Q3 2023 Valero Energy Corp Earnings Call

Greetings and welcome to the Valero Energy Corp, third quarter 2023 earnings call. At this time, all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please.

Press Star Zero on your telephone keypad.

As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host comparable our chief I'm, Sorry, Vice President Investor Relations and finance. Thank you. Please go ahead.

Good morning, everyone and welcome to Valero Energy Corporation's third quarter 2023 earnings Conference call.

With me today are lane Riggs, our CEO and President Jason Frazier, our executive Vice President and CFO, Gary Simmons, our executive Vice President and CFO and several other members of Valero Senior management team.

If you have not received the earnings release and would like a copy you can find one on our website at Investor Valero Dotcom.

Also attached to the earnings release are tables that provide additional financial information on our business segments, and reconciliations and disclosures for adjusted 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 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 X.

Spectation, including those we've described in our earnings release and filings with the SEC.

Now I'll turn the call over to lane for opening remarks.

Thank you Homer and good morning, everyone. We're pleased to report strong financial results for the third quarter. In fact, we set a record for third quarter earnings per share.

Finally margins were supported by strong product demand against the backdrop of low product inventories.

Which remained at five year lows as by high refinery utilization rates globally.

The strengthened demand was.

Evident in our U S wholesale system, which matched the second quarter record of over 1 million barrels per day of sales volume.

Our refineries operated well and achieved 95% throughput capacity utilization in the third quarter, which is a testament to our team's continued focus on operational excellence.

We continue to prioritize strategic projects that enhance the earnings capability of our business and expand our long term competitive advantage.

D G D sustainable aviation fuel or SaaS project at Port Arthur remains on schedule and is expected to be <unk>.

<unk> in 2025.

Once complete we expect the port Arthur plant have the Optionality to upgrade up to 50% of its current 470 million gallon annual renewable diesel production capacity of staff.

Project is estimated to cost $315 million half of that attributable to Valero.

With the completion of this project Diamond Green diesel is expected to become one of the largest manufacturers of SaaS in the world.

On the financial side, we honored our commitment to shareholder returns with a payout ratio of 68% of adjusted net cash provided by operating activities through dividends and share repurchases in the third quarter and we ended the third quarter with a net debt to capitalization ratio of 17%.

In closing while there are broader factors that may drive volatility in the market. We remain focused on things. We can control. This includes operating our assets efficiently in a safe reliable and environmentally responsible manner.

Maintaining capital discipline by adhering to a minimum return threshold for growth projects.

And honoring our commitment to shareholder returns.

So with that Homer I'll hand, the call back to you.

Helane for the third quarter of 2023 net income attributable to Valero stockholders was $2 6 billion or $7 49 per share compared to $2 8 billion or $7 19 per share for the third quarter of 2022.

Adjusted net income attributable to Valero stockholders was $2 8 billion or $7 14 per share for the third quarter of 2022.

The refining segment reported $3 4 billion of operating income for the third quarter of 2023 compared to $3 8 billion for the third quarter of 2022.

Refining throughput volumes in the third quarter of 2023 averaged 3 million barrels per day, implying a throughput capacity utilization of 95%.

Yeah.

Refining cash operating expenses were $4 91 per barrel in the third quarter of 2023 higher than guidance of $4 70 per barrel, primarily attributed to higher than expected energy prices.

Unknown Executive: Greetings and welcome to the Valero Energy Corp. 3rd quarter, 2023 earnings call. At this time, all participants are on a listen only mode.

Renewable diesel segment operating income was 123 million for the third quarter of 2023 compared to $212 million for the third quarter of 2022.

Unknown Executive: A brief question and answer session will follow the formal presentation. If anyone to require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Renewable diesel sales volumes averaged 3 million gallons per day in the third quarter of 2023, which was 761000 gallons per day higher than the third quarter of 2020 to the higher sales volumes in the third quarter of 2023 were due to the impact of additional volumes from the D. G D Port Arthur plant, which started up.

Homer Bhullar: It is now my pleasure to introduce your host, Homer Bhullar, Chief, I'm sorry, Vice President, Investigulations and Finance. Thank you. Please go ahead.

Homer Bhullar: Good morning, everyone and welcome to Valero Energy Corp. 3rd quarter, 2023 earnings conference call. With me today, our Lane Riggs, our CEO and president, Jason Frazier, our Executive Vice President and CSO, Gary Simmons, our Executive Vice President and COO, 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 an Investor Valero.com. Also, attaches our earnings release or tables that provide additional financial information on our business segments and reconciliation 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.

In the fourth quarter of 2022.

Operating income was lower than the third quarter of 2022, primarily due to lower renewable diesel margin in the third quarter of 2023.

The ethanol segment reported $197 million of operating income for the third quarter of 2023 compared to $1 million for the third quarter of 2022.

Ethanol production volumes averaged $4 3 million gallons per day in the third quarter of 2023, which was 831000 gallons per day higher than the third quarter of 2022.

Operating income was higher than the third quarter of 2022, primarily as a result of higher production volumes and lower corn prices in the third quarter of 2023.

Homer Bhullar: 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 earnings release and filings of the SEC.

For the third quarter of 2023, G&A expenses were $250 million and net interest expense was 149 million.

Depreciation and amortization expense was 682 million and income tax expense was $813 million for the third quarter of 2023.

The effective tax rate was 23%.

Net cash provided by operating activities was $3 3 billion in the third quarter of 2023.

Homer Bhullar: Now I'll turn the call over to Lane for opening remarks.

Included in this amount was a 33 million favorable change in working capital and $82 million of adjusted net cash provided by operating activities associated with the other joint venture members share of D. G D.

Lane Riggs: Thank you, Homer, and good morning, everyone. We are pleased to report strong financial results for the third quarter. In fact, we set a record for third quarter earnings per share. Finding margins for supported by strong product demand against the backdrops of low product inventory, which remained at five-year lows despite high refinery utilization rates globally. The strength and demand with evident in our U.S, wholesale system, which matched the second quarter record of over 1 million barrels per day of sales volume.

Excluding these items adjusted net cash provided by operating activities was $3 2 billion in the third quarter of 2023.

Regarding investing activities, we made $394 million of capital investments in the third quarter of 2023 of which 303 million was for sustaining the business, including costs for turnarounds catalysts and regulatory compliance and 91 million was for growing the business.

Lane Riggs: Our finalies operated well and achieved 95% throughput capacity utilization in the third quarter, which is a testament to our team's continued focus on operational excellence. We continue to prioritize strategic projects that enhance the earnings capability of our business and expand our long-term competitive advantage. The DGD sustainable aviation fuel or SAF project at Port Arthur remains on schedule and is expected to be complete in 2025. Once complete, we expect the Port Arthur plant to have the optionality to upgrade up to 50% of its current 470 million gallon annual renewable diesel production capacity at SAF.

Excluding capital investments attributable to the other joint venture members share of D. G D capital investments attributable to Valero, where $352 million in the third quarter of 2023.

Moving to financing activities, we returned $2 $2 billion to our stockholders in the third quarter of 2023 of which $360 million was paid as dividends and $1 8 billion was for the purchase of approximately 13 million shares of common stock.

Resulting in a payout ratio of 68% of adjusted net cash provided by operating activities.

Lane Riggs: The project is estimated to cost 315 million with half of that attributable to Bolero. With the completion of this project, Diamond Green Diesel is expected to become one of the largest manufacturers of staff in the world. On the financial side, we honored our commitment to shareholder returns with a payout ratio of 68% of adjusted net cash provided by operating activities through dividends and cherry purchases in the third quarter. And we ended the third quarter of the net debt capitalization ratio of 17%.

This results in a year to date payout ratio of 58% as of September 32023.

With respect to our balance sheet, we ended the quarter with $9 2 billion of total debt $2 3 billion of finance lease obligations and $5 8 billion of cash and cash equivalents.

Debt to capitalization ratio net of cash and cash equivalents was 17% as of September 32023.

Lane Riggs: In closing, whether are broader factors that may drive volatility in the market, remain focused on things we can control, this includes operating our assets efficiently in a safe, reliable, and environmentally responsible manner, maintaining capital disloaned by adhering to a minimum return threshold for broke projects, and honoring our commitment to shareholder returns.

And we ended the quarter well capitalized with $5 4 billion of available liquidity excluding cash.

Separately as reported by navigator last week, they canceled their C. O. Two pipeline project, we still see carbon capture and storage as a strategic opportunity to reduce the carbon intensity of conventional ethanol, which would also qualify it as a feedstock for sustainable aviation fuel without carbon capture and storage.

Homer Bhullar: So with that, Homer, I'll hand the call back to you. Thanks, Lane.

Homer Bhullar: For the third quarter of 2023, net income attributable to Valero stockholders was $2.6 billion or $7.49 per share compared to $2.8 billion or $7.19 per share for the third quarter of 2022. Adjusted net income attributable to Valero stockholders was $2.8 billion or $7.14 per share for the third quarter of 2022. The refining segment reported $3.4 billion of operating income for the third quarter of 2023 compared to $3.8 billion for the third quarter of 2022.

Conventional ethanol does not have a pathway to staff under today's policies.

We continue to evaluate other projects to sequester Seo to.

Turning to guidance, we still expect capital investments attributable to Valero for 2023 to be approximately $2 billion, which includes expenditures for turnarounds catalysts and joint venture investments.

$1 5 billion of that is allocated to sustaining the business and the balance to growth.

For modeling our fourth quarter operations, we expect refining throughput volumes to fall within the following ranges.

Gulf Coast at 177 to 182 million barrels per day.

Homer Bhullar: Refining throughput volumes in the third quarter of 2023 averaged $3 million per day, implying a throughput capacity utilization of 95%. Refining cash operating expenses were $4.91 per barrel in the third quarter of 2023, higher than guidance of $4.70 per barrel, primarily attributed to higher than expected energy prices. Renewable diesel segment operating income was $123 million for the third quarter of 2023 compared to $212 million for the third quarter of 2022. Renewable diesel sales volumes averaged $3 million per day in the third quarter of 2023, which was $761,000 per day higher than the third quarter of 2022.

Mid continent at $445 to 465000 barrels per day.

West Coast at 245 to 265000 barrels per day, and North Atlantic at 470 to 490000 barrels per day.

We expect refining cash operating expenses in the fourth quarter to be approximately $4 60 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 <unk> 19 per gallon for noncash costs, such as depreciation and amortization.

Homer Bhullar: The higher sales volumes in the third quarter of 2023 were due to the impact of additional volumes from the DGD Port Arthur plant, which started up in the fourth quarter of 2022. Operating income was lower than the third quarter of 2022, primarily due to lower renewable diesel margin in the third quarter of 2023. The ethanol segment reported $197 million of operating income for the third quarter of 2023 compared to $1 million for the third quarter of 2022.

Our ethanol segment is expected to produce $4 4 million gallons per day in the fourth quarter operating expenses should average 39 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 $145 million and total depreciation and amortization expense should be approximately $690 million.

For 2023, we expect G&A expenses to be approximately $925 million.

Homer Bhullar: Ethanol production volumes averaged $4.3 million per day in the third quarter of 2023, which was $831,000 per day higher than the third quarter of 2022. Operating income was higher than the third quarter of 2022, primarily as a result of higher production volumes and lower corn prices in the third quarter of 2023. For the third quarter of 2023, GNA expenses were $250 million and net interest expense was $149 million. Deforestation and Emeritization Expense was $682 million, and income tax expense was $813 million for the third quarter of 2023.

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.

If you have more than two questions. Please rejoin the queue as time permits to ensure other callers have time to ask their questions.

Thank you the floor is now open for questions.

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Confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star Keys again Thats Star One to register a question at this time.

Homer Bhullar: The effective tax rate was 23%. Net cash provided by operating activities was $3.3 billion in the third quarter of 2023. Included in this amount was a $33 million favorable change in working capital and 82 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD. Excluding these items, adjusted net cash provided by operating activities was $3.2 billion in the third quarter of 2023. Regarding investing activities, we made $394 million of capital investments in the third quarter of 2023 of which $303 million was for sustaining the business, including costs for turnarounds, catalysts, and regulatory compliance, and $91 million was for growing the business.

Today's first question is coming from Theresa Chen of Barclays. Please go ahead.

Good morning, and thank you for taking my question I first want to ask about your outlook for near term refining margins and specifically on the gasoline side, we've seen that significant volatility recently, especially early in October what do you think explains the recent downside and how does.

That compare with demand across your footprint, maybe going back to <unk> earlier comments on the wholesale system and just generally how do you think gasoline margins trend going forward.

Hey, Good morning Theresa. This is Gary I think you had several factors that contributed to the sharp selloff in gasoline you kind of had the market view that that hurricane season was over you were approaching RVP transition and then the Dol put out some fairly pessimistic demand numbers until all of that kind of hit at once.

Homer Bhullar: Excluding capital investments attributable to the other joint venture member share of DGD, capital investments attributable to Valero were $352 million in the third quarter of 2023. Moving to financing activities, we returned $2.2 billion to our stockholders in the third quarter of 2023 of which $360 million was paid as dividends, and $1.8 billion was for the purchase of approximately $13 million shares of common stock, resulting in a payout ratio of 68% of adjusted net cash provided by operating activities.

And caused a fairly significant sell off in gasoline in terms of the outlook going forward, we would expect gasoline to kind of follow typical seasonal patterns weaker cracks kind of the fourth quarter and first quarter. The thing we're really looking at as you know the fundamental that looks good to us as a market structure still doesn't really support storing summer grade.

Gasoline.

Putting gasoline in New York Harbor for driving season next year, so as long as that's the case.

Our view would be then when you get to driving season next year demand picks back up Youll see see cracks respond.

Homer Bhullar: This results in a year-to-date payout ratio of 58% as of September 30, 2023. With respect to our balance sheet, we ended the quarter with $9.2 billion of total debt, $2.3 billion of finance lease obligations, and $5.8 billion of cash and cash equivalents. That decapitalization ratio net of cash and cash equivalents was 17% as of September 30, 2023.

Thank you.

Homer Bhullar: And we ended the quarter well capitalized with $5.4 billion of available liquidity excluding cash.

On net.

Crude oil side in terms of light heavy differential.

Given the heightened geopolitical risks in the middle East.

Coupled with the incremental Venezuelan production following the recent sanctions relief and taking also into account the potential near term startup to forecast. How do you think about the impact of all of these variables on light heavy differentials and how do you see this evolving from here.

Yeah, So really the key driver on the light heavy differentials continues to be the $4 5 million barrels a day that OPEC plus has off the market.

Homer Bhullar: Separately, as reported by Navigator last week, they canceled their CO2 pipeline project. We still see carbon capture and storage as a strategic opportunity to reduce the carbon intensity of conventional ethanol, which would also qualify it as a feedstock for sustainable aviation fuel. Without carbon capture and storage, conventional ethanol does not have a pathway into staff under today's policies. We continue to evaluate other projects to sequester CO2.

We saw fairly tight differentials in the third quarter. They have move wider despite the geopolitical issues that you've discussed you know some of that is just typical seasonal patterns.

<unk> had less high sulfur fuel burn for power generation in the middle East So high sulfur fuel discounts have widened some we've seen some turnaround activity, especially in pad two that pushed some heavy sell are back on the market.

Homer Bhullar: Turning to guidance, we still 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 and the balance to growth.

Causing differentials to widen out freight.

Freight markets actually have a fairly significant impact on those differentials as well so freight moving higher is causing the differentials to move, but we kind of see until the OPEC plus comes back on the market that youll have narrower heavy sour differentials and they'll follow typical seasonal patterns.

Homer Bhullar: For modeling our fourth quarter operations, we expect refining throughput volumes to fall within the following ranges. Galt's coast at 1.77 to 1.82 million barrels per day. Mid Condon at 445-465,000 barrels per day, West Coast at 245-265,000 barrels per day, and North Atlantic at 470-490,000 barrels per day. We expect refining cash operating expenses in the fourth quarter to be approximately $4.60 per barrel.

Thank you Gary.

Thank you. The next question is coming from Sam Margolin of Wolfe Research. Please go ahead.

Hey, everyone.

Thanks for taking Warrington.

This might be one question, but in two parts, which I know you guys love.

So.

It goes back to the gasoline com.

Comment on and it just seems like the market might be more seasonal than it had been in the past just because of.

You know the way consumers kind of travel and work.

And then but at the same time.

Homer Bhullar: 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 $0.49 per gallon, which includes $0.19 per gallon for non-cash costs such as depreciation and amortization.

Your system has gotten a little more diesel oriented with the port Arthur Coker and Valero has a history of really strong sort of capture results and execution resulted in the fourth quarter. When there is typically a lot of volatility and dislocations.

Around all of these markets. So the question is.

Homer Bhullar: Our ethanol segment is expected to produce 4.4 million gallons per day in the fourth quarter. Operating expenses should average $0.39 per gallon, which includes $0.05 per gallon for non-cash costs such as depreciation and amortization.

Do you think that this kind of enhanced seasonality in gasoline is something we should get used to do in future years and.

In terms of your configuration and position within that.

Is it is it arguably better than it was sort of before.

Homer Bhullar: For the fourth quarter, net interest expense should be about $145 million, and total depreciation and amortization expense should be approximately $690 million. For 2023, we expect GNA expenses to be approximately $925 million.

You brought on some some recent projects. Thank you.

Yes, so on the first part of the question in terms of even more seasonality around gasoline I can't say that we're really seeing that.

We did see sales throughout our wholesale system fall off a little bit after labor day, but <unk> actually recovered quite nicely and we're back into that million barrels a day of sales gasoline sales year over year or up 2% and the current market from where they were last year. At this time diesel sales are up a little stronger at 8%. So I don't think it really is a CS.

Homer Bhullar: 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 Q as time permits to ensure other callers have time to ask their questions.

And the ability factor that's impacting gasoline.

<unk>.

At least in the domestic markets.

Homer Bhullar: 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 tone will indicate your binders in the question queue. You may press star two if you would like to remove your question from the Q. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that's star one to register a question at this time.

So as Wayne on the second.

Click and park Pam it's.

We really had a view since I'm on slide 20, early 2018, where we saw the diesel would be sort of the fuel the future of the.

It's the economic driver so not only did we do the coker that you alluded to.

We also built the two big Hydrocracker, we ramp the two big Hydro crackers. This was all in an effort to make our system more robust and its ability to move around and specifically build a move towards more and more difficult out of RSO.

Teresa Chinas: Today's first question is coming from Teresa Chinas Barclays. Please go ahead. Good morning and thank you for taking my questions.

Gary Simmons: I first like to ask about your outlook for near-term refining margins and specifically on the gas lane side. We've seen significant volatility recently, especially early in October. What do you think explains the recent downside and how does that compare with demand across your footprint, maybe going back to lane's earlier comments on your wholesale system? And just generally, how do you think gasoline margins trend going forward?

Alright sounds good thank you so much.

Okay.

Thank you. The next question is coming from Doug Leggate of Bank of America. Please go ahead.

Thanks, Hi, guys Lynn Thanks for having me on a couple of questions if I may.

I guess the first one is I guess about the port Arthur Coker and more generally.

What youre seeing going on in the Gulf coast as it relates to heavy or advantaged. So recruit spreads and I guess my point is does book is obviously looms large in the horizon, but my <expletive> seems to have behaved very differently from your indicator from WCS and I realize that it's largely your euro benchmark.

Gary Simmons: Good morning, Teresa. This is Gary. I think you had several factors that contributed to the short sell-off in gasoline. You kind of had the market view that hurricane season was over. You were approaching RVP transition. Then the DOE put out some fairly pessimistic demand numbers. Until all that kind of hit it once and caused a fairly significant sell-off in gasoline. In terms of low-typical seasonal patterns, weaker cracks, kind of the fourth quarter and first quarter. The thing we're really looking at is, you know, the fundamental that looks good to us as a market structure still doesn't really support storing summer-grade gasoline.

So so I'm just curious are we seeing the capture rates from the coker that you anticipated.

What's your prognosis I guess for those advantage crude spreads.

Obviously, a big factor in that project.

Well I'm going to hand, this off to Gary and Greg I think Gary you might answer the heavy sour part and let Greg I wanted to answer the capture rate around the coker.

Gary Simmons: We're putting gasoline in New York Harbor for driving season next year, so as long as that's the case, our view would be then when you get to driving season next year, demand pick back up, you'll see cracks respond.

Yeah, So we've seen heavy sour discounts widened back out.

In Canada. They are back on unfortunately on the pipelines it looks like.

Forecast for fairly robust production in Canada, Youre seeing the Venezuela and back on the market and then our view is even when to focus does start up.

Gary Simmons: Thank you and on the crude oil side in terms of life heavy differential, given the heightened geopolitical risks in the Middle East and coupled with the incremental Venezuelan production, following the recent sanctions relief and taking also into account the potential near-term start-up of this book. How do you think about the impact of all these variables on life heavy differential, and how do you see this evolving from here? Yes, really the key driver on the light heavy differential continues to be the 4.5 million barrels a day that OPEC Plus has off the market.

May take some my off the market, but probably increases fuel yield for Mexico, and so that coker, we can use that as a feedstock as well and I'll, let Greg address the capture question and Doug what I would say about the kocur's. It operated very well for the quarter, certainly consistent with our expectations and so the projects generating good strong economics.

Value both by lowering feedstocks at some of the things Gary is talking about and also enabling us to increase throughput.

Oh, sorry, guys on does book houses are impacting spreads on the Gulf coast materially.

Gary Simmons: So we saw fairly tight differentials in the third quarter. They have moved wider despite the geopolitical issues that you've discussed. You know, some of that is just typical seasonal patterns. You've had less high-sover fuel burn for power generation in the Middle East, though high-sover fuel discounted wide and some. We've seen some turnaround activity, you know, especially in pad two that pushed some heavy seller back on the market, causing differentials to widen out.

I don't think theres any impact today.

Okay. Thanks, My follow up so quick one maybe for Jason but.

Another $1 8 billion of buybacks, you've now bought back I think about 15% of your shares in the last year and a half.

Still got plenty of cash on the balance sheet and we know this sector is notoriously seasonal I'm just curious how we should think about your <unk>.

Deployment or strategy of buy bikes into seasonal periods, when you get perhaps getting more opportunistic.

Gary Simmons: Freight markets actually have a fairly significant impact on those differentials as well. So freight moving higher is causing the differentials to move, but we kind of see until the OPEC Plus comes back on the market that you'll have narrower heavy-sour differentials in the follow typical seasonal patterns.

Yes, Thanks, Doug.

Okay I'll talk about our approach to buybacks is driven by our thoughts around cash the dividend that so I'll walk you through that and how we looked at about thinking about the rest of the year and then we can see if there's more you won't beyond that.

Gary Simmons: Thank you, Gary. Thank you.

So on cash as you said we are you know we ended the quarter at $5 8 billion. We've indicated minimum target of four so we're very comfortable with us being in that current range now on the debt side, we always proactively looked at our portfolio through a liability management lands on an ongoing basis, but we certainly don't have any needs to pay down any debt at this time.

Sam Margolin: The next question is coming from Sam Margolan of Wolf Research. Please go ahead. Hey, everyone. Thanks for taking the question. This might be one question, but in two parts, which I know you guys love. So it goes back to the gasoline comment, and it just seems like the market might be more seasonal than it had been in the past just because of the way consumers kind of travel and work. And then, but at the same time, you know, your system has gotten a little more diesel oriented with the Port Arthur Coker and Valero has a history of really strong sort of capture results and execution results in the fourth quarter when there's typically a lot of volatility and dislocations around all these markets.

Sam Margolin: So the question is, you know, do you think that this kind of enhanced seasonality in gasoline is something we should get used to in future years? And, you know, in terms of your configuration and position within that, is it arguably better than it was sort of before? You know, you brought on some some recent projects.

Net debt to cap as of September 30th was 17%. So it is a bit under our target range. So we're in good shape, there and on the dividend waiting to maintain the dividend as competitive growing and sustainable through the cycle and we feel like we're in a reasonable range now I wouldn't want to get into more specifics on timing or potential dividend increases at this time.

And then that brings us to buybacks and you know our approach to buybacks is to have the annual target of 40%, 50% of adjusted net cash from operations and we view the buybacks as a flywheel supplement in our dividend to hit whatever our target is for the year.

In the third quarter, we added 68% pay out year to date through the third quarter. We're at 58%. So I would say under these conditions, even given the softer seasonality in the fourth quarter, you should definitely expect us to pay out over 50% for the year.

You may recall prior to the pandemic that was a fairly regular practice the five years before the pandemic I think the average like a 57% payout. So in these periods, where we have greatly above average free cash generation that will probably continue to be our practice.

Gary Simmons: Thank you. Yes. Well, you know, I'm the first part of the question in terms of even more seasonality around gasoline. I can't say that we're really seeing that. You know, we did see sales throughout our wholesale system fall off a little bit after Labor Day, but they've actually recovered quite nicely and we're back into that million barrels a day of sales. Gasoline sales year over year are up 2 percent, you know, in the current market from where they were last year at this time.

Clarification Lynn if you don't mind that.

Thought you'd already above 50% the high end of your peer does that preclude.

Stepping into additional buybacks.

Gary Simmons: Diesel sales are up a little stronger at 8 percent. So I don't think it really is a seasonability factor that's impacting gasoline, you know, at least in the domestic market. Markins. So it's laying on the left of that second part, Sam. We really had a view since I'm going to say the early 20 teams where we saw that diesel would be sort of the fuel of the future. It's the economic driver.

For the balance of this year.

No no it does and we look at it on an annual basis and I would think it will be over 50 for the year. So it definitely does it yourself. Thank you Matt.

Got it thanks, so much.

Okay.

Thank you. The next question is coming from Ryan Todd of Piper Sandler. Please go ahead.

Yeah.

Okay. Thanks.

Gary Simmons: So not only did we give you the coer that you alluded to here recently, we also built a two big hydrocracker. We ramped the two big hydrocracker. This is all in an effort to make our system more robust and its ability to move around and specifically be able to move toward making more and more difficult out of our after. All right. Sounds good.

Maybe could you talk a.

A little bit about what youre seeing the renewable diesel markets.

<unk> margins are obviously quite soft indicators been weak.

Can you talk was there any impact from hedging losses in the third quarter and maybe could you help us.

If there were kind of a rough estimate of maybe what that was and then can you just more broadly talk about what youre seeing in terms of supply demand in the marketplace impact of.

Sam Margolin: Thank you so much. Thank you.

Doug Leggate: The next question is coming from Doug Leggate. Thanks, America. Please go ahead. Thanks, guys. Lynn, thanks for having me on. I've got a couple of questions if I may.

RIN pricing in RVO limitations et cetera.

Gary Simmons: I guess the first one is I guess about the poor author, Coker, and more generally, what you're seeing going on and got the Gulf Coast as it relates to heavy or advantaged surrogrewd spreads. And I guess my point is does Boca's obviously looms large in horizon, but Maya seems to have behaved very differently from your indicator from WCS and I realize that it's largely your benchmark. So I'm just curious. Are we seeing the capture rates from the coer that you anticipated and what's your prognosis, I guess, for those advantage, crude spreads that are also a big factor in that project.

Sure Ryan This is Eric I think we saw the RIN prices drop pretty quickly kind of in that September and into October and really as you stare at that that drop it was kind of on the news that.

Yes, there was the anticipation of a couple of big start ups at the end of the year that have now been delayed. It was also on the news that there was going to be with with Russia.

<unk>.

Freezing out its exports that you.

It would force the U S to export more therefore dropped the obligation so but the combination of all that news kind of caused a precipitous drop in the rins kind of right at the right at the end of the quarter and into the beginning of the fourth quarter.

Gary Simmons: I'm going to hand this off to Gary and Greg. I think Gary might answer the heavy sour part in that Greg couldn't answer this capture rate around the coer. Yeah, so we've seen heavy sour discounts widened back out in Canada. They're back on a forcement on the pipelines. It looks like forecast for fairly robust production in Canada. You're seeing the Venezuelan back on the market. And then our view is even when the focus does start up, it may take some my off the market, but probably increases fuel yield from Mexico. And so that coaker, you know, we can use that as a feedstock as well.

The real.

Margin loss, there is really because as fat prices have since adjusted in the spot market, but obviously theres a lag of our fat prices that kind of carried on that.

Since started to catch up with this drop in credit prices.

But.

Well, we'll see that continue to carry through through the fourth quarter, but overall I think thats really what were seeing the spot margin as clean backup that prices continue to come off.

You really see all of that being.

It's kind of a return to profitability here in the fourth quarter. So.

Greg Bram: And I'll let Greg address the capture question. Yeah, and what I'd say about the coakers, it operated very well for the quarter, certainly consistent with our expectations. And so the project's generating good, strong economic value, both by lowering feedstocks, some of the things Gary's talking about and also enabling us to increase throughput. Sorry, guys, on does both of us, is that impacting spreads on the golf coasts materially? I don't think there's any impact today. Okay, thanks.

That's really what we see going on in the RV market.

Doug Leggate: My follow up is a quick one.

Okay. Thank you.

And then maybe.

Switching on the refining side as we think about pad five.

You have said.

Yeah.

Really quite strong through the third quarter on a relative basis across the country.

The early parts of the fourth quarter can.

Can you talk maybe about what youre seeing overall in terms of kind of supply demand in pad five across the operation there.

Jason Fraser: Maybe it's for Jason, but another 1.8 billion of buybacks. You've now bought back. I think about 50% of your shares in the last year and a half. You still got plenty of cash on balance sheet and we know this sector is notoriously seasonal.

Theres a lot of moving pieces with <unk>.

Some refineries that are that have transitioned off the market from conversion right now.

So how do you as you look forward over the next do you expect that market to stay relatively tight for the foreseeable future and how do we think about relative to your operations there.

Jason Fraser: I'm just curious how we think about your deployment or strategy of buybacks into seasonal periods, you know, when you get perhaps getting more opportunistic. Yeah, thanks so yeah, it's okay. I'll talk about, you know, our approach to buybacks is driven by our thoughts around cash, the dividend debt. So I'll walk you through that and how we're looking about thinking about the rest of the year and then we can see if there's more you won't be on that.

Yes, Brian This is Gary I think.

Our view of pad five is that you know with the renewable diesel coming into the market the market should be well supplied on the distillate side, but it's going to be very tight on gasoline you. Just don't have the gasoline production that you used to have with the refinery conversions and so when one refinery goes down it's going to create to create a lot of shortness in the market.

Jason Fraser: Film Cash, as you said, we ended the quarter 5.8 billion. We've indicated minimum target of four, so we're very comfortable with us being in that current range now. On the debt side, we always practically look at our portfolio through a liability management lens on an ongoing basis, but we certainly don't have any needs to pay down any debt at this time. Net debt to caps, as it said, September 30 is a 17 per cent, so it's been under our target range, so we're in good shape there. And on the dividend, we're waiting to maintain a dividend as competitive, growing and sustainable through the cycle, and we feel like we're in a reasonable range now.

Okay. Thank you.

Thank you. The next question is coming from Manav Gupta of UBS. Please go ahead.

Guys EU and wound play of capital discipline, and you look at a lot of projects in India and very few actually make it to the final.

Somewhere in October you guys haven't talked about the major project, yet and I'm. Just wondering if 2024 would then be more of a quick.

Quick hit projects Coker has already come online so when I look at 2020 full or should we think of the year there.

Jason Fraser: I wouldn't want to get into more specifics on timing or potential dividend increases at this time. It then that brings us to buybacks, and you know, our approach to buybacks is to have the annual target of 40 to 50% of adjusted net cash from operations, and we view the buybacks as the flywheel supplementing our dividend to hit whatever our target is for the year. In the third quarter, we added 68% payout, year to date, through the third quarter, we're at 58%.

It could be doing more quick hit projects, let's say the Mega project, but generally can go on for three to four years.

Hey, Manav. This is lane so the way I would say I agree with you.

But we still believe we will spend somewhere between <unk> 5 billion $1 billion, a year strategic capital, but when you look at sort of what's the nature of the certainly in the refining side. They are going to be shorter cash cycle types of projects and still have a big like a coker tie project there'll be a series of small project.

Jason Fraser: So I would say under these conditions, even given the softer seasonality in the fourth quarter, you should definitely expect us to pay out over 50% for the year. And if you may recall, you know, probably because of the pandemic, that was a fairly regular practice, the five years before the pandemic, I think we averaged like 57% payout. So in these periods where we have greatly above average free cash generation, that will probably continue to be our practice.

And then when you further drill down and what do we look for we look for refining projects at lower cost to produce.

Jason Fraser: The clarification, and if you don't mind, the fact you're already above 50% the high end of your payout, there's up preclutes stepping into additional buybacks, you know, for the balance of this year. No, no, we look at it on an annual basis, and I would think we'll be over 50 for the year. So it definitely does.

Well like projects that improve our reliability and then of course, we like the whole renewable line in terms of the ability for us to drop the carbon intensity of our fuel and as you also said, we're very careful about our communication on projects, we'd like to be a little closer to the ore at <unk> before we really talk about them.

Perfect.

Quick follow up you have seen some sanction relief on the Venezuelan side, you weren't buying from Chevron, even before back and Chevron had been giving the indications that they could ramp up over there. So can you help us understand like what kind of volume incremental volumes could come to the market from the Venezuelan side.

Jason Fraser: Thank you. Thanks so much. Thank you.

Ryan Todd: The next question is coming from Ryan Todd of Piper Sandler. Please go ahead. Good. Thanks. May, could you talk to a little bit about what you're seeing in renewable diesel markets? Two few margins are obviously quite soft indicators than week. Can you talk, was there any impact from hedging losses in the third quarter? And maybe could you help us if there were, you know, kind of rough estimate of maybe what that was?

And probably next two or three years.

Yes. This is Gary so if you look there is about 250000 barrels a day of exports in Venezuela. Most of that volume is going to the far east, but with the lifting of sanctions. It has the potential to make its way to the U S Gulf Coast.

Thank you.

Thank you. The next question is coming from John Royall with Jpmorgan. Please go ahead.

Hi, good morning, Thanks for taking my question.

Ryan Todd: And then can you just more broadly talk about what you're seeing in terms of supply demand and marketplace, you know, impact of run pricing and audio limitations, et cetera? Sure. Ryan, this is Eric. I think, you know, we saw the run prices drop pretty quickly, kind of in that September and into October. And really, as you stare at that drop, it was kind of on the news that, you know, there was the anticipation of a couple of big startups at the end of the year that have now been delayed.

So we've talked about coastal weighed heavy dips and how they've tightened up pretty significantly can you remind us how much flexibility you have in your system to run whites versus heavy versus medium.

Ryan Todd: It was also on the news that there was going to be with Russia freezing out of exports that it would force the US to export more, therefore drop the obligation. So the combination of all that news kind of caused a precipitous drop in the rinse, kind of right at the, right at the end of the quarter and into the beginning of the fourth quarter. The real margin loss there is really because as fat prices have since adjusted in the spot market but obviously there's a lag of our fat prices that kind of carry it on that since started to catch up with this drop in credit prices but we'll see that continue to carry through the fourth quarter but overall I think that's really what we're seeing.

Hey, John This is Greg so we can flex quite a bit.

Youll tend to see US do is when the medium grades look attractive we will ramp that up.

Back down about the lights and heavies.

Conversely, when heavy sours get more attractive relative to the medium grades will ramp up the heavies I don't remember the exact percentages, we can get those to you.

They might actually be and are there on our end.

The IR deck, yes page 30 there.

So that's that tends to be what drives us to kind of swing between those different grades.

Yeah.

Great and then.

Maybe you can talk about the beat and Utilizations in the <unk>.

Didn't call out anything in particular, but you were above the high end and I think every region, but one it seems like the system ran quite well are there any moving pieces to call out maybe.

And that's getting pushed out or anything of that sort or is it just better than expected operations.

I would say we didn't.

Third quarter is always going to be a period, where you don't have a lot of turnaround activity I mean, some of it might leak over from the secondary you might start a little bit going into the fourth but each system.

Gary Simmons: The spot margin is cleaned back up, fat prices continue to come off, you really see all of that being kind of a return to profitability here in the fourth quarter so that's really what we see going on in the RD market. Okay, thank you. And then maybe in switching on the refining side, as we think about pad five, you all said it was really quite strong through the third quarter on a relative basis across the country and into the early parts of the fourth quarter.

Industry wide, we're not unique in that most of your turnaround work that are done in the first and second or the fourth quarter and so it should be a high utilization and obviously we've been sized reliability.

For the last more.

More than a decade, we have the programs that we have so you would expect.

When we're not having turnarounds that have a pretty high level of utilization of our assets.

Thank you.

Thank you. The next question is coming from Joe <unk> with Morgan Stanley. Please go ahead.

Hey, good morning, all thanks for taking my questions today.

Gary Simmons: Can you talk to me about what you're seeing overall in terms of kind of supply demand in pad five across your operations there there's a lot of moving pieces with some refineries that are, you know, that have transitioned off the market from conversions coming right now. So how do you as you look forward to the next few expect that market to stay relatively tight for the foreseeable future and I do think about relative your operations there.

So I wanted to start on the diesel side, you've talked about gasoline cracks and we hit on diesel much ounces remains really strong here. So just curious what your thoughts on that.

Diesel here into the winter with low inventories in both the U S and Europe.

But last year, we kind of at a similar level of technician were bailed out by a buyer.

By a warmer winter. So just curious on your thoughts on the set up for a decent margins.

Gary Simmons: Yeah, Ryan, this is Gary. I think, you know, our view of pad five is that, you know, with the renewable diesel coming into the market, the market should be well supplied on the distillate side but it's going to be very tight on gasoline.

Yes, so diesel demand remains very strong I guess I mentioned diesel sales in our system are up about 8% year over year, our view of the broader market is that diesel demand in the U S is probably down about 1% year to date from where it was last year and that's mainly due to the warmer winter we had last year, our guys estimate we lost.

Gary Simmons: You just don't have the gasoline production that you use to have with the refinery conversions and so, you know, when one refinery goes down it's going to create a lot of shortness in the market. Thank you.

Out of 125000 barrels a day of diesel demand due to the warmer weather.

So inventories remain below the five year.

Average level demand remains good so youre heading into winter with low inventories and we would expect strong diesel cracks through the winter and could get very strong if we have a colder colder winter.

Unknown Executive: The next question is coming from enough to be as please go ahead. Guys, you are known for your capital discipline and you look at a lot of projects and in the end very few actually make it to the funnel. We are somewhere in October.

Awesome. Thank you and then shifting gears a little bit so we've talked a little bit about.

Lane Riggs: You guys haven't talked about a major project yet and I'm just wondering if 2024 would then be more of a quick hit projects. I mean, poker has already come online. So when I look at 2024 should we think of as a year where you could be doing more quick hit projects versus a mega project, but generally can go on for three to four years.

<unk> margins being pressured here. So I was just hoping you could touch on some of the regional dynamics that youre seeing and economics of selling into other states in the west coast or potentially Canada to offset the lower LNG prices that we've seen in California.

Yes, we absolutely see California's become kind of the floor of the RV market.

Gary Simmons: Hey, Minabas is Lane. So the way I would say I agree with you and that's but, you know, we still believe we can we'll spend somewhere between half a billion to billion dollars a year strategic capital, but when you look at sort of what's the nature of those, certainly in the refining side they are going to be shorter cast cycle types of projects instead of a big like a poker type project, there'll be a series of small project.

We see more opportunity in Oregon, Washington, and Canada, as kind of the growth growth opportunities and so.

We absolutely look to maximize our product sales into those markets, California continues to talk about raising the obligation for 2030.

Sort of pushed off a lot of their they're still doing a lot of their conferences and workshops on that.

Gary Simmons: And then when you further drill down in what do we look for? We look for refining projects that lower our cost produce. We also like projects that improve our reliability. And then of course, we like to hold renewable line in terms of its ability for us to drop the carbon intensity of our fuels. And as you also said, we're very careful about our communication on projects. You know, we like to be a little closer to FID or at FID before we really talk about it, out.

Gary Simmons: Perfect. Just a quick follow-up.

We still fully expect that at some point they are going to announce the changes to.

To be effective sometime next year and that will increase.

The <unk> price in California so.

But in the meantime, we continue to look at again.

Kind of mentioned that we still have the advantages of being on the Gulf Coast you have access to all of our global feedstocks you have access to all the global markets. So it gives us a lot of capability to go to different markets and we continue to see waste oils advantaged versus vegetable oils.

Gary Simmons: We have seen some sanction relief on the Venezuelan side. You were buying from Chevron even before that and Chevron had been giving the indications that they could ramp up over there.

From a Ci standpoint, so you look at that low cost producer on the Gulf Coast.

That just continues to be kind of the winning formula for for being able to have flexibility to go different markets in the R&D space.

Gary Simmons: So can you help us understand like what kind of volume incremental volumes could come to the market from the Venezuelan side in probably next two or three years?

Awesome. Thanks for taking my questions. This morning.

Gary Simmons: Yeah, this is Gary. So if you look, you know, there's about 250,000 barrels a day of exports from Venezuela. Most of that volume is going to are east, but with the lifting of sanctions, it has the potential to make its way to the US Gulf Coast.

John Royall: Thank you.

Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.

Good morning.

First question is for you is just.

It's been a couple of months since you stepped into the job as CEO just would love your perspective on.

Greg Bram: The next question is coming from John Royall of KPMorgan. Please go ahead. Hi, good morning. Thanks for taking my question. So we've talked about coastal light heavy dips and how they've tightened up pretty significantly. Can you remind us how much flexibility you have in your system to run lights versus heavies versus mediums? Hey John, this is Greg. So we can flex quite a bit. What you'll tend to see us do is when the medium grades look attractive, we'll ramp that up and kind of back down about the lights and the heavies conversely when heavy showers get more attractive relatives of the medium grades, we'll ramp up the heavies.

Early observations recognizing the strategy, it's been very consistent steady for a long time and you've been a big part of it but our early observations as the new leader of the organization in key strategic priorities that we haven't really talked about here on the call thus far.

Sure had been a couple of years Neale Anderson.

But.

No.

Great.

You always got to remember I was.

An integral part of really Joe's team really from the beginning of his CEO tuner and as you've mentioned, it's been a very successful one so.

Are there things that I'm trying to do maybe a little bit differently I would say I put my thumb on the scale on certain issues, maybe a little bit and maybe unweighed, others, but largely speaking our strategy is the same because it was successful.

Greg Bram: I don't remember the exact percentages. We can get those to you. I think they might actually be in our in our deck yet. That tends to be what drives us to kind of swing between those different grades.

And it is currently too so I don't know that I have any real any real plans to deviate from that obviously the world can change and we will respond accordingly.

<unk>.

Greg Bram: Great. And then maybe you can talk about the the bead and utilization in 3Q. You didn't call out anything in particular, but you're above the high end and I think every region, but one seems like the system ran quite well. Are there any moving pieces to call out maybe maintenance getting pushed out or anything of that sort or is it just better than expected operations? You know, I would say the third quarter is always going to be a period where you don't have a lot of turnaround on activity.

This business look a whole lot like it did a year ago. So in our outlook pretty is pretty much unchanged.

Okay No thats it.

Definitely appreciate the consistency at the second question, it's a very.

It's a smaller part of your business, but it's always it can create volatility in earnings is ethanol.

Just curious on your outlook for that business.

Greg Bram: I mean some of it might leak over from the second or you might start a little bit going into the fourth, but you know if you system industry wide, we're not unique in that sense. Most of your turnaround works either done in the first and second or the fourth quarters. And so it should be a high utilization and obviously we've emphasized reliability gosh for the last I don't more than a decade we have the programs that we have so you would expect us when we're not having turnaround to have a pretty high level of utilization of our assets.

Where do you how far away are we from mid cycle as you think about it.

Greg Bram: Thank you.

Yes, the ethanol currently obviously had a good year this year.

With lower corn prices and low natural gas prices. So the ethanol margins have been I would say higher than what we would call a mid cycle.

But it's not really exceptionally higher than mid cycle its actually Ben.

Fairly strong, but I would say looking back historically ethanol is always kind of a kind of a steady drumbeat business we.

We do see that the biggest opportunity here is still this low carbon opportunity and some of the growth in other markets in the world again, we are.

Joe Lads: The next question is coming from Joe Lads with Morgan's family, please go ahead. Hey, good morning all. Thanks for taking my questions today. So I wanted to start on the diesel side. Just talk about gasoline cracks, but I think we've hit on diesel much, which is remained really strong here. Let's just curious what your thoughts on to set up the diesel here into the winter. We have low inventories in both the U.S. And you're up and last year we kind of had a similar level of tightness and we'll bailed out by a by a warmer winters.

30% of the export capability of ethanol for the U S and so we see this interest in the world lowering its carbon footprint by increasing its ethanol blending so Canada has.

Joe Lads: So just curious on your thoughts on the setup for diesel markets. Yeah, so diesel demand remains very strong. You know, I guess I mentioned diesel sales in our system are up about 8% year over year. Our view of the broader markets is that diesel demand in the U.S, is probably down about 1% year to date from where it was last year and that's mainly due to the warmer winter we had last year. Our guys estimate we lost about 125,000 barrels a day of diesel demand due to the warmer weather. So inventories remained below the five year average level. The man remains good.

Gary Simmons: So you're heading into winter with low inventories and we would expect you know, strong diesel cracks to the winter and could get very strong if we have a colder Thank you.

It has become the <unk> country almost overnight, there's talk about that going to <unk> next year.

We're seeing other countries that are starting to look at incremental ethanol blending and then theres a lot of interest in ethanol as a feedstock into chemicals and.

Sure.

Solvents in paints and so.

I think we still see a lot of good opportunities for ethanol globally.

That I think will keep us in a very strong margin environment and then obviously I mean, so much of that depends on whether ultimately.

Obviously, no one can control that but the U S is a big AG country, we have a lot of capability to grow a lot of corn and so as long as that holds up then I think ethanol has got a good outlook.

Thanks, Greg.

Thank you. The next question is coming from Paul Cheng of Scotiabank. Please go ahead.

Gary Simmons: And then shifting gears a little bit. So we've talked a little bit about RD margins being pressured here. So it's just hoping you could talk to on some of the regional dynamics that you're seeing and economics of selling into other states on the West Coast or potentially Canada. It's offset in the lower LCFS crisis that we've seen in California. Yeah, we absolutely see. California has become kind of the floor of the RD market.

Hey, guys good morning.

Good morning, two hopefully quick question.

But maybe.

Maybe either use for lingual Gary.

Look like.

<unk> and met the branding economic why now is really good.

With the winter grade.

Gary Simmons: We see more opportunity in Oregon, Washington and Canada as kind of the growth, growth opportunities. And so we absolutely look to maximize our product sales into those markets. California continues to talk about raising the obligation for 2030. They've sort of pushed off a lot of their, they're still doing a lot of their conferences and workshops on that. We've still fully expected. At some point, they are arching and they're going to announce the changes to be effective sometime next year. And that will increase the, the LCFS price in California.

Yes, we're looking at your system.

What is the incremental percentage of gas.

Gasoline supply will increase as we sell off those spending versus let's call. It.

Water.

The level or what that fourth quarter last year, whatever that compares that you want to use.

And secondly that.

Wanted to see what we do.

Can you give us any color about that house the tenant one cycle look like going into next year.

With that complaint that this year going to be about the same lighter happier.

Gary Simmons: So. But in the meantime, you know, we continue to look at, you know, again, you kind of mentioned that we still have the advantages being on the Gulf Coast. You have access to all the global feed stocks. You have access to all the global markets. So it gives us a lot of capability to go to different markets. And we continue to see waste oils, advantaged versus vegetable oils from a CI standpoint.

Also and also that whether you think the industry is going to have a normal cycle next year after that.

Catch up this year or that day catch up yes go into continuing into next year. Thank you.

So if I understand correctly. The first was how much really does the gasoline pool as well as you did a higher RVP gasoline is that what you were asking Paul.

Gary Simmons: So you look at that. Look at that low cost producer on the Gulf Coast. That just continues to be kind of the winning formula for, for being able to have flexibility to go different markets in the RD space.

Joe Lads: Awesome.

Yes.

A year that when we go to the winter grade, obviously and you've seen more.

Brian.

But that.

Economic will play it actually is very attractive for the branding and I assume that.

Matthew Blair: Thanks for taking my questions this morning.

Neil Mehta: Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.

We integrated it will also allow you to have more flexibility to again get worn to brand strength into the system look like by economic also.

Lane Riggs: Good morning. Lane, first questions for you is just, you know, it's been a couple months since you stepped as a job as CEO. Just, we love your perspective on, you know, early observations, recognizing the strategy has been very consistent steady for a long time and you've been a big part of it. But early observations of the new leader of the organization and key strategic priorities that we haven't really talked about here on the call this far.

Yes, Paul this is Greg so you're right you're definitely increase the amount of primarily butane that you blend into the gasoline.

It ranges, depending on which region you're in and the change in spec sits in the 5% to 10% range and then youre right that to the extent that butane has a higher octane than the pool. It does allow you to put more of the lower octane components into the blend naphtha being one of those right now that looks pretty attractive.

Lane Riggs: Sure had been a couple of years, Neil. I just was good. But now it's been great. You always got, you always got to remember I was an integral part of really Joe's team really from the beginning of his CEO team. And as you've mentioned, it's been a very successful one. So, you know, are there things that I'm trying to do maybe a little bit differently? I'll say I put my thumb on the scales on certain issues, maybe a little bit and I may be unweight others.

And Paul.

Got it.

Go ahead.

No I'm just going to answer I think it was your second question around turnarounds.

We sort of had a policy for a while that we don't give them any real outlook on our turnaround on the industry turnaround.

Behavior so.

Okay.

Lane Riggs: But largely speaking, our strategy is the same because it was successful and it's currently successful. I don't know that, you know, I have any real army, real plans to deviate from that. Obviously, the world can change and we would respond accordingly. But, you know, the world looks, you know, at least this business looked the whole life like it did a year ago. So, and our outlook is pretty much unchanged. Now, we definitely appreciate the consistency.

And then just go back into the earlier question.

Great.

And the clay I'll say because when it is more economic it tends to blend more but on the other hand gasoline crack at it right now so I'm trying to understand how that two years going to impacting you in your thinking.

On your accident year.

Lane Riggs: The second question, it's a very, it's a smaller part of your business, but it's always, you can create volatility and earnings is at the end all. And I just do your curious on your outlook for that business and where to, how far away are we from mid-site? Michael, as you think about. Yeah, the ethanol, you know, obviously has had a good year this year with lower corn prices and low natural gas prices.

I think before if I understand Paul back to winter blending obviously naphtha cheap butane is relatively cheap and we always look at economic signals to try to determine how much gasoline, we're producing that bottleneck.

And that compares to four the reformulated grades they might require.

A little less butane and then the respect that you hit I mean, you would think you would get near 10% and butane and pool, but a lot of times, we hit other other specifications in the finished gasoline besides RVP.

Lane Riggs: So the ethanol margins have been, I would say higher than what we would call a mid cycle. You know, but it's not really exceptionally higher than mid cycle. It's actually been fairly strong, but I would say looking back historically, ethanol is always kind of a steady drumbeat business. We do see that, you know, the biggest opportunity here is still this low carbon opportunity and some of the growth in other markets in the world.

So I mean, it sort of fair.

That's fair.

Okay very good thank you.

Thank you. The next question is coming from Jason <unk> of TD Cowen. Please go ahead.

Good morning, Thanks for taking my questions I wanted to first go back to uses of cash returns of cash I should say and I know.

Lane Riggs: Again, you know, we are 30% of the export capability of ethanol for the US. And so we see this interest in the world, lowering its carbon footprint by increasing its ethanol blending. So Canada has become an E 10 country almost overnight. There's talk about that going to E 15 next year. We're seeing other countries that are starting to look at incremental ethanol blending. And then there's a lot of interest in ethanol as a feedstock into chemicals and and solvents and paints.

<unk> has a 40% to 50% payout ratio.

You know it it seems like.

Youll returning a majority of the excess cash post dividends via buyback, maybe two thirds of that excess cash.

Is that kind of how we should think about return of cash moving forward essentially all of the excess cash over a majority of it.

And what you pay out the dividend is going to be going towards the buyback for the foreseeable future and I think some color around that could help the market bring some of that potential future buyback value forward and I have a follow up thanks.

Lane Riggs: And so, you know, I think we still see a lot of good opportunities for ethanol globally. And I think we'll keep us, you know, in a very strong margin environment. And then obviously, I mean so much of that depends on weather, ultimately. I mean, obviously no one can control that. But, you know, the US is a big ag country. We have a lot of capability to grow a lot of corn. And so as long as, you know, that holds up, I think ethanol's got a good outlook. Thanks.

Hey, Jason This is Wayne, but directionally correct, but we still have to some of our cash obviously go to sustaining our asset. So that's something that we are committed to we want to make sure that were where we had the earnings potential of our assets today in a posture that we can always generate the right earnings.

The market conditions in the second and we maintain the dividend and then we do believe we still have this sort of half a billion dollars of $1 billion of strategic capital to the extent all of that is done all of the excess cash will go to buybacks.

Lane Riggs: Great color.

Lane Riggs: Thank you.

Paul Chang: The next question is coming from Paul Chang of Scotia Bank. Please go ahead. Hey guys, good morning. Two hopefully that quick question. First, maybe either is for Ling or Gary. Look like the same and never branding economic right now is really good with the winter grade. If we're looking at your system, what is the incremental percentage of the gasoline supply will increase as a result of those branding for you versus let's call it third quarter the level or that both quarter last year, whatever is the comparison you want to use.

Alright, great. Thanks, and my second one is kind of on the strategic growth outlook.

You know we've seen some of your larger peers use equity to buy up companies recently, and if I think about some of the potential areas you could expand into like chems like low carbon fuels lows valuations have come down relative to where Valero trades I don't know Valero it doesn't typically used.

Equity to acquire other companies, but given what's going on with navigator pipeline and I'm looking at your potential future growth opportunities.

Are you, taking a closer look at strategic M&A and using equity given your stock and refiners in general have held up pretty well relative to other potential step out opportunities. Thanks.

Paul Chang: And secondly, that want to see what this, if you can give us any color that house turn around cycle look like for you next year in whether that compared to this year going to be about the same lighter happier. Also, and also that whether you think the industry is going to have a normal cycle next year after the catch up this year or that the catch up years going to continue in the next year. Thank you.

Yes, Blaine again, I will say that we.

Looking at all these opportunities and all the business lines that I alluded to earlier and we have an entire group our innovation group that is constantly looking at.

How can we bolt on and leverage our existing footprint, which obviously, we have a big footprint in ethanol, we have a pretty big footprint and renewable diesel and then we also look at everything else Everything's on the table. We're always looking at it but we're also very careful in terms of how we talked about it and how we're going to announce things in terms of how we finance it.

Greg Bram: So if I understand correctly, the first was how much really does the gasoline pool swell as you go to higher RVP gasoline. Is that what you were asking Paul? Yeah, I mean that every year that when we go to the winter grade obviously you see more branding but that with the economic look like is actually very attractive for the branding. And I assume that given the winter grade will also allow you to have more flexibility and you want to brand the strict network into the system and look like it's very economic also.

It's just a matter of when.

As the World evolves, we'll come up with the best way that we think to finance something but it obviously all these things have to go through sort of our investment gated process.

Got it thanks for the answers.

Thank you. The next question is coming from Roger read of Wells Fargo. Please go ahead.

Yes. Thank you good morning, maybe to follow up on.

Greg Bram: Paul, this is Greg. So you're right. You definitely increase the amount of primarily butane that you've lended into the gasoline. It ranges depending on what region you're in and the change inspects. It's in the 5 to 10 percent range. And then you're right that to the extent that butane has a higher octane than the pool, it does allow you to put more of the lower octane components into the blend. Nap the B and one of those right now that looks pretty attractive. Yeah, please go ahead.

Mr. <unk> question. There if we think about acquisitions latest news citgo is potentially going to be on the auction block and beginning of next year. So just curious how you think about.

A greater footprint within refining as any kind of a possibility.

So.

Hey, Roger from Lane so.

Our history, we were a big consolidator in the industry going back to 2000 up to really our last major.

A major acts.

Greg Bram: Now I'm just going to ask you, I think it was your second question around turnaround. We sort of had a policy for a while that we don't give any real outlook on our turnaround or the industry turnaround behavior. Okay, I can just go back into the earlier question about Rick Ananda. Any kind of say, because when it is more economic, you tend to brand more but on the other hand, gasoline track is not great right now.

The acquisition will sort of circa 2013, thats, what our our base became somewhat like it looks today.

So we understand probably as well as any operator out there what it takes to buy something or to Merck something and get it on our system and all the costs associated with it.

And we always look at everything that we think within reason I mean, we always analyze everything and we havent, we havent bought anything like I said since 2013 any refining assets.

You never say never but.

Greg Bram: So I'm trying to understand how the two years going to impact in your thinking or your action here. I think before I understand Paul, back to the winter blending. Obviously, Nap the is cheap, butane is relatively cheap. And we always look at economic signals to try to determine how much gasoline we're producing that thought. And that compared to for the reformulated grades, they might require, you know, a less butane. And then there's specs that you hit. I mean, you would think you would get near 10 percent butane and pool that a lot of times we hit other specifications in the finished gasoline besides RBP. And very good. Thank you.

When we look at everything and we'll again like I alluded to on Jason's question, we'll run it through our processes and figure out where it makes sense for us or not.

Yes, I'd imagine the data right.

We are on that Roger they got to compete with everything else, including buybacks right. So.

Right right no I mean, the data rooms going to have to be interesting at a minimum.

Second question I have it's unrelated but kind of a follow up on some of the things going on on the renewable fuel side, we've seen a lot of downward moves or we saw a strong downward maybe if I should say in the <unk> six brands.

Latter part of Q3 and the early part of Q4 looks like the market is more or less sort of adjusting to that on some of the feedstock and other issues, but I was just curious if you all have any read throughs on.

What caused that decline and whether or not this decline sort of reflects current situation or is there more downside risk to.

Jason Gabelman: The next question is coming from Jason Gableman of TD Cowan. Please go ahead. Morning. Thanks for taking my questions. I want to first go back to uses of cash or returns of cash. I should say, and I know Valero has the 40 to 50 percent payout ratio ratio. You know, it seems like you're returning a majority of the excess cash post dividends via buyback. Maybe two thirds of that excess cash.

<unk> given demand date versus production numbers, and obviously, an increasing volume of.

Jason Fraser: Is that kind of how we should think about return of cash moving forward essentially all of the excess cash or majority of it beyond what you pay out in the dividend is going to be going towards the buyback for the foreseeable future. And I think some color around that could help the market bring some of that potential future buyback value forward. And I have a follow-up. Thanks. Hey Jason, this is Wayne.

Renewable diesel coming in 'twenty four from the industry.

Yes, I think.

As I mentioned before.

There's this there's this kind of constant talk about oncoming production increased rates startups projects that has always said at some point that <unk> is going to be under pressure.

Especially since the EPA did not raise the depot obligation in there in their last set rules. So.

I think though as you.

And then we combine that with there was this kind of a rush I think looked like to me kind of a rush to sell <unk> in the third quarter with that narrative combined with that Russian announcement that they were going to ban exports, which kind of quickly evaporated. So so I think I was kind of a more of a temporary.

Jason Fraser: Look directly correct. We still have that. Some of our cash obviously goes to sustaining our asset. So that's something that we were committed to. We want to make sure that we're a that we're, you know, we had the earnings potential or assets day in a posture that we can always generate the right earnings with the market conditions. And second, we maintain the dividend. And then we do believe we still have this sort of half a billion with billion dollars or strategic capital. To the extent, all that's done, all the excess cash will go to buybacks. All right. Great. Thanks.

The view.

View that.

The default RIN was going to drop even more than like <unk> like you've observed as kind of recovered in fat prices have also since adjusted we clearly see that biodiesel in veg oil or D is is negative now.

One of the things we've always said is that the.

The lower Ci waste oil.

Play was always going to be more advantageous so even at these lower credit values, we're still the advantaged platform.

Jason Fraser: And my second one is kind of on the strategic growth outlook. You know, we've seen some of your larger peers use equity to buy up companies recently. And if I think about some of the potential areas you could expand into like kems, like low carbon fuels, those valuations have come down relative to where Valero trades.

As you go into 2024, obviously obligations all reset it's hard to tell exactly where that's going to go there is no doubt that.

R&D will continue to grow we do see that for us you're going to see R&D continue to grow as we talked before Canada is a big outlet, which takes a lot of this rent exposure away and then you also obviously have the SaaS project coming on we will diversify into a different market and so.

Jason Fraser: I don't know. Valero doesn't typically use the equity to acquire other companies. But given what's going on with Navigator pipeline and, you know, looking at your potential future growth opportunities, are you taking a closer look at strategic M&A and using equity given your stock and refiners in general have held up pretty well relative to other potential step out opportunities. Thanks.

And then.

And if for some reason SAP doesn't work that that product also meets Arctic diesel grades that again go to Nordic countries in Canada. So.

So there is no doubt that there's going to be a continued pressure on the returns.

For both the <unk> six but our strategy has always been there's other markets that you can.

Minimize the impact of that and then with our platform. We are still the most advantaged from a cost and Ci standpoint.

Lane Riggs: Yeah, I'm supposed to blame again. I would say that we look at all these opportunities and all the business lines that I alluded to earlier, and we have an entire group, our innovation group, it's constantly looking at, you know, how can we both on and leverage our existing footprint, which obviously we have a big footprint in ethanol and have a pretty big footprint in renewable vehicles, and we're also looking at, you know, everything else, everything's on the table.

No I appreciate that coastal advantage as always thanks guys.

Thanks Roger.

Thank you.

For today's coming from Matthew Blair of Tudor Pickering Holt. Please go ahead.

Lane Riggs: We're always looking at it, but we're also very careful in terms of how we talk about it and how we're going to announce things. In terms of how we finance, it, you know, it's just a matter of when we, you know, as the world evolves, you know, we'll come up with the best way that we think to finance something, but it obviously all these things have to go through our investment gated process. Got it. Thanks for the answers. Thank you.

Hey, good morning, Thanks for taking my questions circling back to the Rd margins in Q3 are you able to quantify the impact from <unk>.

Fire on the reported 65 gallon EBIT margin.

No, we usually don't give that kind of detail I would say it wasn't large just kind of leave it at that.

Sounds good and then on the refining side could you talk about your product exports in Q3, and so far into Q4.

Roger Reed: The next question is coming from Roger Reed of Wells Fargo. Please go ahead. Yeah, thank you. Good morning. Maybe to follow up on Mr. Gabelman's question there. If we think about acquisitions, latest news says sit-go is potentially going to be on the auction block beginning a next year. So just curious how you think about, you know, a greater footprint within refining as any kind of a possibility.

Do you expect any negative impacts from this announcement from Mexico, a couple of days that they're looking to restrict.

Refined product imports into the country.

Yes, so I'll take the first part of it and then let rich wiles handle the second part yes. Our exports. If you look at the exports in the third quarter. We did 389000 barrels a day 281 of distillate 108 of gasoline.

Based on second quarter, the volumes are up based on historic numbers.

Lane Riggs: So, you know, hey, Rogers Lane, so if you know our history, we were a big consolidator in the industry going back to 2000 up to really our last major acquisition was for the sort of 2013. That's when our base became somewhat like it looks today. And so we understand probably as well as any operator out there what it takes to buy something or to merge something and get it on our system and all the costs associated with it.

They trended up as well.

Two our typical export locations you know most of the gasoline went to Latin America about 70% of the diesel to Latin America, and about 30% to to Europe and those are remaining at those levels as we move into the fourth quarter.

Rich.

Just answer the second half of it.

On this day created some issue, it's actually likely aimed at.

Lane Riggs: And we always look at everything that we think, you know, within reason. I mean, we always analyze everything. And we haven't bought anything like it says in 2013. Any refining assets. You never say never. We look at everything and we'll again, like I alluded to on Jason's question, we'll run it through our processes and figure out whether any makes sense for us or not. Yeah, if I'd imagine the day of the year on that, Roger, they got to compete with everything else, including buybacks. Right. So, right. Right.

Imports muddling, that's going on so you have to have individuals that are trying to bring products gasoline diesel into Mexico, but describing it as something that has a lower tariff like apparel, something like that and reporting it in and that's that's resulting in them getting a lower tariffs.

This decrease is really focused in on that for Valero were properly and putting all of our gasoline and products and.

And we are paying the full.

Full and proper care for it so and then you also all of our fuel comes out of our own system and is of high quality meets the specs. So we have a lot of interaction with the Mexican authorities. They are aware of the legitimacy of our operation and so we don't we don't expect it to be an issue for us.

Roger Reed: No, I mean, the data room is going to have to be interesting at a minimum.

Gary Simmons: Second question I have, it's unrelated, but kind of a follow up on some of the things going on on the renewable fuel side. We've seen a lot of downward moves, or we saw a strong downward move, I should say in the D46 friends. Kind of latter part of Q3 in the early part of Q4 looks like the market's more or less sort of adjusting to that on some of the feedstock and other issues, but I just curious if y'all had any read throughs on.

Sounds good thank you.

Thank you at this time I would like to turn the floor back over to Mr. <unk> for closing comments.

Gary Simmons: You know, what caused that decline and whether or not this decline is sort of reflect current situation, or is there more downside risk to rents given demand date versus production numbers and obviously an increasing volume of renewable diesel coming in 24 from the industry. Yeah, I think, you know, as I mentioned before, you know, there's this, there's this kind of constant talk about oncoming production increased rate startups projects that has always said at some point the D4 is going to be under pressure, especially since the EPA did not raise the default obligation in their in their last set rules.

Thanks, Dan I appreciate everyone joining us today and as always if you have any further questions. Please feel free to contact the IR team a call. Thanks, again and everyone have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.

[music].

Okay.

Gary Simmons: So, you know, I think though is, you know, and then we combined that with there was this kind of a rush, I think, look like to me, kind of a rush to sell rins in the third quarter with that narrative combined with that Russian announcement that they were going to ban exports, which kind of quickly evaporated. So, there's I think kind of a more of a temporary. View that the default RIN was going to drop even more like you've observed is kind of recovered in fat prices have also since adjusted.

Okay.

Yes.

Okay.

[music].

Gary Simmons: We clearly see that biodiesel and veg oil RD is negative now. That's one of the things we've always said is that the lower CI waste oil play was always going to be more advantageous. So even at these lower credit values, we're still the advantage platform. So as you go into 2024, obviously, obligations all reset. It's hard to tell exactly where that's going to go. There's no doubt that RD will continue to grow.

Gary Simmons: We do see that for us, you're going to see RD continue to grow as we talked before. Canada's a big outlet which takes a lot of this RIN exposure away. And then you also obviously have the staff project coming on. We'll diversify into a different market. And for some reason, staff doesn't work. That product also meets Arctic diesel grades that again go to Nordic countries in Canada. So there's no doubt that there's going to be a continued pressure on the RINs for both the D4 and D6. But our strategy has always been there's other markets that you can minimize the impact of that. And then with our platform, we're still the most advantaged from a cost and CI standpoint.

Gary Simmons: Now, I appreciate that coastal advantage as always. Thanks, guys.

Gary Simmons: Thanks, Roger.

Unknown Executive: Thank you.

Matthew Blair: Our last question for today is coming from Matthew Blair of Tudor Pickering Hope. Please go ahead. Hey, good morning. Thanks for taking my questions. I'm circling back to the RD margins in Q3. Are you able to quantify the impact from DDD-2 fire on the reported 65-cent gallon EBIT margin? Now, we usually don't give that kind of detail. I would say it wasn't large. I just kind of leave it at that. Sounds good.

Homer Bhullar: And then on the refining side, could you talk about your product exports in Q3 and so far in the Q4? Do you expect any negative impacts from this announcement from Mexico a couple days that they're looking to restrict refined product imports into the country? Yes, I'll take the first part out and then let Rich Walsh handle the second part. Yeah, our exports, you know, if you look at the exports in the third quarter, we get 389,000 barrels a day, 281 distillate, 108 gasoline.

Homer Bhullar: Based on second quarter, the volumes are up, you know, based on historic numbers, you know, they trended up as well, you know, and to our typical export locations, you know, most of the gasoline went to Latin America, about 70% of the diesel Latin America, about 30% to Europe. And those are remaining at those levels as we move into the fourth quarter. Mr. Rich, you know, I'll just answer the second half of it.

Homer Bhullar: And you know, on the on this decreed issue, it's actually rightly aimed at, you know, import smuggling that's going on. So you have individuals that are trying to bring product gasoline diesel into Mexico, but describing it as something that has a lower tariff, like a tariff and something like that and importing it in. And that's, you know, that's resulting in them getting a lower tariff. So this decree is really focused in on that, you know, for Valera, we're, you know, we're properly importing all of our gasoline and products and we're paying the full, you know, full and proper tariff for it.

Homer Bhullar: So, and then, you know, also, all of our fuel comes out of our own system and it's, you know, it's all high quality meets the spec. So we, we, you know, have a lot of interaction with Mexican authorities. They're aware of the legitimacy of our operations, and so we don't, we don't expect this initiative to be an issue.

Homer Bhullar: Thank you for us. That was good. Thank you.

Homer Bhullar: At this time, I'd like to turn the floor back over to Mr. Boular for closing comments. Thanks Donna. Appreciate everyone joining us today. And as always, if you have any further questions, please feel free to contact the IR team call. Thanks again and everyone have a great day.

Unknown Executive: Ladies and gentlemen, thank you for your participation.

Unknown Executive: This concludes today's event. You may disconnect your lawn. Don't forget to lock off the webcast at this time and enjoy the rest of your day.

Unknown Executive: Thank you.