Q4 2021 Valero Energy Corp Earnings Call
[music].
Greetings and welcome to the Valero fourth quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you would like to ask a question. Please press star one on your telephone keypad, if anyone should require operator assistance during the <unk>.
<unk>. 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 homework polar Vice President Investor Relations and finance. Thank you. Please go ahead.
Good morning, everyone and welcome to Valero Energy Corporation's fourth quarter 2021 earnings conference call with.
With me today are Joe Gorder, our chairman and CEO Lane Riggs, our president and CEO .
Adjacent Frazier, our executive Vice President and CFO , Gary Simmons, our executive Vice President and Chief Commercial Officer, and several other members of Valero Senior management team.
If you have not received the earnings release and would like a copy you can find one on our website at Investor Valero Dotcom.
Also attached to the earnings release are tables that provide additional financial information on our business segments and reconciliations and disclosures for adjusted metrics mentioned on this call.
If you have any questions. After reviewing these tables, please feel free to contact our investor relations team after the call.
I would now like to direct your attention to the forward looking statement disclaimer contained in the press release.
In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward looking statements intended to be covered by the safe Harbor provisions under federal Securities laws.
There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC.
Now I will turn the call over to Joe for opening remarks.
Thanks, Homer and good morning, everyone. We saw continued improvement in our business during the fourth quarter with refining margin supported by strong product demand and our.
Our system, we ended the year with gasoline demand at pre pandemic levels and demand for diesel actually higher than pre pandemic levels.
We also saw significant jet fuel recovery as domestic and international travel opened up increasing from approximately 60% of pre pandemic levels at the beginning of the year to approximately 80% at the end of the year.
Product inventories were low as a result of the refining capacity rationalization, that's taken place in the last two years and weather related impacts from winter storm, Yuri and Hurricane Ida.
On the crude oil side OPEC plus increased production throughout the year with improving demand supplying the market, primarily with sour crude oils, resulting in wider sour crude oil discounts to Brent crude oil.
As a result of all these dynamics, we saw a steady recovery in margins throughout the year, particularly for our complex refining system.
In regards to our ethanol segment ethanol prices were near record highs in the quarter supported by strong demand and low inventories strong margins, coupled with solid operational performance across all of our segments generated record quarterly operating income for our ethanol segment and record overall fourth quarter.
Earnings for Valero.
I am proud to say that 2021 was our best year ever for employ and process safety. In fact, we've set records for process safety for three consecutive years.
These milestones are a testament to our long standing commitment to safe reliable and environmentally responsible operations and.
And despite the pandemic and weather related challenges in 2021, our growth projects remained on track we started up the Pembroke cogeneration unit in the third quarter of 'twenty, one, which provides an efficient and reliable source of electricity and steam and enhances the refineries competitiveness.
In addition, the Diamond Green diesel expansion project D. G. D. Two commenced operations in the fourth quarter on budget and ahead of schedule.
The expansion has since demonstrated production capacity of 410 million gallons per year of renewable diesel as a result of process optimization above the initial nameplate design capacity of 400 million gallons per year.
This expansion brings <unk> total annual renewable diesel capacity to 700 million gallons.
Looking ahead, the <unk> III project at our Port Arthur refinery is progressing ahead of schedule and is now expected to be operational in the first quarter of 2023 with.
With the completion of this 470 million gallon 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.
Blackrock in navigators large scale carbon sequestration project is also progressing on schedule and is still expected to begin startup activities in late 2024.
Valero is expected to be the anchor shipper with eight ethanol plants connected to this system, which should provide a higher ethanol product margin.
The Port Arthur Coker project, which is expected to increase the refinery's utilization rate and improved turnaround efficiency is expected to be completed in the first half of 2023.
On the financial side, the guiding framework underpinning our capital allocation strategy remains unchanged.
We remain disciplined in our allocation of capital, which prioritizes, a strong balance sheet and an investment grade credit rating and.
In 2021, we took measures to reduce valero as long term debt by approximately $1 3 billion. We ended the year, well capitalized with $4 $1 billion of cash and $5 2 billion of available liquidity, excluding cash and our net debt to capitalization was 33%.
We continue to honor our commitment to stockholders defending the dividend across margin cycles, and delivering a payout ratio of 50% in 2021.
And as recently announced the board of Directors has approved a quarterly dividend of 98 per share for the first quarter of 2022.
Looking ahead, we remain optimistic on refining margins with low global light product inventories strong product demand global supply tightness due to significant refining capacity rationalization and wider sour crude oil differentials.
We also remain optimistic on our low carbon businesses, which we continue to expand with the growing global demand for lower carbon intensity products.
We've been leaders in the growth of these businesses and maintain a competitive advantage with our operational and technical expertise.
In closing our teams simple strategy of pursuing excellence in operations deploying capital with an uncompromising focus on returns and honoring our commitment to stockholders has driven our success and positions us well.
So with that Homer I'll hand, the call back to you.
Thanks, Joe for.
For the fourth quarter of 2021 net income attributable to Valero stockholders was $1 billion or $2 46 per share compared to net loss of $359 million or 88 cents per share for the fourth quarter of 2020.
Fourth quarter 2021, adjusted net income attributable to Valero stockholders was also $1 billion or $2 47 per share compared to an adjusted net loss of $429 million or $1 six per share for the fourth quarter of 2020.
For 2021, net income attributable to Valero stockholders was $930 million or $2 27 per share compared to a net loss of $1 4 billion or $3 50 per share in 2020.
2021, adjusted net income attributable to Valero stockholders was $1 2 billion or $2 81 per share.
Compared to an adjusted net loss of $1 3 billion or $3 12 per share in 2020.
For reconciliations to adjusted amounts please refer to the financial tables that accompany the earnings release.
The refining segment reported $1 3 billion of operating income for the fourth quarter of 2021 compared to a $377 million operating loss for the fourth quarter of 2020.
Fourth quarter 2021, adjusted operating income for the refining segment was $1 1 billion compared to an adjusted operating loss of $476 million for the fourth quarter of 2020.
Refining throughput volumes in the fourth quarter of 2021 averaged 3 million barrels per day, which was 483000 barrels per day higher than the fourth quarter of 2020.
Throughput capacity utilization was 96% in the fourth quarter of 2021 compared to 81% in the fourth quarter of 2020.
Refining cash operating expenses of $4 86 per barrel in the fourth quarter of 2021 were <unk> 46 per barrel higher than the fourth quarter of 2020, primarily due to higher natural gas prices.
The renewable diesel segment operating income was $150 million for the fourth quarter of 2021 compared to $127 million for the fourth quarter of 2020.
Adjusted renewable diesel operating income was $152 million for the fourth quarter of 2021.
Renewable diesel sales volumes averaged $1 6 million gallons per day in the fourth quarter of 2021.
Which was 974000 gallons per day higher than the fourth quarter of 2020 the.
The higher operating income and sales volumes were primarily attributed to the startup of Diamond Green diesel expansion project <unk> two in the fourth quarter.
Yes.
The ethanol segment reported record operating income of $474 million for the fourth quarter of 2021 compared to $15 million for the fourth quarter of 2020.
Adjusted.
Operating income for the fourth quarter of 2021 was $475 million compared to $17 million for the fourth quarter of 2020.
Ethanol production volumes averaged $4 4 million gallons per day in the fourth quarter of 2021, which was 278000 gallons per day higher than the fourth quarter of 2020 and.
And as Joe mentioned earlier, the higher operating income was primarily attributed to higher ethanol prices, which were supported by strong demand and low inventories.
For the fourth quarter of 2021, G&A expenses were $286 million and net interest expense was $152 million.
G&A expenses of $865 million in 2021 were largely in line with our guidance.
Depreciation and amortization expense was $598 million and income tax expense was $169 million for the fourth quarter of 2021.
The annual effective tax rate was 17% for 2021, which reflects the benefit from the portion of <unk> net income that is not taxable to us.
Net cash provided by operating activities was $2 5 billion in the fourth quarter of 2021, and $5 9 billion for the full year.
Excluding the favorable impact from the change in working capital of $595 million in the fourth quarter and $2 2 billion in 2021 and the other joint venture members, 50% share of Diamond Green Diesels net cash provided by operating activities excluding changes in <unk>.
<unk> working capital adjusted net cash provided by operating activities was $1 8 billion for the fourth quarter and $3 3 billion for the full year.
With regard to investing activities, we made $752 million of total capital investments in the fourth quarter of 2021 of which $353 million was for sustaining the business, including costs for turnarounds catalysts and regulatory compliance and $399 million was for growing the <unk>.
<unk>.
Excluding capital investments attributable to the other joint venture members, 50% share of Diamond Green diesel and those related to other variable interest entities capital investments attributable to Valero were $545 million in the fourth quarter of 2021, and $1 8 billion for the year.
Moving to financing activities, we returned $401 million to our stockholders in the fourth quarter of 2021 through our dividend and $1 6 billion through dividends in the year, resulting in a 2021 payout ratio of 50% of adjusted net cash provided by operating activities.
For the year.
And our board of Directors recently approved a regular quarterly dividend of 98 per share demonstrating our sound financial position and commitment to return cash to our investors.
With respect to our balance sheet, our year end total debt and finance lease obligations were $13 9 billion and cash and cash equivalents were $4 1 billion.
The debt to capitalization ratio net of cash and cash equivalents was 33%.
In the fourth quarter, we completed a series of debt reduction and refinancing transactions that together reduced valero as long term debt by $693 million.
These debt reduction and refinancing transactions combined with the redemption of $575 million floating rates senior notes due 2023 in the third quarter collectively reduced Valero as long term debt by $1 3 billion.
At the end of the year, we had $5 2 billion of available liquidity excluding cash.
Turning to guidance, we expect capital investments attributable to Valero for 2020 to be approximately $2 billion.
Which includes expenditures for turnarounds catalysts and joint venture investments.
About 60% of our capital investments is allocated to sustaining the business and 40% to growth.
Approximately 50% of our growth capital in 2022 is allocated to expanding our low carbon businesses.
For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges.
Gulf Coast at 166 to 171 million barrels per day.
Mid continent at 395 to 415000 barrels per day.
West coast at $185 to 205000 barrels per day.
And North Atlantic at 430 to 450000 barrels per day.
We expect refining cash operating expenses in the first quarter to be approximately $4 80 per barrel.
With respect to the renewable diesel segment, we expect sales volumes to be approximately 700 million gallons in 2022.
Operating expenses in 2022 should be 45 per gallon, which includes <unk> 15 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 first quarter.
Operating expenses should average 44 per gallon, which includes <unk> <unk> per gallon for noncash costs, such as depreciation and amortization.
For the first quarter net interest expense should be about $150 million and total depreciation and amortization expense should be approximately $600 million.
For 2022, we expect G&A expenses, excluding corporate depreciation to be approximately $870 million.
That concludes our opening remarks before we open the call to questions. We again respectfully request that callers adhere to our protocol of limiting each turn in the Q&A to two questions.
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Our first question today is coming from Theresa Chen of Barclays. Please go ahead.
Good morning, Thank you for taking my questions, Joe I'd like to revisit your comments earlier about the refining margin outlook through 2022.
Clearly, we seem to have a pretty positive setup with lean global inventories and significant amount of refining rationalization. That's happened since it even slightly before the pandemic began while demand continues to recover and remains so.
So looking towards the rest of this year can you just give us a sense of puts and takes on.
The variables that could detract from this thesis to.
To the downside or upside from here.
Sure Theresa Thanks, a lot when we let Gary take a look at take a crack at this sure Teresa.
Look I mean, I will just kind of go through some of the things we're seeing in our system.
We saw good recovery last year, both gasoline and diesel and even good recovery in jet fuel demand and we expect that that rebound to continue through 2022, we started the year gasoline demand is that off a little bit from what we would expect some of that is just seasonality, but even if you go back to 2019, where we were in 2019 at.
This time of year were off about 7% with the spike in Covid cases, and also some weather impacting gasoline demand as well, but I would tell you already are seven day average is only off about 3% of where it was in 2019. So it looks like this.
Latest surge in Covid cases were already coming out of it and so you know with where gasoline inventories are very bullish gasoline moving forward as you already pointed out we expect to see gasoline demand back to 2019 levels, which was close to peak gasoline demand and we'll be trying to feed that demand was significantly less refining.
So we expect the gasoline markets to be very tight when you move to diesel of course diesel inventories are not only low in the United States, but theyre low globally.
Vessel demand actually in our system has been about 7% of where it was in 2019. So some of those factors in particular, whether that are negatively impacting gasoline or actually are having a positive impact on diesel demand. So we see very strong diesel demand and we actually don't see a clear path in the near future to be able to restock those inventories.
Turnaround activity that's occurring in the industry along with the rationalization that's occurred so for US both gasoline and diesel look very constructive moving throughout the year jet demand will be the unknown Rx.
Our expectation is that as we get through this wave of Covid much like we saw last year domestic air travel will pick back up fairly rapidly, but it will be a longer period of time before international travel picks back up so although we expect to be close to that to 2019 levels by the end of the year, probably not fully recovered.
I think to me when you talk about the wildcard really the wildcard for this year with what happens in the crude markets, obviously, a lot of tightness in the crude markets today.
Having an impact on differentials.
So for US it's kind of when do we see OPEC begin to ramp up production.
Global oil demand picks up we would expect OPEC to increase production a lot of that will be medium and heavy sour barrels, which would be constructive to wider differentials moving throughout the year as well.
Yes.
That's great color. Thank you so I got to ask the capital allocation question.
Ben So consistent on your messaging as well as execution around.
With the progress that you've made on reducing debt generating free cash flow for the past couple of quarters and generally positive momentum on the near term. We're finding outlook are we at an inflection point, where we may soon see a step up in cash returned to shareholders.
Okay. Yeah. This is Jason I'll take that and Youre right. We've made good progress on our goals. We had said when we started coming out of this situation, where you rebuild our cash target keeping moral and hand around $3 billion. We've done that we had $4 1 billion at the end of the year. We also said, we're really going to start working on Delevering and in the third and fourth.
Quarters last year, we did two delevering transactions paid off about $1 3 billion net.
Brought our net debt to cap down to 33% at the end of the year and our goal is to ultimately get back to our 20% to 30% long term target we've had and the pace is going to depend on margins and cash generation, but getting on to buybacks and a return of cash to shareholders.
As you said things are looking better now for 2021 that payout was 50% with just the dividend and some minimal buybacks related to the employee plans, but with the margin increase in the fourth quarter and and there continue to be strong during the first quarter. So far at this pattern of recovery does continue we do anticipate we will be doing buybacks. This.
Year to meet our targets and we feel we can both continued our pattern of our our goal of having aggressive debt pay down this year and also meet our shareholder return commitment via projects via our.
Buybacks I'm, sorry, we definitely don't think they're mutually exclusive and it's all different bar framework and targets we've had in place for several years.
Thank you.
Thanks Peter.
Thank you. Our next question is coming from Manav Gupta of Credit Suisse. Please go ahead.
Thank you guys.
I have first question was on DVD, but can you have seen out there is.
A number of projects getting delayed long lead equipment, not getting through everybody's kind of lagging.
<unk> project keeps moving forward and then or do you always tell me you have the best people, but besides best people. What does how are you doing right because allowing you to move the timeline, followed listen everybody else going backward.
Wow.
Well I don't think shall we say.
I'm still going to say, we have the best people.
I am and all of this is why we also completed Diamond Green right. So we have a we have.
A really good understanding what the project execution looks like we have the same business partners that are largely executing diamond green.
Yes.
And we've been able to really improve the schedule and it's really just been.
Clearly, we're in our third and.
And it's just a really good team all the way around not just our people and our business.
Partners.
And we also.
Permitting permit these even better so just across yes.
There's been a lot of lessons learned as we went through one.
No.
Alright, Thats, what I mean, we built one we built.
Just finished too.
We've learned all through all of those things where we are.
Definitely we will have the advantage of being an early mover in this space.
Perfect guys. My second follow up very quickly here is.
It looks like your partner is moving ahead with kind of an acquisition, which would give you guys more used cooking oil animal fats at this stage I think there was a plan at some point to getting more animal fats from internationally coffee D. J D.
How does the feedstock situation looking for <unk> are you very close to what you would need when <unk> is up and running in terms of feedstock now.
Speaker 1: to what you would need when BJD3 is up and running in terms of feedstock now.
Speaker 2: Yeah, Manav, this is Martin. You know, obviously, our plan is to continue to feed DGD 1, 2, and 3 with waste feedstock. We feel good about that. The market feedstock market's tightened up relative to soybean oil. And we knew that was coming with the startup of DGD 2. We changed trade flows. We've moved everything around. And that's had an impact on the market. And frankly, when we contemplated DGD 2 and 3, we expected.
Yes, Manav. This is Martin obviously, our plan is to continue to feed the Gd one two and three with waste feedstock, we feel good about that the market feedstock markets tightened up relative to soybean oil and we knew that was coming with the startup of <unk> two we changed trade flows.
Moved everything around and Thats had an impact on the market and frankly, when we when we contemplated <unk> two and three we expected.
Speaker 2: feedstock to appreciate relative to soybean oil and we expected carbon pricing to appreciate. So you know we're kind of where where we expected to be here and yeah the feedstock situation you know it's a moving target but it's all tied to global GDP growth and you know just to sum it up yeah we expect to be able to feed it.
Feedstock to appreciate relative to soybean oil and we expected carbon pricing to appreciate so we're kind of we're where we expected to be here and the.
The feedstock situation.
Moving target, but it's all tied to global GDP growth and.
Just to sum it up yes, we expect to be able to feed it.
Thank you for taking my questions.
Thanks Manav.
Thank you. Our next question is coming from Phil Gresh of Jpmorgan. Please go ahead.
Yes, hi, good morning.
Hey, Joe.
The Gulf Coast refining margins in the fourth quarter were the best since 2015, if I have that right.
And there are even better than 14 19, when we were talking about IMO 2020, and feedstock advantages and things like that so I was just curious if there's anything more to elaborate on about the strength of the Gulf coast margins that we saw in the quarter and how you think about the sustainability of that.
Yes, so I think a lot of typically in the Gulf coast, when we see stronger capture rates, it's tied to feedstock optimization and so certainly we've been doing a lot around some of those fuel blend stocks and running more of those in our system, which has helped support or supported higher capture rates.
Got it okay.
And then second question just a follow up.
Some of the commentary there on renewable diesel.
The gross margins, they're down sequentially. It sounds like you expect some of that but.
The capture of the indicators there was I think a bit lower than maybe some unexpected.
Were there any transitory factors there.
In your opinion in the quarter as you started up phase.
Phase two and whether it's with feedstock or other factors or is this how you think about.
Kind of a run rate moving forward.
Sure. Phil This is Martin so margin capture in 2021 was all about the feedstock price in first half of 'twenty, one feedstock prices were low relative to soybean oil, which resulted in some really high margin capture.
Fourth quarter, the prices were high relative to soybean oil and that gave us a lower margin capture it at 75%.
Uh huh.
With the startup of <unk> <unk> to <unk>.
Gonna have tighter prices for a while we expect feedstock to be around soybean oil going forward for the immediate future and then we'll see how that plays out in the next few months after that.
We expect it to be right around soybean oil, which would incur closer to this 100% type margin capture and Thats, what we experienced throughout 2019. If you go back and look at those numbers, we average right around 100% margin capture.
So that's kind of how we expect things to shake out in the next few months.
Great very helpful. Thank you.
Thank you. Our next question is coming from Roger read of Wells Fargo. Please go ahead.
Yes, good morning, everybody.
Roger.
Yes.
Thanks.
I want to come back if possible to the crude tightness comments just.
What youre seeing in terms of differentials, what you would expect and then.
Are we highly dependent here on OPEC, putting more oil in the market or is there. Some other factor at work and one of the reasons I ask is some of the closures that we saw on the refining side tended to be a light sweet unit. So.
Physical demand is down on that side is that also accounting for some of the tightest differentials.
Yes, Roger it's Gary I think Theres, a number of factors that contributed to the tightness not simply OPEC. We saw the winter weather have an impact on heavy Canadian production from Western Canada, We had disruptions from supply in Ecuador.
I know theres been a pipeline issue between the pipeline between Iraq in Turkey that took barrels off the market. So a number of factors and we think going forward again, not only getting the OPEC production ramping up.
We expect to not only see the western Canadian production come back we actually think it will grow with some of the logistics projects coming back on and so most of that production that was off the market is coming back. In addition to that production coming on the market. The OPEC production growing we'll take some of the pressure off the crude markets and certainly pressure off the crude differentials.
Yes.
Thanks, Thanks for that and then my unrelated follow up question is coming to you Jason like the inside on the possibility of getting back.
So more normal cash returns model in 'twenty, two I was curious, though given the significant improvement in working capital in 'twenty. One are we at risk of seeing some of that reverse in 'twenty two or would you think about the outlook do you assume a neutral.
Working capital event, and maybe we should assume something going the other way.
Yeah, well there are movements in working capital generally follow a flat price. So when were forecasting we just assumed neutral cash for working capital.
Our basis.
So just a quick reminder, prices go up positive prices go down it's going to eat working capital right that's right.
Okay, great. Thank you.
Thank you. Our next question is coming from Chris Schott of Citigroup. Please go ahead.
Good morning, Thanks for taking my question I wanted to circle back on the capital allocation piece, a little bit, but you've done a great job reducing debt it looks like you'll be able to take another chunk out in this year, It's got high balance sheet cash and it sounds like you're very positive on.
On buybacks I, just sort of wanted to ask about the dividend.
I know it might be a bit premature at this point, but given that we're looking at what could be at above mid cycle here in earnings you've gotten that control the yield is starting to come in currently.
Annualized a little bit under 5% could be tighter than that and if the share price continues to work.
It is taking a hard look at the dividend something that potential increase something that you might think of this year or is it too soon to start talking about that.
Yes. This is Jason it's probably a little soon given what we just came through but we always look at it our commitment is to have a sustainable dividend with a yield at the high end of our peer group and that's where it is now where the peers are in the market is we think it's in a good place.
Okay perfect.
And then just.
For sure you remember at this time last year, there was a big question on sustainability of the dividend right.
A lot can change in a short period now you never question, because you've always had faith.
But anyway.
Interesting that the discover out.
It is true it is like a different world altogether right Joe.
<unk>.
Just another quick a quick question on ethanol, obviously historically high performance here. This is the best quarter, we've seen since we've been reporting quarterly results at ethanol.
Just wondering a little bit about strength carryover I think.
When we discussed this a couple of months back there was some cautious.
Cautious read across as to what happens in 2022, given how volatile the ethanol market is and all the puts and takes I was just wondering if big picture how to think about how where we level set where we are entering 2022 to think about what the cadence might be there some of that strength carrying over but also theres a lot going on in terms of policy gasoline demand a whole bunch of factors. There. So just wondering if we could.
Get some color and maybe a little bit of clarity as to how we should be thinking about that.
As we as we look into 'twenty two.
For <unk> Martin well, obviously fourth quarter was a great quarter for ethanol and you look at it will really set that up as we third quarter the margins started off fairly weak and.
And we were also at end of crop year corn. So that this wasn't corn available in the industry is very low stocks. So there was a lot of run cuts a lot of early maintenance taken and the plans really didn't rebound.
And across the industry I'm, not talking just Valero and get rates back up until early October and then rates exceeded it in early October rates exceeded the five year averages.
It's interesting that even with high rates inventory just never built so when you have a low inventory situation.
That leads to high margins and that's what we saw.
Now the last few weeks of the year in the first few weeks of 2022, we've had significant inventory build so the margins have come off dramatically.
But that being said, we're still probably where we typically are in the first quarter for ethanol margins.
What we always are looking at ethanol now, though is the longer term and thats. The carbon capture that's going to provide a great opportunity for us.
Both from the 45, <unk> and Niall CFS and also we're producing is starting to produce more and more gallons of cellulosic ethanol from corn fiber. So we're optimistic about both of those were also just confidence that ethanol is going to remain a part of the domestic fuel mix.
We expect a higher octane blends in the future, namely 95, Ron which means more ethanol blending and globally. The renewable fuel mandates are going to drive export growth. So we feel really good about ethanol going forward, maybe not this quarter next quarter, but longer term, we feel really good about ethanol.
Makes sense. Thanks, so much for the time appreciate it turn it over.
Hum.
Thank you. Our next question is coming from Doug Leggate of Bank of America. Please go ahead.
Hey, good morning, everyone. This is nothing unusual.
Thanks, Doug.
I'm, sorry, I'm going to hit the capital allocation question, one more time, maybe it's a slightly different angle excuse me one second.
[laughter].
Excuse me.
No.
Got a token dividend.
Yeah, Hi.
I got something done.
Violence between dividends and buybacks.
Really what I'm kind of focused on here because you could easily buy by 5% of your stock.
That's a pretty healthy dividend growth for an ordinary business I'll remind your business. So I'm just kind of curious how you think about the balance going forward.
As you reconsider the right level of debt perhaps.
On the right balance between not 43, 2% cash allocation to cash returns between the dividend and the buyback I know, it's a broad question, but I'm just kind of curious how are you.
I guess, what's behind this jaws and.
In years gone by there has been criticism of buybacks at a high price level I'm wondering I guess the buyback is more of a tool to manage the dividend burden going forward.
Yes no.
Doug It certainly would be when you think about where the yields particularly last year I mean, we've been flushed with cash last year, we bought back shares, but we were right and Youre right. It is a double edged sword right. We ended up with good cash flows and typically a high stock price all at the same time.
That's why it's hard to create a formulaic approach to how we look at doing this and so I think jason's laid it out coming out of Covid. We had a very specific set of priorities that we wanted to put in place and I think he covered those.
What I'll do is.
Look we got a good strong CFO , let's see what he thinks here you got anything you'd like to share.
Everything you said was accurate.
Well, yes, we have to have a balanced dividend because as we've proven through the last downturn, we're going to defend it in the downturn. So you have to be wary of making it too.
The buyback CV the flywheel.
So Doug I wouldn't say I mean, we always look at the dividend and we'd like to increase it.
There is a time when it'll be right to do that.
And it's a burden that we've we've been able to carry certainly it's easy and a good margin environment like we are today, but in the down margin environment as Jason said, we deferred that ad.
And it was a bit of a load, but we're committed to it and we just don't want to get overextended.
And it's well positioned versus the peers are first steps to look versus our peers, we committed to be up near the top of the N and as long as were the highest.
That box is checked.
Yes.
Hey, guys.
Wanted to be respectful to everyone else.
I'm going to take my second question on the same topic, if you don't mind because.
<unk>.
I am looking at for example, with some of the Canadians have done thinking about companies that have long life sustainable assets. Obviously your business is a very.
Similar to that in some respects in terms of the annuity nature.
I Wonder then.
When some folks did question your dividend last year.
But some.
Why wouldn't you use your balance sheet.
Balance sheets are much stronger level, so that kind of concern can be taken out of the investment case. So in other words why is 20% to 30% the right level why not go lower given the shock that we all saw in the past year and I'll leave it there. Thanks.
Doug That's a fair question and I can tell you that's one of the things that Jason holder or looking at consistently.
The capital markets were very assessable last year, even even in the downturn in rates were so attractive that we were able to really do a good job of financing the business through this.
But.
Again.
You never really know Jason Yeah, that's right one thing we do to address this is hold a higher cash balance, but we also want to have an efficient capital structure and debt's pretty cheap right now going to zero that would give you the maximum flexibility and kind of resilience. But then you have the cost of higher costs, but Doug are you there for <unk>.
And that we would like lever up to buy back shares or something along those lines.
Well, it's really it's really more of that so you would opportunistically positioned.
To lean on the balance sheet, when you need to without.
The market is speculating about the dividend is it really more because I think your business can support an annuity dividend discount model type of approach, but the balance sheet needs to be right sized to achieve that and again, we just didn't really try and take that volatility out of.
The go forward investment case, I've taken my quota of triangle. So I appreciate the answers.
Sure.
Okay, we'll see you soon.
Thank you. Our next question is coming from Paul Sankey of.
Research. Please go ahead.
Good morning, everyone.
Paul J can I ask you guys about.
About Europe , just from your perspective as a major refinery.
Uh huh.
What's going on.
<unk> demand the impact of natural gas prices crude slates, you know the whole bit.
Thanks, Paul.
Yes. So this is Gary I guess, what we're seeing in terms of demand as they are kind of ahead of where we are in recovery from the latest spike in Covid cases.
If you look at our seven day and in the UK were up about 10% of where we were a month to date, so starting to see a good recovery in mobility and gasoline demand in the system.
Again, very similar situation on diesel stocks are very low so diesel looks very constructive as well.
On the natural gas side, you know you see some switching of crude diets as a result of the high natural gas prices is still $30 an M. Btu in northwest Europe . So you see some people kicking out medium and heavy sour grades of crude running more light sweet I think where we've seen it the most is.
Asian around hydro processing.
Capacity, so people idling and cutting hydrocracking capacity as a result of very high natural gas prices, which again puts less diesel in the market and is one of the reasons why we're experiencing all the tightness around diesel that we are.
Excellent. Thank you could I just follow up with California, we've seen margins come off quite a bit there, but more importantly could you talk a bit about how renewable diesel will pay to play through.
In that market, where you will you are exposed to both sides. So I'm just wondering what your perspective is because we could see a situation obviously, where.
And the market gets quite challenged I think by renewables.
Thanks.
Paul This is Martin renewable diesel has held up really well from a demand side in California, It's kind of amazing to me going through Covid.
Seen out there, obviously deficits have decreased and they've decreased because of less car, Bob our gasoline use unless diesel use but renewable diesel.
For the first half of the year and Thats. The latest stats, we have is running at 23% of the diesel pool.
In California, So we're.
Blending in our 23 statewide which is pretty amazing and a lot of imports coming into California to renewable diesel.
Kind of held up remarkably well now you can say well, maybe that's why the credit prices down.
I think really the credit prices got a lot more to do with just less deficits then it has to do with with additional credits from renewable diesel so.
That's a great market for us I think.
What really got hurt demand wise was more in Europe on renewable diesel and probably more in Canada to with just kind of waiting for the CFS. So.
So we expect those two to rebound and with more demand globally.
Understood could you just sort of the forward a little bit as we look over the next couple of years in terms of how the supply demand balance might play out and I'll leave it there sorry, not commit you love today Joe.
Yes.
Sure.
We will have a chance for that here pretty soon.
Yeah.
You play it forward, there's really nothing that stops renewable diesel from you can blend it.
Really any rate with renewable diesel right, there's 85% renewable diesel sold in California today.
I think carbs projections are to get somewhere around <unk> 40 by 2030, I think a lot of people think.
Could be higher than that so that's California, but you've also got other states considering el CFS you've got the.
CFS in Canada that we're looking forward to by the end of this year and the Canadian diesel markets twice the size of California's market. So that's going to be.
A big market for us.
And we expect that people will over Jenna.
Generally credits early when they can right. That's what happened in California. There was early credit generation building up a credit bank and we expect to see the same thing in Canada, which is good for renewable diesel demand.
Great. Thanks, all the best for 'twenty two guys. Thank you. Thanks.
Thanks, Paul.
Thank you. Our next question is coming from Paul Cheng of Scotiabank. Please go ahead.
Hey, guys good morning good.
Morning, Paul.
Two questions. Please firstly, it's for Marty.
I think.
Within the renewable diesel and not pull it up seems to be getting some excitement by some of your peer SaaS.
Just wanted to see what the company and again Tuesday, and Wednesday, you come home and what needs.
To change in order for the economics could be.
Paul.
Both diesel from your standpoint for you to pay interest and yet.
At that point, what type of investment.
We need to make in order to make the switch.
So thats the first question.
And second question is puppy one name.
Low fat and then take the full corporate margin capture once when they quit.
Right.
Just wanted to see if there's any one off events.
And also that in the two.
T.
In Europe and also with that.
In Quebec City, I mean, which is strong.
In terms of the margin capture in the fourth quarter. Thank you.
Okay, It's Martin I'll get started there Paul I.
I think.
We were all looking at the build back better Bill and what was in that on a tax credit basis for <unk>.
And what we saw that incentive level proposed and that bill was not sufficient to attract additional investment.
Next app versus the base case of producing renewable diesel.
The existing unit.
However, we're still progressing SaaS production through our data and engineering process and concurrently we are developing customers.
Plenty of customers interested in SaaS, but a favorable tax credit.
A something something else is going to be required or tax credit or something else to really get over the hump to where SaaS is economic to produce relative to producing renewable diesel.
That being said, we're still confident that staff productions, a question of when and not if.
We think the margins will eventually work the SaaS, the only way to reduce the carbon intensity of air travel.
Hey, Michael.
How big is that.
Sorry, sorry, just one follow up on what Martin said.
How big is the gap in terms of big incentive for you to to fund the Saf to be attractive.
Compared to it that we know about DSO and also.
Colgate that worked out the investment you need to make and how big is the investment.
For you at that to make T J D.
To be able to put to you at that call it 20% or 30%.
Yeah on the gap I mean were somewhere probably around this 70 cents a gallon gap still Paul to make it economic.
On the investment we're still going through our gated process. So we don't have a number on that yet we have preliminary numbers, but we don't have a number that were ready to share yet.
Okay. Thank you Lynn.
Alright, so yes.
So interesting about the two refineries, we have an Atlantic basin.
Quebec is seasonally stronger in the fourth and first quarter.
It's.
Largely a distillate.
Very specialized distillate producing refinery waste configured worth 10, Brooks really more of a gasoline producing configured refinery. So that's kind of how they worked out so really in terms of the fourth quarter performance, it's really pulled back.
Well on their margin capture and obviously you have the issues with.
Around high natural gas prices over in.
In the UK, obviously that helps sort of hurt their margin capture.
And Brooks and and linear and the one off items that you spend at the thing in the quarter all with that.
That you guys have done a phenomenal job in operation and be able to fully capture the benefits of that market.
I like the second answer but it's.
Yes.
<unk>, they both ran really well in the quarter.
Okay. Thank you.
Thanks, Paul.
Thank you. Our next question is coming from Sam Margolin of Wolfe Research. Please go ahead.
Hey, good morning, everybody. Thank you Sam.
Yeah.
Wanted to just circle back to the industry capacity questions in a few other analysts on the call have alluded to a lot of.
Closures over the past 12 months, but theres, some third parties and some management.
And the industry that are suggesting that the number of closures is even higher than any of us are aware of or any kind of report that we would see.
Mike confirm and so I wonder what your thoughts on that are and then secondly, there's a two part question, but only one theoretically.
Theoretically where cracks are today, you would think that capacity rationalization would stop here or slow down.
But.
There's other factors that are that may be driving some some closures. So if you think that could.
This trend could continue based on Noneconomic factors would love your input on that too. Thanks.
I'd say on a plane. So we are trying to study the data right now because what we see similar issue with in terms of where utilization is and versus closures.
And again, it's just sort of what were sort of preliminarily deciding or we're looking at as we think.
Theres, probably some slowdowns that are occurring maybe because of maintenance deferrals or turnaround deferrals in the industry. We don't that's not something we know, but it's a theory as to what Youre seeing.
And certainly where margins are now at the call on capacity is pretty much Max so.
Other than the turnarounds and the outages.
The refinery utilization ought to be in this 90% to 95% range. Once you get all the data worked out make sure all the refineries you think shouldnt be in everything.
Where we see it as well.
Okay. Thanks, so much.
Okay.
Thank you. Our next question is coming from Ryan Todd of Piper Sandler. Please go ahead.
Great. Thanks.
Just one quick follow up on your comments on California from earlier I know you had talked about some of the longer term.
Or at least issues with low carbon fuel standard credits.
Do you have a view on.
For the next 12 months, where do you think that also give us credit scope from here, we've gone from 200 to 150 ish.
Do you see further downside or do you think we stabilize here.
Yes, that's a good question this is Martin.
What's difficult about this is you always driving with your rearview mirror right unless the data lags by six months.
I'm not complaining about that and makes sense, it's a lot of data, but so we're always kind of we've got.
At the end of this month, we will get the third quarter data.
What's interesting is when you look at it.
The credit price, obviously depends on credit generation versus deficit generation and Covid certainly reduce deficit generation. It has been since the second quarter of 'twenty. So you have to think that credit prices have been reduced by COVID-19 .
And then the other thing that's interesting demands when you look at the credit generation in <unk> 'twenty, one I'd say, that's certainly surprised me to the upside, but when you dig into that Theres really two line items in the credit generation that stand out.
The first was it Bios CMG bio compressed natural gas was 13% of all the <unk> 'twenty, one credits and that line item was up 190% versus 2019.
And second off road electricity generated 9% of all credits now this is off road not on road and that was up 146% versus 2019.
And more interestingly on the off road, 71% of those credits came from E forklifts.
So when you think about the biopsy LNG the off road. The forklifts you just wonder if that pace of credit generation can continue or the infrastructure in and just really the.
It gets in the way right I don't know how many times you can replace your forklifts to get in the forklift, but it seems like that would run out at some point.
So we'll see how that does.
So that shakes out, but if you think about those two line items.
21%, 22% of the credits in California.
Two line items, there, which really were very small in the past. So that's just kind of interesting data and then the other is the biodiesel renewable diesel and on road electricity credit generation as a percent of total credits were all flat for <unk> 21 versus 2019 as a whole, but it's just a little.
Hopefully that helps them.
Yeah. Thanks, that's great and then maybe just one overall I know you've talked a lot about what you're seeing generally in terms of demand, particularly here in the U S.
Any comment in terms of what Youre seeing on the product export side that may indicate what youre seeing on an internet international product demand, particularly in your primary export markets.
Yes. This is Gary so I would tell you we're probably seeing we're not seeing the recovery in Latin America quite as fast as we've seen in North America or the U K. So demand is still down a little bit we're seeing good export demand into the region I would expect in the first quarter, our exports will be down a little bit not really.
An indication of demand in Latin America, but more a function of.
Maintenance activity occurring, especially in the U S Gulf coast during the quarter and really good domestic demand, but the demand is there and in Latin America, and our typical export markets.
Great. Thanks, guys.
Thank you. Our next question is coming from Jason <unk> of Cowen. Please go ahead.
Okay.
Hey, good morning, Thanks for taking my questions.
Dovetail off the comment I was just made maintenance in the Gulf coast. It looks like guidance for throughput is down.
Quarter over quarter for <unk>, and <unk> about 200000 barrels a day.
Can you just discuss it.
What maintenance BOP maintenance activity youre going to have a long queue. If there are other onetime items impacting that guidance and if you think that's indicative of the industry as a whole just given it seems like there was a lot of maintenance delayed due to COVID-19 over the past couple of years.
Then my second question.
As.
Hopefully when we get out there kind of odd geopolitics and what's going on with Ross.
Valero import a lot of it.
Mediate feedstock from Russia.
Just discuss maybe the margin kind of enhancement that provides and how youre more broadly thinking about both the risk and opportunities.
These geopolitical.
Issues with Russia present for your company.
So this is lane I'll take the first one so we don't really comment directly on our turnaround activity going into the quarter the volumes or the proxy for that so you can just sort of.
What that means and we certainly don't.
We also don't comment on our peers on what we think they are doing with respect to turnarounds.
This historical policy for us.
Gary you want to talk about Russia, Yes. So you know obviously, we don't really until any kind of sanctions are announced we don't really know what they would entail.
What I can tell you is that when we've seen things like this happened in the past in other locations. It simply results in a change in trade flows. So what we would expect to happen here is some of those intermediates that we're running today will be run somewhere else throughout the world and wherever those end up going they'll kick out feedstocks it make it available for us to.
So certainly as a commercial team we're looking at what those are today and making sure. We have them approved in our system and are ready to run them, if we need to in the future.
Got it thanks.
Thank you. Our next question is coming from kind of our lineup of Morgan Stanley . Please go ahead.
Yeah, Thanks, maybe sticking with.
A major X quarters I was wondering what you guys made up.
The discussion around Pemex potentially ending crude exports.
What do you see as the implications do you think it's likely to occur and what do you think the implications on the particularly the Gulf coast refining industry would be.
Yeah. So this is Gary I think lane has been pretty public on our views on being able to meaningfully change refinery reliability and utilization you know we've kind of said two turnaround cycles and a lot of capital. So you know it looks like their goals are pretty aggressive but.
They're able to increase refinery utilization the dos Bocas refinery starts up certainly it would decrease the amount of crude for export. Our view is that the first destinations to be cut will really be European destinations in Asia destinations for export from Mexico.
It goes first our experience has been that as they increase refinery runs in Mexico. They increase the export of high sulfur fuel oil and that's a good feedstock for our high complexity U S. Gulf Coast system that actually serves as a nice complement to a lot of the light sweet grades we run in our U S Gulf Coast system.
We've had a longstanding great relationship with Pemex, and we expect that to continue long into the future.
Got it helpful context, maybe.
Maybe just returning to the to the capacity question, but in a global sense.
The closures.
Obviously, you had sort of a net decline in some areas.
At least in theory flipping back to growth.
Global capacity level over the next couple of years here.
Do you are you concerned about that do you see that meaningfully altering the tier earlier point product flows or crude flows.
How do you think about that impact on your margins.
This is Wayne.
We read the same journals you guys do in trade magazines, and we have people to keep up with refinery closures and require some starting up you know obviously, the middle east customer farmers, starting up China has some I guess, we sort of believe that is true.
China has those longer term plan of having larger refineries run sort of what we call the teapot refineries, but at the end of the day, it's hard to really sort of.
Just have a real strong view on.
Where all this really has.
I always go back to win.
The refined the Indian refinery wines with starting up and we were we were concerned and we are fully series. It was gonna put review us refineries distress calculated there.
The import parity indoor market and at the end of the day what happened is most of the barrel stayed in the region. So you just you know.
Things to work through but what we do is we run our assets make sure they're competitive enough to win here in the U S, but everywhere in the world and we know that as long as there is rent out there in this industry will get we'll get our share of it so.
Fair enough. Thank you I'll turn it back.
Thanks Carter.
At this time I'd like to turn the floor back over to Mr. Boehler for closing comments great.
Great. Thanks, Donna and thanks, everyone for joining us today, obviously, if theres anything you want to follow up on feel free to pick the IR team. Thank you and have a great week.
Ladies.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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