Q2 2023 Valero Energy Corp Earnings Call
[music].
Greetings and welcome to the Valero Energy Corp, second quarter of 2023 earnings call. At this time all participants are on a listen only mode. A brief question and answer session will filed a formal presentation.
Anyone to require operator assistance during the conference. Please press star on your telephone keypad.
Minder at this conference is being recorded.
Now my pleasure to introduce your house home or Buller, Vice President Investor Relations and finance. Thank you. Please go ahead.
Good morning, everyone and welcome to the Little Energy Corporation second quarter 2000, twenty-three earnings conference call.
With me today are lane Riggs R. C E O and President Jason Frazier, our executive Vice President and CFO , Gary Simmons, Our executive Vice President and C O O 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 or tables that provide additional financial information on our business segments, and reconciliations and disclosures for adjusted financial 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 the statements in the press release in on this conference call that state the companies 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 earnings release in filings with the S. E C.
Now I'll turn the call over to lane for opening remarks.
Thank you Homer a good morning, everyone before we discuss quarterly results.
I want to thank Joe border for everything he's done to build up on bolero 43 year history.
Joe Steward of repositioning of our <unk> and the <unk>.
Commitment to shareholder returns through capital discipline innovation is wrong execution.
I'm grateful for his leadership I'm proud of what Valero is accomplished.
I'm honored to build on that foundation cause we continue to advance our position as a leading manufacturer of liquid transportation fuels.
Moving along the corridor results were pleased to report solid financial results in the second quarter underpinned by our strongest accused and across all of our business segments.
Finally ran well with throughput capacity utilization of 94% of the refinery margin for supported by continued type called a supply demand balances vulgar.
A man with strong with R. U S wholesale systems setting a sales record of over 1 million barrels per day in May and June .
We also had a positive contribution from the Port Arthur Coker project, which was started up in early April and is operating well in a full capacity the new coke or has increased the refinery throughput capacity and enhances the ability to process incremental volumes of heavy crude and residual feedstocks.
Ah renewable diesel segments that record for operating income and sales volumes in the second quarter driven by incremental production volume from Diamond Greenbee full port Arthur.
The Diamond Green diesel sustainable aviation fuel project at Port Arthur is progressing on schedule.
Plan is expected to have the ability to upgrade 50 per cent of the current 470 million gallon annual renewable diesel production capacity to sustainable aviation fuel or fast.
It is expected to be complete in 2025 and is estimated to cost 315 million.
Half of that attributable to Valero with the completion of this project D. G. D is expected to become one of the largest manufacturers of staff in the world.
These projects expand our long term competitive advantage and I wanted to mend our projects and operations team for their dedication and execution.
We also continue to evaluate other opportunities, while maintaining capital discipline and.
Honoring our commitment that all projects me to minimum return threshold.
On the financial side, we returned 53% of your adjusted net cash provided by operating activities to shareholders through dividends in share repurchases in the second quarter.
And we ended the second quarter with a net depth to capitalization ratio of 18%.
Looking ahead.
We expect low global light product inventories and type product supply and demand balances to continue to support refining fundamentals.
Global demand for transportation fuels as recover substantially with gasoline and diesel demand now comparable to pre pandemic levels.
Jet fuel demand continues to increase steadily.
In closing we remain committed to the core strategy that has been in place under Jos leadership for nearly a decade or focus on operational excellence capital discipline and honoring our commitment to shareholder returns are served as well and will continue any car strategy going forward.
Homer with that I'll have to call back to you.
Thanks Lane for the second quarter of 2023 net income attributable to Valero stockholders was 1.9 billion or $5.40 per share compared to 4.7 billion or $11.57 per share for the second quarter of 2022.
Second quarter 2022, adjusted net income attributable to Valero stockholders was 4.6 billion or $11.36 per share.
The refining segment reported 2.4 billion of operating income for the second quarter of 2023 compared to $6.2 billion for the second quarter of 2022.
Adjusted operating income was $6.1 billion for the second quarter of 2022.
Refining throughput volumes in the second quarter of 2023 average 3 million barrels per day, implying a throughput capacity utilization of 94%.
Refining cash operating expenses were $4.46 per barrel in the second quarter of 2023 lower than guidance of 460, primarily attributed to lower than expected natural gas prices.
Renewable diesel segment operating income was 440 million for the second quarter of 2023 compared to 152 million for the second quarter of 2022.
Renewable diesel sales volumes average 4.4 million gallons per day in the second quarter of 2023, which was 2.2 million gallons per day higher than the second quarter of 2022.
The higher sales volumes in the second quarter of 2023 were due to the impact of additional volumes from the startup of the D. G D Port Arthur plant in the fourth quarter of 2022.
The ethanol segment reported $127 million of operating income for the second quarter of 2023 compared to $101 million for the second quarter of 2022.
Ah Justice operating income for the second quarter of 2022 79 million <unk>.
As in all production volumes averaged 4.4 million gallons per day in the second quarter of 2023, which was 582000 gallons per day higher than the second quarter of 2022.
For the second quarter of 2023, G&A expenses were $209 million and net interest expense was hundred 48 million.
Depreciation and amortization expense was $669 million in income tax expense was $595 million for the second quarter of 2023.
The effective tax rate was 22%.
Net cash provided by operating activities was $1.5 billion in the second quarter of 2023.
Excluding the unfavorable change in working capital of $1.2 billion in the second quarter and the other joint venture members share of D. G. DS net cash provided by operating activities excluding changes in its working capital adjusted net cash provided by operating activities was 2.5 billion.
Regarding investing activities, we made $458 million of capital investments in the second quarter of 2023.
It's $382 million was for sustaining the business, including cost for turnarounds catalysts in regulatory compliance and $76 million was for growing the business.
Excluding capital investments attributable to the other joint venture members share of D. G D capital investments attributable to roll their over $433 million in the second quarter of 2023.
Moving to financing activities, we returned over 1.3 billion to our stockholders in the second quarter of 2023 of which $367 million was paid as dividends at $951 million was for the purchase of approximately 8.4 million shares of common stock.
Resulting in a payout ratio of 53% of adjusted net cash provided by operating activities.
Last week, we announced a quarterly cash dividend on common stock of a dollar two per share payable on September 5th 2023, two holders of record at the close of business on August 3rd 2023.
With respect to our balance sheet, we ended the quarter with $9 billion of total debt $2.3 billion, a finance lease obligations and $5.1 billion of cash and cash equivalents.
The debt to capitalization ratio net of cash and cash equivalents was 18% as of June 30th 2023.
And we ended the quarter, well Capitalised with 5.4 billion of available liquidity excluding cash.
Turning the guidance, we expect capital investments attributable to Valero for 2023 to be approximately 2 billion, which includes expenditures for turnarounds catalysts and joint venture investments about $1.5 billion of that is allocated to sustaining the business in the balance to growth.
For modeling our third quarter operations, we expect refining throughput volumes to fall within the following ranges.
Gulf Coast at 1.77 to 1.82 million barrels per day.
Mid continent at 450 to 470000 barrels per day.
West Coast at 240 to 260000 barrels per day.
In North Atlantic at 435% to 455000 barrels per day.
We expect or finding cash operating expenses in the third quarter to be approximately $4.70 per barrel.
With respect to the renewable diesel segment, we expect sales volumes to be approximately 1.2 billion gallons in 2023.
Operating expenses in 2023 should be 49 per gallon, which includes 19 cents per gallon for non-cash costs, such as depreciation and amortization.
Or ethanol segment is expected to produce 4.4 million gallons per day in the third quarter operating expenses should average 39 per gallon, which includes five per gallon for non-cash costs, such as depreciation and amortization.
For the third quarter net interest expense should be about $145 million in total depreciation and amortization expense should be approximately $690 million.
Four 2023, we expect G&A expenses, excluding corporate depreciation to be approximately 925 million.
That concludes our opening remarks before we open the call to questions. Please adhere to our protocol of limiting each turn into Q&A to two questions.
If you have more than two questions. Please you joined the queue as time permits to insure other callers have time to answer questions.
Thank you 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 total indicate your line is in the question queue. You May press start to if you would like to remove your question from the queue for participants using speak correctly.
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Today's the first question is coming from <unk> a few P. S. Please go ahead.
I just wanted to quickly start with and congratulate gaddy for the promotion and than usual and all our best wishes are with you.
The first question I have for you is that when we look at B J D. You guys have a track record of bringing projects online before time. So it's been a possibility of ear down. The line you could take a look at it and say we would like to have similar upgrades possible egg D. J D. One in two to make more <unk>.
<unk> on a gold forward basis.
Hey, this is Eric.
Obviously that is a possibility because those are cookie cutter units and we could do the exact same project at Saint Charles that we are currently underway at Port Arthur It's it's too early to talk about any numbers or commitment, but yeah. So that's definitely something we're looking at something that we could do.
The second question here is the daily data is telling us whatever it is and then I'll just need some concerns around demand out there, but the cracks are telling us a completely different story.
Telling us the demand for a product is.
Markedly strong so just wondering if you could highlight San Jose what you're seeing in terms of demand in Vegas regions.
Yeah. This is Gary yes, we do believe that the <unk> is understating gasoline demand, but even their data is showing on a four week average basis gasoline demand up about 3%, but if you look at our numbers course Lane mentioned, we had record volumes in both Marianne June of over a million barrels a day.
We're seeing gasoline sales in our system up 14% year over year up 22% from pre pandemic levels gasoline inventory year over years down seven and a half million barrels. So it's training at the low end of the five year average range.
Typically this time of year to have an open arb to ship barrels from Europe into the United States.
<unk> inventory low in Europe that are are as close which is hindering imports and we see strong export demand from the U S. Gulf Coast into South America. So the fundamentals around gasoline look look very good diesel inventory is up 6 million barrels that continues to trend below the five year average range.
Diesel inventory flat, where historically this time of year, we start to see diesel building Mcgee.
Again, while the <unk> reflects weaker diesel demand year over year. It looks like the weekly data is continually being revised up so although we you know certainly we had a weaker heating oil season diesel demand looks fairly similar to last year. So we move forward a lot of encouraging signs around diesel where we saw weaker tonnage index.
And the second quarter of the June data reflects that the tonnage indexes picking back up.
We will start to see more agricultural demand as we get into harvest season, and more heating oil demand as we get into colder weather continue to see very good export demand from the us Gulf Coast into South America. Some of that has fallen off as we replace and supply with Russian barrels but.
<unk> had been replaced with with more export demand from the U S. Gulf Coast into Europe jet demand also picking up and had a positive impact on overall dissolute supply demand balances. So the distillate demand you know looks up 10% year over year looks pretty strong all the airlines are reporting very strong demand jet trading at 10.
Cents per gallon premium in the U S Gulf coast on our rent adjusted basis today. So yes, the fundamentals looked very very good.
Thank you so much for a detailed response thank you.
Thank you. The next question is coming from the <unk> of J P. Morgan. Please go ahead.
Hi, good morning, Thanks for taking my question.
So I did my first one was my first one was just on the <unk>. It sounds like you're you're running full now in the startup when his plan, but maybe you can just go through any puts and takes around profitability I know have your tips would come in for example, but devo cracks are improving recently and how should we think about there being a structure, we hire Gulf coast capture now and.
Any way to think about quantifying that.
Hey, John This is Greg Bram. So you guys Lane mentioned the cooker started up in April and I think it's probably worth noting the project and operating teams did a great job, bringing that unit online safely without incident and that's after we accelerated the schedule last year to be in a position to capture value from that project here in 2023.
We've ramped it up to full capacity over the course of the quarter and it's running well and meeting expectations and I think with that you can take care of the guidance. We've given in the past and think about where where the market is today and adjust accordingly, I don't think we have really a new or different view because the project is really doing what we expected it to do.
[laughter].
Maybe along the same lines it'd be great to get your thoughts on heavy and medium soured. This from here with OPEC plus cutting in the second round of E. S. P. R. Relief is now over what are your thoughts on on whether it will see a widening from here on.
Mmm Heavies are we like we say in the current environment, where it from a from a sour disrespectful.
Yeah. This is Gary I think we have seen the discount widened back out some as we've moved throughout the third quarter I think there's some reason for optimism you know as we head into all turnaround season had two and three you'll see some decreased demand for heavy sour crudes, which will help the differential. Some you know I think we'll see some more production.
Growth out of Western Canada, as they come out of maintenance season would you put more barrels back on the market.
Should continue to see a ramp up and chevron production from Venezuela heading into the U S. Gulf Coast and then finally, there is some seasonal factors, which should help the discounts as well.
Hi, so for fuel for power burn will begin to wind down seasonally which would put more high sulfur fuel on the market helped the discounts there and then as we transition into winter weather, you would expect to see higher natural gas prices, which changes the economics of for some refineries around the world that have been processing medium and heavy sour crudes, which should help the the discounts as well.
Thank you.
[noise]. Thank you. The next question is coming from Theresa <unk> If Barclays. Please go ahead.
Good morning on the <unk> would you mind, giving an update on the navigator in Black rock Ccf's project, and how's the permitting and write it bright procurement process Kelly.
Hey, Teresa is rich I'll start out by saying that the navigator project is progressing they've got parallel proceedings in front of each of the state's respected utility boards and or counties.
And the regulatory proceedings in Iowa are taking longer than they anticipated and.
And so navigators not expecting regulatory approval until the back half of 2024, which will naturally push their timeline back.
And they've not in nine eight.
And they hadn't given it any update on that.
A new startup schedule so.
Thank you and and in terms of an additional on sat opportunities N. D. D. G. G facilities can you just a pine a bit more I'm you know how would you think about like the key hurdles and it would take to cross the commercial life additional F I D.
Yeah, I think what I would say about SAP is the airlines are still in very much an educational phase of this what what they are still trying to wrestle with us I think there's a good understanding of it is going to come from Rd.
They're starting to understand that the credit markets and how they work, but as you know.
All of these SAP demand a lot of them are voluntary from the carriers and and as well as because it's voluntary they've got options on do they want to accept allocation do they want to accept which model do they want to operate under where in the world do they want to.
Run these barrels and.
I think the learning that everyone is working through right now is conventional jet is fungible product and so the staff will naturally move into fungible markets just like jet fuel does.
But as airlines once the specific molecule at their particular location particular airport even at the airports. It then becomes a fungible product. So all of that becomes a conversation of okay. How do you then take that sort of real life logistics and apply it into these policies and goals and how do you want to set up <unk>.
Commercial deal with that so.
There's still a lot of details being worked through on how this will physically move into the market and then as a result of that how it will price. So I think airlines are still we're still working through a lot of those details I don't see any drop in interest or demand, we see demand still growing strongly through 2030. So I think there's still a lot of upside in this outlook.
I think it's just but we have to work through these commercial details and logistical details.
Thank you.
Thank you. The next question is coming from <unk> Bank of America. Please go ahead.
Oh that sounds so good morning, everybody, Gary perhaps like you because you're a little bit given your recent good news congrats for me as well, but diesel a coupla months ago, you know the world was coming to an end and and you know in terms of consensus expectations and today, we're pocket winter typed premiums for.
<unk>. So I know you touched on already in some of your comments, but.
Can you maybe speak to what you're seeing.
Uhm, that's driving not strength and I wanted to address specifically, what you're seeing in Asia as it relates to trading our understanding is Chinese exports are down.
And maybe that's creating some titans globally. So I'm just wondering if you can offer any perspective as to why display is as strong as it is today.
Yeah, I think he definitely saw.
Is China ramped up and they didn't have the domestic demand keep up with that initially you saw a lot of Chinese exports. Some of those barrels were making their way into Europe and then you had some trade flows that needed to rebalance with the Russian sanctioned. So initially we saw decreased demand from Latin America, and so diesel was <unk>.
Hurting the backup in the U S. But have trade flows of rebalance the Russian barrels that are making their way into Latin America that gap has largely been filled by increased demand from Europe . So if you look for in our system in the second quarter of last year, our exports pretty comparable to the second quarter of this year or last year 95.
Percent of our volume went to Latin America, 5% to Europe second quarter of this year, we had 60% of our exports go to Latin America with 40% of Europe . So you're starting to just see a big pool of diesel from the U S. Gulf Coast into Europe , we saw it in the second quarter and thus far in the third quarter, that's continuing into the hedge the real difference.
So I hope this isn't a second question. This is kind of a clarification question. So are you suggesting.
[laughter] <unk> Russian exports are starting to you know.
Starting to slower, which I think was the expectation is that am I reading your comments correctly.
We have seen rushing export slow I don't know if that's just maintenance activity occurring in Russia, what's driving it but we have seen some of the south American demand that we feel like we lost a Russian barrels that those countries are back inquiring for supply from us again.
[noise]. Okay. Thank you Uhm my follow up is on capture race and you know it it seems to US I mean refining looked in line with consensus for this quarter, the dance with pretty weak capture and the <unk> and the north Atlantic. So I'm curious if she can walk us through whether that's transitory if there was anything specific in the quarter.
And how do you see a trembling so hard in the third quarter.
Whoever wants to take out thanks.
Yeah, Doug This is Greg So as you mentioned your overall capture rates were pretty consistent with what we would expect from a <unk> move I should mention from from the earlier question in the Gulf Coast Coker was a positive impact the new koger on capture rates in the Gulf, but as you mentioned in the mid con lowered their.
<unk>, primarily do the turnaround activity and you can see that in our lower throughput rates in second quarter.
Versus the first quarter and then in the North Atlantic we tend to always see a seasonal shift in the value of Canadian distill it up in that market strong in the winter and then coming off in the in the spring and summer time. So that was one of the effects. We saw there than the one that was a bit more unique to this particular period was just high.
Cost for for Syncrude coming out of Canada, primarily.
Impacted by some maintenance and also the wildfires they had up there.
Mmm, how does the training and two three.
And we're starting to ache, you're starting to see it moderate a bit but it'll take some time that usually it's not just a very short short term effect, but we expect that it will start to improve.
Alright, Thank you guys.
Alright.
Mmm. Thank you. The next question is coming from Paul <unk> a thank you research. Please go ahead.
Morning, or ball volition Terry.
Can you just keep going a little bit with the artist.
On the OPEC cuts can you talk a little bit about the impact that I've been having a markets from your perspective, the Mexican explosion was another.
Obvious one just a commentary on how disrupted the crude market is from advice points of view right now.
I got you on Russia U you seem to be more or less address that already three Doug. Thanks.
Yeah. So is certainly the big move in the crude market as had been the OPEC plus production cuts uniform 5 million barrels a day off the market and I think you're seeing that is global oil demand picks up and those barrels are not yet back on the market you are seeing flat price trend higher and you've definitely seen it in the quality differentials as well, but in addition to the OPEC plus.
Cuts there were a number of other issues that you mentioned, we had maintenance in Canada.
The wildfires in Canada.
Platform fire in Mexico, you kind of went from a seller out of the SBR to a buyer into the SPR. So all of those things had a significant impact on the quality differentials in the second quarter, we're seeing some of those things start to reverse as we move into the third quarter.
Got it and then on the outages.
Outages.
And refining can you talk a bit I mean, there was there was reports of.
Lots of different things happening not least because of the heat in Texas could you talk a bit about anything that happened with you guys in the courts, but also how the industry.
Perhaps it was.
Through if it was a bit distorted by by various units being down and stuff.
No. Paul this is Greg I I don't know that we can speak a whole lot to what was going on elsewhere. Our operations were very good for the quarter.
Good mechanical availability in line with the kind of our typical first quartile type of.
Performance. So the weather has had just a very modest impact on any of our operation.
Got it and then just finally, a quick when the the 14th St talks about wholesale up.
Is obviously, you're taking market share it seems to be driven by.
Renewable fuels right is that how do we explain the difference between you will strength of sales versus the overall market being way to load up.
No that wouldn't include really what we're talking about on renewables that would be strict are strictly R. U S. Wholesale volumes I think some of it is due to a rationalization that occurred in the industry that allowed us to be more competitive, but we've gone through and in many locations renegotiated terminal agreements that just allow us to be.
More competitive in some regions, where we have been historically and capture additional market share.
Got it thanks very much.
Thank you. The next question is coming from Brian pad of paper Sandler. Please go ahead.
[noise] great. Thanks, maybe a question on the renewable lethal side.
I mean can you tell it obviously very sounds performance in the quarter can you talk about about sales in the quarter, which were I need stronger than we had expected also had a very strong cats, right, which which was much improved and certainly I think.
Some benefit from from past pricing, there, but can you talk about.
<unk> what are the driver's area implications as we look forward the back half of these are both on sales and kind of margin and capture in the renewable equal time.
Yeah, we definitely had there's always some timing of ships and our numbers for the quarter, but we do also have the unit running above its original design.
Design capacity. So we are running higher rates of D. G D. Three as well as seeing strong sales throughout the world as we move into a lot of production moving into Canada with its new CFR that went live in July and then there's other states that are coming on beyond California. So so over.
Yeah, we did see increased sales due to the combination of some timing of ships and then obviously, we're running above design rates.
And on the on the margin captures had any any general comments.
What are you, saying I mean headline indicators have been I've been following by your capture was much improved.
Yeah. The the margin on the margin capture side, we definitely saw fat prices lower in the second quarter, we saw waste oils become advantage. It again, so that that improves a lot of our capture right.
If we talk a little bit about <unk> those have been pretty much as expected Lcs market's been relatively flat VBA came out with its new ran outlook and it was largely unchanged. So.
But overall, that's mostly a product Gary mentioned, we've seen strong USD <unk>.
Demand that's the basis of the Formula plus I would say.
More attractive fat prices as you already mentioned.
Alright, thanks, so maybe.
But they started off with a port Arthur poker in the capital Rolling off on that in terms of growth Capex, you, obviously have the staff project underway, but.
What what types of projects might compete for growth capital going forward is it more likely to be.
Incremental staff capacity are there are there things on the refining tie that you were looking at whether it's something to increase our theme production or anything like that on the margins side that could compete for capital of you as you think about the next couple of years.
Oh, Yeah <unk>. So you can really expect us to continue to look optimize and look at opportunities around our existing assets, we've been doing that.
Mark Big or flashy button cumulative you know they'll have an effect on our on our overall performance. When we continued to gape. Those just like we always have and then there's the other side of the business Ah renewable side you know, we're looking at the potential always the gate and develop innovative projects and the transportation fuel space leverage our operations I points on our project execute.
<unk> capabilities.
Thankfully.
Oh.
Thank you. The next question is coming from <unk> Morgan Stanley . Please go ahead.
Great.
Thanks, everybody for taking my questions today, So I want to go back to capture right here. So we noticed just on on the West Coast refinery March where a really strong during the quarter could you just touch on some of the drivers Sharon and how how we should think about the setup for the third quarter.
Yeah. This is Greg so on the West coast, where great operations out there, but they are really the thing to note. There is finisher has a very very high gasoline yield in terms of its products mix. So when gasoline is very strong relative to distillate products out in the west coast, we see strong capture rates out there driven by a <unk>.
That's that's the primary factor you saw in the second quarter.
Great. Thanks, that's helpful. And then just my second one is just on Opex and just the drivers of higher Opex I in third quarter versus to Chew and we sat on.
Side of how should we think about that.
This is why I feel.
It's really driven by slightly higher outlook for natural gas in the third quarter of in the second quarter.
Perfect. Thank you.
Thank you. The next question is coming from Roger read of Wells Fargo. Please go ahead.
Mmm.
Yeah, Hello, good morning, and congrats to everybody on their their new roles here.
He hit the deep.
One of mine I'd like to hit the diesel question, a slightly different way last winter, we saw pre unusually warm weather throughout the northern hemisphere. So going back I think you're all addresses on the last call, but what do you think the missing demand was last year from our weather standpoint, and so when we.
Think about the upcoming winter and.
We always just model normal weather, so what will we potentially be looking like looking at from a demand step up.
Roger we had modeled that but I don't have the number in front of me and I don't want to give you a bad number but we can we can follow up with you with with with Homer and it gives you the number we had on heating oil demand.
Okay. That's that's helpful. The other is we have a saying somebody mentioned earlier, you know seeing diesel moved back up over gasoline.
Give us an idea of how you run in terms of being Max geese, or I should say Max disorder, Max gasoline as we send coming through the summer.
Roger we've been mostly in Max gasoline mode that we've been watching that movement between those two products.
And we will make that shift when we start to see that kind of swing cut drive us back the other way.
One of the things maybe just to keep in mind is on that swing cut you know as you keep that heavier part of the gasoline in the gasoline pool. It pulls in more butane into the blend pool and when you look at where butane prices are currently that's really attractive to get as much butane into blend as you can.
Yeah, <unk> definitely definitely help out of hurt depending on which side of the argument here on there. Okay. Thanks guys.
Thanks.
Thank you. The next question is coming from Paul Cheng Scotiabank. Please go ahead.
Hi, good morning location, so everyone knew well yeah.
May I ask.
Two I apologize okay. John May So I'll get my question was there anything that just just let me know and I'll go and look at the transcript two questions first with a heavy <unk> tongue and <unk>. Yeah. It's also come down my loss discount, yes, seven it seems <unk> attractive to say.
I think we need to call back home from you guys to one of those barrel and <unk>, yes, and the way that for you to further minimize that <unk>. What is the minimum that you have two lines.
The second question is that in the longer than take.
The reason why the <unk> <unk>.
From the second quarter, I mean, not just companion to the first quarter a complaint with the last couple of years that you've been wanting Saint cog in 100 per cent 19, five to maybe 120 per cent and so.
To put a reason or thank you Sir have.
Some one off unisa consensus that we <unk>. Thank you.
Hey, Paul Mr. Brandon answer them.
Hey, Paul I'll start with the first one on the different crudes, if I understood. Your question, we see incentive to run the heavy grades as well as the lights right now the advantage for heavy crudes narrowed quite a bit as we got into the quarter as Gary mentioned as those differentials start to move back out that will increase the incentive.
To move to continue to process the heavy grades the medium salaries have probably been the one that had been least attractive.
And we would need to see those be you know have a wider discount to the light sweet grades before we would start to to make a shift there.
On your question you capture right question actually before we go into the capture can I lost that how much that you can.
Making sure that <unk>.
Yeah, we can minimize quite a bit Paul one thing to keep in mind as you know there's different parts of the country different parts of even the Gulf Coast region, where the medium sours particular grades will still be attractive to run it and will process. Those in the places where that medium grade is not as attractive the easiest way to think about is.
A lot of cases, we can can run a combination of heavy and light to essentially kind of mirror with a medium grade it looks like but do that at a lower cost than bind the medium sour crude itself.
Okay, Let me think.
Okay, and then you can answer it was that.
Around the North Atlantic.
Yeah.
Yeah, primarily Paul primarily the the one thing that was unique about the second quarter was the higher crude cost and again driven by higher prices for syncrude out of out of Canada, both maintenance and wildfire related.
It was probably the thing that caused kind of that region to look different this quarter than it would typically for a second quarter period.
<unk> <unk> <unk> <unk> <unk> <unk> <unk> input by.
Now it is much higher than that Paul.
Oh, yes, much higher so Daniel Quebec cities, we need one named <unk>.
Yes, our our Quebec refinery runs combination of Canadian crudes, and then waterborne cruise that we bring up from the Gulf Coast.
Mhm okay. Thank.
Thank you.
Thank you. The next question is coming from missing Tomorrow afternoon Sue her securities. Please go ahead.
Hi, Good morning, all and thanks for taking my question I just want to start with can you comment on the recent G. P. A decision to deny deny RFS neighbors were small refiners and how does that look for your ethanol business. I think you mentioned volumes were flat, but can you talk a little bit on pricing for ethanol.
[noise] the switch Walsh all I can I can talk of I guess, a little bit about the gay decision and then when it comes to pricing I'll hand, it back off to Eric Honeymoon I mean, we don't have any small refinery exemptions in play and so it's.
It's a bit of a non a non factor for us.
I mean really not a lot more to share on it in that regard.
And then as far as the commercial impact of that.
We see the same thing bit of a non event.
And we really don't know the compliance posture of those small refiners. So it's not we don't see a big impact to any of our businesses on the small refinery exemption.
Sorry, what I was actually referring to was on your commercial side, whether you were seeing any improve demand for ethanol because of the.
Exemption I guess I'll ask a different question as well.
Just under sustaining Capex, you mentioned 1.5 billion for this here have you seen anything on the regulatory front that could increase data increase the intensity of your sustaining capex in the future thinking of things like you know stringent practically emission standards or anything like that.
<unk> you know when you look at our history on our on our sustaining capital and some of the things we were actually ahead of our competitor.
Blair gaffe recovery and somebody sort of thing.
Both with respect to regulatory capital were in good shape, and we're still willing to stick with our 1.5 billion of sustaining.
Average that doesn't mean, it can ebb and flow really with turnaround pony.
Thank you.
Thank you. The next question is coming from the Almeida of Goldman Sachs. Please go ahead.
Yeah. Good morning team in Lane, Gary and Geoff here on the line congratulations to each of you and that's kind of where I want to start I mean lane that over the last couple of years the strategic vision.
Has been very clear and consistent will just love your perspective as you step into this new role what are the two or three things that you're most focused on to take Valera to the next level.
Hey, Thanks, Neil So you mean, Joan I really I work with Joe on the strategy for the last nine years, obviously deal and I go way back before that so it's not like you know I've been a part of the current strategy has been successful I don't think you should expect us to deviate substantially from the where we been strategically in terms of my of areas of focus I think the first.
Area of focus is just making sure everybody understands exactly that right.
<unk>, we've been very successful in our execution, maintaining our operations excellence, our ability to execute squarely and and be great executed with the projects and I want to make sure that that continues and I want to make sure that we stay disciplined with very predictable and those are all the things that I think I I didn't mean to make sure what's going on.
For the foreseeable future.
I'm going to slide Joe keep working at.
Innovative projects Facebook for our opportunities.
Some of our strategic capital.
Some of these opportunities that are around our effort for the diamond green or pfaff or some of the other things that we obviously have done been ahead of everybody else in the world. We think we can continue to be that company.
Thanks Lane in the follow up is just around return of cap at all and just maybe provide an update it was another quarter, where you were able to return cash.
In excess of sort of the brackets that you talked about historically and how are you thinking about what the stock having done well here more recently continuing to lean as a buyback versus reinvest back in the business and and talk about the dividend as well.
Yeah, I don't think there's any.
Revisiting of our approach the capital.
Really strong performance and.
With regard to like Bob acts in a dividend we're going to continue our same approach as well.
Far as going above our long term target of 40% to 50% return to shareholders historically to back before the pandemic, we had been at the high end or above our target range pretty regularly as in <unk>.
Last year, we got back to the 45% in mid mid point of our range. While at the same time getting are dead back down to pre pandemic levels of building cash. So we got ourselves back in the good posture that we were comfortable with.
And we we'd also said would that accomplish we'd be at the mid point or above going forward in the second quarter. Like you said, we were up above are 50% range. We had a 50% 53 per cent payout year to date were 52 per cent payout. So this year, we've clearly traded above 50% and going forward as in the past is a setback before COVID-19 just what unusual start.
Stance force, we won't hesitate to pay out above the upper end of the range for the year. When we think that's the best use of our excess cash under the circumstances.
On the dividend we continue to have the same approach to it we want our dividend to be positioned what are you able to be positioned competitive versus our peers, we want it to be growing and sustainable through the cycle continues to be our approach on the dividend. That's how we'll set it in a buybacks will continue to serve as a flywheel toe browned out are retiring to get us to our targets.
Okay.
[noise]. Thank you. The next question is coming from Jason cable minutes Cowan. Please go ahead.
Yeah, Hey, Thanks for taking my questions first I wanted to ask.
Renewable fuel standard as well and the the outlook for rent prices and the impact of the business. There's a decent amount of concern that there's gonna be an oversupply of wrens next year and and that has implications both for diamond Green diesel as well as on refining and the ability to capture.
Sure some of the pass through of the ring cost and the crack so it was <unk>.
Wondering if you have any comments around your rent out look as it relates job impacts to both of those segments given some risk Julian prices moving lower next year and I have a follow up thanks.
Yeah. This is Eric on the rim prices. The EPA held the ethanol requirement of 15 billion gallons, which as we've seen over the last several years is beyond the blend wall, which means the <unk> will be used to fulfill that obligation.
Even our outlook, we don't see a big change in <unk> RIN prices are in supply.
That is relatively business as usual.
I mean, I guess, if I could just push it back a little bit there is a lot of new renewable diesel capacity coming online next year. So it does seem like there's gotta be a lot more in supply I don't know if that enters into your thought process.
You as you look at it next year.
Yeah, if you.
You know, we're not going to speak on everyone else's projects, but we do see that a lot of the Rd projects are taking longer to come up and their projects are being slowed down so.
Our outlook is the expected growth curve of R. D is not going to be as aggressive as a lot of a lot of predictions.
Okay. Thanks, I appreciate that and I might follow up is is just going back to the outlook on cracks and and I think a lot of investors have been surprised at the strength, we're seeing in in cracks and so kind of two parts to this one.
Do do you think the kind of harder than normal weather globally has has supported diesel demanded all you've already mentioned that you are not going to comment on Ah refining operations of your peers and the warm weather. So I'm wondering if there's been a demand impact though from the hot weather and then the second part is can you talk about just.
Given you mentioned inventory product inventories of low the path forward to rebuilding those given you know the global capacity seems to be running all out how does the world restock gasoline and diesel which are which are at or below his historical levels. Thanks.
Yeah. Jason This is Gary I don't know that we can see you know that the warmer weather has caused a significant change in diesel demand.
Think we're inventories are low in the United States. We're seeing the same thing globally low diesel inventories and a pull from the United States into especially into Europe very high.
As a result of low inventories globally <unk>.
Moving forward I don't know really where the path is in terms of restocking inventories you look or 35 million barrels below the five year average last year. At this time, we were 35 million barrels below the five year average so we really aren't making a dent in it if you look going forward, yes, there is new refining capacity coming online, but when you look at the stated nameplate.
Capacity that new refining capacity and you look at the estimates of global oil demand growth. It doesn't look like a significant impact on the supply demand balance is going forward.
Great. Thanks for the color.
Thank you.
The next question is coming from Matthew player of Tudor Pickering call. Please go ahead.
Hey, good morning, Thanks for taking my questions do you have any thoughts on the expected impact on our margins in 2025, when the BTC converts to a P. T C.
As we look at it it appears the dollar per gallon subsidy would would go down with the P. T C. But then it seems like he might be helped out by just less competition from foreign R. D. Imports does that does that make sense on your end and is there anything else you would have there.
Yeah, I think you've got that surrounded the one thing I would add is when you go to a carbon intensity basis for the PTC.
That will advantage Diamond Green diesel because we run the lowest Ci feedstocks so.
Whatever the PTC becomes we will still have the highest capture of PTC versus our peers. So.
There's no doubt that it becomes a fraction of one dollar based on C I, but.
We also have the most advantage platform.
Great. Thank you and then on the ethanol side is an alcohol to to jet S. A F projects still a longterm possibility and could you. If so could you compare that to what you're doing currently D. G D like how does it.
Two production techniques compare in terms of capital cost operating costs scale and do airlines distinguish between between the two different types of fuel.
Yeah, I think yeah, that's a lot of questions there.
[laughter].
Well, what I would say it's so the first question is there a is there a pathway to take ethanol into jet fuel. The answer's, yes post sequestration that as a buy it does allow ethanol become a viable feedstock into that market. It's way too early to talk about numbers and capital and all of that from from Ah.
Project standpoint, but if you look at it from the airlines standpoint, they do see that the first barrel assaf that they will get ratably will be our D. Based there is that conversion goes through the the the Rd markets. The next barrel could be from a from an ethanol source, but that's.
Like you said that is <unk> that is much further out there on the timeline. So yeah and then if you look at in terms of the technology, there and is there a capability there and it will airlines differentiate between the two again, probably too soon to tell but from a fuel standpoint, the there's no difference between.
And ethanol based barrel vs on Rd based barrel from a from a from a staff standpoint, but.
Lot of a lot of work to be done first on how our D will price staff into the market and then these are all much much further down the timeline.
Understood. Thanks for your comments.
Thank you at this time I'd like to turn the floor back over to Mister Butler for closing comment.
Thanks, Donna appreciate everyone joining us today and please feel free to contact the I R. Team. If you have any follow up questions have a great day everyone.
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.
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