Q3 2022 Valero Energy Corp Earnings Call
[music].
Greetings and welcome to the Polaris third 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 do so by pressing star one on your telephone.
Pat.
Once you 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 Homopolar, Vice President Investor Relations and finance. Thank you. Please go ahead.
Good morning, everyone and welcome to Valero Energy Corporation's third 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 <unk> 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 Joe for opening remarks.
Yes.
Thanks, Homer and good morning, everyone. We're pleased to report strong financial results for the third quarter credited to our safe and reliable operational performance and continued strength in refining fundamentals.
Refining margins remained supported by strong product demand low product inventories and continued energy cost advantages for U S refineries compared to global competitors.
Despite high refinery utilization rates global product supply remains constrained due to roughly 4 million barrels per day of global refining capacity being taken permanently offline since 2020 for a variety of reasons, including unfavorable economics or as part of planned conversions to produce low.
Carbon fuels.
Product demand across our system remains strong with gasoline and diesel demand higher than pre pandemic levels and jet fuel demand steadily approaching 2019 levels are refining utilization increased to 95% in the third quarter as we continued to maximize refining throughput.
Our refining system also benefited from wider sour crude oil differentials to the Brent light sweet crude oil benchmark.
The wider sour crude oil differentials are attributed to increased sour crude oil supply the impact of the I M. O 2020 regulation for lower sulfur marine fuels and high natural gas prices in Europe that incentivize European refiners to process sweet crude oils in lieu of sour crude oils.
And we remain on track with our refining growth projects that reduce cost and improve margin capture.
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.
And our renewable diesel segment, we continued to optimize our operations setting another sales volume record in the third quarter.
The new D. G D. Three renewable diesel plant located next door, our port Arthur refinery is currently in the startup process and is expected to be operational in November the.
The completion of this 470 million gallons per year plant is expected to increase D. G. DS total annual capacity to approximately $1 2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha.
And for our other low carbon fuel opportunities the Blackrock in navigators carbon sequestration pipeline project is progressing on schedule and is expected to begin startup activities in late 2024.
We're expecting 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, our strong balance sheet remains the cornerstone of our capital allocation framework in the third quarter, we reduced our debt by an additional one point to $5 billion, bringing our total debt reduction to approximately $3 6 billion since incurring $4 billion of incremental debt.
During the height of the pandemic in 2020.
And we will continue to further evaluate deleveraging opportunities going forward.
Looking ahead refining fundamentals remained strong as global product supply remains constrained due to capacity reductions and high natural gas prices in Europe , which are setting a higher floor on margins.
In addition, we continue to realize the benefit from discounted sour crude oil and fuel oil feedstocks in our system.
While geopolitical and macroeconomic factors may drive volatility in the market. We remain focused on what we can control.
Maximizing refinery utilization in a safe reliable and environmentally responsible manner to provide essential products. We also remain committed to advancing the growth of our low carbon fuels businesses to increase profitability and further strengthen our competitive advantage.
So with that Homer I'll hand, the call back to you.
Thanks, Joe.
For the third quarter of 2022 net income attributable to Valero stockholders was $2 8 billion or $7 19 per share compared to $463 million or $1 13 per share for the third quarter of 2021.
Adjusted net income attributable to Valero stockholders was $2 8 billion or $7 14 per share for the third quarter of 2022 compared to $545 million or $1 33 per share for the third quarter of 2021.
For reconciliations to adjusted amounts please refer to the earnings release and the accompanying financial tables.
The refining segment reported $3 8 billion of operating income for the third quarter of 2022 compared to $835 million for the third quarter of 2021.
Adjusted operating income for the third quarter of 2021 was $911 million.
Yeah.
Refining throughput volumes in the third quarter of 2022 averaged 3 million barrels per day, which was 141000 barrels per day higher than the third quarter of 2021.
Throughput capacity utilization was 95% in the third quarter of 2022 compared to 91% in the third quarter of 2021.
Refining cash operating expenses of $5 48 per barrel in the third quarter of 2022 were <unk> 95 per barrel higher than the third quarter of 2021, primarily attributed to higher natural gas prices.
Renewable diesel segment operating income was $212 million for the third quarter of 2022 compared to $108 million for the third quarter of 2021.
Renewable diesel sales volumes averaged $2 2 million gallons per day in the third quarter of 2022, which was $1 6 million gallons per day higher than the third quarter of 2021.
The higher sales volumes were due to <unk> downtime in the third quarter of 2021, resulting from hurricane Ida and the impact of additional volumes from <unk>, two which started up in the fourth quarter of 2021.
The ethanol segment reported $1 million of operating income for the third quarter of 2022 compared to a $44 million operating loss for the third quarter of 2021.
Adjusted operating income for the third quarter of 2021 was $4 million.
Ethanol production volumes averaged $3 5 million gallons per day in the third quarter of 2022.
For the third quarter of 2022, G&A expenses were $214 million and net interest expense was $138 million.
Depreciation and amortization expense was $632 million and income tax expense was $816 million for the third quarter of 2022.
The effective tax rate was 22%.
Net cash provided by operating activities was $2 billion in the third quarter of 2022 <unk>.
Excluding the unfavorable change in working capital of $1 5 billion, which was primarily due to our third quarter estimated tax payment.
The other joint venture members share of DG is net cash provided by operating activities, excluding changes in <unk> working capital.
Adjusted net cash provided by operating activities was $3 4 billion.
Yes.
With regard to investing activities, we made $602 million of capital investments in the third quarter of 2022 of which $185 million was for sustaining the business, including costs for turnarounds catalysts and regulatory compliance and $417 million was for growing the business.
Excluding capital investments attributable to the other joint venture members share of D. G D and those related to other variable interest entities capital investments attributable to Valero were $479 million in the third quarter of 2022.
Moving to financing activities year to date, we have returned 40% of adjusted net cash provided by operating activities to our stockholders through dividends and stock buybacks, which is consistent with our guidance to be at the low end of our annual 40% to 50% target payout ratio, while focusing on deleveraging our balance sheet.
<unk>.
With respect to our balance sheet, we completed another debt reduction transaction in the third quarter that reduced <unk> debt by $1 two 5 billion.
As Joe noted earlier this transaction combined with a series of debt reduction and refinancing transactions since the second half of 2021 have collectively reduced <unk> debt by approximately $3 6 billion.
We ended the quarter with $9 6 billion of total debt $1 9 billion of finance lease obligations and $4 billion of cash and cash equivalents.
The debt to capitalization ratio net of cash and cash equivalents was approximately 24% 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 9 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 fourth quarter operations, we expect refining throughput volumes to fall within the following ranges.
Gulf Coast at 173 to $1 seven 8 million barrels per day.
Mid continent at 460 to 480000 barrels per day.
West Coast at 250 to 270000 barrels per day, and North Atlantic at 440 to 460000 barrels per day.
We expect refining cash operating expenses in the fourth quarter to be approximately $5 10 per barrel.
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 November .
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 four 1 million gallons per day in the fourth quarter.
Operating expenses should average 50 per gallon, which includes <unk> <unk> per gallon for noncash costs, such as depreciation and amortization.
For the fourth 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. Please 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.
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First question is coming from Doug Leggate of Bank of America. Please go ahead.
Oh, sorry, sorry, good morning, everybody.
So I.
I Wonder if I could take the opportunity to ask just your views on a couple of big picture macro issues in the quarter. Your operational performance speaks for itself.
Obviously, the license to the cash returns back with the buyback.
My question I guess is your visit to the White House recently.
Your thoughts on.
The possibility of an export product export bonds, it seems to be still rumbling on the table.
Any color you are comfortable sharing that would be my first comment.
Then my second question, if I may maybe it's for William and one of the guys, but you did make a comment that your results about a higher floor on margins I'm, just wondering and you don't want a view on this I'm wondering if you could elaborate on what you're trying to imply from that commentary and I'll leave it there. Thank you.
No Doug that's great. Both good questions. So on the visit to the White House Lane and I went in and of course, there were seven companies I think represented there we ended up meeting with the Secretary Granholm.
And I would I would say that it was a constructive conversation.
She was looking for things that the industry might suggest that would try to bring down the cost of fuels and so we did we provided her with with several.
Suggestions, which would have a.
And in fact on increasing the supply of fuel into the marketplace.
Thus far I don't believe any of those have been embraced Budd.
At least it was put on the table for her to give some consideration to.
And so the team that we have involved in the process continues to work with her team. So the dialogue has continued I know that our D. C. Office has spent quite a bit of time continuing to work with them and that of course.
The supply folks back here also had been involved in those conversations so the dialogue continues and I think theyre looking for.
Just additional opportunities that they might have to reduce the fuel price. So rich is there anything you would.
You would add to that.
Your line.
So I think they understand the consequences of trying to.
Disrupt market flows and I think they realize.
That would probably be more harmful than helpful and so I think that.
I think that understanding is there so I know.
They're looking at a lot of options, but I think thats the understanding that the industry at least yes. So thats as it relates to the potential ban on exports, Doug I mean, I do think they understand the consequences of that and I think the general consensus is it wouldn't have the effect that they are trying to achieve so.
And then you want to take the second question, Yes sure Doug This is lane.
From a work process, we define the mid cycle as being sort of the average margin.
Tweaks that we think are market anomalies that go through the entire business cycle.
We're not through the next business cycle, yet, but we do believe structurally you have it.
Period, where we've had refinery closures through the pandemic, you're going to have probably not as much investment in the fossil fuel industry in particular refining going forward at a time. When you know everybody is trying to understand exactly how the balances are going to work, but our view is it will be a higher call one refining capacity so.
We're prepared to quantify that but we do believe the next mid cycle will be higher than the last cycle.
Guys forgive me for the quick follow up but.
There was a lot of concern I guess of Chinese exports hitting the market.
And obviously new capacity expansion late and so I was just wondering if you could throw that into your consideration.
Is that a concern for you guys and not definitions and cycle I will leave it there.
Thank you.
There has been a talked about we've seen some increases with respect to at least on the path of the Chinese are picking up purchases, but I don't know that we've really seen them in the market on products that much I'm looking at Gary by the way, Yes, no I think our traders believe most of the Chinese exports are going to stay in the region.
And then even if you kind of assume some of it comes into the North Atlantic Basin in the short term the French refinery strikes are really offsetting any of that in longer term it looks like to us any incremental volume coming out of China will be offset by further reductions in exports from Russia as the sanctions are ramped up and then a longer term.
But it just happens.
Where they are where the Europeans and north American or what else is sort of under ESG pressure arent really trying to two increased refining capacity. So but there is original world. This fund raise refining capacity to probably be India and China.
Thank you I appreciate the answers.
Okay.
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 you talked about bullet proofing your balance sheet in the prior quarter and you mentioned you're evaluating further reductions in your prepared remarks.
How much lower would you wait to get on your leverage before you kind of get to that bulletproof level, where you can move off.
The low end of the 40% to 50% returns or do you think youre already there.
So John that's a good question, we'll let Jason take a swag at it here yes.
Yes, yes.
As we've been talking about we're still working on paying down our COVID-19 that we have about $432 million left to pay it off the full 4 billion after accounting for the tender offer we did.
This.
Third quarter, so we're working our debt down.
And let's see on the cash side, we're at a $4 billion cash balance we've talked about how going forward, we'd like to hold more cash at $3 4 billion, probably on a base level, but if youre looking at potentially higher flat price levels are economic downturn, you would maybe want to hold a little bit more sweet biased to the upper end of that so we're close to a good spot on both.
Those on our long term debt to cap net debt to cap, we have a 20% 30% range that we target were $24 five now.
<unk> at the end of the third quarter down from 40% at the highest part of our Covid. So we've been working with the right direction I'd like to be even lower you'd like to be at the 20% range to give even more financial flexibility going forward.
So that's kind of an overview. So we're getting close to the point, where I mean, the low end of the range would necessarily be the target anymore.
Okay. That's helpful. Thank you and then.
Maybe you could talk about a refining captures and how theyre looking so far in <unk> I know we have.
In October a rising price environment, but also youre seeing some tailwind from heavy diff. So any color there just generally will be helpful.
Yes, this is lane I or.
The heavy dips are baked into our margin indicators to Sunday, So those will move with it.
I think all things being equal when you compare a third for the fourth quarter and this is really in any given year, you'll see a blending of butane benefit you know so if you hold all the other things Carsten.
Rates are the marginally improved because of we're gonna have been one more butane in the fourth quarter than we did in the third quarter.
And obviously, a flat price moves up or down byproducts have an opposite effect. So those are all still intact.
But your biggest contributions from margin capture really as gasoline and diesel so.
We'll just see but.
The main thing to always keep in mind going from third for third quarter to fourth quarters blending of butane.
Okay. Thanks very much.
Thank you. The next question is coming from Theresa Chen of Barclays. Please go ahead.
Good morning, everyone.
I wanted to ask about your comments related to demand across your footprint first and your wholesale volumes being very strong last quarter and currently when you talk about demand, surpassing 2019 levels for gasoline and diesel is that primarily driven by strength in your export channels.
Domestic demand in your areas are equally strong and like to get a sense of what's happening there.
Yeah Theresa this is Gary really its the domestic market and in our wholesale volumes have trended considerably higher we set our wholesale volume record in August we beat that in September and we are on pace to beat it again in October so wholesale volumes continued to trend higher.
Look at the prompt market through our wholesale channels of trade gasoline is trading about 8% above where we were pre pandemic levels.
Diesel volumes are trading about 32% above where we were pre pandemic levels. So seeing really strong domestic demand through our wholesale channels of trade.
Got it thank you.
In relation to the high European natural gas prices supporting higher margins and given the recent decline in TTS and natural gas storage.
Over 93% lowering that Henry hub to GTS spread do you see any risk for a pullback in margins as a result over the near term, but longer term I imagine just depends on the pace of liquefaction fill that one.
But I'll try I'll take a shot at it and Gary Jim or Michael.
We still need to re inventory the Atlantic basin with diesel by and large we're still you know when you look at inventory stocks are slow.
Most of what's happening in Europe , and you have all these LNG ship.
The shifts that are sort of floating down and still are limited.
On the Regasification of everything so we'll just have to see how it plays out.
But certainly in the last couple of weeks naturally for our Pembroke refinery natural gas prices have fallen.
Got it thank you.
Thank you. The next question is coming from Sam Margolin of Wolfe Research. Please go ahead.
Good morning, everybody.
Alright.
So we you know we definitely see evidence everybody does this structurally higher margin environment.
But more than just kind of through cycle margins being higher but the market is also sort of characterized by anomalies like I'm very high frequency of sort of regional blowouts or.
Single commodity events within the stream and I was wondering if you could just maybe speak broadly to that not to.
Not to ask too open ended or a question, but just.
Is that.
Things like this a function of kind of capacity coming down globally, or just a very tight market on an underlying basis or is it is it really just a coincidence, where we've had kind of a bunch of one off things happen in sequence and that might not necessarily be a go forward.
Trend.
Yes, so I think some of it is structural I think as Joe alluded to in his opening we had a lot of refinery rationalization refining capacity converted to produce low carbon fuels and so much tighter supply demand balances, which structurally means a stronger market.
Some of the things you talked about on market dislocation could be more transient in nature. You know a lot of that is just a function of very very low product inventories.
Especially in the domestic markets I think we feel like through the winter period of time, you could see some restocking of gasoline, which could prevent some of those market dislocations from happening at least in the short term diesel on the other hand, it looks to us to be remain very very tight and I think youll continue to see volatility.
As in the markets due to very low inventory.
Okay. Thanks for that and then just a follow up on DVD.
And the startup timing you know in the past when when you guys start up of a <unk> unit.
Can see feedstock prices are the veg oil complex sort of respond.
And this year I don't know if it's a timing issue where it hasnt really started yet in earnest or if the market's just adjusted to that demand ahead of time, but it seems like the feedstock environment as tolerated.
Starting new starting capacity a little bit better than in the past if you have any thoughts about just.
<unk> three into the into the feedstock background and that'd be helpful.
Yes. This is Eric I think what your observations are correct. We did we are not seeing the increase in feedstock prices like we did with <unk> to this time last year thinking.
Thinking about costs that I think some of it is given refining margins the <unk>.
Conversion projects that had been announced I think have largely been deferred or delayed.
And with the drop in LC at best prices I think a lot of the projects have been deferred and delayed. So if you look we.
We're just not we have not seen the increase in feedstock prices like we did last year with <unk>, starting up and we have bought feedstock for the startup in this quarter.
Okay. Thank you so much have a great day.
Sam.
Thank you. The next question is coming from Ryan Todd of Piper Sandler. Please go ahead.
Okay.
Great. Thanks, maybe one.
Follow up immediately on Diamond Green diesel you've been in pretty rapid expansion mode with <unk> over the last couple of years.
With the startup of <unk> three.
Take a pause here to kind of digest and evaluate market conditions for a bit or how do you think about the strategic direction of Diamond Green diesel unit over the next five years in terms of priorities there.
Yes, I think.
We've talked about this quarter and last quarter El CFS prices continue to drop and I think that is taking a lot of the funnel way.
In this space and so as you look across the industry a lot of projects are getting deferred and delayed and given the high energy prices across the world everyone's kind of rethinking a lot of their policies. So we have to especially in Europe , you have to step back and see are they going to continue the path and pace that they have been on historically.
So I think you know after digitally through we've said we will pause reassess the market I think <unk> is becoming a lot more interesting.
But overall I think there is a there will be a pause after <unk> III.
Great. Thanks, and then maybe.
You mentioned.
Briefly in passing earlier.
And I know, it's a little speculative, but any thoughts on how you think trade routes and supply chains get impacted if if you expand on Russian product imports goes into effect early next year there are.
Is there a logical home for some of that Russian product.
To make its way to you.
There's someplace else, South America, or Africa, et cetera, or or do you think.
Those Russian barrels just kind of go away and refining utilization falls dramatically there.
So our view is that you will see a reduction in Russian exports of primarily diesel they export a little bit of naphtha non much gasoline, but but on the diesel side you will see a reduction in exports you do have the potential.
For some of those barrels to find homes in South America and Africa as you mentioned, but we kind of believe diplomatic pressures from the U S and from Europe will kind of keep a lot of that from happening and you will see a reduction in exports from Russia.
Great. Thank you.
Thank you. The next question is coming from Paul. Thank you. Thank you research. Please go ahead.
Yes.
Hi, guys can you hear me okay.
Florida Paul.
Can you hear me Jeff Yes.
Yes, Sir we can.
Cool.
Can you talk a little bit about the strategic Petroleum reserve release, Joe You mentioned, a few things that made us.
Crude discounts widen but my understanding was a lot of the throw down in the SPR was crude I was.
Just wondering how much yes.
It affects that view.
I guess operationally and from a profit point of view and what your outlook is for the coming months I would assume that youre anticipating that we'd say for an even stop releasing the crudes.
Yes, so really what we saw is with each of the FTR auctions, we have good logistics at our Gulf coast assets to be able to receive the barrel a lot of people really don't have the logistics in place to be able to take those barrels so.
Certainly early on they were more sour barrels and we took a good volume of the SPR volume as it transitioned to more sweeter.
Still saw value in our system to take those barrels and we would expect that to continue moving forward as long as they're offering the severity.
And are you anticipating continuing drawdowns through let's say, it's going to take three what do you think you'll have to yourself.
I think you'll continue to see drawdowns at least through this year and then start to see some restocking happen next year.
Alright, Thanks, a lot.
I'll leave it there thank you.
Thanks, Paul.
Thank you. The next question is coming from kind of our lineup of Morgan Stanley . Please go ahead.
Yes, Thanks, I wanted to return to that.
Topic that you had.
Mentioned briefly earlier, which is the suggestions that you made to the administration and potential pathways for reducing fuel costs. I am curious if you could just provide a little color on the things that the industry suggested.
Well later and I were both there. So you want to talk about it first I think yeah. This is lane. So I think the main there was two main one which was one was increasing or relaxing the sulfur spec on fuels.
Many of the U S refiners didnt necessarily invest in.
It looks like you are making and making ultra low sulfur diesel as much as maybe some others or tier three gasoline and so consequently, they are in the posture having to export.
Some of those some gasoline and some diesel to markets around the world.
Handle the sulfur so that was really I think the two big ones I mean, obviously, a part of that meeting was meant to see if there was any possibility if somebody can start a refinery up and we discussed.
The industry discuss the difficulty in doing that.
And that was really the main ones.
Waving specs really on products was with what we talked about the one interesting thing Qatar that came out of it too is yes. There is a consideration for the ability to restart refining capacity that had been shut down.
The general sentiment was that that wasn't going to happen now.
Of course, we're not in that boat, but people had very good reasons for making the decisions that they made.
And they weren't in a position to unwind those decisions so.
The solution is going to probably have to come from some.
Waiving of regulation or.
Reduction in demand, which we just haven't seen to date.
It makes sense semi related policy question, just given that the.
The inflation reduction act is maybe at a bit of time to be digested by the market.
Players out there that you talk to what types of opportunities are you seeing as more likely or more in the money with the incentives and that bill.
This rich Ross I'll take just a high level of effort on it and then if we.
Kind of give you an idea.
We're really we're focusing on a number of things one is that they have clean energy tax credits in there.
That are enacted.
Really an extension of the BT C. The blenders tax credit which has helped.
Helpful to us there's also tax credits there for sustainable aviation fuel and I think Eric had mentioned earlier that makes it more interesting for us to look at and in Additionally, Theres theres additions for the 45 Q tax credit, which we think strongly supports our carbon sequestration and we think youre going to see more opportunities develop around on that.
Yeah.
Okay got it I'll turn it back here. Thank you.
Thank you.
Thank you. The next question is coming from Paul Cheng of Scotiabank. Please go ahead.
Hey, guys good morning.
Hi, Paul.
Two question hopefully Sean.
The first one is just on main I think back in the first quarter Conference call. You gave a number of a thorn in the diesel crack.
If on page four you asking when you find the business Europe because of the natural.
Natural gas price gap and at that time, you're using saying give me a chance to 25 total cap.
Since then we have seen the European refinery essentially cut their natural gas consumption by half.
Okay was that you stand up a number you can share and yesterday, we need that cut from $8. Two full just anemia or that we can we need to win that way.
Secondly that.
Also if you can give us what's your view on natural gas exposure.
By operating region for you guys are the.
The second question, yes on D J D.
I think that.
The joint venture.
So full win on the.
Diesel contract.
And as a part of the hatch operation.
So you're in a backwardation curve, yet HUD yet.
The third quarter, I think that bandwidth patient curve is substantially less than second quarter. So we were surprised.
<unk> captured Dan improve.
Companion to your benchmark indicator, yes.
Is there anything going on we should be aware that lead to that or anything any insight you can pull one thank you.
Hey, Paul so yeah.
Yes.
Sorry to come back to that first question a little bit but.
You're accurate in what I've stated in the first quarter today, what we're seeing and we've talked number of refineries natural gas prices have fallen, but I think what youre seeing in Atlantic Basin Youre seeing in the diesel crack is.
The advantage of lower but you still have a wide diesel crack and that's because a lot of the refineries that are having to sort of re inventory the Atlantic basin.
Looking to running a lot of sweeter crudes, because they can't meet the fuel oil back right. So they ended up bidding up the industry or at least the marginal guy out there bidding up bidding up the sort of low sulphur crude price to try to.
To meet the demand in the Atlantic Basin, So and Youre seeing and Youre seeing that in discounts, you're seeing medium sour getting cheaper youre seeing heavy sour getting cheaper part of that is also a function of redirection of all the Russian trade flow. So that's really in terms of a prompt basis whats driving the heat crack.
I don't know that Europe solve this natural gas problem, we'll just going to see you know there's a lot of tankers sitting offshore trying to re gas and so.
We'll just see how that goes.
Okay.
Before you go on that one I, just kind of what's that mean.
Yes.
On page <unk>, we find them versus you up on natural guys.
Gas price curve.
That's yet in pact that advantage.
When the European we find that cut than natural gas consumption.
Well what that that doesn't mean, we need that's not how you should be <unk>.
What I'm, saying is versus the fourth quarter first of all really up until about three weeks ago.
There was an advantage that you could see they were paying higher cost of fuel. We could also see when we use our pembroke refinery as a proxy we were through that right. Other work, even though now that we would eliminate all of our natural gas purchases, but what we could see was.
The profitability or at least you know your ability to.
What's setting the marginal capacity out there in the Atlantic Basin is not so much around natural gas I don't think today I think what it is if people are having to buy a very low sulfur crude oil to try to meet the low sulfur diesel spec and trying to avoid making a higher fuel oils back so.
In simple terms a lot some of it's being driven by <unk>.
Oh 2020, and the ability of some of these simple refineries can't deal with the crude oils that are available to them to restock the Atlantic Basin.
I see so you're actually the only thing yes, the natural gas is driving to advantage at all.
Well one of them. This is just a three week phenomenon, Paul I'm not sure I would jump out there and try to make it an annualized thing I'm, just saying I think the most of it.
For the last quarter, a lot of it's just being driven by the marginal economics of a simple refinery or trying to buy.
Having to buy low sulfur crudes to meet the Atlantic Basin diesel requirements.
Okay. Thank you.
Alright, Eric you're ready, yes, so on DTD.
What you said is correct that backwardation was less severe in the third quarter than the second quarter. So the margin the margin capture issue in the third quarter was more related to feedstock slate that we ran and as before we said we haven't seen an increase.
In feedstock prices, we did see and this is a little bit of a function of the margin indicator. We saw seaborne soybean prices dropped 5% to 15, a pound below all of the waste oil feedstocks and when you look at that through the third quarter that was about 80% of the impact on the on.
On the margin on the margin capture so it was really related to what we're seeing is veg oils pricing at or below wastewater feedstocks and so the only thing I would say.
Going forward to be aware of we are increasing the amount of veg oil that we are running in <unk> in the <unk> complex not because waste oils are not available just because we see flat prices of veg oils coming down to a point, where the <unk> advantages are.
Or not is or is not as.
Strong.
What we see in waste oils. So we are incremented veg oil into into <unk>, because we see those prices are attractive.
Hey, Eric do you have that percentage how much is the vegetable oil you're going to run in the D. J D. Three.
Yeah, we're not going to give out that level of detail.
I'll say as you know.
Up until.
The fourth quarter, we ran essentially zero veg oil. So we will we're increments visual into the units because of this attractive price.
I see alright, thank you.
Paul.
Thank you. The next question is coming from Roger read of Wells Fargo. Please go ahead.
Hello, everybody and good morning.
Roger.
Maybe just to come back.
Cash returns to shareholders question.
We're getting a lot of interest on not just the 40% to 60% return, but how are you thinking about the split between those.
And when should we think about.
Potential to raise the dividend is it as simple as you get rid of the 4 billion that came with Covid or is there a step beyond that you want to see and I think the question is growing more acute cases, you look at the overall crack spread environment right. It's one that that says.
Youre, earning above a typical mid cycle so.
The expectation I think here.
Greater than mid cycle cash returns to shareholders is pushing on us just curious how you're thinking about it.
Yes. This is Jason I think Joe answered it pretty well I ran through our cash you were up to 4 billion now which is getting to where we like to be.
Desk it into a good level of 24 and a half we still like to do a little bit more we have 430 left just paid off the COVID-19 and prefer to be at the lower end of that 20% to 30% range.
Uh huh.
Yes, we're getting into good shape, but I would say, we're not declaring victory yet.
Roger.
Jason answered correctly, we don't know what the economic climate is going to be like going into next year.
It's probably premature to.
Certainly to make a commitment right now on anything that we're going to use the balance sheet to defend.
I think everyone clearly could see that we had stated in the past we're going to defend the dividend with the balance sheet and we did that and we will do that in the future and so we just wanted to be sure that we don't knee jerk here and that we've got a line of sight that we get positioned where we want to be positioned and then we have line of sight to.
The way things look going into next year before we would make that decision, but I do think we've got the flywheel of the buybacks and we talked about maybe not.
Moving up above and by the way, it's 40% to 50%. Okay. You took us up to 60 I didn't notice.
Okay.
It's 40% to 50% and we'll see we'll use that flywheel to drive the returns.
He got to try something here and there.
That's right.
Alright, well, let me, let me try something else more on the kind of the operational side you brought it up and there is obviously a risk.
Slowing economic cycle out there.
Yeah.
What what level when you think about a typical.
Recession impact in terms of fuel demand recognizing gasoline is already well below what we would call kind of a normal environment. So, let's maybe think about diesel since that's the real strong park. When you think about industrial demand weakness transportation related weakness right, whether it's just typical.
<unk> et cetera.
How does that factor in like what kind of would you expect to see.
A couple of hundred thousand barrels go away is it a is it a 10% sort of cut top to bottom and I'm. Just wondering how you think about that the typical magnitude impact of the recession on fuel demand.
Hey, Roger This is Gary I guess he knows the guys have kind of gone back and looked at it at recessionary periods in the past.
They see that product demand is kind of hit about two times GDP, so whatever kind of GDP assumption youre going to have you would take twice that on the impact of fuel demand and as you mentioned.
More of that is going to be diesel less on gasoline I think there are some unique situations as we head into next year one.
Jet demand hasnt fully recovered and so you'll have.
A good increase in jet demand as we would anticipate and then Chinese oil demand has been down 20% at some point in time, they will come out of the pandemic and you would expect to see Chinese demand recover. So the combination of both those things is that we would expect even even with a typical recessionary period, you may see year over year.
Global oil demand growth.
Okay.
Alright, Thank you I appreciate it.
Okay.
Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.
Yeah, good morning team.
First question is just around the site.
Hi, where fuel oil market and we're seeing the big.
Discounts are showing up in the market and I'd Love your perspective on what do you think's driving and how much of that really is the later impacts of I M O versus other dynamics in the market and are you changing your configuration and refining at all to run.
To run some of that high sulfur fuel oil into the coker.
It more through what through WCS and so.
Yeah. So this is Gary.
<unk> touched on a few of these things, but there is a number of factors that have been really driving the heavy sour discounts.
First the sanctions put on Russia have caused some rebalancing a lot of the Indian and Chinese refiners are running Urals, it's backed up Mars and heavy Canadian into the Gulf, which are driving those discounts wider so we talked about the higher prices of natural gas around the world.
Cause the operating expenses running heavy and medium salaries to be higher so that causes the discounts to be wider.
There is a higher naphtha content and heavy Canadian crude nap theres been discounted so that drives the discounts wider we've seen some unplanned maintenance.
In the U S, which is which has also contributed.
But overall I think we continue to see weakness in high sulfur fuel oil combined.
Combined with higher refinery utilization, putting more product on the market. So some of that you know what we expected in IMO 2020, we're finally, starting to see in the market.
Lack of Chinese demand is certainly also contributing to that so for us when we look at the market going forward seasonal maintenance in Western Canada is coming to an end youll see higher diluent volumes as we head into winter. So all of that's putting more heavy Canadian on the market.
We expect to see even more rebalancing occur as sanctions are wrapped up in Russia.
So we expect this market to continue with.
Certainly maximizing heavy Canadian in our system today, and seeing a lot of opportunity to buy house high sulfur fuel blend stocks as you mentioned that we're putting into our cookers.
Yeah that makes a lot of sense and the other question is you guys have really built a wonderful business here through through.
Organically really haven't done much M&A in the better part of the last decade.
Just your perspective on whether as you look forward are there bolt on M&A opportunities and as we are seeing some A&D in the downstream markets.
And in the low carbon markets or do you want to continue to build the business on an organic basis.
So we're very comfortable with the approach we've taken to building the business I mean, we went through the period of course, where we grew the business.
And frankly bolted on a lot of stuff to the portfolio, which we now have a <unk>.
Largely operating to a level that we're comfortable with and so we're very comfortable with the refining portfolio that we have in place today, we always look at opportunities that are out there and we will continue to do that but the strategy that we've employed with.
Really directing a significant part of the capital budget too.
The renewables businesses is made sense to us we believe that theyre very durable as as refining, but but we're very comfortable with that approach and.
And we're comfortable with the way we've gone about doing it which is certainly in the renewable diesel business from the ground up. So I think you should expect that we're not going to jump into the market for any kind of significant transaction.
And we will continue to do what we're doing.
That makes a ton of sense. Thanks chip.
Sure.
Yes.
Thank you. The next question is coming from Jason <unk> of Cowen. Please go ahead.
Hey, Thanks for taking my questions.
I have two the first one kind of on near term dynamics.
Just thinking.
For Q I was hoping you could discuss a couple of things one.
Impac stock capture with the startup of <unk> three.
The ability to capture strong west coast cracks in October gasoline margins were over $100 a barrel and then any impacts from the Mississippi River.
Drought that.
You saw in your footprint that could be ongoing and I have a follow up thanks.
Yeah.
I'm going to start with easy to three okay.
<unk> three <unk>.
Margin capture I think will be challenge one of the details of this business is when you first start up a brand new unit, we have to start up on temporary pathways.
Is that are you know.
Somewhat generic to renewable diesel units.
Got to run like that for the first several months until you gather the data to get your actual carbon intensity numbers. So margin capture on D. G. III will be lower initially as we start up because you have a line out and.
Like I said get the data to then submit your your actual Ci numbers. So I think that will be one of the main issues as we startup <unk> III. So we will get certainly get volume will certainly get more.
Overall income, but if you look at it from a.
If you look at it through the margin indicator on a dollar per gallon basis on temporary <unk> for the first several months it will be lower.
That'll line outs in the back half of 'twenty three as we as we submit our data to get responses from all the different.
Uh huh.
The different.
Jurisdictions that you have to submit your Ci numbers too.
This is lane on on the on California, we.
We have been executing a turnaround at our Benicia refinery.
Some of which of the two.
Turnaround was in the third quarter, and we'll be wrapping up here in the fourth quarter, so to the extent we.
We'd still maximize gasoline even to the extent we could based on the operating posture, we had for the first round.
Wilmington brand at full rates so.
Oh, that's really.
We will just see how the fourth quarter wraps up with respect to the gasoline crack on the west coast.
I guess the final one around Memphis, the river levels had been impacting us at our at our Memphis refinery.
Both the ability to clear the refinery and supply the river terminals as of this morning, both northbound and southbound traffic out on the river is wide open and expect it to be there for the next couple of weeks. So we expect the situation to improve.
Yeah.
Great. Thanks that colors, all really helpful to think about <unk>.
And then the other one just on low carbon opportunities within your portfolio.
In addition to.
The D. G. D venture you also have an ethanol business and it seems like with.
The carbon capture project that Youre installing there and the inflation reduction act, maybe ethanol to jet is a technology.
That makes sense, particularly given weaker ethanol margins is that is that something that you're looking at either.
Got it complement.
Any SaaS growth you would pursue within D G D or as an alternative investment instead.
Instead of pursuing SaaS near term within D. J D.
Yes, so that's definitely something on the radar for us.
As you said ethanol carbon carbon captured ethanol will be eligible to get into SaaS and given our footprint and our navigator project.
It will be in the SAP as a possibility with or without ethanol product post sequestration, so thats definitely sort of a.
So nothing on the radar to look at sort of post 2025, when navigator comes online.
Thanks.
Thank you, ladies and gentlemen, we're showing time for our final question. The final question today is coming from Matthew Blair of Tudor Pickering Holt. Please go ahead.
Hey, good morning, Thanks for squeezing me in here I just had one question on the <unk> guidance, if I heard correctly. It was still $750 million for the year, which I believe implies that Q4 volumes to be lower quarter over quarter. Despite its starting up the new plant in November .
Could you help us understand that is that just being a little conservative around the startup or is there a turnaround at the <unk>, one or <unk> two that we should be keeping in mind.
It's a little conservative.
We are in startup of <unk> three the plan is to ramp to full rates in November . So if you added that volume and it will come in higher than the 750, but.
We still we're still lining the unit out and have yet to put feed into the eco finer. So we won't know that detail until mid November or so so from a guidance standpoint, you decided to keep the guidance itself.
<unk> proven that we can see that rate.
It sounds good thank you very much.
Okay.
Thank you at this time I would like to turn the floor back over for closing comments.
Great. Thank you Donna 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 week.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and enjoy the rest of your day.
Yeah.
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Okay.
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