Q2 2022 Valero Energy Corp Earnings Call
[music].
Greetings and welcome to Valero second quarter 2022 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 you May press star one on your telephone keypad, if anyone should require operator.
Assistance during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Homer Polar Vice President Investor Relations. Thank you. Please go ahead.
Good morning, everyone and welcome to Valero Energy Corporation's second quarter 2022 earnings Conference call.
With me today are Joe Gorder, our chairman and CEO Lane Riggs, our president and CEO O, Jason Frazier, our executive Vice President and CFO , Gary Simmons, Our executive Vice President and Chief Commercial Officer, and several other members of Valero Senior management team.
If you have not received the earnings release and would like a copy you can find one on our website at Investor Valero Dot com.
Also attached to the earnings release are tables that provide additional financial information on our business segments 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 our team maximized refining run rates in the second quarter, while executing our long standing commitment to safe reliable and environmentally responsible operations in fact, we've been increasing throughput since 2020 as demand recovers.
Along with the easing of COVID-19 pandemic restrictions.
Our refinery utilization rate increased from the pandemic low of 74% in the second quarter of 2020% to 94% in the second quarter of 2022.
Refining margins in the second quarter were supported by continued strength in product demand, coupled with low product inventories and continued energy cost advantage for U S refineries compared to global competitors.
Product supply is constrained as a result of significant refinery capacity rationalization that was triggered by the COVID-19 pandemic driving the shutdown of marginal refineries and conversion of several refineries to produce low carbon fuels. In addition, the Russia, Ukraine conflict intensified.
The supply tightness with less Russian products in the global market.
However product demand has been strong through the summer driving season, and pent up demand for travel.
<unk> continues to maximize refinery throughput to help supply the market at this time when global product inventories are at historically low levels.
Our low carbon renewable diesel and ethanol segments also performed well in the quarter.
The renewable diesel segment had record production volumes as the D. G D expansion D. G D two ramped up to full capacity.
On the strategic front, we remain on track with our growth projects that reduce cost and improve margin capture.
The Port Arthur Coker project, which is expected to increase the refinery's throughput capacity, while also improving turnaround efficiency is expected to be completed in the first half of 2023.
As for our low carbon projects. The D. G D. Three renewable diesel project located next to our Port Arthur refinery is expected to be operational in the fourth quarter of 2022.
The completion of this 470 million gallon per year plant is expected to nearly double D. G. DS total annual capacity to approximately $1 2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha.
Blackrock in navigators carbon sequestration project is progressing on schedule and is expected to begin startup activities in late 2024.
We are expected to be the anchor shipper with eight of our ethanol plants connected to this system, which should provide a lower carbon intensity ethanol product and generate higher product margins.
And we continue to evaluate other low carbon opportunities such as sustainable aviation fuel renewable hydrogen and additional renewable naphtha and carbon sequestration projects.
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 incurred $4 billion of incremental debt in 2020 during the low margin environment, resulting from the pandemic.
Since then we've reduced our debt by $2 $3 billion, including a $300 million reduction in June .
We'll evaluate further deleveraging opportunities going forward.
In summary, we remain focused on safe reliable and environmentally responsible operations and on maximizing system throughput to provide the essential products that the world needs and.
And we continue to strengthen our long term competitive advantage through our refining optimization projects and to grow our business through innovative low carbon fuels that enhanced the margin capability of our portfolio.
So with that Homer I'll hand, the call back to you.
Thanks, Joe for the second quarter of 2022 net income attributable to Valero stockholders was $4 7 billion or $11 57 per share compared to $162 million or <unk> 39 per share for the second quarter of 2021.
Adjusted net income attributable to Valero stockholders was $4 6 billion or $11 36 per share for the second quarter of 2022.
Compared to 260 million or <unk> 63 per share for the second quarter of 2021.
For reconciliations to adjusted amounts please refer to the earnings release and the accompanying financial tables.
The refining segment reported $6 2 billion of operating income for the second quarter of 2022 compared to $349 million for the second quarter of 2021.
Adjusted operating income was $6 1 billion for the second quarter of 2022 compared to $442 million for the second quarter of 2021.
Refining throughput volumes in the second quarter of 2022 averaged 3 million barrels per day, which was 127000 barrels per day higher than the second quarter of 2021.
Throughput capacity utilization was 94% in the second quarter of 2022 compared to 90% in the second quarter of 2021.
Refining cash operating expenses of $5 20 per barrel in the second quarter of 2022 were $1 seven per barrel higher than the second quarter of 2021, primarily attributed to higher natural gas prices.
Renewable diesel segment operating income was $152 million for the second quarter of 2022 compared to $248 million for the second quarter of 2021.
Renewable diesel sales volumes averaged $2 2 million gallons per day in the second quarter of 2022, which was $1 3 million gallons per day higher than the second quarter of 2021 the.
The higher sales volumes were attributed to <unk> operations, which started up in the fourth quarter of 2021.
The ethanol segment reported $101 million of operating income for the second quarter of 2022 compared to $99 million for the second quarter of 2021.
Adjusted operating income, which primarily excludes the gain from the sale of our Jefferson ethanol plant, whose operations were idled in 2020 was $79 million for the second quarter of 2022.
Ethanol production volumes averaged $3 9 million gallons per day in the second quarter of 2022.
For the second quarter of 2022, G&A expenses were $233 million and net interest expense was $142 million.
Depreciation and amortization expense was $602 million and income tax expense was $1 3 billion for the second quarter of 2022.
The effective tax rate was 22%.
Net cash provided by operating activities was $5 8 billion in the second quarter of 2022.
Excluding the favorable impact from the change in working capital of $594 million.
And the other joint venture members, 50% share of <unk> net cash provided by operating activities. Excluding changes in <unk> working capital adjusted net cash provided by operating activities was $5 2 billion.
With regard to investing activities, we made $653 million of capital investments in the second quarter of 2022 of which $298 million was for sustaining the business, including costs for turnarounds catalysts and regulatory compliance and $355 million was for growing the.
<unk>.
Excluding capital investments attributable to the other joint venture members, 50% share of DTD and those related to other variable interest entities capital investments attributable to Valero were $524 million in the second quarter of 2022.
Moving to financing activities earlier this month, our board of directors approved a regular quarterly common stock dividend of 98 cents per share payable on September one to holders of record on August 4th.
We returned 42% of adjusted net cash provided by operating activities to our stockholders through dividends and stock buybacks in the quarter, which is at the low end of our annual 40% to 50% target payout ratio.
With respect to our balance sheet, we completed another debt reduction transaction in the second quarter that reduce valero is debt by $300 million.
As Joe already noted this transaction combined with the debt reduction and refinancing transactions completed in the second half of 2021 and the first quarter of 2022 have collectively reduced <unk> debt by $2 3 billion.
We ended the quarter with $10 9 billion of total debt $2 billion of finance lease obligations and $5 4 billion of cash and cash equivalents.
The debt to capitalization ratio net of cash and cash equivalents was 25% down from the pandemic high of 40% at the end of March 2021, which was largely the result of the debt incurred during the height of the COVID-19 pandemic.
And we ended the quarter well capitalized with $4 6 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 that amount is allocated to sustaining the business and 40% to growth.
About half of the growth capital in 2022 is allocated to expanding our low carbon fuels businesses.
For modeling our third quarter operations, we expect refining throughput volumes to fall within the following ranges.
Gulf Coast at 172 to $1 $7 7 million barrels per day.
Mid continent at 420 to 440000 barrels per day.
West Coast at 255 to 275000 barrels per day, and North Atlantic at $445 to 465000 barrels per day.
We expect refining cash operating expenses in the third quarter to be approximately $5 40 per barrel, which is higher than the second quarter, primarily due to higher energy costs.
With respect to the renewable diesel segment, we expect sales volumes to be approximately 750 million gallons in 2022 with the anticipated startup of <unk> three in the fourth quarter.
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 $3 9 million gallons per day in the third quarter operating expenses should average 50 per gallon, which includes <unk> <unk> per gallon for noncash costs, such as depreciation and amortization.
For the third quarter net interest expense should be about $140 million and total depreciation and amortization expense should be approximately $640 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 respect this request to ensure other callers have time to ask their questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to move your question from the queue for participants using speaker equipment. It may be necessary to pick up your hand.
Said before pressing the star keys.
Once again that is star one to register a question at this time.
The first question today is coming from Manav Gupta of Credit Suisse. Please go ahead.
Yes.
Guys I'm going to actually ask only one question.
And that is basically can you help us understand the demand dynamics out there there were some bodies on demand destruction and then there were some monies on recessionary demand.
One of our stations via having indicates that's not the case, but you will have the most diversified footprint. So help us understand gasoline or diesel what are you seeing in terms of demand out there and I'll leave it there. Thank you.
Thanks, Bob This is Gary I can tell you you know through our wholesale channel, there's really no indication of any demand destruction in June we actually set sales records, we sold 911000 barrels a day in the month of June .
Which surpassed our previous record in August of 2018, where we did 904000 barrels a day.
We read a lot about demand destruction mobility data showing <unk> in that range of three 5% demand destruction.
Again, we're not seeing in our system, we did see a bit of a lull. The first couple of weeks of July but.
Our seven day averages now are back to kind of that June level with gasoline at pre pandemic levels in diesel continuing to trend above pre pandemic levels.
Okay.
Thank you guys and congrats on a very good quarter.
Thank you.
Hum.
The next question is coming from Theresa Chen of Barclays. Please go ahead.
Great quarter team very impressive.
In light of the macro developments, both on the supply side and the demand side what are your thoughts about where it's mid cycle crack is now structurally.
You guys want to.
This is why I'm also you're correct and tourism.
To me a little bit but.
Obviously right now it's significantly above the mid cycle.
Our at least our view of mid cycle than probably anybody else's for that matter, but with that said you know you got to remember idea of mid cycle as we go through an entire economic cycle wider firm recession recession.
And so that's kind of absorbed descriptive and defined and we worked through those numbers with you.
Adjustments.
We believe at least the world seems to be trending in a place where through the next economic cycle for a number of reasons, whether it's just sort of.
The way the energy transition is working for the lack of investment in fossil fuels for a number of these types of reasons, we sort of see that.
But youll probably be above where our mid cycle was a day for the next for the next economic cycle.
Yes, I agree with what <unk> said really our market outlook calls for a prolonged period, where we would be above what we currently have as mid cycle and there is a number of structural changes when you talk about high energy cost as a result of higher natural gas costs in the U S. We have lower feedstock costs due to our proximity to crude natural gas and then.
Youre getting refiners that are now having to pay some form of a carbon tax which raises our cost as well so as long as supply and demand balances are tight and there's a call on that capacity it would be logical to assume it's going to start to reset that mid cycle level.
Thank you.
Kind of picking back on that.
Our next question related to demand.
We do see a period of demand contraction or demand softness what do you think the risk is at this point for the industry as a whole to build the overwhelming amount of inventories given that the refining industry just lift through two and a half years.
Having to be extremely flexible shutting down capacity et cetera.
Run through the pandemic.
Yes, so again kind of referring back to those structural advantages we have in the U S on feedstock costs and energy costs and freight advantages going to South America.
We feel like we're in such a strong competitive position, even if demand fell here in the United States, we would be able to export volume to be competitive doing that.
In South America.
And this is why I refer to your point I mean.
The extreme measures or industry.
Deal with a pandemic demand destruction.
Hard to imagine outside of another pandemic demand destruction we're.
Going through a recession would have anything remotely close to that obviously going through the pandemic quite a bit of capacity was taken offline.
Thank you.
Thank you. The next question is coming from Doug Leggate of Bank of America. Please go ahead.
Good morning, everyone. Thanks for taking my questions. So guys I guess kind of a follow up on the mid cycle question, but I'm going to ask a little differently given your unique insights to this.
Pembroke is clearly an insight to what's happening in Europe , but today I guess is paying.
Somewhere around $60 per thousand cubic feet natural gas, obviously is a little lower than that but when you think about the structural cost advantage of the U S.
We are focused I guess on mid cycle as opposed to global.
What are the dynamics that youre seeing is pembroke, making money today.
Relative competitiveness as a benchmark, let's say for Europe versus the U S.
Hey, Doug explained so it's very good question and we sort of talked about this quite a bit in terms of this advantage the United States was having with respect to obviously energy prices.
Today, Pembroke is doing well it did particularly well in this past quarter.
To give a bit more of a precise answer around natural gas. We've been may only paying about 30% I don't know maybe this morning. It was 50, but I mean.
<unk>, but I would say it's more in the 30 range was quite a bit of volatility however, the U K, a little bit better position than.
Europe is in terms of the value that they're paying for gasoline even even there's another step change and we're not we don't refine over there. So we're just we're just sort of reading the same things that you guys are with another step change in <unk>.
Terms of of how much gas is costing in the UK versus some of these European refineries that are maybe not in the best since.
The situation around around natural gas.
So pembroke is doing well I mean.
So I wouldn't consider it actually to be marginal capacity today. Obviously, we in fact are doing well means that we're way past them to somebody else.
Them being the marginal for our module capacity sitting out there setting, but mainly the heat crack.
So.
So let me follow up real quick witnessed Pembroke.
The extent youre prepared to share on your portfolio cost curve today.
Well today is high right because of the cost of natural gas, but when you look at them on the other issues, whether its our sort of our you know our cost per barrel are all those sort of an energy adjusted basis Theyre one of the most competitive refineries in.
In Europe , a nashville or pretty good on a U S basis on saw them I'm not going to give exact precision, but it's a very efficient refinery.
They do they are very very competitive in the Atlantic basin.
Okay. Thank you my follow up hopefully a quick one you've cut your net debt in half over the past year I guess.
I for one as you know I'm delighted to see some cash build and the balance sheet I'm. Just curious how you think about putting your balance sheet versus stepping into perhaps share buybacks over the over there.
The foreseeable future and I'll leave it there thanks.
Thanks, Doug This is Jason I can take that one.
We'll be doing basically the same thing we've been doing in the past our capital allocation priorities haven't changed we said when the margins start to recover and we start paying down our debt and build cash as a priority. We made really good progress on both of those fronts.
And <unk> mentioned on the debt side and you mentioned, we had a series of transactions start last September running through June 1st we paid back $2 3 billion of our Covid deaths. So far on the cash side. We said we plan to hold more given what we experienced through Covid three to 4 billion B. The range, we'd look at it we're now at $5 4 billion with a net debt to cap.
25% at the end of the second quarter. So.
So we think we're in a good shape from those.
Fronts now our approach to buybacks will continue to be guided by our target payout ratio of 40%, 50% adjusted net cash from operations.
Remained at the lower end of the range. So far this year given our competing priorities are paying back the debt and building cash right at 42% payout so far this year.
So we think we're in good shape and we'll plan to continue doing more of the same paying down our debt and our non R&R return commitment to shareholders.
Alright, guys I appreciate the answers thank you.
You bet take care.
Thank you. The next question is coming from Roger read of Wells Fargo. Please go ahead.
Thank you good morning.
All right.
Coming back to demand thing, but maybe a little more of a forward look distillate was the big surprise kind of in the spring coming out of the winter in Europe , and as we look to this <unk>.
Next winter.
I mean, if you if you're in Europe . It doesn't look like gaskets any cheaper so as we think about distillate or fuel oil demand there and the way we're running at this point in the summer.
Do you see as the ways in which incremental diesel can make it into and to Europe and affect the overall Atlantic basin margins.
Yes, it's going to be a real challenge for us Roger to be able to supply a lot more diesel into Europe . If you look you know with the U S inventories, where they are the industry basically running all out.
We're getting back to where jet demand is recovering in the U S, which is actually driving USD yields down a little bit.
So it's very difficult for me, saying that theres going to be a lot of flow from the U S into Europe .
Got you and then as a follow up on the 40% to 50% payout ratio.
Pre COVID-19 there were a number of times you ran well above that level now that we're in a situation where it looks like better than mid cycle.
Cracks are going to persist for a while you want to hold more cash do you see this as a situation where you may undershoot or kind of consistently stay at the low end as we saw in the second quarter or is this something that evolves as lets just say is $4 billion of debt repayment is achieved is does it go back.
Into that or does the high end of the range thereafter.
Do you want to answer the first yeah, Yeah sure Yeah, you're right for the foreseeable future lease in the next several months, we still got that competing priority to paying down our debt. So I think we'll stay at the lower end, while we're paying down debt is and if the cycle continues to be Super strong you're right, we'll have a lot of excess cash.
Consider yeah, Roger I agree completely.
Lately with what Jason said.
We wanted to go ahead and get things cleaned up and get this balance sheet, absolutely bulletproof and carrying a bit more cash.
It's something that makes a lot of sense to do you'd like to have you know your your maintenance and turnaround capex covered with cash on hand, the dividend cover with cash on hand, and then we'll see where we go.
But anyway I think for now we're on the right course, and as Gary has stated it looks like the margin environment is going to be higher for some time. It certainly is today.
What we experienced in the second quarter, but certainly well above what we would consider to be a traditional mid cycle and if we continue to build cash.
We will continue to honor the payout and it will probably move from the lower end to the higher Ed.
Okay, and just maybe just one little tweak on that as you think about <unk>.
Dividend versus share Repost does that ultimately change once the balance sheet is back the way you want it.
It's been a while since you've increased the dividend I guess, that's really what I'm getting at should we think of that is becoming another way to return cash.
Yes, I mean, you should that is something we'll be looking at.
Discuss our short term focus is on getting the debt back down and we will look at that will be met and we said this before it will be measured in our approach to ensure its something thats sustainable through the cycle, especially given what we experienced coming through COVID-19, but that is something we'll be looking at.
Great. Thank you.
Okay.
Thank you. The next question is coming from Paul Sankey of Thank you research. Please go ahead.
Hi, good morning, everyone.
Obviously.
It was obviously a momentum.
The oil markets can you just talk a bit about whatsapp.
What's happened in crude markets and what the outlook is.
In terms of obviously, the Russian impact various differentials when looking at the Brent <unk> spread everything else. Thanks.
Yes. This is Gary so I think overall, we started to see there was not certainty what would happen with the Russian sanctions, but as time has gone on it appears that the <unk>.
<unk> has continued to flow and it's a change in trade flows not less Russian oil on the market.
The combination of that.
<unk> barrels coming onto the market.
Some production growth in certain parts of the world.
Cost flat price to come down and then it's also caused quality differentials to be pressured somewhat.
In addition to the things I mentioned the early releases the SPR largely medium sour barrels, which pressured the differentials and then we've seen high sulfur fuel oil move weaker which high sulfur fuel oil prices tend to impact quality gift registry as well some of that is Russian reserve is starting to wake its way back to the market.
Seeing more high sulfur fuel oil come from Mexico, and so those things are starting to pressure the quality differentials that we're seeing in the market today.
That's very helpful. Thanks could you just continue that food how do you think things will change over the next six months or so I mean, one obvious thing is that the SPR.
I mean, presumably at some point, it's got to stop being released.
Yes, that's exactly right I think youll see lower volumes coming from the SPR. Most people have kind of lowered their global oil demand forecast. So I think the oil markets are fairly well balanced we wouldn't expect a lot of movement in the quality differentials from where they are today.
Thank you I appreciate it thanks guys. Thank.
Hey careful.
Okay.
Thank you. The next question is coming from John <unk> of Jpmorgan. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
So.
R&D can you talk about the captures stepping down in <unk> and any moving pieces there beyond the backwardation that I talked about in the last quarter.
And then what do you expect the long term capture so it looks like in that business.
Yes.
Our normal looking market structure for diesel.
<unk> III.
Yes. This is Eric.
Thank you hit the nail on the head really the big difference between Q1, and Q2 was the the severity of the backwardation quarter.
Quarter to quarter, but if you look at the rest of the capture rate which was weaker.
<unk> prices were higher and.
Obviously <unk> prices were down.
Sort of averaging a $130 in the first quarter versus closer to $100 in the second quarter. So.
So clearly margins tighter in the second quarter and capture rates lower mostly due to the backwardation you mentioned.
If you look forward I think again, you have said it.
As USD markets normalize youll see a little bit of a return to normal in the back half of this year for R&D.
Great and then.
Just sticking with RG <unk>.
We've had some good news on the BTC and the SaaS side.
Morning.
Could you give your latest thoughts on the Lcs program in California.
Pricing could go there I know, we're scoping process now to think about.
Federal program in Canada, starting next year, so just any thoughts on pricing there into the second half of next year would be helpful.
Yes, the first market in California is really seem to have stabilized in the sort of 90 to $100 range. We don't see a lot of volume moving in as you mentioned the scoping meetings. They have they are considering increasing the obligations.
Into 2030, which should have a create a greater demand for the <unk> credits.
As we see now with renewable diesel and other renewables.
Consuming up to about 50% of the obligation in gasoline demand still relatively muted on the west coast.
Credit obligations.
Not a big driver there. So I think you mentioned, Canada, we see that as an opening emerging market.
The World is trying to figure out what these early credit prices are going to be valued at.
Is that new federal regulation in Canada. It goes into effect between now and next June .
And then obviously with Oregon, Washington, opening up they all seem to be hanging around the same sort of 90 to $100.
Price. So obviously, we want to see we are we'd like to see that go back up but if I was going to have an outlook. It seems it seems to have stabilized somewhere kind of in that range.
Okay. That's helpful. Thank you.
Thank you. The next question is coming from Connor Lynagh with Morgan Stanley . Please go ahead.
Yes, Thanks, I wanted to return to the topic of export markets and sort of the global balance as we get closer to.
Europe's proposed date to stop taking Russia and refined products.
What's your sort of high level view of how the market will reposition and those sort of implication I'm wondering about heroes.
You highlight Latin America is a key area of your exports is that likely to change do you think Russian volumes will be competitive there just pile on that would be great.
Yes, it's difficult to know what's going to happen with the sanctions I think we see some south American countries that seem to be interested in taking some Russian barrels. So that's certainly could be a scenario that developed some of the the Russian diesel makes its way to South America, and then we backfill into Europe , I could see that happening, but we.
Don't really have a lot of clarity, what's what's going to happen.
I guess I'm just trying to triangulate you you maybe maybe this is more of a shorter term comment, but you were suggesting earlier that there probably was not a high likelihood that U S.
Diesel in particular would be flowing to Europe .
That more of a near term comment and if the sanctions were to be enacted would you would you revisit that viewer.
You're just basically what the duration of that expectation.
Yes, certainly in the short term freight rates are high and we see a better incentive going into Latin America, I don't know, what's going to happen in terms of Russian sanctions and the rebalancing. So that'll be just kind of a wait and see.
Alright fair enough, maybe just to sneak one last one in here capture rates have actually held up pretty strong in the refining business.
That we should think about in terms of big swing factors in the third quarter here or do you think the QQ.
Result is pretty good.
But what are you going to be in the near term.
I don't blame so it's early but I would say normally speaking absent any big moves in flat price it would be fairly similar.
I appreciate it I'll turn it back.
Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.
Yes, good morning team congrats on a great quarter here. The first question was around the blenders tax credit we got some news out of Washington last night that there could be an extension there. So just would love your perspective on what that could mean for the <unk> business and how do you understand the room.
The nations in Washington.
Well this is Eric I'll start with the BTC, obviously as part of the business model that we capture.
With renewable diesel, obviously and we'd always said that.
We're fairly certain there would be some sort of a blenders tax credit because theres always been one for about the last decade.
We have seen that there was some view that without a blenders tax credit the default RIN would pick it up and maybe not perfectly dollar for dollar, but certainly in sort of the 70% to 80% range and so we'll see how this we'll see how this plays out but certainly it's sue.
Supportive of the renewable business.
I don't know rich you wanted to comment at all on the on the political side. Yes. This is for Charles I mean, we just solid Bill came out late last night 700 pages. We're looking through it I mean, there are some things in there that are helpful to our business the tax credit obviously, we just talking about.
Theres also a SaaS.
Tax credit in there as well that we'll be looking at and there is other things too we're trying to sort through.
So.
I think it was a surprise to everybody that came out that quick I don't think we really ever thought that the blenders tax credit was going to be.
Tax credit would be a problem with our end up on one of these bills before the end of the year, but it's.
It's always good to see it.
No.
Looking looking stronger than on the forefront so.
Alright, great guys and then follow up is just on yield switching it we're in an environment now, where we're obviously heating oil and distillates trading well above that.
Gasoline do you see the industry and the company being able to switch to capture capture that and does that take some pressure.
Take some pressure off the distillate side of the equation and help to rebalance inventory.
Yes, Neil this is lane, so Gary kind of addressed this a little bit our assets have been a Max distillate mode for a few weeks and so one of the one of the dynamic that's occurring right now as jet recovers, what actually makes distillate yields fall.
Our diesel deals fall, so I guess the short answer is no.
I assume everybody else was doing kind of a similar signals theres not a lot of additional diesel outside of incremental runs that somebody might have in the industry is running at a pretty high utilization rate. So I don't see a big.
A big opportunity to make up sort of a decent shortfall right now.
Yes.
Excellent thanks, guys.
Thank you. The next question is coming from Ryan Todd of Piper Sandler. Please go ahead.
Great. Thanks.
Maybe.
I'll follow up on renewable diesel.
Waste that spreads in the feedstock market, obviously, we've seen those spreads narrow you can lay over.
For the first half of the year in particular as soybean oil moves pretty soon.
Significantly in the recent time here.
Can you talk a little bit about what youre seeing in animal fat and kind of low Ci feed markets in.
In the second half of the year would you expect those to widen out a little bit more and then as you look towards the.
Startup of <unk> III would you expect.
A replay of what we saw late late last year, whereas you start buying that theres some.
And a normalization in equilibrium period, there, where we see some volatility.
Okay.
Yes, I think.
As you said I mean, the soybean oil market was was pricing in the second quarter, but have since.
Come down and if you look at it feedstock availability is there I mean, we are not having any problems sourcing any of the different waste oils or animal fat feedstocks.
Relative values it goes along with it.
With the Lcs asked that a lot of that is not as advantages.
Ben if you look at sort of this time last year, but we certainly have availability to get the feedstocks, we need for <unk> three and then there is no doubt with D. G III being our third and largest units starting up in the fourth quarter. It will change some of the trade flows certainly in the U S.
And as well as where we can pull from all the global sources of feedstocks.
You are right, we will see an impact of feedstocks in general as we change a lot of the trade flows and then but I think it will.
We will see an equilibrate than sometime.
Sometime next year as they sort of settles out how those trade flows change and so it'll be interesting.
So that will be one thing we're looking at as you as you start up and see like I mentioned earlier with the.
The Canadian regulation opening up in some other markets opening up.
Looking at.
How that all plays out.
Versus feedstocks.
Okay, and then maybe just.
<unk> been on.
Project spend and the environment from your update that clearly that seem to be having an impact on timing.
Any any impact at the inflationary environment or supply chain. It could have on capital budget that things like the port Arthur Coker project or <unk> three.
We look over the next 12 months.
Hi, This is lane.
All of those were all those projects were steel prices and labor and everything else is locked in prior to sort of this inflationary time that we're experiencing right now.
Yes.
Yeah.
Perfect. Thank you.
Yeah.
Yeah.
Thank you. The next question is coming from Sam Margolin of Wolfe Research. Please go ahead.
Hello, how are you.
Good you.
Good thanks.
I want to ask about a comment I heard earlier on the call.
Made me think that you mentioned.
High sulfur fuel oil spreads are blowing out.
We've got.
Light sweet premiums and WCS discounts are very deep you've also got these.
Very wide.
Differentials between distillate and other products specifically gasoline.
It sounds like the scenario that people imagine for I'm, a 2020 and I was just wondering how influential do you think that is.
In the market today, given everything else that's going on.
I think you are seeing a lot of pull through of IMO 2020 in the market today.
Contributing to the stronger distillate cracks that youre seeing because more diesel is being pulled into the marine sector and then it's also contributing to the high sulfur fuel discounts.
Well.
Yeah. This is lane I'll add to that it's also recalling some of these really high valuations on.
On quarter, I'm going to say sort of Atlantic basin, Sweet crudes, because again, it's a little bit it's not unlike what's happening on natural gas the marginal refiner trying not to make high.
High sulfur fuel oil bidding up the light sweet market. So you can so they can try to stay out of that market right. So it's a it's propping up that the value of that crude versus the medium sours.
Okay.
And then.
There is a follow up sort of drilling down on the renewable diesel conversation and maybe on the policy side, but.
Some feedback that we've gotten recently from other industry contacts is that renewable fuels, including ethanol.
We have moved very much into the energy security category and almost <unk>.
Taking prominence over the over the carbon emission side.
And then Thats spurring a lot of support incremental support I should say.
From regulators and DC I was wondering if youre seeing.
At the same thing when you interact with your counterparts in the government.
This rich I'll take an opportunity.
I would just I would just qualify by saying they are low carbon too so theyre not theyre not.
Moving just into security. They are also part of the low carbon solutions. So if you look at like our renewable diesel it actually can outperform on our carbon intensity basis some of the some of the.
EV alternatives that are out there. So I think one I think what you're starting to see now is a realization among regulators that actually these low carbon liquid fuels or drop in there they are cheaper to implement their available for consumers.
Consumers and they provide an opportunity to also solve some of the climate issues that are out there. So I think what youre seeing is recognized recognizing.
In the marketplace that these might be better alternatives and of course, they are domestic and <unk>.
And a real strength of the U S.
Our economy so it.
It's not surprising that youre not youre starting to see.
More affection for the low carbon fuels.
Alright, thanks, so much.
Yeah.
Thank you. The next question is coming from Jason <unk> of Cowen. Please go ahead.
Hey, Thanks for taking my questions.
I wanted to ask firstly on the policy side and the government.
Seemed interested in intervening in the market when petroleum prices got too high.
Only a month ago, and there's obviously concerns into the back half of the year that prices can rise again, particularly on the flat crude price.
I was wondering if you could.
Maybe just.
Discuss a bit how your conversations with the government, particularly around our petroleum product export ban or quota and if you think that's a realistic policy option that the government.
Could implement in the future and how that would impact you and I have a follow up thanks.
Okay. So late and I had the opportunity to meet with the secretary of energy and members of her team.
In response to President <unk> request and <unk>.
I would consider the meeting to be constructive.
She was well briefed on what the issues were and the implications of some of the policy changes that you just mentioned.
We talked about various options that could be implemented in the short term. It would help take some of the pressure off of fuel prices. They have those in hand and in fact the staff. Her staff has continued to follow up with members of our team and other attendees at that meeting to see.
It might make sense to try to implement so.
It was a good meeting.
Anything you'd add to that.
The only thing I would as I at least I don't remember any mentioned trying to limit exports that would ever.
Really no not talked about whatsoever.
Yes, and yes.
And it goes to my point that they understand the implications of some of these decisions batting.
Exports doesn't have the effect that they would wanted to have as far as we can tell it would probably just put some pressure on the industry and it would certainly drive the global prices higher without the U S supply to backfill some of the shortfalls that are out there. So.
They seem to have a keen grasp of that and that was encouraging to us.
But no I consider it was a constructive meeting.
They are interested.
Interested in solutions.
It's always interesting to see what happens after these conversations take place and would there be any any actual follow up with it but but theyre still talking so.
More to come Jason.
Alright, that's what are there any potential solutions that you and the representatives.
So ion.
Yes.
One of the things was RVP change RVP and relaxing sulfur spec that was essentially I think major.
Paul.
On the call and policy been essentially initiatives that you could have it.
Would help maybe.
You know I think from some of the U S refiners have to export.
Because of the sulfur specs are fairly clear in there so I think the.
And then the other idea was again like what Joe just mentioned relaxing the RVP and some of these.
And with that would require some of the non attainment metropolitan areas would go from reformulated too.
Coupling that with a little bit.
Bigger bigger move, but those are the things that we talked about.
Got it that's really helpful. And then my follow up just on DVD, we're getting to the cash flow inflection point in the business. When <unk> starts up and I was wondering if you could help us think about guidepost for what the cash distribution policy will be.
The joint venture or back to the partners or at least a time when when we could expect an update on that thanks.
Okay. Yeah. This is Jason I'll start off and then maybe Eric can chime in.
I'll know how DCD was the business was built we use cash flows from the business. It's funded all of the growth are largely funded the growth till now we will have <unk> three coming online in the fourth quarter. So there should be some excess cash flows to look out at the time and the partners will be.
What to do with it.
Well, yes. So obviously, we do expect there to be a positive cash flow next year with <unk> III starting up in capital.
Finishing on that project and so obviously, we'll have to work with our partner on.
What we want to do with that cash and so like we've said, we're going to take a pause after D. G. III starts up and kind of take a look on the market.
A lot of things we've talked about today between feedstocks are new new.
Product outlets and then with the recent policy discussions lagging that came out last night, what do we want to do with the cash, but obviously there should be.
Our cash flow to discuss in 2023 associated with with DG.
Alright, thanks, Thanks, a lot for the answers.
Okay.
Thank you. The next question is coming from Matthew Blair of Tudor Pickering Holt. Please go ahead.
Hey, good morning.
Potential BTC for Saf goes through would you think about adding SaaS capability.
<unk> three.
And if so what kind of yields should we be thinking about.
Okay.
Yeah. So.
There, obviously theres a lot of things, we got to still get the details before.
But we certainly have a project in the wings that is waiting to see how this SaaS credit is going to play out and so there is a project that we've looked at for that we continue to do engineering on that that would bolt on SaaS capability to <unk> III.
With.
Roughly a kind of a 50 50 yield of SaaS and renewable diesel so.
It would be a significant increase in SaaS capability for the U S.
Obviously the largest.
Largest producer of SaaS so.
Yes, it does look like it could be a possibility, but like I said a lot of details to work through from a policy standpoint, and then as well that has to be discussed with our partner.
Sounds good and then could you walk us through the Q2 hedging impacts D. G. D. I think in Q1. It was a headwind of $119 million what does that look like for Q2 and is this an inventory hedge or margin hedge any details there.
Yes, those details will be in the Q and what I'd say is really it's all just a product of backwardation being more severe in the second quarter than the first quarter. So it was a larger impact and Thats why.
We said earlier margin capture was much lower.
Mostly just because of the market effects on USD, but.
I think.
We see that probably cut.
Looking a little more favorable in the back half of the year, but that's all going to really be tied to how the U S. D market plays out but it currently looks better let's see how the rest of the year plays out.
Great. Thank you.
Thank you that brings us to the end of the question and answer session I would like to turn the floor back over to Mr. Fuller for closing comments.
Great. Thank you. We appreciate everyone joining us today, obviously feel free to contact the IR team. If you have any additional questions. Thank you everyone and have a great day.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines of walk off the webcast at this time and enjoy the rest of your day.
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