviously coming out and we focused our efforts on where carbon dioxide is concentrated in those stack from therefore, it's easier to sequester it and get it targeted below the low.
And we're doing that in whatever the regime of whether it's the <unk> market.
And the <unk> market. So that those are that's how we're doing it for now Ryan again.
Where we've landed we're doing ethanol we're looking at we have met tomorrow, but predominantly <unk>.
The flue gas <unk> gas flow for things that we're analyzing.
But there.
Ultimately needs to be more certainty and more of a larger framework out there for that kind of investment for refining and but.
And then you need to you need a carbon price is a little bit higher something more on the order of like DLC carbon prices.
Anything you want to add Martin.
The point I mean lane hit it on the head when you look at an ethanol plant. It's a cost effective way you've got basically pure Seo too and it's at 1.1 stack in the plant.
And then you also have.
45, <unk> and the and the Ci reduction so when you get to a and then.
Steam methane reformer and makes sense too, but when you get to most of our refineries were not accessing those low carbon markets, you've got a lot of them.
<unk>, so you're going to have to get a higher carbon price and thats, what its going to take to get more going on in the carbon sequestration Mark.
Thanks, so much.
Mhm.
The next question is from Manav Gupta of Credit Suisse. Please proceed with your question.
Hey, guys. Thank you.
Joe My question is more specific to the U S demand I think beginning a lot of negative attention from the Covid spikes in other parts of the world, but things are looking pretty good in the U S. S. Plenty out all your initial comments I'm trying to understand in your opinion, how far are we in terms of timeframe.
Where we could go back to pre pandemic levels demand for gasoline diesel and domestic jet even if you leave out the international as yet how far out are we from a point, where we could see a full recovery in the key products in the U S.
Mr. Simmons, yes, so as Joe mentioned, you know gasoline recovery has gone very well a combination of the vaccine rollout and economic stimulus is kind of driven.
A rapid recovery in demand for our products.
Our wholesale numbers are pretty consistent with the Doe data I think our seven day average is about 95% of pre pandemic level, which is where Wednesday staff came out on the day as.
As well, so a little bit below the five year average per well within the five year average range.
We're pretty bullish on gasoline going forward not only due to the pace of recovery, but we think theres a number of factors that could be very supportive for gasoline demand.
As people return to normal style of life, we're seeing that people are driving more and kind of avoiding m<expletive> transit for the summer season, we believe that a lot of people that want to go on vacation will again, maybe avoid travel on an airplane and take more driving vacations and then just as gill alluded to because people felt trapped in there.
<unk> per year now they'll spend more of the discretionary income on experiences like vacation rather than things. So.
Everything domestically on the gasoline front looks very good and even though we've seen spikes of Covid cases around the world are domestic markets are domestic export markets are starting to pick up as well Mexico gasoline demand in March was up 11% from February so the gasoline side looks looks very good.
On the diesel side.
Really been in this mode, where diesel demand is almost fully recovered.
Moving to see very strong diesel demand, especially in our mid continent system today as agricultural demand is starting to kick in.
And the combination of the economic stimulus and infrastructure build we think drives economic growth and low cost sustained.
Strong diesel demand moving forward you also talked about jet and certainly we felt like jet would lag in terms of demand recovery and it has but you know if you look at the Doe stats. This week, we were at 76% of pre pandemic levels and I think if you look at a lot of our leading indicators you know the TSA cash.
Singer accounts look very strong and that's not fully showing up in the daily data yet so far the airlines have chosen just to put more p<expletive>engers on a plane, but we're getting to an inflection point, where now they are starting to add flights you can see that in jet fuel nominations.
And also the fact that airlines are calling their pilots and their crews back and starting to add flights. So I think.
If you look at where jet demand could go pre pandemic kino about 81% of flights in the U S where domestic flights I think we could get that demand back that last 20%.
In terms of international travel will probably take a little longer to recover there.
Yeah perfect My quick follow ups here is.
The other renewable diesel results clearly are reflecting two very high quality companies looking together and it's kind of showing up in the results and my point is I think it's something you're still looking so well then you should do more of it as I understand when you designed the JBT you did leave space export outside of Florida D. J D.
Exactly like did you run into at St. Charles So at what point will you wait for <unk> to do startup, but at what point does the literally dialing them together and start looking at the DJ day for exports at the facility and I'll leave it there.
Thanks, Bob.
So who wants to do that Mark.
I'll take a shot.
So.
Everything you said, you're absolutely correct.
We've left quad area to look at Diamond Green.
Or are there, but we want to see other market develops we want to understand a sustainable aviation fuel, which is another option for us in this space. The work we're developing project along both of those lines and we'll just see how the world work, but we've got a we've got to get two of these started up.
And get them done as you've seen we are schedules were doing much better and so we're actually bringing to market earlier and our real focus right. Now is to do just that our guys go there.
We're very much involved and trying to accelerate these projects and bring them forward.
Any way possible because low.
You can see the economics and the projects.
Thank you so much.
The next question is from Paul Cheng of Scotiabank. Please proceed with your question.
Hey, guys good morning.
I think that I am going to ask two questions. One yes, maybe it's a multiple part that with ATP.
Thank you.
[laughter].
I would expect nothing less.
Though I'm guilty of charge.
For the BTC to.
Can you give us a percentage of kits fall that yes, the F on Patriot they stopped light.
The waste oil and all debt and also then when we're looking at renewable on the CSP supply contract.
You generally quiet fear among the Green day, and can you tell us that I mean, how much is the wind your January from.
From those contract and when that will expire and when you talk about I think martijn.
D C at Ccs spend opinion day ethanol, so that we need to take off your panel up to 16, so should we <expletive>ume debt half of your.
Throughput volume, we get that pent up and after 47 cents per gallon of the credit debt, if we <expletive>ume debt.
<unk> maintained at 200, so that's the first question share.
Sure.
Before I ask a second well.
Yes.
John I would figure that one out.
Or do you feel youre going to have to wait for the second part of the first price.
That was all on the on the feedstock <unk> two I mean were expecting.
We're going to have a higher mix of tallow, but we still expect feedstocks for D. G D to b.
<unk> advantage so.
It's the same same cast of characters that the used cooking oil the tallo.
Distillers corn oil up ethanol plants.
So that's what we expect to complete stock from <unk> two to be.
Certainly we'll be heading from more tallow and used cooking oil is pretty close to being tapped out right now in the U S. More of them show up with these high prices. That's what we expect so what and then the ethanol question.
And we'll present carbon sequestration and how much of our volume.
But we're planning.
We're looking at certainly the.
There's been a few questions to California market can absorb it all and it depends on how many of these ethanol projects happen California's 10% of the U S gasoline market. So it's 10% of the U S ethanol market, but we certainly expect by the time, we have these sequestration projects to be in place.
Something's going to happen in the northeast New York's Big market as we said in new Mexico.
Got a standard that theyre looking at.
Depending on what Canada does with the clean fuel standard that may be an option to go there we have to see what those final regs look like from from carbon sequestration, but again, we just feel like there is.
It's going to be more of these claims youll standard low carbon fuel standard in the future than they are now so the other.
Plays out.
How about the CFS key supply contract on the wind generation and wind that those contract expires.
I don't think we can comment on that unfortunately, Paul.
Okay.
Hey, Seth.
The second question, Yes on Mexico.
Given the recent political situation look like.
<unk> may want to weep national lines, So what debt, we emphasize that day.
Maybe.
<unk> been seeing in some of the sectors, including energy. So I mean, what youll read for the people on the ground and debt is that something that would impact your.
Your expansion or that you all fits us oil per day.
This rich wiles from me take our effort at answering that I mean, I think when we look at Mexico first off.
It would take a constitutional reform for them to really.
Formally close out the energy sector and nationalize. It. So we don't we don't see the political climate supporting that.
You're talking about the recent legislative reforms that Mexico is working on those are really aimed around.
Fuel theft, and other things if you're if you've got a legitimate business and your operating there as we have I think we'd be able to operate around those regulations is a tough regulatory environment to be there, but we're very.
Adapted this stuff we'd move quickly we have.
Our market <expletive>ets on the ground there and we're working cooperatively with the Mexican government and we think we have a pretty good relationship with them and a good relationship with Pemex and so our view is that we will be in Mexico.
The long haul and we think that.
It's good for the Mexican people and we think we.
We can help supply and solve some of their energy needs.
Thank you.
The next question is from Paul Sankey of Sankey Research. Please proceed with your question.
Hi, good morning, everyone.
The final question.
The Bad news is I've got a question. So the good news is Yvonne six of them.
So we've missed you Paul.
You too.
I think one concern of clients has been imports of products into the U S and I guess that goes further to refining shutdown. So could you just talk a little bit about the dynamics of.
I guess Atlantic basin product market. So I'm, just wondering whether that's a sort of dumping of gasoline that's going on.
The other these are refineries.
Refineries, what do you think about refineries getting shut down because we know you guys are in the right part of the cost curve.
Just wondering what your perspective is on whether or not we can rationalize some of the stuff that's cut up damaging the market, particularly into new hub and that will be it from me. Thanks guys.
Thanks, Paul Yeah, Paul So I think in Joe's opening comments. He mentioned, we drew down 60 million barrels of light product inventory as a result of the winter storm. It put inventory is very very low in the U S and the low inventories really incentivized imports, especially into the east coast and so we've seen that record.
<unk> of imports, but youre already starting to see those arts close and the volumes of product flowing from northwest Europe, and the New York Harbor slow in addition to the slowing of imports were starting to see exports pick back up so certainly for us.
We had exports down in the first quarter as we replenished inventories, but already in April our exports are starting to normalize as well. So I do think that was a short term dynamic that will reverse as we move forward.
So do you have anything to add on.
Finding shutdowns.
Hey, Paul This is lane.
I would just say we've had a strategic outlook.
The southern refineries.
And Europe will continue to be under pressure largely driven by changes.
Changes in trade flows and then you kind of add to that the ESG goals.
The company is are there are going to continue to be under pressure and we also.
Believe and continue to have a sort of an outlook.
Latin American refineries are going to struggle to run a competitive utilization rate and so that's just going to be an ongoing thing so.
To the extent that that's.
How the Atlantic Basin tries to sort of settle up in a sort of a post COVID-19 universe, we'll just see how it all works.
Thank you guys.
The next question is from Ryan Todd of Simmons Energy. Please proceed with your question.
Great. Thanks, maybe a couple of hopefully fairly quick.
One on RMG, a number of your integrated peers.
I've been involved in.
On partnerships on the R&D side is this something that you've looked at.
Do you view it does not.
Not fitting there are competitive within your portfolio and compare to the carbon capture and renewable diesel projects and then maybe.
A second one.
You've got the Pembroke co Gen unit in the Diamond pipeline expansion.
Coming on in the second half of this year, there was an EBITDA range <expletive>ociated with those which as you know.
Reasonably wide any any thoughts on the current market what the potential EBITDA contribution would be and what the big drivers are there and the range.
Yes. This is rich lashway I'll take the first piece of the of the R&D. So we are looking at different opportunities, where we can take the the R&D on a kind of a booking claim basis into the refineries to generate development fuels, which fit into into the.
The U K so.
That's kind of our foray into it right now, but we still continue to look at other opportunities for RMG into you know kind of our supply chain to lower the carbon intensity of the products that we're producing so we are we are doing it.
But we just kind.
Kind of in a quieter kind of scale.
And for the Pembroke Cogent, we expect to start up here at the.
The end of the second quarter for the third quarter I think RFID ebitdas.
I want to say, a 38 million UF, obviously, you have some currency risk in that but I mean, that's sort of the range on terms of what the EBITDA.
Contribution is on an annual basis and.
I have a pipeline.
Yeah, if anything.
That was just an optimization in the return on that Ryan is going to be similar to like any logistics projects.
Great. Thanks, Jeremy.
Okay.
The next question is from Jason <unk> of Cowen. Please proceed with your question.
Oh yeah.
Everyone I wanted to ask.
On the refinery utilization guidance.
Specifically in the U S low excluding excluding north Atlantic are you essentially running.
Kind of a maximum levels at this point, excluding maintenance or are you still operating in this framework, where we are.
Trying to control manage.
Supply chain, that's the first one and then second one just on some of the credit prices that impact renewable diesel first just the outlook on when do you expect prices to come off when RVO is are announced or when the small refinery exemption case.
Is concluded and then Conversely announced their best prices weakened recently a bit just wondering your views on why that is and if you expect net interest strengthen.
Moving away.
I'll speak to the first question about the outlook.
Commensurate with where we are today.
I call on refining capacity is fairly decent one I wouldn't say, we're running at Max rates, but we're running above we're running at utilization rates that were more indicative of free COVID-19 level, but theyre not theyre not completely we're not completely running at Max because we are still being very careful with our supply chain.
Yes, and then on the.
Can you talk about the rent.
The RVO will impact the <unk> talked about that earlier.
Each satisfy the total renewable obligation. The day four ran is really all about the veg oil prices in the world. So as long as they stay escalated and it's going to take at least the crop cycle to fix that we expected <unk> to stay high.
CFS, it's off as you stated I think a lot of that has to do with this with the lockdown in California.
And as you've got you just generated less deficit. That's out there. So you would have to you would think that the credit bank is going to grow marginally in this environment, but as soon as California gets back to speed here, we would expect lcs prices to rebound and that should be happening.
In the second third quarters of this year, we would think.
Yeah.
Our next question is from Matthew Blair of Tudor Pickering, Holt <unk> co. Please proceed with your question.
Hey, Thanks for squeezing me in here you mentioned the Saf, how much Fas <unk> produced today and if that number is low whats the timing and cost to adding flexibility.
Ability.
And.
Could you just talk in general about the economics on Saf vs Rd.
And how you see this as growth market developing thanks.
Yes, so I'll start with the last very last question you have first okay.
Available aviation fuel will require something above or renewable diesel because the reveal penalty and Theres capital Corp, or energy cost all of the above to try to make it. So you know if you saw it.
You sort of say, hey, I can always.
I have the investment to make renewable diesel therefore, I need additional I mean something additional.
The sustainable aviation fuel.
Today.
Yes.
We are not configured to make it directly we there's ways that we could make it a big yield penalty law.
And again back to the cost structure in terms of the way, we think the most economic way to produce produce it would require a pretty relatively expensive investment.
It's essentially adding a reactor into our into this hole.
The process, though and fractionation so.
There are some costs there.
Things of digital projects, we're trying to develop where you certainly nida.
You do need some <unk>.
Interested in small amounts here and there and you could probably get to that from fractionation, but to do this in any meaningful way youre going to need youre going to need something to get.
Over the hump here with route of requiring.
Jet fuel to be renewable.
Okay.
Great. Thank you.
Yeah.
There are no additional questions at this time I would like to turn the call back to Homer <unk> for closing remarks.
Great well. Thank you everyone for joining us today, and obviously if you have any follow ups feel free to contact the IR team stay.
Stay safe and healthy and have a great day. Thanks, everyone.
Okay.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
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