Q1 2022 Valero Energy Corp Earnings Call
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Greetings and welcome to Valero Energy Corporation's first quarter 2022 earnings call.
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At this time I'll now turn the conference over to Homer Buller, Vice President of Investor Relations and finance Mr. Bilek, you may now begin.
Good morning, everyone and welcome to Valero Energy Corporation's first quarter 2022 earnings conference call.
With me today are Joe Gorder, our chairman and CEO Lane Riggs, our president and CEO , Jason Frazier, our executive Vice President and CFO , Gary Simmons, Our executive Vice President and Chief Commercial Officer, and several other members of Valero Senior management team.
If you have not received the earnings release and would like a copy you can find one on our website at Investor Valero 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'll turn the call over to Jill for opening remarks.
Thanks, Homer and good morning, everyone. I am pleased to report that today, we delivered solid financial results for the first quarter led by a continued recovery in our refining segment.
Refining margins were supported by strong product demand, coupled with very low product inventories globally.
Refinery capacity rationalizations that have taken place in the last couple of years continue to contribute to the supply tightness. In addition high natural gas prices in Europe are supporting product cracks to compensate for the higher operating cost.
This in turn provides a structural margin advantage for U S refineries, particularly those located in the Gulf Coast, where natural gas costs are significantly lower than in Europe .
Turning to our low carbon segments, the ethanol business generated positive operating income despite a weak margin environment and our growing renewable diesel business continues to generate good results with high demand for renewable diesel.
We expect low carbon fuel policies to continue to expand globally and drive demand for low carbon fuels and with that view, we're leveraging our operational and technical expertise to steadily expand our competitive advantage.
The D. G D. Three renewable diesel project located next to our Port Arthur refinery is now expected to be operational in the fourth quarter of 2022 with.
With the completion of this 470 million gallon per year plan D. G. DS total annual capacity is expected to be approximately $1 2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha.
Blackrock in navigators large scale carbon sequestration project is progressing on schedule and is expected to begin startup activities in late 2020 for Valero.
<unk> is expected to be the anchor shipper with eight ethanol plants connected to this system, which should provide a lower carbon intensity ethanol product and result in higher product margins.
We continue to evaluate other low carbon opportunities such as sustainable aviation fuel renewable hydrogen and additional renewable naphtha and carbon sequestration projects.
And then refining the Port Arthur Coker project, which is expected to increase the refinery's utilization rate and improved turnaround efficiency is still expected to be completed in the first half of 2023.
On the financial side, we remain committed to our capital allocation framework, which prioritizes, our strong balance sheet and an investment grade credit rating.
We further reduced our long term debt by $750 million in February through debt reduction and refinancing transactions, bringing our total long term debt reduction to $2 billion in six months.
And we continue to honor our commitment to stockholder returns with an annual target payout ratio of 40% to 50% re restarted stock buybacks in the first quarter, which combined with our dividend returned $545 million to our stockholders.
Looking ahead, the fundamentals that drove strong results in the first quarter, particularly in March continue to provide a positive backdrop for the refining segment.
We expect product demand to remain healthy with light products demand near pre pandemic levels and the pent up desire to travel and take vacations should drive incremental demand for transportation fuels as we head into the summer.
Global product inventories remain low, particularly for diesel and theres less refining capacity available to replenish inventories.
In addition, natural gas price disparity between the U S and Europe should provide a structural margin advantage for U S refiners, especially for assets located in the Gulf Coast.
In closing, we're encouraged by the refining outlook, which coupled with our growth strategy in low carbon fuels should further strengthen our long term competitive advantage and drive long term stockholder returns.
So with that Homer I'll hand, the call back to you.
Thanks, Joe for.
For the first quarter of 2022 net income attributable to Valero stockholders was $905 million or $2 21 per share compared to a net loss of $704 million or $1 73 per share for the first quarter of 2021.
First quarter 2022, adjusted net income attributable to Valero stockholders was $944 million or $2 31 per share compared to an adjusted net loss of $666 million or $1 64 per share for the first quarter of 2021.
For reconciliations to adjusted amounts please refer to the financials tables that accompany the earnings release.
The refining segment reported $1 $45 billion of operating income for the first quarter of 2022 compared to a $592 million operating loss of the first quarter of 2021.
First quarter 2022, adjusted operating income was $1 47 billion compared to an adjusted operating loss of $506 million for the first quarter of 2021.
Refining throughput volumes in the first quarter of 2022 averaged two 8 million barrels per day, which was 390000 barrels per day higher than the first quarter of 2021.
Throughput capacity utilization was 89% in the first quarter of 2022 compared to 77% in the first quarter of 2021.
Refining cash operating expenses of $4 73 per barrel in the first quarter of 2022 were $2 <unk> per barrel lower than the first quarter of 2021, which were impacted by excess energy costs related to winter storm Yuri.
The renewable diesel segment operating income was $149 million for the first quarter of 2022 compared to $203 million for the first quarter of 2021.
Renewable diesel sales volumes averaged $1 7 million gallons per day in the first quarter of 2022, which was 871000 gallons per day higher than the first quarter of 2021.
Higher sales volumes were attributed to the fourth quarter 2021 startup of the Diamond Green diesel expansion project or <unk>.
The ethanol segment reported $1 million of operating income for the first quarter of 2022 compared to $56 million operating loss for the first quarter of 2021.
Ethanol production volumes averaged 4 million gallons per day in the first quarter of 2022, which was 483000 gallons per day higher than the first quarter of 2021.
For the first quarter of 2022, G&A expenses were $205 million and net interest expense was $145 million.
Depreciation and amortization expense was $606 million and the income tax expense was $252 million for the first quarter of 2022.
The effective tax rate was 21%.
Net cash provided by operating activities was $588 million in the first quarter of 2022.
Excluding the unfavorable impact from the change in working capital of $722 million and the other joint venture members, 50% share of Diamond Green diesel net cash provided by operating activities, excluding changes in <unk> working capital adjusted net cash provided by operating activities.
<unk> was $1 2 billion.
With regard to investing activities, we made $843 million of capital investments in the first quarter of 2022.
Of which $536 million was for sustaining the business, including costs for turnarounds catalysts and regulatory compliance and $307 million was for growing the business.
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 $718 million in the first quarter of 2022.
Yeah.
Moving to financing activities, we returned $545 million to our stockholders in the first quarter of 2022 with $401 million paid as dividends and $144 million of stock buybacks, resulting in a payout ratio of 44% of adjusted net cash provided by operating.
Activities for the quarter.
With respect to our balance sheet, we completed debt reduction and refinancing transactions in the first quarter that reduced valero as long term debt by $750 million.
As Joe already noted these debt reduction and refinancing transactions combined with the debt reduction and refinancing transactions completed in the third and fourth quarters of 2021 have reduced Valero as long term debt by $2 billion.
At quarter end total debt and finance lease obligations were $13 2 billion in cash and cash equivalents were $2 6 billion the.
The debt to capitalization ratio net of cash and cash equivalents was 34%.
And we ended the quarter well capitalized with $4 9 billion of available liquidity excluding cash.
Turning to guidance, we still 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 that amount is allocated to sustaining the business and 40%.
To growth.
Half of the growth capital in 2022 is allocated to expanding our low carbon businesses.
For modeling our second quarter operations, we expect refining throughput volumes to fall within the following ranges.
Gulf Coast at 164 to $1 six 9 million barrels per day.
Mid continent at 395 to 415000 barrels per day.
West Coast at 225 to 245000 barrels per day, and North Atlantic at $445 to 465000 barrels per day.
We expect refining cash operating expenses in the second quarter to be approximately $5 15 per barrel, which are higher than last quarter, primarily due to higher natural gas prices.
With respect to the renewable diesel segment, we now expect sales volumes to be approximately 750 million gallons in 2022 with the anticipated startup of <unk> in the fourth quarter.
Operating expenses in 2022 should still be <unk> 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 million gallons per day in the second quarter.
Operating expenses should average 48 per gallon, which includes <unk> <unk> per gallon for noncash costs, such as depreciation and amortization.
For the second quarter net interest expense should be about $140 million and total depreciation and amortization expense should be approximately $630 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. If you have more than two questions. Please rejoin the queue as time permits please.
Please respect this request to ensure other callers have time to ask their questions.
Thank you.
Now be conducting a question and answer session.
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One moment, please we poll for questions.
Thank you. Our first question comes from the line of Doug Leggate with Bank of America. Please proceed with your question.
Thanks, Good morning, everyone. Thanks for taking my questions.
This one might be for Gary actually.
Or whoever Joe do you want to allocate it to but I am curious about the cadence.
The margin trajectory realized margin trajectory through the quarter.
The world kind of changed at the end of February , but what we're trying to really get a handle on is what the.
The kind of sustainable earnings momentum might look like.
Given what we saw in March and obviously stronger cracks indicators again in April . So that's my first question the cadence of margins through the quarter and what it looks like in April .
So far.
Yeah, Doug So I would tell you in the first quarter. We saw is really pretty strong diesel demand throughout the quarter, but to start first quarter gasoline demand was a little bit soft we had a wave of COVID-19 go through which impacted mobility and so the quarter started with a little softer gasoline demand, but it recovered rapidly throughout the quarter so by the.
End of the quarter, we were seeing gasoline demand at or slightly above pre pandemic levels. We.
We are seeing distillate demand above pre pandemic levels and that demand being met with significantly less refinery.
Capacity as we had rationalization that occurred during the pandemic, so really tight supply demand balances and then very very low product inventories. So we're looking at a situation where total light product inventories 41 million barrels below the five year average.
So very very tight and especially tight for diesel diesel inventories in the U S 27 million barrels below the five year average for the strength in crack spreads really been led by diesel.
As long as inventories remain low you would expect that to translate into very strong refining margin environment and in fact, so far in April we've seen stronger margins and we even had.
In March.
What we expect to see throughout the quarter is ultimately as we get into driving season and gasoline demand continues to pick up youre going to have to have compression between gasoline cracks and diesel cracks.
A lot of the <unk> that comes into the United States to fill conversion capacity was sourced from Russia. So biggio is tight and we're going to have competition between the incremental barrel going to an FCC to make gasoline versus that barrel going into a hydrocracker to make diesel so we would expect.
Gasoline cracks to get stronger as we move through the second quarter.
Sorry to press you on this but.
Maybe I'll ask it like this how much of the earnings in the quarter from refining where in March.
Doug we can't give you.
Breakdown of earnings, but I think as Gerry highlighted obviously March was.
Significant contributor.
Okay, sorry for.
My follow up is really on on Joe's prepared remarks about structural cost advantage to I think where we stand on this our view is that the.
The U S has moved into almost like a regional Golden age given your structural cost opportunities and the rationalization of capacity here I'm wondering if you could just.
<unk> offer some color on how we quantify the what does that advantage looks like given you'd called Pembroke is a benchmark relative to the U S. What is the delta right now.
What would you hazard a guess is that kind of normalized go forward spread between U S and European gas as it relates to refining.
Yes, Doug that's a good question lets let lane take a whack at it here, yes. So as we alluded to we have the Pembroke refinery. So we did have a little bit of insight into the multi sort of today natural gas prices over in the UK are roughly about $30 per million Btu sort of look at the United States and we're currently planning on box.
Six five specifically used 30 versus five and about $8 per barrel higher heat crack sort of.
Breakeven.
No.
Broke the breakeven versus the Gulf coast assets.
Is that kind of a ratable as we if.
If we normalize the long end of the curve right now shows about a $5 plus.
Spread per Mcf, so that would just be kind of reasonable sounding like a buck in the hopper someone like all of them.
Well I'm not quite following what I would say is that.
But the burden of saying Hey, I've got this.
What he correct Glenn need from Pembroke versus the Gulf Coast, I need about $8 per barrel R&D correct.
If I'm paying $30 per million Btu for gas in the U K versus sort of a $5 on the U S.
Right. Okay, we can take it from there. Thanks, so much guys I appreciate it.
Thank you. Our next question is from the line of Roger Read Wells Fargo. Please proceed with your question.
Yes, thanks, good morning.
Probably a little bit to follow up on.
How we think about the second quarter here and capture.
And kind of contrast that with the guidance on volume so the guidance on volumes.
Imply some more maintenance going on this quarter. So as we think about higher crude prices lower secondary products.
Yeah, I'll I'll call it kind of stratospheric diesel cracks and how we should think about.
The moving parts here affecting capture for you all.
Yes. This is lane.
That's sort of been talking about this is we've been on the road I mean, it is very difficult right now to sort of compare previous capture rate versus the index as they are today as you said first and foremost it's backwardation in the crude markets and the product market secondarily is our secondary products like propylene and pet Coke and Asphaltenes other.
Does that don't move quite as fast as crude has moved up in price and of course finally, we had quite a bit of turnaround activity in the first quarter, we're giving our volume guidance in terms of how the second quarter looks.
But I think going forward is longer as much backwardation in the markets. It will it'll you'll make trying to figure out what the margin capture is going to be on a go forward basis, a little more difficult.
Well at least you got plenty of room to work with given where the crack spreads are.
Yes.
Yeah.
Follow up question so ended the quarter.
Cash if I remember correctly was to something billion.
Joe.
The last management meeting at the beginning of April you talked about maybe being more comfortable.
You did maybe Jason did carrying 4 billion of cash you restarted the share repos here in Q1, presumably those will keep going.
What's the right way to think about.
Maybe hitting the upper end of the 40 to 50 or exceeding the 50 do you want to get to the $4 billion in cash first as theyre more debt to pay down just kind of walk us through before we what we should think about as we think about.
Better than expected cash flows I think most of us had coming into the year and how that may play out as we go through the rest of this year.
Yeah. This is Jason I'll take a shot at it no you are right you hit our three goals, which we've talked about it we will try to do simultaneously, we want to build up cash on a continued to pay down debt, we paid down $2 billion over the past six months and also do are definitely on our commitment to our shareholders with.
The buybacks I believe with what we did in the first quarter, we were at about 44% on the share buybacks with regard to the payout ratio and it will still look at it on an annual basis and you said we're at two six on cash. So we're not even at that we talked about having at least three probably going forward as a minimum of course it'll vary around but.
That's what we're looking at so we'll build some more cash we don't have any maturities coming due while we have small one next quarter, but we'll be looking at opportunistic debt repurchases as we move forward.
Yes, so we'll try to do them all simultaneously, we don't have an order, where we will get up to 4 billion of cash before we do X or anything like that.
Roger the only thing I'd add to what Jason said is.
We live one day at a time in this business for sure.
But if you if you look at what we're looking at in the market today, you feel pretty comfortable with the ability to go ahead and achieve all of those things that we mentioned.
Building some cash as we go forward, we thought it was opportunistic to buy back shares with the outlook that we had for the market going forward and so we went ahead and did it and we've got our commitment to honor the payout ratio target and so Jason said it right. We're looking at doing all three of them simultaneously.
But I guess, what it speaks to from my perspective is kind of the general outlook that we have on the market going forward and that we're going to be able to achieve all of these three things.
With the way things appear to be right now.
Yeah.
It's great to see thanks.
But.
Thank you. Our next question is from the line of Phil Gresh with Jpmorgan. Please proceed with your question.
Yes. Good morning, one follow up to that just as we think about the balance sheet and the fact that.
Effectively approach the leverage target.
Out of the equation. If this is a really strong environment or a peak ish type of year would you consider moving the leverage target lower.
There's a lot of question marks out there recession risk or other things just curious how youre thinking about kind of managing through cycles and leverage.
Yes. This is Jason we're pretty comfortable with our 20% 30% range. It definitely gives us a range to get a lot lower than we are now believe were at 34% now so we still got a little ways to get down to the upper end of our target and of course, we can do that by holding the cash or paying down debt, we'll look at both of those tools.
But.
Yes, I mean, I think we're comfortable with the range and that gives us lot of flexibility within it.
Okay fair enough.
And then just on D J D.
Yes, I think you've talked about go forward capture right there on the gross margin somewhere around 100%.
The capture rate was definitely better in <unk> relative to the to some of the headwinds and <unk> I was just curious if there are any other headwinds there and one in Q2 to.
To think about there might have been transitory and just how youre thinking about the go forward margin outlook.
Hey, Phil This is Martin you arrived to capture rate improved in <unk> versus <unk> <unk>. The issue is really feedstock costs relative to soybean oil and it actually priced above soybean oil or feedstock.
As we talked about before.
That was largely due to the <unk> to getting into the picture changing feedstock clothes and every time, we've done that in the past when we've expanded we've seen feedstock prices go up the good news in the first quarter as feedstock prices moderated relative to soybean oil.
They ended the quarter below soybean oil so that all looks good so the.
What impacted margin capture in the first quarter was really the backwardation elaine's talked about that prompt crack is just not achievable. So that was the issue. So it's really the backwardation in the <unk> market that impacted the capture and as long as we have that that backwardation will have.
The lag on the capture but that won't be a permanent thing.
Great. That's helpful. Thank you.
Thank you. Our next question is from the line of Connor Lynagh with Morgan Stanley . Please proceed with your question.
Yes. Thanks.
Just high level one on.
Distillate.
Total inventories I mean, do you attribute the supply tightness entirely to what's been happening in Europe , either on the natural gas cost side of things or the outright disruptions in Russia or do you feel there is some sort of a bigger global issue here.
Well I think it's a number of factors, but certainly you know as I alluded to distillate demand has remained fairly strong throughout the pandemic and youre trying to supply that demand with less refining capacity as we've had rationalization.
Occur in the industry.
<unk> coupled with the fact that you know we came through.
At a time, where there was a lot of maintenance activity.
We're trying to catch up for maintenance that maybe didn't occur during the pandemic. So you saw low refinery utilization and then you add to it the natural gas <unk>.
Presenting challenges in Europe , and less Russian this with long into the market as well and it kind of puts us in a position where we're at.
I guess, the we're in sort of driving it. This is as we look into the summer driving season.
Presumably further recovery in jet demand.
Is there is there slack that you guys see in the global refining system or in the U S refining system to really significantly increase runs and refill those inventories or do you think we need to see some sort of demand destruction to balance the market.
It's hard to see that refinery utilization can increase much we've been in this 93% utilization and historically, although we've been able to hit 93% utilization generally you can't sustain it for long periods of time. So I don't think Theres a lot of room on refinery utilization in terms of increasing supply.
I think the market will have to balance more on the demand side.
Got it and just to sneak one more and do you think thats more likely on the on the gasoline diesel or jet side or how would you think about that in terms of product.
Well I think it depends you know in the domestic market. It looks like jet demand is recovering nicely certainly youll have an impact to international travel.
Still with Covid restrictions in place some places and then high prices impacting some air travel as well.
Gasoline and diesel seemed very constructive and a lot of it is just we have still a lot of pent up demand people that have been unable to travel for a couple of years are ready to go out and take vacation and so in our mind, we will see very good demand continue for both gasoline and diesel.
Alright, thanks very much.
Thank you. Our next question is from the line of Paul Cheng with Scotiabank. Please proceed with your question.
Hey, guys good morning.
Hi, Paul.
Yeah.
Actually you mentioned earlier about the backwardation curve.
We all understand how the Kumar cat backward patient currently impact on margin capture.
I'm not sure I fully understand how to pull it out.
That rotation carefully the impact on the.
On the margin capture on what their profitability.
Can you maybe help me understand that need to be at that tell us that that's the first question.
Okay. So I'll take a shot and maybe Gary confirm it up you know when you are trading in the cycle right. If the crack is rolling up towards you and you're out there sort of selling into it.
Youre not necessarily catcher capturing the peak number all the time.
We've had days, where the diesel cracks gone up about <unk> 20, a gallon and produce so youre not going to hit you are not going to hit it perfectly.
And of course, since we wrote a ratable book and where we're sort of fully hedged there again, it's a little bit more difficult for us to.
To fully capture a steeply backward.
The foot market.
Yes that means that you have seen that contango market capture wave with benefit.
Yes for products anchored yes, right yes.
What's structures, telling you that the world is short right. It's either short that's what structure is telling you. So yeah. Your commercial arms actually do pretty well in a contango market is just the <unk>.
Underlying tracks not necessarily as good as you would like.
Right and in the crude market you have seen that with patient on contango, we can pretty much.
Do a relatively EC estimate what's the impact from Dana CMA.
And the rule of thumb that is the fragmentation curve.
Part of the market volatility.
With all of the impact on your margin capture on not great fashion and you have it as a fashion is there any rule of thumb that what percentage that might be.
No I'll start as you know, it's not as transparent because so many of our barrels are essentially Brent based and so you have to look at the overall data market.
How we build up to the to get from sort of the physical market to an ice relationships. So it's a little it's a little not as transparent.
Obviously, you're going to see but you can obviously you can look at what something so more of the complex role of that to see if it really is the Bakken structurally backward or not and then just swap out the four to come up with your how you how you guys want to model that.
I see okay. The second question just on the Russian invasion and correspondingly.
That's a lot of moving part I mean, the European gas PA, Yes, Heidi fits.
Feedstock availability on Biggio autos have become REIT to us and we also seen of course that the potash export.
From Russia.
I guess I'll go to Europe has been dramatically reduced.
Is that your operation in Europe painful.
And also maybe that your Gulf coast.
Finding operation had been changed ally.
More than that Bob.
Two things to Neil I mean.
The product yield had been any meaningful sunsets because off.
The market condition or that the current situation that we see.
And also that because you no longer can bind the am 100.
When you purchase the other similar type from Latin America.
Erica or middle East.
How would that impact on your on your product.
On your operation.
Okay, So hey, Paul I'll take a shot and Gary can correct anything that I say, that's not exactly correct.
So starting with the first item.
Biggio definitely when you look at how we how the Russian balances word Vijay.
This is essentially they are the final sort of ex order of a major a major physical supply of <unk> to the market and so we'll just have to see how that plays out.
It's not.
The depot crackers, so high versus gasoline youre still on the Max diesel mode.
You already kind of touched upon it earlier I think our anticipation is as you get more into the driving season as you.
You sort of you enter into a period, where maybe it's a little more difficult to fill up these conversion units because of the availability of gasoline you'll have to start bidding molecules away from the distillate market and as long as the distillate market remains tight.
Keep pulling up both correct, we'll just have to see how that how that works out with respect to our EM 100 supply we're out buying sort of replacement barrels.
The areas that you alluded to which is largely the middle East and South America.
We have been buying those.
The base if they were the most economic but we certainly been able to certainly to shore up our supply situation with those barrels from those areas.
But that's those very well when you're wonderful y'all refinery due date.
Stephanie on that do you need to change the way how you operate.
Well, we're blending differently right. So what it means is because yes. They are all the feedstock or even 100 have variability from different areas in all of these intermediate have different variability and qualities and we're always I mean, thats part of that part of the sausage, making we figure out how to how to blend to something that we think is the most.
Economic for us to run.
Alright, thank you.
Thank you.
Next question is from the line of Theresa Chen with Barclays. Please proceed with your questions.
Good morning.
A follow up question later on.
The comments around demand in gasoline clearly theres a lot of concern on demand currently and much of that is driven by factor or is it a broad that's outside of your control, but I was hoping if you could offer your thoughts on how elastic do you think that demand curve is currently.
And you're already in like a tight product supply situation due to rationalization alone now the Russian vgs coming out of the market and to your point <unk>.
<unk> incentivize that barrel of NGL from the hydro Cracker English means that.
Gasoline cracks them to go higher if crude hasn't got a lower price can you just go higher so how does all of that shakeout, that's like the demand picture for you.
Hey, Theresa this is Gary so it's difficult to tell at what price point do you see demand destruction on gasoline I think theres a number of factors that come into play. There certainly you would expect elevated pricing to have an impact on demand. However, we've seen wage inflation.
Offsets that and allows people to tolerate a higher price point with personal savings up again people pent up demand, they're going to want to travel and they have money in the bank. So will probably offset some of that to some degree and then throughout the world not so much in the U S. But in many other countries we've seen the government step in.
In the forms of tax subsidies ways to kind of offset those increases and keep the street price Downs I think a lot of those factors will kind of offset some of the things that we typically see in that would cause the demand destruction to occur on gasoline.
Got it and just on the export side, what are you seeing in terms of the competitive dynamics in the export markets and clearly you are well positioned given your geographical conscience concentration in the Gulf Coast.
And how do you see the market evolving for Gulf Coast refiners as domestic supply has rationalized to some extent and Latam continues to grow over time and there seems to be a structural date for diesel into Europe , given their shortage. How do you see these factors playing out.
Yes, so I think as long as you know when you look at the advantages the U S. Gulf Coast refining system has we've talked a lot about natural gas, but also feedstock cost advantages running domestic crude or Canadian or Mexican crude it puts us in a very strong position to be able to compete globally into the export markets and I think you'll.
Youll see that continue pad three is long diesel and so youll see that linked move into the export markets Latin America and Europe throughout the summer.
Thank you.
Thank you.
Our next question is coming from the line of Paul Sankey with Turnkey Research. Please proceed with your questions.
Good morning.
These are all pretty much follow up question sorry.
Pretty much follow up questions. Given everything you said just specifically do you have a number for how much a Russian crude in.
I guess, the Geos Intermedia, and then and then Russian product that is now out of the market further to what you're saying and it seems that youre, saying that trade remains strong despite.
The strong dollar and the high prices.
And the follow up would be on the working capital movement how is.
The environment affecting your trading and markets in general because you know we're all aware that that's been a falling off of open interest I assume that the working capital commitment will stay high as long as prices stay high.
But if there's anything you can add on what it's what it means for markets that would be very helpful. Thank you.
Thank you Paul Yes, so I guess to start with we have seen it looks like diesel coming out of Russia, and am 100 coming out of Russia have fallen off thus far we haven't really seen the falloff in crude exports from Russia. So so far.
It looks like it's been more of a rebalancing of trade flows rather than a reduction in exports you can see India, taking more Russian barrels, China, taking more Russian barrels.
Some Latin grades in West African grades flowing into Europe , and then in here in the United States Youre seeing more Brazilian and Colombian grades that we're going to India and in China, starting to fall in the U S. So I don't know that we've seen so much on the crude export side, but certainly on the.
<unk> hundred the residual and the distillate, you're starting to see export falloff.
Working capital discussion.
Paul This is lane I'll take a shot at it. This is what you are trying to get one of the things that you've seen in the working capital.
Is it.
This thinly traded derivative market. The paper market is sort of is trying what youre seeing is the trading companies and the operating companies are sort of trying to sort out who is going to have the physical length, that's going either across the Atlantic or to South America, depending on trade flow and it's because of this volatility.
On the derivative market. So everybody is trying to that's still being sorted out I guess is the best way I would say that.
If I could sneak in a quick follow up the light sweet throughput. So they looked like they were an all time record high at the moment right.
Okay.
Yes, they are.
Thanks Luca.
Take care Paul.
Our next question is from the line of Manav Gupta with credit Suisse.
Please proceed with your questions.
Good morning, I wanted to try for one I'm not sure if I kept Don said, it but it's my job to dry.
So if you go back a decade.
2015 was the best year in earnings and let me know if I'm wrong, but I think you made over $9 in EPS in 2015. So when you move forward today first quarter 231, the next two quarters most of us.
Believing mulatto believe there's like eight or $9 EPS number.
The combined for the two quarters and then the last quarter is generally our strongest so thats. Another 250, we put also thinks together this high that will be achieved in 2022 will be materially higher than the 2015 earnings number.
I'm thinking about that right can you comment a little about how the management is thinking about a record high earnings in over a decade.
So manav I'll, just say that I said it earlier, we live one day at a time.
And we certainly like your thinking in your mindset and frankly, I think everything you've heard from the team. This morning is that things look constructive on on all segments of our business right now and so we're optimistic but we don't count our chickens before they're hatched. So we'll continue to do.
What we do and that has come in every day and try to.
Operate safely and reliably and in an environmentally responsible way and to optimize to the extent, we can and if we just keep doing that day. After day. After day I think we're going to find ourselves in a really good place.
Perfect. Thank you and one quick follow up here is every.
Every quarter, we see a very positive trend DGB moves ahead by one quarter and so if you spot that.
The logical conclusion here is that on your <unk> call you would basically say that we have achieved mechanical completion and we all stock.
Okay.
I am just supporting that Brian So let me know.
Okay.
Bart do you want to.
[laughter].
Honestly, we've got a long track record here.
<unk> pretty much and duplicative to just a little bit bigger so that helped a lot.
Same construction teams same contractors.
Perfect weather, so we got to get through Hurricane season is still manav, but everything looks great over at Port Arthur.
But the one thing that I would say too and.
Don't talk about it a lot, but our team's ability to execute major projects like this I mean lane has really worked very hard on this over the years and our team's ability to execute significant projects and the partners that we've got helping execute those projects you are extraordinary and it leads to the kind of results.
You said it looked like a trend.
It's a trend that we like it we'll try to maintain.
Thank you so much for taking my questions.
Okay.
Thank you our next questions come from the line of Neil Mehta with Goldman Sachs. Please proceed with your questions.
Good morning team.
First question is on the U S. Gulf Coast, we've seen a lot of capacity retirement down there whether it was lyondell here recently, obviously shell continent tab and then the alliance.
Mining assets as well something like 7% of pad III capacity has now had the market next year, how do you guys see that impacting.
The structural outlook.
Gulf Coast.
And what changes if anything or is that market, just so deep and interconnected that retirement doesn't have a meaningful impact on the way you think about product basis.
Yeah.
Yes, So I would say you know overall, Neil pad III as an export market on both gasoline and diesel so I wouldn't expect to see it.
<unk> impact.
Shut down capacity in terms of the product market, we do see.
It gives us some advantages on the crude stock, we've certainly seen that as refineries come down.
Actually those refineries in the eastern Gulf. It gives us access to some U S grades that maybe we didn't have access to before.
Yes, the follow ups also in the product markets and just love your perspective on what's happening in China right now certainly it looks like a couple million barrels a day.
Product demand could be down but at the same time, China is not exporting product into the market in this meaningful way and so Singapore margins continued to be very strong, but as you look at the balances here.
How much of a concern is China.
Or do you think that again that impact could be contained because of inventory levels, but also product quotas.
Yeah.
Well no I think it really the answer is it's kind of.
And what you just stated thus far although certainly the COVID-19 restrictions have impacted demand in China, they're not exporting a lot of product. So I think if you had weak demand in China and high refinery utilization, resulting in very high exports that would be concerning but we're not seeing that in the market today.
Great. Thank you so much.
Our next question is from the line of Sam Margolin with Wolfe Research. Please proceed with your question.
Good morning, everybody how are you doing.
Yes.
A question on capital allocation.
A significant amount of your growth Capex is low carbon <unk>.
Projects and those projects come early but they're they're gated by a very regimented process and just because a project comes early doesn't mean the next one is going to start early.
So you might develop kind of a lumpy.
Pattern of growth Capex and I'm, just wondering if that has an effect on your on the other elements of your of your capital allocation. The other components return of capital or if you are if you harvest that cash what happens when you have maybe a lean year in growth Capex, just because of the cadence of.
Of your gated process.
So you are saying.
Have a year and a lean year for growth Capex youre talking about a year, we spend less on growth capex.
Yes, because you finish if you finished PGD three early it doesn't mean, you're going to start the next one early as well right because you're still going through the process for it so you.
You might have a gap in spending given the given the.
The magnitude of your of your growth Capex in that in that.
A portion.
Gotcha, Okay, <unk> I'll take I'll take a stab so it's an interesting idea and I do think Youll see are our strategic capital in a well versed sustaining capital. We've always said that we guide to two to two and a half on the overall capital budget normally one of happy role averages. So by definition, our strategic capital is gonna be a half a billion.
Two 1 billion nominally.
At least on an average in there.
We are gonna it'll be lumpier, because they are sizable projects and.
So I think Directionally, that's true from a potentially from a year to year I don't think Youll see us go from zero to $2 billion or something like that but youll certainly see a half a billion dollars of variability with respect to our strategic capital spend here in the near term.
Good morning.
Yes.
Since the mix drivers excess.
Cash I don't think we change our model based on all the variability in growth Capex right.
Yes, Sam I think it was mentioned earlier, Jason mentioned earlier, we haven't yet achieved the three targets that we're shooting for as far as.
The use of cash whether it be the debt ratio.
Buybacks and so on so we've got a little bit of work to do around that yet but.
Building, a little bit of cash that never is very troubling to us.
Got it yeah, and this is sort of a follow up and it is kind of a.
A hypothetical around <unk> four.
Talking a lot on this call about.
Clear evidence of a distillate shortage, that's driven by some structural factors and so now you have a consideration for renewable diesel supply that goes beyond just policy and the regulatory framework, because we just need more Disney more diesel period renewable or otherwise and so I'm wondering if that's a consideration that's now going into.
The commercial analysis behind incremental R&D projects.
Yes, Sam this is Martin.
I'm not sure we've looked at it that way, but overall I would just tell you the demand for renewable diesel and we look at the balances. We just think that demand is going to out strip supply and we've got a lot of speculation in the market.
Lot of demands coming on we'll see how much of that happens.
But we feel good about supply.
The European.
Demand for renewable diesel.
We feel good about demand demand for renewable diesel in Europe is going to rebound a lot with no more COVID-19 lockdowns hasnt been the case, so we got red two out through 2030.
What they are talking about and the fit for 55 program, what theyre going to do for the Red three is pretty aggressive so and then, California, Oregon and Washington.
CFS in Canada. So we just see a lot of demand out there.
Thanks, so much.
Okay.
Thank you. Our next question is from the line of Ryan Todd with Piper Sandler. Please proceed with your questions.
Hey, Thanks, maybe.
Just a couple of high level strategic ones I mean, clearly we've talked a lot here about how attractive the setup is.
For the rest of this year with markets that can tie in margin strong outside of a potential recession, what risks do you worry about that could materially change the outlook Joe.
Well I mean, if we if we ended up in AR.
Huge recession.
I think those are the kind of things that certainly are out of our control, but it would it would likely affect demand.
And another bout of Covid that would shut down People's mobility.
Would impact us, but outside non controllable factors like that right now.
I think we're generally pretty bullish about the way things look you add anything.
Guys.
No I mean, those comments are right I mean, we didn't really see.
I do think people my own personal.
People's Tolerance October was a little different than the last time, so I don't know that we'll see the demand destruction.
What sort of some form of Varian of Covid comes running through for whatever reason, but yes.
Yeah.
It has to be our biggest risk at this point.
Yeah.
Alright, and then maybe.
It feels like it's been a long time since you've been in the market for the purchase of a refining asset.
But I wonder if you have any comment on developments in the refining asset market, particularly we have news of a failed sale process for the Lyondell refinery is this just a.
Our GAAP and bid ask range that youre seeing or do you see it is increasingly difficult for large assets to transact going forward.
And if that's the case what does it mean for medium to longer term supply demand balances globally as this.
Why are we more likely to see more closures versus sales going forward and keeping market is tighter than they might be otherwise.
Well I mean, probably the safest way for us to talk about that is from our own perspective.
And.
There haven't been assets in the market that were compelling for us to buy that doesn't mean, there aren't attractive assets that we'd be interested in but.
With our experience in acquisitions of assets you you.
You go through the periods of being Super enthusiastic about it and then you get deal. He you want to go do it and then you buy it and then you get in there and you start looking at it in Lane tells me, it's going to cost $3 billion to get it up to <unk> standard.
Maybe that wasn't exactly the best thing so.
For us truly it is simply a matter of asset allocation, Ryan I mean, where do we want to spend our money in.
Right now it's not that these assets are good or aren't attractive. It's just we feel we've got higher returns better uses for the capital that we want to employ.
And then buying a refinery thats on the market at this point in time so.
I'll stop there anything you would add.
I do think what it does mean is that you potentially.
Are transacting, a large refinery or even certainly smaller ones. The likelihood that they may shut down is probably directed at least directionally versus a path with more likely and that's what we're seeing.
Yes.
Great. Thank you.
Thank you. Our final question comes from the line of Jason <unk> with Cowen. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
I have two the first will be a follow up on the refining margin outlook.
We're getting a lot of inbounds asking how long this strong margin environment collapsed, you've obviously been very bullish on the call.
Maybe a couple of near term things, we have seen that I was hoping to get your comment on one is the kind.
Kind of somewhat rapidly tightening.
Spread between European gas prices in U S natural gas prices.
Do you think that impacts the margin environment at all could you see Europe increased utilization on some of it.
Dairy distillate processing units.
And then the other one is.
Suggesting that there could be a 5 million barrel per day increase in refining throughput from now through summer.
As refining capacity that the maintenance comes back with this kind of double the typical rate I think you would see over that period, just wondering if that factors into your bullish outlook on refining and and if you expect either of those to weigh on the market at all and then I have a quick follow up on capital.
Allocation. Thanks.
Oh.
So this is lane I'll start with your first note I'm seeing are rapidly closing and the arbitrage between.
I would say European gas in the U S. Gulf have there's a bear there because these export facilities or both.
So to the extent that.
That that'll happen you need to get some more export.
Got to get to where you have open capacity on <unk>.
The liquid.
These liquid natural gas facilities have to be have open capacity to fully get there and so you.
You've kind of got a need to go out there and look at what pace and when the Mexicans are all being built.
In terms of refining worldwide refining capacity and how we think about it we keep saying all along we don't spend a lot of time trying to figure out what the rest of the world is doing on this.
You guys have the same data that we have we focus on.
And then what we do well and that's what we focus along with that said I mean, there are going to be refinery closures based on the rest of the call that we've talked about versus certain parts of the world are going to build refineries and so.
But we don't we certainly at least we don't worry so much about how these balances are going to necessarily affect us.
Got it and then just a quick follow up on capital allocation moving forward.
It seems like you have this coker project and then after that no major refining projects <unk> been discussing some other low carbon energy investments or is the intention for over time more of the growth capital.
Nearly all of it to kind of gravitate towards that low carbon bucket.
I wouldn't I wouldn't say that by any stretch I mean.
We can.
All right, we talk about stuff after we fully developed it to understand how much it's going to cost and have a good feel for the market and so I think it's fair for you to assume that later the team are looking at all of the projects.
We evaluate them against each other.
I wouldn't want to tell you that there'll never be another refining project, but I can tell you a lot of the stuff that's in the hopper.
He and the team are looking at tend to be more towards the cleaner fuel side.
No.
But.
Honestly I wouldn't I would never say never on another refining project.
Alright, thanks for the time.
Burgess.
Thank you.
At this time, we've reached the end of our question and answer session now I'll turn the floor back to Homer <unk> for closing remarks.
Great. Thanks, Rob. Thank you everyone. We appreciate you guys dialing in.
Uh huh.