Q2 2021 Valero Energy Corp Earnings Call
[music].
Greetings and welcome to the Valero second quarter 2021.
Earnings Conference call.
At this time all participants are on a listen only mode. A question and answer session will follow the formal presentation.
If you would like to ask a question you may do so by pressing star 1 on your telephone keypad.
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Pat as a reminder, this conference is being recorded.
And is now my pleasure to introduce your host.
Homer bowler Vice President Investor Relations and finance. Thank you Sir Please go ahead.
Good morning, everyone and welcome to Valero Energy Corporation's second quarter 2021 earnings.
1 call with me today are Joe Gorder, our chairman and CEO Lane Riggs, our president and C. O 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.
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If you have not received the earnings release and would like a copy you can find 1 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.
<unk> 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 and the press release and on this conference call that state, the company's or management's expectations or.
These fusions of the future are forward looking statements and tended 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.
Predict for opening remarks.
Thanks, Homer and good morning, everyone, our system's flexibility and the team's relentless focus on optimization and a weak, but otherwise improving margin environment enabled us to deliver positive earnings and the second quarter.
More importantly cash provided by.
Operating activities more than covered our cash used in investing and financing activities for the quarter, even without the cash benefits from our 2020 income tax refund and the proceeds from the sale of a portion of our interest and the Pasadena terminal.
There was a significant increase and mobility in the second.
Quarter, driving higher demand for refined products, particularly in the U S and.
In fact, we're seeing demand for gasoline and diesel and excess of pre pandemic levels and our U S Gulf coast and mid continent regions.
Net demand continues to ramp up as well and is around 80% of 2019.
Level.
We responded with higher refinery utilization to match product demand and our system.
In addition product exports have been picking up particularly to Latin America with the easing of Lockdowns and the region.
And we exported 410000 barrels per day of products from our system in June.
Which is the highest volume since 2018.
Our renewable diesel segment continues to perform exceptionally well and once again set records for renewable diesel margin and sales volumes higher.
Highlighting diamond Green diesels ability to process, a wide range of discounted feedstocks and Valero.
<unk> operational and technical expertise.
Our ethanol segment also performed well and provided solid operating income and the second quarter as demand for ethanol increased along with higher gasoline production.
Carbon sequestration project with Blackrock and navigator is moved.
Arrows on head and has garnered strong interest from additional parties and the binding open season Valero is expected to be the anchor shipper with 8 ethanol plants connected to this system.
This project serves to help achieve our goal to lower the carbon intensity of our products, while providing solid economic returns.
Moving and our Diamond Green diesel II project at St. Charles remains on budget and is scheduled to be operational and the middle of the fourth quarter of this year.
This expansion project is expected to increase renewable diesel production capacity by 400 million gallons per year, bringing the total capacity at St Charles to 6.
90 million gallons per year of renewable diesel and 30 million gallons per year of renewable naphtha.
And our Diamond Green diesel 3 project at Port Arthur is also progressing well and is now expected to be operational and the first half of 2023 with.
With the completion of.
This 470 million gallons per year plant <unk> total annual capacity is expected to be $1.2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha.
Our refinery optimization projects remain on track with the Pembroke cogeneration expected.
And to be completed in the third quarter of this year and the Port Arthur Coker project expected to be completed in 2023.
Looking ahead, we have a favorable outlook for refining margins as product demand continues to improve with increasing global vaccinations and mobility and.
In addition.
And theres been significant refinery capacity rationalization in the U S and the last couple of years and we expect further closures of uncompetitive refineries, particularly in Europe, we believe that product demand recovery, coupled with significant refinery rationalization should be supportive of strong refining margins.
We also expect to see wider medium and heavy crude oil differentials as OPEC plus increases crude supply, which should further provides support to refining margins.
And as low carbon fuel policies continue to expand globally, we remain well positioned with the current projects and progress we.
We expect to quadruple our renewable diesel production and the next couple of years.
In addition, we continue to explore and develop opportunities and carbon sequestration sustainable aviation fuel renewable hydrogen and other innovative projects to strengthen our long term competitive advantage.
So with that Homer.
And the call back to you.
Thanks, Joe.
Before I provide our second quarter financial results summary, I am pleased to inform you that we recently published an updated stewardship and responsibility report, which now includes our sustainability accounting standards or SaaS be disclosures.
In addition to being on track to achieve our previously announced target to reduce and offset 63% of our global refining greenhouse gas emissions by 2025 through investments and board approved projects. The report includes a new target to reduce and offset 100% of our global refinery.
Refining greenhouse gas emissions by 2035.
These targets are consistent with our strategy as we continue to innovate and leverage our global liquid fuels platform to expand our long term competitive advantage with investments and economic low carbon projects.
And now turning to our quarterly summary.
Net income attributable to Valero stockholders was $162 million or <unk> 39 per share for the second quarter of 2021.
Compared to $1.3 billion or $3 <unk> per share for the second quarter of 2020.
Second quarter 2021.
Summary, net income attributable to Valero stockholders was $197 million or <unk> 48 per share compared to an adjusted net loss of $504 million or.
On a $1.25 per share for the second quarter of 2020.
For reconciliations to adjusted amounts.
Adjusted you refer to the financial tables that accompany the earnings release.
The refining segment reported $349 million of operating income for the second quarter of 2021 compared to 1.8 billion for the second quarter of 2020.
Second quarter 2021 adjusted operating.
Income per their refining segment was $361 million compared to an adjusted operating loss of $383 million for the second quarter of 2020.
Refining throughput volumes and the second quarter of 2021 average 2.8 million barrels per day, which was 514000 barrels per.
<unk> <unk> higher than the second quarter of 2020.
Throughput capacity utilization was 90% and the second quarter of 2021.
Refining cash operating expenses of $4.13 per barrel or 26 per barrel lower than the second quarter of 2020, primarily due.
Per day higher throughput and the second quarter of 2021.
The renewable diesel segment operating income was $248 million for the second quarter of 2021 compared to $129 million for the second quarter of 2020.
Renewable diesel sales volumes averaged 900.
23000 gallons per day, and the second quarter of 2021, which was 128000 gallons per day higher than the second quarter of 2020.
The segment set another record for operating income and sales volumes.
The ethanol segment reported operating income of $99 million for the.
The second quarter of 2021 compared to $91 million for the second quarter of 2020.
The second quarter 2020, adjusted operating loss was $20 million.
Ethanol production volumes to average $4.2 million gallons per day, and the second quarter of 2021, which was $1.9 million gallons.
Higher than the second quarter of 2020.
For the second quarter of 2021, G&A expenses were $176 million and net interest expense was $150 million.
Depreciation and amortization expense was $588 million and income tax expense was 100.
<unk> hundred $69 million for the second quarter of 2021.
The effective tax rate was 37%, which was higher than our second quarter of 2020, primarily due to the remeasurement of our deferred tax liabilities, primarily as a result of an increase and the UK statutory tax rate that will be effective.
Per day on 2023.
Net cash provided by operating activities was 2 billion and the second quarter of 2021 <unk>.
Excluding the favorable impact from the change in working capital of $1.1 billion 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 $809 million.
With regard to investing activities, we made $548 million of total capital investments and the second quarter of 2020.
1 of which 252 million was for sustaining the business, including costs for turnarounds catalysts and regulatory compliance and $296 million was for growing the business.
Excluding capital investments attributable to our partner's, 50% share of Diamond Green diesel and those related.
And other variable interest entities and capital investments attributable to Valero were $417 million and the second quarter of 2021.
Moving to financing activities, we returned $401 million to our stockholders and the second quarter of 2021 through our dividend.
Related to halting and a payout ratio of 50% of adjusted net cash provided by operating activities for the quarter.
Yeah.
Earlier this month, our board of Directors also approved a regular quarterly dividend of <unk> 98 per share payable and the third quarter and.
And as Joe noted, we were able to cut.
With all of our investing and financing activities, which includes our dividend and capital investments and the second quarter with cash provided by operating activities, even without the benefit from the cash tax refund and the proceeds from the sale of a portion of our interest and the Pasadena terminal.
With respect to our balance sheet.
Cover order and total debt and finance lease obligations were $14.7 billion and cash and cash equivalents were $3.6 billion the.
Net debt to capitalization ratio net of cash and cash equivalents was 37%.
At the end of June we had $5 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.
<unk> had containing the business and 40% to growth.
And over half of our growth capital in 2021 is allocated to expanding our renewable diesel business.
For modeling our third quarter operations, we expect refining throughput volumes to fall within the following ranges.
Gulf Coast at 1.6 to $1.65 million barrels per day.
And mid continent at $435 to 455000 barrels per day.
West Coast at 250 to 270000 barrels per day.
And north Atlantic at 450.
470000 barrels per day.
We expect refining cash operating expenses and the third quarter to be approximately $4.45 per barrel.
With respect to the renewable diesel segment with the anticipated startup of <unk>, 2 and the middle of the fourth quarter, we expect.
To fails volumes to average 1 million gallons per day in 2021.
Operating expenses and 2021 should be 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, and the third quarter.
Operating expenses should average 43 per gallon, which includes <unk> <unk> per gallon for noncash costs, such as depreciation and amortization.
For the third quarter net interest expense should be about $150 million and.
So 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.
Total debt 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 2 questions.
If you have more than 2 questions. Please rejoin the queue as time permits. Please respect this request to ensure other callers have time to ask your.
Questions.
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Our first question is coming from Phil Gresh of Jpmorgan. Please go ahead.
Hi, Yes, hi, good morning good.
Good morning, Phil.
Nice job.
Organic dividend coverage, despite choppy refining margins here.
I know you touched on some of this and your opening remarks around the macro environment and June was obviously pretty tough.
July is getting better here what.
And what do you think needs to happen going forward to see sustainable improvement of margins back.
Back to more normalized levels is it just demand and differentials or do we need some of these closures you were referencing in our remarks, just any additional thoughts.
Hey, good morning, Phil This is Gary.
And you talked about Joe talked about mobility, increasing and the second quarter, we saw a good recovery and mobility and the domestic markets and.
And with the recovery and.
Mobility, we saw on road transportation fuel demand basically recover to pre pandemic levels. The issue, we really had and the.
And the second quarter was the pace of recovery and the U S was just much faster than what we saw and most of the other major demand centers throughout the world.
And so where our margins started to track up as demand improved eventually our market began to dislocate from the global markets and we incentivize imports and so we saw very high levels of imports later in the quarter caused inventory to build and as inventory built we eventually saw margin disruption I think the good news.
And for US you know as we go into the third quarter is that at least the markets. We have good visibility into we're seeing mobility increase and those markets like we did and the U S and the second quarter with the increase and mobility, we're seeing demand and take off quite nicely, certainly see that and our Canadian markets and the U K and the markets, we go to and in Latin.
Circa and I think Thats, what you really need to have sustained margin recovery is the global market global demand pick up so thus far in July we've seen margins that are better than we saw and the second quarter.
And so that's certainly encouraging and then on the crude side you know you talked a little bit about the differ.
<unk> I think you know to see meaningful move and the differentials and we need OPEC barrels back on the market of course. It was good to hear you know OPEC plans to put 400000 barrels a day back on out on the market. Some time post August.
And I think to some degree and the markets are already reflecting that if you look at the heavy Canadian differentials and the Gulf today.
On a reported number has about 75 wider discounts and what we see and the prompt market and again that 75 net wider discounts and the face of backwardation and the Brent market. So if you look at that discount as a percent of Brent is a fairly meaningful move that we would see as we get later in the year.
[laughter].
Okay. Thanks for that color I, just want to switch over and renewable diesel for the second question indicator margins were.
And were down sequentially, obviously because of the soybean oil based indicator.
Regardless, you put up another record quarter, they're up sequentially again per.
And from the advantaged.
Got that benefit, but how do you see the sustainability of this trend.
Are there any transitory factors and the quarter are structural things that you're thinking about moving forward.
Hey, Phil This is Martin and I think if you step back and just think about the renewable diesel segment and right on our refining expertise has been a critical component.
Stock because of the development and operations and renewable diesel and ultimately the success of that business you have to also keep in mind, and we werent and early mover and this space and then the accumulated decades worth of knowledge, which is a lot more than almost all of our peers are operating reliability has been very good and that has helped differentiate diamond green.
We also use the same rig reliability process that renewable diesel that we've applied to our refining system and then finally structurally on the pricing.
Diamond Green as well as the other producers you would expect them to have stronger results when prices are going up the RIN price USD price going up.
Because.
Cause that value you see immediately and you're just going to be a lag and the cost of sales on the feedstock. So with this increasing price environment helped us somewhat.
Got it okay. Thank you.
Thank you. Our next question is coming from Doug Leggate of Bank of America. Please go ahead.
Oh, Thanks, good morning.
And the Olson.
And my.
And my observations on the cash number is something that's on the phone.
Mike.
Expense that goes second and acute.
Alright.
Hopefully you can hear me okay.
Joe.
And maybe Jason from this 1.
And on the cash flow, obviously us things improve and the second half of the year and showing up.
The cash coverage is going to be there, but you still have the cash return commitment to investors. While your balance sheet was somewhat elevated so can you walk us through how you will prioritize.
On the incremental cash returns once you move and ex universal well the balance sheet take priority beyond dividends.
So my first question is a follow up.
Yeah.
Okay, Yes, sure I'll be glad to talk to you about it and as Joe said, you'll this quarter was a big big step change for us and a couple.
Couple of ways of aid money for the first time, when we had enough cash to cover all of our needs and so.
That's a great place to be and or glad to be back. There again, we did put on a $4 billion of debt last year and we have said as things normalize you will initially focus on 2 things first build and our cash balance back up to $3 billion plus and that range.
And then second start and are working to get our leverage down.
And our June <unk> cash balance was about $3.6 billion. So we are in line there and we're in a pretty good spot and we're starting to work and on the second prong, which is looking at our debt repayment.
We said a few times before we would look at redeeming. This tranche of 3 year floaters that are callable as early as this fall.
So that would likely be our first step and Thats still true that's definitely something we're looking at it is and move forward further into this year and beyond that we will continue to look at other liability management opportunity and as earnings and cash generation and continued to normalize as you said, which is why we hope things continue to move we will have increased functionality and the more cash.
Cash we have.
But maintaining our credit rating is also a priority for us and we're targeting to have a net debt to cap around 3 times and a normalized environment, which is consistent with where we were and the past.
And we still have a long term net debt to cap target of 20% 30%.
And to get more to your question.
So still remain committed to our capital allocation framework, our share all shareholder payout ratio was 50% this quarter and we continue to target this 40% to 50% ratio on an annual basis, we do expect to be able to meet debt as we move forward through the recovery and beyond even as we work on our deleveraging strategy. So we think we're going to be able to do both.
I think it would be your answer we're not and that's certainly not going to have to sacrifice the dividend and I don't think we'll have to sacrifice the target and the 40% target either.
Yes, I guess I was thinking more about the discretionary beyond the dividend, but just not so great. So on and clear answer and thank you for that.
And I wonder if I could bring it back.
I don't know if you want to take those from someone else, but in your prepared remarks, you talked about.
And the perennial prospect from refinery closures.
You asked I guess, specifically, but these are typically triggered by capital events turnarounds and things of that nature as you know from the more vulnerable refinery.
I'm just wondering the fact that you look for growth.
Your prepared remarks, do you have any particular thoughts or insights or.
Visibility, that's giving you some comfort debt.
And it might happen this time around that and accelerated pace and all day.
Yes.
No Doug that's a good question and I don't think we've got.
Particular insight that anybody else doesn't have into spa.
Specific assets I think we can all look at him and say where the vulnerabilities are I know lane spoken about this many times I just want to share your thoughts yes.
Think about it as we think about regions that have what I would say structural disadvantages and we've talked about them for sure.
And U S East Coast U S West Coast, and it's Latin America, and they all have slightly different reasons for their disadvantages and the reason we focus on those areas as they planned job or we have operations and those areas and we expect we think about how those areas will change over time, and how we will respond to it.
And obviously.
And when we have operations in those areas and stress tests, and we try to understand the cash flow debt.
And our asset generates from an entire economic cycle and as you alluded to and we've said before the things that drive assets are these big you start with that you have and issue, whether it's trade flow or reliability or.
Or whatever and you layer and chunky capital, whether its regulatory capital or a big turnaround and that's when these assets really fall.
Operators start to think about what theyre going to do and as Joe said, we don't we aren't.
We don't sit there and this refinery over here on this refinery over there and we just sort of thinking of it regionally and where we.
We think those issues and where closures might ultimately happen.
I appreciate the answers fellas and I assume the Valero portfolio is quite.
And quite profitable growth.
We always work very hard to make sure that we maintain our ongoing and competitive advantage and all of the markets that we operate.
Seinfeld.
Thanks, Doug.
Our next answer is our next question is coming from Theresa Chen of Barclays. Please go ahead.
Good morning. Thank you for taking my questions, maybe first touching on D. G. D. Again, just in light of the very strong profitability.
Ability, we've been seeing for many quarters in a row.
And given that Lcs, that's credit prices have seen from volatility and filtering recently, how do you see that trend going forward and what's driving that.
Hey, Theresa this is Martin and I think 1 thing you have to look at is the credit Bank and California.
And so it's been pretty stable now for 5 quarters.
But the other thing is if you think California.
Haven't seen any data from them since the end of 2020, right. So theres a lag tomorrow, we'll actually see the first quarter data. So you might see but it's probably a little bit of lack of knowledge.
The credit.
Warren you and being stable.
For the last several quarters and then the other thing that I think you have to think about do we worry about that too much and not not really because if you had something that happened and where there was a prolonged share for the price of price went down and California Im pretty sure. The response.
Bank card would be to move the goalpost to actually raise the carbon reduction targets because they have signaled several times and they are pretty content with the $200 type per ton carbon price. So we would just expect.
Quicker carbon reduction if there was a long term shift.
<unk> price, which would then raise the price back up.
Got it that makes sense and then on the broader renewable front and I wanted to ask about your endeavors. There on many projects you have under development and specifically on renewable hydrogen and what kind of projects are you planning to do there.
And net price and Wayne and what we're doing there again, it's in our St Charles and Port Arthur refinery and those projects planned up to our Diamond Green diesel project, we look for way to essentially make renewable hydrogen from the LPG and that come off of those units and then turn to get them into an SLR.
And then the Heidrick and go back.
From the carbon intensity of the <unk>.
Product on both of those those units.
Thank you.
Mhm.
Thank you. Our next question is coming from Roger read of Wells Fargo. Please go ahead.
Yes, Thank you and good morning.
And from lower Hi, Roger.
I guess I'll have to come back maybe the first question and first discussion there with you Gary as you were looking at the way things are improving we've definitely seen.
Inventories come down hard in the Europe market and that was <unk>.
And wondering as you look at.
And that as you look at the mobility, improving and some of those areas.
What is the what would be the expectation for imports over the next I don't know, let's just say 2 to 3 months to keep at a reasonable timeframe and.
And what that could mean for margins potentially being measurably.
Stronger and Q3 than they were for at least the end of Q2.
Yeah, Roger So I think I think I'd point to as you know the arb to import gasoline from Europe has really been closed most all of July and so that's been encouraging to see I think the last set of data is really the first time we saw.
And it reflected in the day to imports falling off but it really has you know more of it and impact and just the imports because we've also seen that again much more competitive and into Latin American markets.
Not only was Europe export into the United States, but they were pushing into Latin America and <unk>.
Causing us.
To lose some of the exports, we typically send to that market, but as things have picked up and Europe, they're not only not sending barrels to the U S, but but we're seeing our exports ramp up into Latin America. So you know what I would say is more normalization of trade flows.
Which will help inventories continue to draw and support better crack spreads.
Great. Thanks, and then the other question a little off the typical beaten path here, but you're obviously moving aggressively more expansions and renewable diesel is we've seen a lot of talk about sustainable aviation fuel as 1 of the areas. I was just curious is there anything youre looking out on that front or the economics.
<unk> and sustainable aviation as attractive as renewable diesel as you look at them and then what would be the <unk>.
Yes to some extent interchange ability between renewable diesel and sustainable aviation fuel.
Yeah, and so this is Martin.
If you look at that Roger.
And to make.
Renewable jet or SaaS, you have to have some additional equipment I mean, there's a few ways to do it but you're either going to and youre, probably going to add a reactor and youre certainly going to add the fractionator. So thats additional capital and then what's your yield pattern changes a little bit where you make some more light and so at the end of the day to get back.
With equal to renewable diesel youre going to have to get some help on the SaaS side with some additional.
Pricing mechanism and additional green premium there so right now and we don't see the economic and send them to make staff.
That being said, obviously, we're studying it we're looking and everything we're looking how the landscape changes.
And what's going through and all parts of the world and legislative processes of regulatory processes, and we'll keep watching it and you know we fully expect to be making it at some point.
So I don't think it's a question of if but it's more about when.
Thank you.
Our next question is.
Excuse me coming from Sam Margolin of Wolfe Research. Please go ahead.
Hi, everybody how you doing.
Hi, Sam.
My first question is from Martin if I could ask you to go into a little bit more detail about debt yields.
You made.
D. G D. Just given the you know per gallon and value of all the different credit flowing and at a yield outcome is very powerful so.
And if you're able to can you just give a little more.
Detail around that and how sustainable it is and whether and how far off sort of your plans you are.
In terms of yield outcomes and production efficiency.
Well, Sam I would say, our you know our yields right on track with what we what our what we expect the and it's really not so much the yield and it's more just about the timing.
And we've been in a market with a huge increase in USD.
Comment on it's a huge increase in Iran and.
Year to day and fat prices also been up but you've had a bigger escalation and the ran and then you've had and the fat price.
And we've also been helped by the discount you know our feedstocks by running a 100 per cent waste feedstocks.
We're certainly buying on a price.
The price can really lower that soybean oil and so what I'm, saying on the timing is just and a rising market like that you're going to immediately see the U L. S D price and your revenue Youre going to immediately see the RIN price and there's just a lag and the feedstock.
Price and hitting cost of goods sold so youre going to see a little better margin environment and a rising.
Prices.
Hey, Bill.
And on the way and I'll add to the oil, but we have been working on catalyst supplier and in terms of improvement and the yield of the current units and essentially trying to maximize renewable diesel.
LPG or naphtha and versus some of the off gas. So we have seen our yields on.
Why.
And.
Cigna overall operating experience from.
2013.
Okay understood. Thank you and then yeah.
Yeah, Joe in your prepared remarks, you had a comment about.
Light heavy differentials potentially bottoming and and starting to expand here is as OPEC volumes.
Come back.
I think I'm still looking at the sulphur penalty, it's still very wide is there a signal around high sulfur fuel oil discounts and what that means for when actual supply of sour expands as the as the expansion of that advantage can be faster than normal or is it are you still thinking about it as kind of.
The normal relationship between kind of supply versus differentials.
No I think you know some of the movement, you've seen and high sulfur fuel really to 2 primary drivers on high sulfur fuel discounts 1 just the prospect of getting more OPEC barrels on to the markets caused high sulfur fuel oil to weaken some and then you know some.
Changes in the tax policies and in China caused them to kick out some high sulfur fuel blend stocks, which caused high sulfur fuel oil to move weaker today you know, it's 1 of the more economic feedstocks were running and our system high sulfur fuel oil high sulfur fuel blend stocks as 1 of the highest margin fees, we have on our system today and.
And we expect that to continue.
Okay, Thanks, everybody take care.
Thank you. Our next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.
Yeah. Good morning, everyone and that's the first question here is just as probably from Martin on the ethanol side yet.
And had strong results at that business segment can you just talk about.
What do you think the sustainability of this ethanol recovery is and the moving pieces from feedstock to product prices.
Sure Neal, Yes second quarter was obviously really good and if you look at the weekly.
Inventory debt and the second quarter, what was happening through most of the quarter as the inventories just kept drawing on.
And typically when inventories draw and you know youre going and get a better margin and it's pretty pretty good correlation there and and the U S ethanol industry.
So when we bought it.
The weekly data and now and June starting.
And they may and through June we've seen that turn the other way so margins now or are lower than they were and the second quarter.
How long is this going to last I'm not sure we're starting to see some run cuts and the industry. Now you know we've signaled some some lower guidance for third quarter on runs versus what we did and second quarter.
So, we'll see where that turns I mean really what we're looking at long term, though and ethanol is carbon sequestration and we feel like that what is going to differentiate and differentiate us from the industry.
Between the 45 Q tax credit that's worth about 15 cents a gallon.
Moving to L CFS markets.
And is it more like 50 cents per gallon growth.
And we're well positioned there with what we're doing with navigator and Blackrock and then we're also looking at some standalone projects at our eastern ethanol plants for carbon sequestration. So that's really our end game is to lower the carbon intensity of our product and our.
On state stay competitive there and differentiate ourselves.
Yeah.
That's great and that's a follow up is it just a big picture question and I don't know if the spread for Joe or Lane, but you know if I think about the demand side of the equation for both gasoline and diesel has come back really nicely. Obviously, we're still waiting here on global jet and.
On that until recently did and performance just strikes us that and the refining system and the United States was running too hard ahead of ahead of product.
Do you believe that a.
Discipline in the U S refining system has broken down or do you see that as still a structural tailwind for.
And the space that are independent refiners will generally run at relatively low level of utilization relative to demand, enabling a favorable inventory. So it's a big picture question, but when and structural benefits certainly and the refineries over the last couple of years has been.
It has been the desktop on discipline around runs.
Yes.
And why and when I say independent.
Independent refiner and we will be much more disciplined and then the industry was a decade ago and it's just because we would be at the end of the day, we have to manage our assets to 2.
The cash flow and to make money I think what you're what you've seen there was a clear signal and April and may to raise utilization and there was a big and you know the.
The market.
Signaling that what really happened and you already talked about it earlier as it was just a bug line right.
The U S have recovered.
We were out of our mobility had gone way up and and attracted imports from areas that were still essentially and lockdowns and he has surplus capacity in Europe and some of these other places that attracted imports I wouldn't say that.
So stay tuned.
Refining industries had gotten a lack of discipline and it was on our operating per the signals.
You could make the issue that we have kept with their capacity out there that you know.
Essentially to get pointed in the us and them.
From an earlier caller mentioned.
European fundamentals look better so.
With today, and what Youre seeing and even though margins are up and we're not really absorbs closer and United States coming out of Europe.
Okay.
Thanks Lynn.
[laughter].
Thank you. Our next question is coming from Paul Cheng of Scotia, Howard Weil. Please go ahead.
Hey.
Good morning, Paul.
Couple of quick questions.
Maybe this is for Gary Gary Mexico.
The reason action by a M L O.
That's a close and the concern from your guys' standpoint and.
And what did you place.
Ongoing investment in the near term to take a wait and see at the tail or that you think is just continue to be business as usual and push forward with and with the maybe.
And maybe elimination on Ken Ken.
A large number of the important and Nick spotlights on have you.
No the market on that much change there.
The first question.
The second question, Yes on lane.
Just curious I mean, you guys and the industry and has done a remarkable job in changing day all of that to to use the effects or anything else that system refunding system to 1.
It seemed like both crew.
Over that and I'll say from here, even for cough cold and heavy oil and refined that she had substantially more to delight and doing the pandemic substantially reduced your view and.
Ethan.
And then trying to canyon to gasoline, but a lot of time debt that D wave from the day.
Different place than your model. So a long deadweight why would you do it or have you seen and the Ah.
And the efficiency or and the Kohl's create as such that the margin capture it become maybe perhaps a bit worse off.
Thank you.
Okay, Paul and.
And I'll start and if ridgewell from wants to add anything to it and I'll, let him and on on Mexico, I'm really our strategy is unchanged and the 1 thing I would say is we're not really investing in Mexico.
Partnered with with <unk> and others that are really making those investments and then we signed long term agreements to utilize the.
The assets that they are investing in but overall I think the strategy that we're using and Mexico is what they had intended when they started energy input report and I wanted to see investment and infrastructure and their country and.
A lot of others are really not doing that kind of taken advantage of the legislation.
<unk>, we are investing and country and I think what we are doing and Mexico is exactly what was intended with the change and the regulation. So our strategy is still very much.
Intact. Their crews is fully operational now we have our terminal in Mexico City was commissioned during the second.
Water.
We will commission on our terminal and Puebla and the third quarter. We have also started to bring jet fuel into Veracruz and will start jet fuel sales and the third quarter as well so things are going very well for us and Mexico rich on low if you want to add anything I think that sums it up.
And Sam.
Second question.
Did I think and we particularly we obviously are aware of have learned a lot going into the epidemic pandemic in terms of how the operator on Earth, maybe differently and I'm actually demonstrated more flexibility.
As you would expect us to figure out how to how to operate I think in terms of margin capture what youll see is.
And for your out of it is going into it we had contango right. So.
There were structural contango on the crude markets and as we're coming out of it and we've gone flat slight backwardation. So.
I think what Youll see kind of moving ahead, you have a combination of flight.
Slight backwardation, and obviously high flat price will cause some of the byproducts that.
Yes.
Have some margin capture.
<unk> margin cash doesn't really affect so much or our ability to generate EBITDA as much as Duane and turn on the margin capture but in terms of anything that's happened post pandemic.
And if anything we just learned a lot more about how to manage our business.
Even more carefully than we had before.
Alright, thank you.
Thank you.
Question is coming from Manav Gupta of credit Suisse. Please go ahead.
Hey, guys just first wanted to congratulate Mr. John Locke and homeland and.
And for their promotions and.
Wish them on the luck for all the new responsibilities that thinking within Valero and also wanted to congratulate you and Joel I mean.
The capital discipline and shareholder returns and strong pillars on which you have to build this new Valero. So it was personally very important for you to achieve full dividend coverage and so congrats on getting that despite a tough macro.
Yeah.
Well, Thanks, Manav and you know John and home are both going to need a lot of luck.
Sure.
Yeah.
Hum My quick question here is a lane you is we've seen not Atlantic here actually you know, sometimes outperforming on Macondo very strong.
And this quarter came and it a little weaker and I'm, hoping it was just that on around and it has nothing to do with that 1 of the refinery is located in Europe, and Canada and just if you could give us some color on why and north Atlantic, but slightly weaker quarter over quarter.
Yes.
Yes.
Both refinery turnarounds.
The revolver.
Okay. Thank you for taking my question.
Thank you. Our next question is coming from Ryan Todd of Piper Sandler. Please go ahead.
Okay.
Okay. Thanks, maybe went on.
You announced the debt.
And you've moved.
And at the timing of the Diamond Green diesel phase III and started up from on the second half to the first half of 2020.3.
And what's allowed you to to accelerate that and then maybe can you talk about.
The general environment out there I think most people probably would have taken that over for for most of the capacity expansion start dates.
And out there.
And I guess within that overall environment.
And what have you seen and that's allowing you to kind of execute better than expected on your projects.
Sure. This is Martin and I think 1 thing you have to remember now as D. G. D..3 is pretty much a carbon copy of D. G D too.
So that helps us I mean, all of the major equipment.
A little bit, but just tweaks. So we had a lot on the engineering and.
And sooner than you typically would have.
And obviously, we knew that when we funded it but just getting out and.
The market a while.
And while steel prices and everything we're up we kind of beat all.
To the market. So we had placed orders before that happens.
And the delivery is good I mean, the shop spaces, there and the labor situations really good on the on the Gulf Coast, where we're building so.
So all of those things and then just you know having experience removed over experienced contractors from D. G D.
All of that due to just built 1 of these units. So you know all the all the work the structural work concrete work structural steel is already going up. So we just got a really quick start out of the gates and.
And we expect to be able to maintain that.
And in a nutshell.
And an experienced construction team.
2 and getting out in front on these price increases and and shop space has been really good force.
This is why I want to emphasize what Martin just said I mean part and what we're able to do here is just not just really and this space, but we have a really good project execution group and they were in the process of building Diamond Green too and we.
Lauren.
And it's actually accelerated and brought in it.
It's schedule. So we just first of all that and transferred Diamond Green and you just sort of speaks to our capability.
Not only operate well, but we can execute project and very well and not just non refining base, but also on the renewable diesel space.
And on.
Great. Thanks, and congratulations on it's pretty impressive.
And maybe a separate question on on.
<unk> and the RVO and and Theres been obviously, a lot of noise lately, a lot of volatility and those markets.
Following the Supreme Court's ruling on on Fsrus and with the upcoming RVO.
Okay.
With yourselves involved now and a pretty material way on on both sides of the issue on the gasoline and side and on the on the biofuel side.
Any thoughts as we head into how you think these days you're going to try to balance things are and how you look on the market playing out with RVO is and the.
Over the next couple of years.
This is rich ill take a crack at that.
Yeah.
There is a lot of noise on this but as you know and when you really sort it all out and it comes down to EPS gonna have to issue. These RVO as they clearly are kicking them out and get past a lot of the infrastructure discussion and and.
And not.
Not to have this issue rear up and the middle of their efforts to try to push forward there the infrastructure Bill So we.
And would expect that once you once you kind of clear the CPA is going to have to issue and RVO, where almost all the way through 2020.1.
By the time, they could get a rule proposed and the out years almost kind of almost certainly.
He passed it so youre looking at maybe 2021, and 2022 combined rule or at least I'm coming out at the same time and I think that'll and.
And the other reality is that they recognize that they need to set and RVO, that's achievable and and and and obtainable and so we expect them to do.
On the <unk>.
The Supreme Court ruling really focused on only 1 issue was appealed up and.
That was that was on these.
And really.
On the SRU ruling the other aspects of the 10th circuit ruling that kick those sru's back to EPA are still are still are still there and.
Do that EPA has got them back under and they have and issued and SRT since 2 to 2018 so.
Okay.
And the prospect for Fsrus, probably doesn't really change with the Supreme Court ruling and the EPA has still got a whole host of other issues that they have to sort through that came out on the 10th circuit ruling that was still is still.
Stance and so.
How do you how do you guess, what's going to happen on this and the reality is I've just got a 7 and attainable.
And achievable mandate and that.
That's what they'll have to do.
Alright, I appreciate the commentary thank you.
Yeah.
Thank.
Thank you. Our next question is coming from Matthew Blair of Tudor Pickering Holt. Please go ahead.
Hey, good morning, I wanted to follow up on Martin's response on the CFO question Martin and I think you said that you expect carb to moving the goalposts to keep credit prices around 200 a ton.
And so just 2 follow ups on that 1 mechanically do you know how that would work.
Carb have unilateral authority to to do something like that or do they need legislative approval is there sort of like a public comment period and.
And 2 what would you expect the refiner response to be if that happen.
And just thinking about Valero and yet you have 2 refineries and the state that are incurring all CFS cost or some other refiners and the states that currently don't have argued production.
Is that something that refiners would fight could they fight it any more color there.
Well, it and what's different and with the car.
Regulations and with the L. CFS to answer to your last question first on that debt obligation goes down to the rack so that the prices passed on on for.
For the refinery in California.
Which is in contrast to the way the RFS works. So that's.
And I wouldn't expect to see.
Fight from the from the refiners on that.
The other question is more interesting.
Carb has theres been several statements out there about.
Moving the goalpost.
To answer your specific question and I'm not sure I can what what is required there and do a little looking into that but.
And my understanding is they have the ability to do that but we'll have to check on that.
Yes, I mean, that's great. Thank you I'll leave it there.
Yeah.
Your next question is coming from Jason <unk> of Cowen. Please go ahead.
Hey, good morning.
I wanted to ask on <unk>.
<unk> 2 aspects that could have been transitory.
First on biofuel blending and there was some thought that maybe.
Blending biofuels instead of buying Rins minimizes.
The.
Cost of Rins, you incur but it's unclear if the actual.
Sales and costs flow flow that way or not so could you just.
And a elaborate on if youre still seeing the same benefit from blending.
And as you historically have and that it avoids.
Having to go out and buy a range or are you incurring some costs at a similar time to go on and bye bye.
Bye Bye Rins and then a second question also on kind of transitory items.
On the co product impacts on <unk> are those headwinds dissipating and turning into a tailwind.
Oil prices are declining.
Or are different products moving in different ways.
And I think on your first question, whether you are outlining the ran or doing the blending and youre kind of achieving the same thing so the market prices.
So the rent is what it is so easy.
<unk>.
And so you get to the same result.
And second question.
There are a byproduct that we make and the refinery that don't move in lockstep with crude product and things like asphalt petco sulfur LPG.
And the long haul they do it takes a longer and other work.
Prudent and stuff are moved down of a tendency to sort of take longer to get to their equilibrium with Bruce. So you would expect it for whatever reason of crude prices per download will improve and I don't know that.
And I'm speculating that crude prices will be down from the entire quarter.
But that is how it works.
Okay.
Sorry can I just follow up on that first answer quickly is that to say, there's no real benefit from going on and blending biofuels versus buying rins, because I was under the assumption and if you're blending biofuels year, sidestep and buying rins, and there's kind of an embedded and benefit and in doing that.
Well I would say there was a benefit right and you can't I mean, obviously, everybody just can't buy Ryan Youre going to have to move the biofuels too. So certainly we're looking at both sides of that equation, but.
Markets functioning properly and people are certainly.
And there's people that have to meet obligations and youre going to have some blending and.
And properly functioning market, I'm, just saying youre going and get to the same place, but youre going to do both.
Alright, and I'll leave it there thanks.
At this time I would like to turn the floor back over to Mr. Cola for closing comments.
Thanks, Donna we appreciate everyone joining us today.
Stay safe and healthy and feel free to contact the IR team. If you have any additional questions have a great day, everyone. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and have a wonderful day.
Okay.
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