Q3 2021 Valero Energy Corp Earnings Call
[music].
Greetings, ladies and gentlemen, and welcome to the Valero third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow.
Presentation, if you would like to ask a question. Please press star one on your telephone keypad, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Homer Butler, Vice President of Investor Relations and finance.
Thank you Sir please go ahead.
Good morning, everyone and welcome to Valero Energy Corporation's third quarter 2021 earnings conference call with.
With me today are Joe Gorder, our chairman and CEO Lane Riggs, our president and C O O Jason Frazier, our executive Vice.
Residents 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 are.
Differ from our expectations, including those we've described in our filings with the SEC.
Now I'll turn the call over to Joe for opening remarks.
Thanks, Homer and good morning, everyone. We saw significant improvement in refining margins globally in the third quarter as economic activity and mobility continued.
Over in key markets.
Finding margins were supported by strong recovery in product demand, coupled with product inventories falling to low levels. During the quarter. In fact total U S light product inventories are now at five year lows and total light product demand is over 95% of the 2000.
To regain level.
Across our system current gasoline sales are at 95% of the 2019 level and diesel sales are 10% higher than in 2019.
On the crude oil side medium and heavy sour crude oil differentials widened during the quarter.
90, plus increased supply.
Hurricane either resulted in some downtime at our St Charles and <unk> refineries and the Diamond Green diesel plant, we immediately deployed emergency teams and supplies. After the storm to help our employees their families and the surrounding communities in the restoration.
And recovery effort the affected facilities did not sustained significant damage from the storm and once power and utilities were restored the plants were successfully restarted.
I am very proud of our team's efforts and the ability to safely shutdown and restart our operations.
Despite the impacts of the hurricane.
<unk> also completed the Diamond Green diesel expansion project D. G D. Two in the third quarter ahead of schedule and on budget and are in the process of starting up the new unit.
D G D to increases of renewable diesel production capacity by 400 million gallons per year, bringing D. G DS total.
We have a diesel capacity to 690 million gallons per year.
In addition, we successfully completed and started up the new Pembroke Cogeneration unit in the third quarter, which is expected to provide an efficient and reliable source of electricity and steam and further enhance the refineries competitive.
Renewal this.
Looking ahead the D. G D. Three project at our Port Arthur refinery continues to progress and is still expected to be operational in the first half of 2023.
With the completion of this 470 million gallons per year plan D. G. DS total annual capacity is.
As expected to be $1 2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha.
The large scale carbon sequestration project with Blackrock and navigator is also progressing on schedule.
<unk> has received the necessary board approvals to proceed with the carbon capture pipeline.
<unk> system as a result of a successful binding open season.
Valero is expected to be the anchor shipper with eight ethanol plants connected to this system, which should provide a higher ethanol product margin uplift.
The Port Arthur Coker project, which is expected to increase the refinery's utilization.
<unk> rate and improved turnaround efficiency is still expected to be completed in 2023.
On the financial side, we remain disciplined in our allocation of capital, which prioritizes a strong balance sheet and an investment grade credit rating, we redeemed the entire outstanding principal amount.
Of our $575 million floating rate senior notes due in 2023 in the third quarter and we ended the quarter well capitalized with $3 5 billion of cash and $5 2 billion of available liquidity excluding cash.
Looking ahead, we continue to have a favorable outlook.
Outlook on refining margins as a result of low global product inventories continued demand recovery in global balances supported by the significant refinery capacity rationalization seen over the last year and a half.
In addition, the expected high natural gas prices in Europe, and Asia through the winter.
Could further support liquid fuels demand as power generation facilities industrial consumers and petrochemical producers see incentives to switch from natural gas to refinery oil products for feedstock and energy needs.
Continued improvement in earnings of our core refining business, coupled with the auto.
Ongoing expansion of our renewables businesses should strengthen our competitive advantage and drive long term shareholder returns.
So with that Homer I'll hand, the call back to you.
Thanks, Joe for the third quarter of 2021 net income attributable to Valero stockholders was four.
$63 million or $1 13 per share compared to a net loss of $464 million or $1 14 per share for the third quarter of 2020.
Third quarter 2021, adjusted net income attributable to Valero stockholders was $500 million or $1 20.
Two per share compared to an adjusted net loss of $472 million or $1 16 per share for the third quarter of 2020.
For reconciliations to adjusted amounts please refer to the financial tables that accompany the earnings release.
The refining segment reported 830.
<unk> hundred $5 million of operating income for the third quarter of 2021 compared to a $629 million operating loss for the third quarter of 2020.
Third quarter 2021, adjusted operating income for the refining segment was $853 million compared to an adjusted operating loss.
Loss of $575 million for the third quarter of 2020.
Refining throughput volumes in the third quarter of 2021 averaged two 9 million barrels per day, which was 338000 barrels per day higher than the third quarter of 2020.
Throughput capacity utilization.
<unk> was 91% in the third quarter of 2021 compared to 80% in the third quarter of 2020.
Refining cash operating expenses of $4 53 per barrel or 27 cents per barrel higher than the third quarter of 2020, primarily due to.
Higher natural gas prices.
The renewable diesel segment operating income was $108 million for the third quarter of 2021 compared to 184 million for the third quarter of 2020.
Renewable diesel sales volumes averaged 671000 gallons per day.
In the third quarter of 2021, which was 199000 gallons per day lower than the third quarter of 2020.
The lower operating income and sales volumes in the third quarter of 2021 are primarily attributed to plant downtime due to hurricane Ida.
The ethanol segment.
<unk> reported a $44 million operating loss for the third quarter of 2021 compared to $22 million of operating income for the third quarter of 2020.
Excluding the adjustments shown in the accompanying earnings release tables third quarter 2021, adjusted operating income was $4 million.
Compared to $36 million for the third quarter of 2020.
Ethanol production volumes averaged $3 6 million gallons per day in the third quarter of 2021, which was 175000 gallons per day lower than the third quarter of 2020.
For the third quarter of 2021 G&A.
G&A expenses were $195 million and net interest expense was $152 million.
Depreciation and amortization expense was $641 million in income tax expense was $65 million for the third quarter of 2021.
The effective tax rate was 11%.
Which reflects the benefit from the portion of D. G. DS net income that is not taxable to us.
Net cash provided by operating activities was $1 4 billion in the third quarter of 2021.
Excluding the favorable impact from the change in working capital of 379.
<unk>.
And our joint venture partner's, 50% share of Diamond Green diesels net cash provided by operating activities. Excluding changes in D. G. DS working capital adjusted net cash provided by operating activities was $1 billion.
With regard to investing activities we.
$585 million of total capital investments in the third quarter of 2021 of which 191 million was for sustaining the business, including costs for turnarounds catalysts and regulatory compliance and $394 million was for growing the business.
Excluding capital.
Made investments attributable to our partner's, 50% share of Diamond Green diesel and those related to other variable interest entities capital investments attributable to Valero were $392 million in the third quarter of 2021.
Moving to financing activities, we returned four.
Little in billion dollars to our stockholders in the third quarter of 2021 through our dividend, resulting in a payout ratio of 40% of adjusted net cash provided by operating activities for the quarter.
With respect to our balance sheet at quarter end total debt and finance lease obligations were $14 2 billion.
And cash and cash equivalents were $3 5 billion.
And as Joe mentioned earlier, we redeemed the entire outstanding principal amount of our $575 million floating rates senior notes due in 2023 in the third quarter.
The debt to capitalization ratio net of cash and cash.
<unk> hundred 37% and at the end of September we had $5 2 billion of available liquidity excluding cash.
Turning to guidance, we still expect capital investments attributable to Valero for 2021 to be approximately $2 billion, which includes expenditures for turnarounds catalysts and.
<unk> venture investments.
60% of our capital investments is allocated to sustaining the business and 40% to growth.
And over 60% of our growth capital in 2021 is allocated to expanding our renewable diesel business.
For modeling our fourth quarter operating.
Injunctions, we expect refining throughput volumes to fall within the following ranges.
Gulf Coast at 167 to $1 seven 2 million barrels per day.
Mid continent at 455 to 475000 barrels per day.
West Coast at two.
<unk> hundred 30 to 250000 barrels per day.
And North Atlantic at 435 to 455000 barrels per day.
We expect refining cash operating expenses in the fourth quarter to be approximately $4 70 per barrel.
What.
With respect to the renewable diesel segment, we expect sales volumes to average 1 million gallons per day in 2021.
Operating expenses in 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 $4 2 million gallons per day in the fourth quarter opt.
Operating expenses should average 43 cents per gallon, which includes five per gallon for noncash costs, such as depreciation and amortization.
For the fourth quarter net.
Interest expense should be about $150 million and total depreciation and amortization expense should be approximately $600 million.
For 2021, we still expect G&A expenses, excluding corporate depreciation to be approximately $850 million.
That.
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 if.
If you have more than two questions. Please rejoin the queue as time permits.
These respect this request to ensure other.
Callers have time to ask their questions.
Thank you the floor is now open for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment.
Equipment, it may be necessary to pick up your handset before pressing the star keys once again Thats Star One to register a question at this time. Our first question is coming from Doug Leggate of Bank of America. Please go ahead.
Thanks, Good morning, everyone, Hi, Joe and team good morning, Omar Thanks for getting that done.
So I want to start with a balance sheet question and then a micro question. If I may so this might be for Jason but.
When you think forward to 2022, you've obviously completed the renewable diesel expansion at this point.
Your capital this year.
Obviously hot growth capital in there still.
Your balance sheet.
It's still probably above where you'd like to see at mid cycle, how should we be thinking about capex and prioritizing the right level of debt to our balance sheet that you'd like to have as we think about 2022.
Go ahead Jason.
Yeah, all in Capex I mean, our.
Capex budget going forward, where we're forecasting to be pretty consistent with as we've done in the past so really no change there.
We ended up with extra.
You said excess cash flow, but we have our commitment to shareholders to return to 40% to 50% that really hadn't changed we have our dividend, which we think is in a pretty.
Pretty good place relative to the peers.
And then we will have buybacks to make up to our target is in the cash beyond that we are going to look at delevering a bit that's a commitment. We made we bought back the $5 75 of floating rate notes and just last month and we're looking to do more next week I mean, sorry next year.
As we move forward. So yes, I think what would you like that to be Jason I guess is my point, where do you want net debt to cap to be.
But we hadn't changed what we have in our frameworks with 20, 30%. So we haven't changed that but we're definitely working down from where we are now I don't know that we've changed our the endpoint.
At this time.
Okay. Thank you Joe My micro question is really low.
I wanted to turn of phrase it like this there's a ton of moving parts for you guys in particular with top line that we're seeing and obviously OPEC plus adding back oil and all the rest of it. So you got the spread side of it and then you've got the product side of it with jet fuel perhaps being missed.
Missing link.
Maybe the simplest way to ask this question is do you see for Valero 2022 at this point from what you know is an above mid cycle year, although below mid cycle year in terms of EBITDA.
Leave it there thanks.
Thanks, Doug.
Hey, Doug This is Gary I would tell you on the demand side of the equation our view.
<unk> of 2022 has been fairly consistent we see gasoline and diesel demand recurring returning to pre pandemic levels. Our view is that it probably is the latter part of the year before jet demand recover to pre pandemic levels. The real change on 2022 has come from the fact that inventories are just so low.
Inventories domestically are low but globally, they are low as well and when you look at the fourth quarter turnaround activity. It is difficult for us to see that we're going to replenish.
Lean product inventories before next year, and so going into next year with inventories low we're starting to move to a view that we could.
Some some fairly strong crack spreads I think in addition to that the high cost natural gas also comes into play.
When you look at places around the world that are paying $30 a million btu for natural gas it pressures that refining capacity and kind of raises the incremental crack spreads needed for them to run which also pushes margins.
Could see so you know I would tell you that you know we probably came in looking at 2022 slightly below mid cycle and its trending now more above mid cycle type levels.
I appreciate the answers guys and we'll talk to in a couple of weeks. Thank you.
Thanks, Doug.
Thank you. Our next question is coming from Theresa Chen.
<unk> of Barclays. Please go ahead.
Hi, there and good morning, everyone. Good morning, Truthfully My question morning.
Gary I.
Wanted to follow up.
On that your comment about the natural gas pressure internationally and clearly.
Hi.
And with that domestically as well so first maybe just on the competitive dynamics between domestic and <unk>.
Refiners elsewhere in Europe for example.
How does how do you think this affects the competitive positioning of your assets and you know where do you see that exports are potentially going to.
But it's a good question I guess, you know might ask for some lane help here. So natural gas is what about 25% of our opex or something like that yeah. So you kind of figure $4 a barrel in a dollar that's natural gas and if you are paying.
$30 versus five you can see what that does for overall refinery cash.
Operating expenses, which does give us a very significant advantage into those export markets and we're seeing that today, you're not seeing much flow from Europe into those Latin American markets, and we're seeing a big pull into those markets.
Got it and maybe switching gears, a little bit now I would.
Would love to get an update on your outlook on renewable diesel economics economics.
As D. G. D. Two is now starting up and specifically it looks like I'll see if house prices have hit the trough and now are seeing some signs of life consistent with Martin previous expectations is this largely because of demand.
Covering for petroleum products in California, beginning to higher deficit generation, if theres something else going on here would love. It. If you know Martin can look into your Crystal ball again, and give us a sense of where prices could go from here.
Okay truth to this Martin I'll give that a shot I think yeah, we've seen the Lcs.
As prices rebound $2 75, a metric ton now.
I think some of that's due to the expectation again in the second half that out the second quarter of 'twenty. One data will be published at the end of the month, but if you go back and look it's really obvious the deficits after 2019 just stopped.
Increasing and at that time, the carbon reduction goal was moving from $6 two 5% to seven 5% to 875%. So historically each year you'd see a step change in deficits. We've seen nothing happened since 2019 and credits are keeping up with deficits in the credit bank is flat.
Flat so that kind of explains why the pricing went away it's not an over generation of credits. It's a lack of deficits, it's clear and I think with the Delta.
Delta variant now hopefully in the rearview mirror and mobility improving.
We would expect to see some pretty big changes in the deficit.
The picture in California, going forward and I think that's what the.
The market has begun to expect as far as the renewable diesel economics of D. G. D. As we signaled we expected the margins to moderate versus the record margins in the first half of 2021.
Part of this is D.
D G D to getting into the marketplace.
Impacting the.
Waste feedstock market at this point, because we're changing the flows and anytime you change the flows and change the inertia of the market youre going to see a temporary increase in price once the new flows worked through the market, we expect those prices to moderate.
Great.
And I'll go back to what we always talk about the annual margins you know we've been very consistent for the past three years.
Our annual margins only moved from 2014, a gallon to $2 37, a gallon in that three year period, and we believe that margin history is a good indication of what to expect in the future.
Moderate thank you.
Thank you. Our next question is coming from Roger read of Wells Fargo. Please go ahead.
Okay.
Yes, good morning, everybody.
Hey, Roger.
Yes.
Let's go ahead and beat the natural gas horse here completely to that.
I know you've got the Cogent plan that helps you sort of mitigate things a little bit over in Europe as you step back and look at both your operations and think about it.
Somebody else what are the options for mitigation of higher natural gas costs.
<unk> me.
Do you hedge do you think others hedge.
Another way to come at it is mentioned in the intro Joe I think he said was probably demand for some other liquid products. So what are what are the some of the ratios. We should think about there as to how that could pull additional.
Product demand and.
What are maybe trigger points for why you would do that over natural gas.
So hey, Roger This is lane ballparkish, although some of the one is that we do when you have completed our cogent project over in Pembroke and so you'd sort of ask yourself at $30.
The work.
<unk>.
And it does I mean, our fund RFID economics on that you know it was about $105000 a day of benefit and today, we're somewhere between 130 to $150000 a day and it just has to do with the through the marginal supplier of electricity in that market versus sort of an efficient codes and so thats really we have that margin.
We're running it and it does help now a lot of the unit a lot, particularly in the U K a lot of those guys are have cogent as well I don't know how efficient they are because that's where the relative economics lie is how efficient your cogent is versus the marginal guy in that market.
As Gary alluded to earlier, what Youre seeing is you need margin in the Atlantic Basin, because there is a.
Call on their capacity to essentially run oil and satisfy the market. So what that means is Europe and the UK are and be very marginal and their economics, but that gives a bit I gives us substantially larger margin into people on this side of the Atlantic.
In terms of ways to mitigate it through hedging there is a few ways. One if you can just minimize gas right you can start.
That we Havent propane you can do other things with most of our refiners for the complexity, we're long gas.
So we can always get into a place where we're at is essentially driving our natural gas requirements from oil and.
And so we play that arbitrage and signal around and try to see where that is and the other thing is these option strategies you can go.
By call option for gas in various ways of using options to mitigate your exposure and then obviously you can go out and buy forward contract I don't know how many people do that it's an interesting question and we look at it all the time and we compare when we look at it a little bit of insurance, because it's not it's not free right and so you have to take a view of Ma.
Trying to use.
Use this to lower my exposure from a cost perspective, I'm not trying to trying.
Trying to prevent a.
Shock and so.
In other words, something like we saw during winter storm urea or something like that so you have to sort of frame. What are you trying to do here because it isn't free and if it doesn't translate into something that cost for somebody.
Our size ends up being just additional operating profit, we essentially paid as insurance and so you have other ways to do it you can decide to fix or floated youre getting closer into the mine. So there's a lot of there's a lot of tools in our tool bag to mitigate this.
But in the end of the day to try to lock in lower prices going forward Theres almost always structural contango.
If you look at the curve right now, it's kind of crazy looking and so everybody staring at this because you can see the futures activity in the first quarter and so it's difficult, but we do have tools to do that.
Did you speak to.
That's what I was saying we can before we.
We feel for it.
Mainly propane we offer.
Gas from our operations Okay.
Thanks.
Let's look at it from a happier standpoint, the product demand side. It appears jet fuel should get a lift with some of the international travel restrictions coming off next month and then we obviously have supply.
Why change issues in trucking I was just curious you mentioned earlier that it looked like diesel demand was up versus 19 levels. Do you think there's another lift up focused on logistics and just general trucking demand and then how do you see the jet fuel.
Manned picture.
So hopefully improving as we go into year end.
Yeah. So Roger I think there is a good chance some upside to diesel we've seen good harvest demand.
Lot of it depends on the fourth quarter, what happens in weather, but specifically on the trucking side.
Still a lot of companies struggling to find drivers to drive.
Five the trucks and get products moved around so I think as we work through that and get drivers back to work. There is a chance that you see more highway demand for diesel which is encouraging on the jet side, we saw a nice step change in the third quarter.
We're trending 70, 172% of 2019 levels in that.
Your home to the ATM. So that's nice to see you know what that level, you're you're kind of overall total light product demand is about 300000 barrels a day below where it was in 2019, but you've got 675000 barrels a day less refining capacity. So already you know youre really tighter supply.
That jumped balances at least domestically than we were pre pandemic and then we are seeing encouraging signs on the jet side. You know you'd look we don't have a lot of transparency there, but the nominations that we're seeing from the airlines that we supply seem to.
Show that they are anticipating a pretty heavy holiday travel season.
Demand and so we would expect an uptick there with jet demand.
Great. Thank you.
Thank you. Our next question is coming from Phil Gresh of Jpmorgan. Please go ahead.
Yeah. Good morning, just following up on the last commentary around.
Domestic supply demand picture, how are you thinking about the export markets right now it seems like the Brazilian demand is really starting to pick up from recent data point. So just in general what are you seeing and then how do you think about the competitive dynamics in those export markets given the situation with European refineries right now.
Yeah. So I would tell you that you know our export demand has returned to pre pandemic levels very good mobility in Latin America, and we're seeing very strong export demand on the diesel side. The same type thing very good export demand and the arb to Europe is swinging kind of opening.
<unk> coal to Europe as well.
So again, you know trade flows seem to completely normalize to where they were pre pandemic.
Yeah.
Got it okay.
And then my second question is just you know there's been a lot of discussion of the impact of higher natural gas on European refineries.
And the effect, it's had on crack spreads so.
Well, if we were to see a scenario where natural gas prices were to come back down in Europe do you feel like the underlying diesel crack which still be stronger than where it was before all this happened just because of <unk>.
You're lying demand improvements or just curious how we should think about that.
Yeah, So I suspect you would see some.
Some falloff in the crack spread as natural gas weakened however, the inventory situation will continue to keep and support crack spreads it looks to us, especially in Europe, you know, even if they ramp up utilization and you look at where demand is versus the inventory draw thats been trending it's going to be very difficult for Europe.
<unk> really replenish their stocks and as long as that's the case you know we would expect it to support the cracks.
Okay got it thank you.
Thank you. Our next question is coming from Chris Schott Route of Citigroup. Please go ahead.
Hi, Good morning, Thanks for taking my question guys.
Alright.
Good morning, I wanted to ask first on just a little bit on the capital allocation policy and given the commentary around EBITA being looking like it could be a little bit above mid cycle next year.
And what you said about being uncomfortable place on the dividend I'm looking to maintain your capital allocation framework.
I'm just curious how D G DS earnings and specifically the distributions from the JV fit into that I think my name as had been expecting maybe that the distributions up to the partners come later, given that you've got Capex on D. G D. Three coming in the project as you know.
For 2023 start but is that.
And how you think about potentially putting more money back to shareholders and specifically to the dividend.
Or is sort of the distribution not really that material versus the other sources of cash flow that you have.
Okay. This is Jason I can take a shot and you're right.
It's definitely a positive development and going to get bigger and bigger as the DTD more units come online. So it is significant it doesn't change our math of how we look at it we get half of that.
The distributions and that's cash into us.
Still our 40% to 50% target and our normal analysis in that state, but it's definitely.
A growing stream of EBITDA to us.
Excited about and will help us going forward.
Thanks, Jason.
I wanted to ask about something we haven't touched on yet ethanol Ccs project good progress there.
A couple of questions here in one.
How soon could U S D or or what do you need to see to be able to roll in the remainder of the footprint into at Ccs project, and then from a macro standpoint, or I guess more of a revenue standpoint, we've got some.
News about 45, Q increases for certain increase for certain.
Please.
We've also got some volatility around the RFS and what that means for overall ethanol demand and support from the government for ethanol blending I was just wondering if the second part of the question. If you could address sort of how those all those factors kind of.
It might affect your your thoughts about the project.
Interest.
Yes, Sean this is Martin lower operating 12 ethanol plants now eight of them are going into the navigator system than the ones on the eastern side before on the eastern side and we're moving forward with.
Seacrest sequestration plans at three of the four and potentially all of them a little bit down.
On the road the geology on the eastern side of the U S. So this is Indiana and Ohio is eastern side of the corn belt I should say.
Is good for <unk>, So we're planning to do sequestration at the.
Actually on site.
So now thats going.
Going through our gated process and still hurdles to get through there, but that's the plan. So that's where we're headed on that and we're excited about <unk>.
As you stated a 45 queues uplift of about 15 cents a gallon and then just on a gross basis, the low carb and getting to a 40 Ci versus a 70.
Worth almost 50 cents a gallon on a gross basis.
So as far as if we look at demand for ethanol.
We're feeling.
I think pretty good about.
Maybe something happening with the fuel spec in the U S to get to a 95 Ron.
Higher efficiency engine.
<unk> the autos good for ethanol good for oil.
<unk> got a lot more optimistic about that than we probably have been in the past that would increase the ethanol blending.
Ethanol is definitely in the fuel mix to stay in the United States and we're seeing now we're getting into situations to with.
With pretty good export demand again, that's kind of picking back up post.
Post the big impacts of Covid. So.
We're pretty optimistic about the future there, but it's really what's driving our optimism is as the low carbon we're deep into corn fiber ethanol at this point producing that at several sites.
The outlook for the carbon sequestration.
Got it thanks, Brian I appreciate that thank you very much guys I'll leave it there.
Thanks.
Thank you. Our next question is coming from Manav Gupta of Credit Suisse. Please go ahead.
Hey, guys real quick follow up on Doug's question.
When we go back and look at 18, and 19 and Youll, specifically, a golf course scrap it was about averaging about 10 72, you are indicators are indicating it's closer to 13 right now Brent WCS is almost nine I know we have some time to go in this quarter, but the way things that shaping up is it six.
Fair to say your strongest golf course squadron, probably two to three years is now approaching.
Well it's.
Again, we don't know how the quarter is going to shape out, but certainly if you look at the month to date indicator. It is significantly above mid cycle, we would agree with you on that.
Okay and a quick follow up here is there a number of commercial technologies out there to produce sustainable aviation fuel, but nothing works like heifer and nobody works half hour better than Valero does and so we are seeing out there you know smaller players come out with lesser commercial technologies get big Offtake agreements with airlines Big companies.
And the Guy who can believe that best is still sitting on the sideline. So I was wondering what gets a little involved in sustainable aviation fuel.
Yeah.
Sure Manav. This is Martin well, we're progressing or a SaaS production through our data engineering process and we're currently developing talking with customers and as you stated there is.
These customers are interested in staff, so it's not really a demand issue.
I also wanted to stay that D. J D. Four is not required for SAP as we as we have in retrofit D. G D. One two or three or any combination thereof.
The thing about SaaS is it does require additional investment.
A fraction.
Plenty or at a minimum and maybe additionally.
Shipment beyond that.
So the price of SaaS needs to be such to justify that incremental investment.
So we're not waiting engineering wise for the final outcome of the SaaS blenders tax credit, but we do think of favorable tax credits compared to the.
<unk> $8, a gallon that you get on the blenders tax credit. So a favorable one two that is likely needed to proceed beyond engineering and as you say, it's not a question of if we're going to produce and sell SAP. It's a question of when but again, we're looking for positive incremental EBITDA out of this and not just to do it.
And so that's kind of what's the holdup is right now.
Thank you.
Okay.
Okay.
Thank you. Our next question is coming from Paul Sankey of Turnkey Research. Please go ahead.
Morning, everyone.
Paul.
It's a long time since we've we've worried about natural gas.
This can you remind me what the sensitivity.
Sort of a rule of thumb you guys used for how battle. Good it is and how much that's changed since you know it's been 10 years since it's really been a problem.
As your asset base changed in terms of its sensitivity.
And the lines will still about a dollar change per million.
The price it was about 22022 per barrel for US right Lane, while I have you the crude slate has changed a lot.
Over that period as well nothing from Venezuela, very low Saudi.
Plenty from Canada issues with Mexico can you just talk about and also notably some.
B chicken discounts for example, West Africa, it's Brent.
Dubai to Brent can you talk a bit about how you're managing the crude market. Thanks.
Although my good friend Gary.
Okay.
So so far today, you know if you'd look we're seeing the lightest margin in some of the heavy feedstocks, we run you mentioned.
Heavy Canadian has good margins some of the fuel blend stocks that were running today have good margin.
In terms of the other light sweet medium sour it kind of comes and goes if you look at today's market and would favor light sweet over medium sours, but in general what we're seeing is kind of in our Gulf coast assets as you move east and the Gulf.
Sigma tend to have better economics on the medium sours and as you move west it favors running more light sweet.
But I see them.
Is the lower amount of crude coming out of the U S itself had a major impact.
No you know as long as we are still exporting crude.
If you did that really kind of sets the Brent Ti arb and more a long ways from getting to a point, where we're not in the export markets.
Yeah that makes sense.
With that back to the rule of thumb for my final part.
What's your sensitivity to jet fuel, if there's a way of framing that because obviously, if we see that come.
But I would've thought is the highest margin product you guys produce oh.
Hi, I just wanted to know.
Maybe what the opportunity costs as being at the low jet fuel or what the issues have been around operations.
Well. This is lane so I would tell you that I don't know.
I wouldn't consider it it's all a matter of optimization.
If you look at historically in February and in it. So you can compare that to you will have to be and you can sort of see what it almost always the industry that out to the to the penny, but most of the time unless there's something unusual in the market is essentially in different youll Hep C between jet now with that said.
Our operation.
And especially we can actually go market go down to zero jet so.
And the way we're configured so I wouldn't say that it's been a big opportunity cost not making jet now obviously.
What that means to the industry as a jet has been going into diesel and so to the extent it accretive length and potentially hurt the crack.
But.
As you've heard throughout the call jet diesel demand is actually above where it was so theres been some offsets to all of that so.
Specifically I don't think us not being able to make jet has been a big hit to us.
Yeah that makes sense and it's just you make an interesting point about how much latent diesel demand there is with the shortage of truckers and everything else.
Operating diesel market looks really really tight right.
Yes, great.
Great. Thanks, guys.
Thank you. Our next question is coming from Paul Cheng of Scotiabank. Please go ahead.
Hey, guys good morning.
Alright.
I wanted to also ask a question.
That natural gas.
Linda I think he was talking about earlier when I think you asked about the cost stay 22 cents per barrel how about on the gross margin capture.
Given that the hydro cracker puppy, well, maybe we'll put you use up how Poland five six bcf of.
The hydro treat them also do you expect that so how should we look at the higher natural gas price.
The impact on the gross margin.
And that's it.
Yeah.
Yeah, it's about 10 cents per barrel and cost of goods.
Yes, 10 cents per pound.
Donna.
Yes, yes.
Okay.
And the second question is that I think this is bald mountain when when we look at.
The BTC.
We saw in the third quarter and ethanol.
They both coming into gross margin.
Based on what the benchmark.
AWP.
Benchmark you indicate that leasing now number that Paul we knew about these so it seems like its pretty flat, but your gross margin and accurate job.
Substantially.
And then for ethanol.
<unk> up.
On the gross margin indicator, but you guys actually did not.
You indicate Tom.
I think what happened on the fifth.
So and I think that the.
It off the T stop me so on the window of a diesel when you did the quarter also so can you maybe elaborate I think help us to understand what happened and also what that those twin.
Thank you again to the <unk>.
For the full.
Fourth quarter.
And also if you can tell us that what is the current EQT.
To get our current runway.
Yeah.
Yes.
Hi, Paul I might need some help in keeping those strengths.
Go amongst start with ethanol.
[laughter] positive.
Yeah.
So the third quarter as you stated the indicator margin was 70 cents, a gallon, which was up 30 cents a gallon versus the second quarter, but which after I remember about that indicator margin is it's based on the seaborne corn price and does not include the corn basis in most years.
That's fine.
Approximation to our corn cost, but due to the low corn stocks.
Our ratio of the used or the stocks to use ratio. This year basis was extremely high if you look at some of the USDA reports basis was dollar $1 20, a bushel so that takes.
30% to 40 cents out of the indicator. So at the end of the day. The indicator was just artificially high in that kind of EBITDA was not achievable.
So the good news is now with the new corn crop, while the seaborne price is still high the basis has hasbro.
Broken so those indicator margins youre seeing now which are over a dollar a gallon or <unk>.
Pretty indicative of where the where the industry would be so so that's so it's not an ongoing issue, but this corn corn prices going to stay high.
And we're going to go through this period.
The next year, where basis as you get to the end of the corn crop really good Todd, but right now with kind of the basis is broken.
An D J D.
The indicator was down to like $2 84 in the third quarter pretty flat.
The second quarter, but on.
D. You know there's quite a few things moving the first thing I would tell you we signaled that we would.
Have lower margins in the third quarter. Some of that was we expected this prices as prices are going up.
The product prices fat prices all of that is going up the rent goes up immediately.
<unk> got a lag in our cost of goods with a fat. So when you break over in that price increase sooner starts decreasing in your rainfalls immediately and you are still consuming a higher priced feedstock. So we had some of that in the third quarter.
Other thing that's happened in the third quarter as we were out buying for.
But we are going to be too and we're entering the market and I went through that earlier anytime you go into the market in a big way and change these flows.
Marcia in the market and it's going to take a while for it to get back down. So we expect these waste feedstock prices are they priced relative to soybean oil to come off and we're seeing a little good.
D G. There now so we expect that.
To correct itself too.
I'm trying to think what else I missed there.
What's the GTT to current run rate.
Hey, we're just in the process of starting it up Paul, but we're moving along well everything looks good but we don't have a run rate yet.
Good news.
Oh, Okay. So you haven't actually stopped running yet.
Yeah. It goes away and we actually started it up about three days ago.
Okay.
Thank you.
Thanks, Paul.
Thank you. Our next question is coming from Sam Margolin of Wolfe Research.
Sir Please go ahead.
Hi, good morning, everyone.
Right.
Follow up on capital allocation.
And as the as the cycle kind of gets farmer here in the past the buyback and the dividend growth.
Work together right it was sort.
Partially enabled too.
To grow your dividend as much as you did because you took out 30% of your shares as we think about entering the next phase of the cycle here into a potentially stronger period do they have to be together or can you do.
One component of.
Increasing capital returns without without the other.
Yeah, Jason let me take that.
Yeah, you know Sam I mean, we don't necessarily link them together right. We do use the 40% to 50% target is based on how we make our decisions and as Jason said earlier.
We've got the dividend yield kind of towards the high end of the.
Range right now maybe at the high end of the peer range.
So we'll continue to look at it going forward and he laid out the priorities really for <unk>.
Our use of cash as we go forward and he wants the lever a little bit I guess, we're at what like somewhere around 37% total debt to cap we'd like.
Fear push it back down closer to that 30% number we had and you can do that in a multitude of ways, but anyway, that's one of our top priorities.
We haven't given up on buybacks by any stretch the imagination, we see them as playing a part in this capital allocation framework going forward.
It's funny, because you guys love us when.
And then sometimes we do it and the price is high the stock comes up and you say Oh, what do buybacks right. So anyway, it's a fine balancing act for us and I think if you just revert back to the capital allocation framework and the way we've executed in the past I think right now that's our plan for execution.
And when we do our work.
Okay. Thanks, very helpful and then just.
Just a follow up from Martin on the dynamics in them.
In the renewable diesel space. So this may have been a coincidence, but at the time that DTD.
And in a competitor plant in the same area were down.
The whole complex.
<unk> of bean oil and waste oils came down too and some people interpreted that as a signal of sort of just how tight the market is right a couple of plants can be.
Bring down that that complex by 20 cents a pound.
Your is your feeling the same thing or was that just a coincidence and you know theres actually some.
So the capacity in feedstock that's underappreciated.
Hey, Sam This is Martin it's a coincidence on definitely on the bean oil side I mean, when you when you look at that if you look at bean oil prices.
Soybean oil just looking any vintage of oil price in veg oil price, whether its palm oil being oil or canola.
Spin oil that's the big three globally.
You know there are.
They have doubled since the fall of 2019 and all of that was led by a shortage of palm oil and the palm oil stocks got low in Malaysia. So to put it in perspective, if you look in Malaysia, and Indonesia Palm oil that production is.
Canola times as large as soybean oil in the United States, So palm oil drives veg oil pricing.
So anytime you see soybean oil just crude <unk> soybean oil move it's a lot more about palm oil likely than anything else.
<unk>.
So now that said the waste.
Six stock price relative to.
Soybean oil as I said earlier, I think <unk> had an impact on that.
It gets complicated because you get into all kinds of tallow and slaughter rates and the weight of animals and all this information.
Information, but we do expect that to come back out.
Certainly you've got a situation now where the waste feedstock prices or on an energy content are way above the value of corn on an energy content. So the people feeding waste oils or try and figure out ways not cede waste oils.
We're still optimistic about waste feedstock in the future.
Really glad we.
Seamless pretreatment capacity to handle it.
Thanks, So much have a great day.
[laughter].
Thank you. Our next question is coming from Ryan Todd of Piper Sandler. Please go ahead.
Okay. Thanks.
Maybe.
The natural follow up on your last comment there but over.
For the last 12 months, we've seen a lot of headlines about potential capacity additions in renewable diesel, but I think we've also seen a shift amongst a lot of those additions towards what I would characterize as kind of a capital light entry to renewable diesel.
Targeting vegetable oils and avoiding the cost of pretreatment facility. So how do you see these trends impact.
In Rd markets over the next few years, given you're increasingly differentiated position on feedstock flexibility in sourcing.
<unk> the trees are getting older the yields getting less so there is.
Little bit of a virtual issue that's been coming for years. So we don't see the veg oil prices moderating, but what you have to remember that for for Diamond Green diesel for our renewable diesel business a high veg oil prices met with a higher D for Rand.
And the absolute veg oil pricing doesn't dictate margin for us and also the spread between <unk> soybean oil and crude <unk> soybean oil does not impact D. G. D. So being in this waste feedstock position with robust pretreatment just puts us in a lot better position.
And the guys that are coming in and running veg oils and not.
So that position I think is going to be a little tough, but we feel pretty good about our position.
Great. Thanks, and then maybe hum.
I'll follow up on or a shift.
Shifting to refining.
I assume we know your answer to you specifically, but there are quite a few a lot of refineries currently being marketed out there.
You know what what would it take for you to seriously consider adding another asset to your portfolio and it's not for you specifically.
How do you see this the.
Shaking out with a lot of these assets do you see more closures or I.
I guess, how do you how do you see this kind of asset long position right now playing out over the next 12 to 18 months.
Alright, well I'll I'll answer it this way and then rich can say whatever it was.
[laughter] lashway.
You know, we're very comfortable with the portfolio that we have today and when.
As you know we've got a strong track record of having grown through acquisition in the past and there was a time and place for that strategy to be executed and we executed really well and then we spent the last 10 years plus.
Just getting the assets up to a standard that we were comfortable operating in.
And we realize that any acquisition like that that we would make we would end up going through the same process and so.
It would have to be an incredibly compelling case for us to give that any consideration and and so.
Although we continue to look at what's in the market just to be sure we don't Miss opportunities.
I wouldn't anticipate that you should expect us to be doing anything on that front I'd, rather invest in the assets that we know continue to optimize the assets that we have and build the renewables business right now and invest in additional refining capacity.
Thanks Chuck.
Okay.
Thank you. Our next question is coming from Jason <unk> of Cowen. Please go ahead.
Thanks.
I guess the first one just.
Easy modeling one is this lower tax rate is that.
A good rate to use.
Moving forward I think you mentioned the lower rate was driven by.
The <unk> non op impact so just wondering if that's a good rate and if anything else drove the lower <unk>.
Tax rate for the quarter and secondly, I just wanted to go back.
The <unk> S.
Price volatility in California.
It seems like Theres, a lot of renewable fuel capacity coming online next year.
And I'm wondering.
In the market. We're in right now at what price does the L. CFS price has to go to an order.
Maybe consider selling some of your renewable diesel into Europe, rather than in California.
I'm asking because you guys have a good position in terms of your U S Gulf Coast.
Optionality. So I'm wondering if you could give any insight to that thanks.
Yes. This is.
Multi cough I'll take the question on the tax rate and then hand it over to Martin for your second question.
The tax rate for the quarter. It does look like it was 11%.
A little chat.
<unk> to tell you kind of what to expect in the future, but in the near future I would say it would be somewhat under 21%.
Mark So just as a reminder.
As we said in the in the earnings release, you have to remember the impact that the <unk> earnings have on the effective tax rate. So.
Our consolidated pre tax income includes a 100% of <unk> income.
And while tax expense only reflects tax.
On a portion of that income.
There is no tax expense on our share of the blenders tax credits included in <unk> income.
Nor is there any tax on our partners have a <unk> income so that impact is pretty <unk>.
Outweighed impact on our overall effective rate.
Taxes, just also want to remind you that our partners' share of <unk> income is excluded from our net income by backing it out and noncontrolling interests. So.
If you look at it just from a purely EPS or cash standpoint, the only benefit Lear is getting.
As not being taxed.
<unk> on our share of the blenders tax credit.
Which is.
Quite a bit lower than I think some of the some of the animals are thinking that it does so what it tells you is that our results are not driven as much by the perceived tax benefit as they whereby underlying recovery in margins.
And so I'll hand, it over to Martin.
Sure. Thanks Mark.
Yes.
I would say on the L. CFS. If you look about look at it it's really to get to the root of your question is again. This has been a lot more about deficits out there driving the price down and too many credits in the first quarter 'twenty one renewable diesel.
Blending was 23% in California, the highest at previous quarter was 18%, but still the credits arent just exploding in California. Its just the lack of deficits.
As we.
We get out of the Covid and the Delta Varian and back to work.
Got a big data lag right now in California.
We know what the second quarter that is we'll know that at the end of October.
So but.
So and.
And credit prices are up you know they've hit a low of about one dollar tree.
Dollars.
$58, a ton and now they're 175, but to get to your question.
<unk>.
Right, we don't go to Europe.
Canada with our fuel already we're always looking at the different markets and working for the highest spec back in.
Given our long term contracts, we will sometimes be constrained, but we're always in those markets.
Alright. Thanks.
Thank you. Our next question is coming from William I'm, Sorry, Matthew Blair of Tudor Pickering Holt. Please go ahead.
Hey, good morning, and thanks for squeezing me in here.
I was wondering if you anticipate being a shipper on cap line here in Louisiana refineries.
So.
Would that be WCS or perhaps some.
Other crude.
At that that cap line tariff filing from earlier this week, especially volumes are only 102000 barrels per day with just being kind of low. So just trying to suss out if that's due to a lack of interest from Louisiana refineries or that's due to a lack of supply with the connector pipeline not going through.
Yeah. So this is Gary with most of the pipelines and cap line really not too much different for us.
Our focus has been on getting good connectivity to those pipelines, but not necessarily taking a shipper commitment.
We let the producer ship and then we buy at the other end and I think Thats, what we would plan to do with cap line as well.
And do you think those volumes will be WCS down or something else.
That's a good question I think you know the it.
It looks like initially it will be mainly light sweet crude that certainly with the line three replacement, we could see heavy Canadian making its way into cap line at some point in time and that would be good for us.
A more efficient way to get heavy Canadian to our St. Charles refinery.
Indeed, thanks I'll leave it there.
Thanks Matthew.
Thank you at this time I'd like to turn the floor back over to management for any additional or closing comments.
Thanks, Don I appreciate everyone dialing in today.
If you have any questions you want to follow up on please feel free to reach out to the IR team. Thanks.
Thanks, everyone and please stay safe and healthy.
Ladies and gentlemen, thank you for your participation and interest in Valero you may disconnect. Your lines have log off the webcast at this time and enjoy the rest of your day.
[music].
Okay.
[music].
Yeah.
Yes.
[music].