Q2 2024 Valero Energy Corp Earnings Call
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Unknown Executive: second quarter 2024. At this time, I'll, The question and answer session will follow, if anyone should require operators. Press Star Zero on your telephone keypad.
Homer Bhullar: Please note this conference; I will now turn the conference to Homer Bhullar, Vice President of Investor Relations and Finance. Good morning, everyone, and welcome to Valero Energy Corporation's second quarter 2024 earnings conference call. With me today are Lane Riggs, our CEO and President, Jason Fraser, our Executive Vice President and CFO, Gary Simmons, our Executive Vice President and COO, and several other members of Valero's senior management team.
Homer Bhullar: If you have not received the earnings release and would like a copy, you can find one on our website at InvestorValero.com. 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.
If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call.
Homer Bhullar: 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 with the SEC. Now I'll turn the call over to Lane for his opening remarks. Thank you, Homer, and good morning, everyone.
Speaker Change: 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.
Speaker Change: 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 with the SEC.
Now I'll turn the call over to Lane for opening remarks.
Lane Riggs: We are happy to report strong financial results for the second quarter. Our refineries operated well and achieved 94% throughput capacity utilization. We saw continued strength in our U.S. wholesale system, with sales exceeding 1 million barrels per day in the second quarter. We also saw a good contribution from our renewable diesel and ethanol segments. On the strategic front, our growth projects are progressing on schedule. The Diamond Green Diesel sustainable aviation fuel project in Port Arthur is still expected to be operational in the fourth quarter, at which point DGD is expected to become one of the largest manufacturers of SAF in the world.
Lane: Thank you, Homer, and good morning, everyone.
Lane: Our refineries operated well and achieved 94% throughput capacity utilization.
Lane Riggs: And we continue to pursue short-cycle, high-return optimization projects around our existing refining assets. On the financial side, we remain committed to shareholder returns, with a year-to-date payout of 80%. Last week, we announced a quarterly cash dividend on our common stock of $1.07 per share. Looking ahead, limited announced capacity additions beyond 2025 should support long-term refining fundamentals. In closing, our team's simple strategy of pursuing excellence in operation, Return-Driven Discipline on Growth Projects, and a demonstrated commitment to shareholder returns has underpinned our success and positions us well for the future. So with that, Homer, I'll hand the call back to you.
Lane: Last week we announced a quarterly cash dividend on our common stock of $1.07 per share.
Speaker Change: Looking ahead, limited announced capacity additions beyond 2025 should support long-term refining fundamentals.
Speaker Change: In closing, our team's simple strategy of pursuing excellence in operation, return-driven discipline on growth projects, and a demonstrated commitment to shareholder returns has underpinned our success and positions us well for the future.
Homer Bhullar: Thanks, Lane. For the second quarter of 2024, net income attributable to Valero stockholders was $880 million, or $2.71 per share, compared to $1.9 billion or $5.40 per share for the second quarter of 2023. The refining segment reported $1.2 billion of operating income for the second quarter of 2024 compared to $2.4 billion for the second quarter of 2023. Refining throughput volumes in the second quarter of 2024 averaged 3 million barrels per day. Throughput capacity utilization was 94% in the second quarter of 2024.
Speaker Change: So with that, Homer, I'll hand the call back to you.
Homer: Thanks, Lane. For the second quarter of 2024, net income attributable to Valero stockholders was $880 million, or $2.71 per share, compared to $1.9 billion, or $5.40 per share for the second quarter of 2023.
Speaker Change: The refining segment reported $1.2 billion of operating income for the second quarter of 2024 compared to $2.4 billion for the second quarter of 2023.
Speaker Change: Refining throughput volumes in the second quarter of 2024 averaged 3 million barrels per day. Throughput capacity utilization was 94% in the second quarter of 2024.
Homer Bhullar: Refining cash operating expenses were $4.45 per barrel in the second quarter of 2024. Renewable diesel segment operating income was $112 million for the second quarter of 2024 compared to $440 million for the second quarter of 2023. Renewable diesel sales volumes averaged 3.5 million gallons per day in the second quarter of 2024, which was 908,000 gallons per day lower than the second quarter of 2023. Operating income was lower than the second quarter of 2023 due to lower sales volumes resulting from planned maintenance activities and lower renewable diesel margin in the second quarter of 2024.
Speaker Change: Refining cash operating expenses are $4.45 per barrel in the second quarter of 2024.
Homer: Renewable diesel segment operating income was $112 million for the second quarter of 2024 compared to $440 million for the second quarter of 2023.
Homer: Renewable diesel sales volumes averaged 3.5 million gallons per day in the second quarter of 2024, which was 908,000 gallons per day lower than the second quarter of 2023.
Homer: Operating income was lower than the second quarter of 2023 due to lower sales volumes resulting from planned maintenance activities and lower renewable diesel margin in the second quarter of 2024.
Homer Bhullar: The ethanol segment reported $105 million of operating income for the second quarter of 2024, compared to $127 million for the second quarter of 2023. Ethanol production volumes averaged 4.5 million gallons per day in the second quarter of 2024, which was 31,000 gallons per day higher than the second quarter of 2023. For the second quarter of 2024, G&A expenses were $203 million, net interest expense was $140 million, depreciation and amortization expense was $696 million, and income tax expense was $277 million. The effective tax rate was 23%.
Homer: The ethanol segment reported $105 million of operating income for the second quarter of 2024, compared to $127 million for the second quarter of 2023.
Homer: Ethanol production volumes averaged 4.5 million gallons per day in the second quarter of 2024, which was 31,000 gallons per day higher than the second quarter of 2023.
Homer: For the second quarter of 2024, G&A expenses were $203 million, net interest expense was $140 million, depreciation and amortization expense was $696 million, and income tax expense was $277 million.
Homer Bhullar: Net cash provided by Operating Activities was $2.5 billion in the second quarter of 2024. Included in this amount was a $789 million favorable change in working capital and $83 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 $1.6 billion in the second quarter of 2024. Regarding investing activities, we made $420 million of capital investments in the second quarter of 2024, of which $329 million was for sustaining the business, including costs for turnarounds, catalysts, and regulatory compliance, and the balance was for growing the business.
Homer: The effective tax rate was 23%.
Homer: Net cash provided by operating activities was $2.5 billion in the second quarter of 2024.
Homer: Included in this amount was a $789 million favorable change in working capital and $83 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD.
Homer: Excluding these items, adjusted net cash provided by operating activities was $1.6 billion in the second quarter of 2024.
Homer: Regarding investing activities, we made $420 million of capital investments in the second quarter of 2024, of which $329 million was for sustaining the business, including costs for turnarounds, catalysts, and regulatory compliance, and the balance was for growing the business.
Homer Bhullar: Excluding capital investments attributable to the other joint venture member share of DGD and other variable interest entities, capital investments attributable to Valero were $360 million in the second quarter of 2024. Moving to financing activities, we returned $1.4 billion to our stockholders in the second quarter of 2024, of which $347 million was paid as dividends and $1 billion was for the purchase of approximately 6.6 million shares of common stock, resulting in a payout ratio of 87% for the quarter.
Homer: Excluding capital investments attributable to other joint venture member share of DGD and other variable interest entities, capital investments attributable to Valero were $360 million in the second quarter of 2024.
Homer: Moving to financing activities, we returned $1.4 billion to our stockholders in the second quarter of 2024, of which $347 million was paid as dividends and $1 billion was for the purchase of approximately 6.6 million shares of common stock, resulting in a payout ratio of 87% for the quarter.
Homer Bhullar: Year-to-date, we have returned $2.8 billion to our stockholders in the form of dividends and buybacks, resulting in a payout ratio of 80%, well above our minimum commitment of 40-50%. With respect to our balance sheet, we ended the quarter with $8.4 billion of total debt, $2.4 billion of finance lease obligations, and $5.2 billion of cash and cash equivalents.
Homer: Year-to-date, we have returned $2.8 billion to our stockholders in the form of dividends and buybacks, resulting in a payout ratio of 80%, well above our minimum commitment of 40-50%.
Homer: With respect to our balance sheet, we ended the quarter with $8.4 billion of total debt, $2.4 billion of finance lease obligations, and $5.2 billion of cash and cash equivalents.
Homer Bhullar: The debt-to-capitalization ratio, net of cash and cash equivalents, was 16% as of June 30, 2024, and we ended the quarter well-capitalized with $5.3 billion of available liquidity, excluding cash. Turning to guidance, we still expect capital investments attributable to Valero for 2024 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance, and joint venture investments. About $1.6 billion of that is allocated to sustaining the business and the balance to growth, with approximately half of the growth capital going towards our low-carbon fuels businesses and half towards refining projects.
Homer: The debt-to-capitalization ratio net of cash and cash equivalents was 16% as of June 30, 2024. And we ended the quarter well-capitalized with $5.3 billion of available liquidity, excluding cash.
Homer: Turning to guidance, we still expect capital investments attributable to Valero for 2024 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance, and joint venture investments.
Homer: About $1.6 billion of that is allocated to sustaining the business and the balance to growth, with approximately half of the growth capital towards our low-carbon fuels businesses and half towards refining projects.
Homer Bhullar: For modeling our third quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.77 to 1.82 million barrels per day. Midcontinent at 405,000 to 425,000 barrels per day, West Coast at 235,000 to 255,000 barrels per day, and North Atlantic at 390,000 to 410,000 barrels per day. We expect refining cash operating expenses in the third quarter to be approximately $4.70 per barrel. With respect to the renewable diesel segment, we expect sales volumes to be approximately 1.2 billion gallons in 2024.
Homer: For modeling our third quarter operations, we expect refining throughput volumes to fall within the following ranges.
Homer: Gulf Coast at 1.77 to 1.82 million barrels per day.
Homer: Mid-continent at 405,000 to 425,000 barrels per day, West Coast at 235,000 to 255,000 barrels per day, and North Atlantic at 390,000 to 410,000 barrels per day.
Homer: We expect refining cash operating expenses in the third quarter to be approximately $4.70 per barrel.
Homer: With respect to the renewable diesel segment, we expect sales volumes to be approximately 1.2 billion gallons in 2024.
Homer Bhullar: Operating expenses in 2024 should be $0.45 per gallon, which includes $0.18 per gallon for non-cash costs such as depreciation and amortization. Our ethanol segment is expected to produce 4.6 million gallons per day in the third quarter. Operating expenses should average $0.40 per gallon, which includes $0.05 per gallon for non-cash costs such as depreciation and amortization.
Homer: Operating expenses in 2024 should be $0.45 per gallon, which includes $0.18 per gallon for non-cash costs such as depreciation and amortization.
Homer: Our ethanol segment is expected to produce 4.6 million gallons per day in the third quarter. Operating expenses should average $0.40 per gallon which includes $0.05 per gallon for non-cash costs such as depreciation and amortization.
Homer Bhullar: For the third quarter, net interest expense should be about $140 million, and total depreciation and amortization expense should be approximately $690 million. For 2024, we expect GN expenses to be approximately $975 million. That concludes our opening remarks. Before we open the call to questions, please limit each turn in the Q&A to two questions to ensure other callers have time to ask their questions. Press star 1 on your telephone keypad. Your line is in the question; press star two to remove your question from the queue.
Homer: For the third quarter, net interest expense should be about $140 million and total depreciation and amortization expense should be approximately $690 million.
Homer: For 2024, we expect GN expenses to be approximately $975 million.
Speaker Change: That concludes our opening remarks. Before we open the call to questions, please limit each turn in the Q&A to two questions to ensure other callers have time to ask their questions.
Speaker Change: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Unknown Executive: And for equipment, and it may be necessary to pick up your handset before. Our first question is from John Royall. Hi, good morning.
John Macalister Royall: Thanks for taking my question. So my first question is on the refining macro side, and more specifically your views on supply and demand. The U.S. system ran pretty hard through 2.2.
Speaker Change: Our first question is from John Royall with J.P. Morgan. Please proceed.
John Macalister Royall: Hi, good morning. Thanks for taking my question.
Unknown Executive: We built some inventories on both the gasoline and the diesel side. What are you seeing on the demand side in both the U.S. and globally, and how do you view the overall supply-demand balance in light of that? Hey, John. This is Gary.
John Macalister Royall: So my first question is on the refining macro side, and more specifically your views on supply and demand.
John Macalister Royall: The U.S. system ran pretty hard through 2Q. We built some inventories on both the gasoline and the diesel side. What are you seeing on the demand side in both the U.S. and globally, and how do you view the overall supply-demand balance today?
Gary K. Simmons: I think you know in the U.S., for the most part, the economy has been fairly resilient, and the market fundamentals look pretty similar to what we've been looking at for the past couple of years. If you look at our wholesale data, the four-week average, our gasoline sales are up about a half percent. There tends to be a lot of noise in the weekly DOE data, but year-to-date, DOE data would suggest a slight decline in gasoline demand, less than one percent.
Gary: Hey John , this is Gary. I think, you know, in the U.S., for the most part, the economy has been fairly resilient and the market fundamentals look pretty similar to what we've been looking at the past couple of years.
Speaker Change: If you look at our wholesale data, four week average, our gasoline sales are up about a half percent.
John Macalister Royall: There tends to be a lot of noise in the weekly DOE data, but year-to-date...
Gary K. Simmons: If you look at vehicles that are lightly traveled, they're up 1.4 percent, which would, again, indicate a slight increase in demand for gasoline. I guess the way we're looking at it is we'd say year-over-year, gasoline demand in the U.S. is flat. On the diesel side, we're actually showing a pretty good step change in our system of diesel sales. Four-week average diesel sales in our system are up 10
John Macalister Royall: DOE data would suggest a slight decline in gasoline demand, less than one percent.
John Macalister Royall: You look at vehicles mild-traveled, they're up 1.4%, which would again indicate a slight increase in demand for gasoline. I guess the way we're looking at it is we'd say year-over-year gasoline demand in the U.S. is flat.
Speaker Change: On the diesel side, we're actually showing a pretty good step change in our system of diesel sales. Four-week average diesel sales in our system are up 10 percent. Again, don't necessarily believe that's representative of the broader market.
Gary K. Simmons: Again, don't necessarily believe that's representative of the broader markets. If you look at year-to-date diesel sales in the DOE data, it would suggest a decline in diesel demand, about 100,000 barrels a day. Directionally, I think that makes sense to us with slightly weaker freight numbers early in the year. You didn't really have any help from weather, and a little less demand from the upstream sector. However, a lot of that has been offset by the increase in jet demand, so about half of that has been offset by an increase in jet demand. So maybe distillate demand will go down slightly. So in the U.S., we would say gasoline demand flat, and year-over-year distillate demand down slightly. But I think the bigger impact has really been on the overall North Atlantic Basin.
Speaker Change: If you look at year-to-date diesel sales and the DOE data, it would suggest a decline in diesel demand, about 100,000 barrels a day.
Speaker Change: Directionally, I think that makes sense to us with a little weaker freight numbers early in the year.
John Macalister Royall: You didn't really have any help from weather, a little less demand from the upstream sector.
John Macalister Royall: However, you know, a lot of that has been offset with the increase in jet demand, so.
John Macalister Royall: About half of that, you know, offset with an increase in jet demand, so maybe distillate demand down slightly. So in the U.S. we would say gasoline demand flat year over year, distillate demand down slightly. I think the bigger impact has really been for the overall North Atlantic Basin.
Gary K. Simmons: You know, certainly in the North Atlantic Basin, we saw regions with slowing economic activity that negatively impacted, especially demand for diesel. And then it looks like some of the new capacity that came on in the Middle East really never made it to nameplate capacity until early this year. So we saw a bit of a step change in refining runs in the Middle East, with a lot of that product making its way into Europe. But, you know, some of that early in the year was masked by some of the drone strikes on Russian refining capacity.
John Macalister Royall: You know, certainly in the North Atlantic Basin, we saw regions with...
John Macalister Royall: Slowing economic activity that negatively impacted especially demand for diesel.
John Macalister Royall: And then it looks like some of the new capacity that came on in the Middle East really never made it to nameplate capacity until
John Macalister Royall: Early this year, so we saw a bit of a step change in refining runs in the Middle East with a lot of that product making its way into Europe .
Gary K. Simmons: But the combination of higher refinery runs in the Middle East and a little sluggish economic activity in parts of the Atlantic Basin allowed a restocking of, you know, inventories in the region. So with that, we've, you know, we've obviously seen refinery margins weaken some. We haven't had any type of major weather event, you know, take down refining capacity like we've seen the past few years. Of course, we're right in the middle of hurricane season, so you still have that potential.
John Macalister Royall: So, you know, some of that early in the year was masked with some of the drone strikes on Russian refining capacity. But the combination of higher refinery runs in the Middle East, a little sluggish economic activity in parts of the Atlantic Basin, allowed restocking of, you know, inventories in the region.
John Macalister Royall: So, with that, we've, you know, we've obviously seen refinery margins weaken some. We haven't had any type of major weather event, you know, take down refining capacity like we've seen the past few years, of course. We're right in the middle of hurricane season, so you still have that potential.
Gary K. Simmons: So, you know, with refinery runs up in the North Atlantic Basin combined with a little softer diesel demand, you've seen that restocking. We've gone from well below the five-year average total light product inventory to trending more to the bottom end of the five-year average range. You know, as inventories tend to trend towards the five-year average, you would expect to see a margin environment closer to a mid-cycle type margin environment.
John Macalister Royall: So, you know, with refinery runs up in the North Atlantic Basin, combined with a little softer diesel demand.
John Macalister Royall: You've seen that restocking. We've gone from, you know, well below the five-year average total light product inventory to trending more to the bottom end of the five-year average range.
John Macalister Royall: You know, as inventories tend to trend towards the five-year average, you would expect to see a margin environment closer to a mid-cycle type margin environment. That's kind of what we're seeing.
Gary K. Simmons: That's kind of what we're seeing. It does feel, you know, as the market has found, a bit of a bottom. Consultant data indicates that, at least earlier this week, hydro-skimming margins in Europe and the Far East were negative, and cracking margins in the Far East were negative.
John Macalister Royall: It does feel, you know, as the market has found, a bit of a bottom. Consultant data indicates, at least earlier this week, hydro skimming margins in Europe and the Far East were negative.
Gary K. Simmons: You know, and if that's correct and we found a bottom, that is what historically has been a mid-cycle type refining margin environment, that's actually pretty bullish on refining going forward. As we move into the third quarter, we'll start to see a little lower utilization, you know, mainly turnarounds affecting refiner utilization. Most of the consultant data actually shows year-over-year demand growth was more weighted to the back end of the year, so hopefully, we'll see a little bit better demand.
John Macalister Royall: Cracking margins in the Far East negative, you know and if that's if that's correct and we found a bottom That is what historically been a mid cycle type refining margin environment. That's it's actually pretty bullish refining going forward
Speaker Change: As we move into the third quarter, we'll start to see a little lower utilization, mainly turnarounds affecting refinery utilization.
Gary K. Simmons: Some of the freight indices are starting to turn. The market in Europe looks actually pretty strong, which has closed the ARB to send gasoline from Europe to the United States and opened the ARB to send U.S. Gulf Coast diesel to Europe. So I think, you know, you'll see some tightening of supply-demand balances in the near term, and then, longer term, we see very little new refining capacity additions with continued demand growth, which should lead to bullish margins in the long term. Great, thanks, Gary. That's very thorough and comprehensive.
Speaker Change: Most of the consultant data actually shows year-over-year demand growth was
Speaker Change: Hopefully see a little bit better demand. Some of the freight indices are starting to turn. Market in Europe looks actually pretty strong, which has closed the ARB to send gasoline from Europe to the United States, opened the ARB to send U.S. Gulf Coast diesel to Europe .
Speaker Change: So, I think, you know, you'll see some tightening of supply-demand balances in the near term, and then longer term, you know, we see very little new refining capacity additions with continued demand growth, which should be bullish margins in the long term.
Jason W. Fraser: And then my second question is on capital returns. You had another very strong quarter. This quarter, I think you're above 80% of CFO. How do you think about the cadence and the buyback going forward from here? And any thoughts on leading into the balance sheet for capital returns? Hey, John. This is Jason.
Speaker Change: Great. Thanks, Gary. That's very thorough. And then my second question is on capital returns.
Speaker Change: You had another very strong quarter. In this quarter, I think you're above 80% of CFO . How do you think about the cadence and the buyback going forward from here? And any thought on leaning into the balance sheet for capital returns?
Jason W. Fraser: Good morning. I might just ask Homer to answer that one for you. Sure. But, I mean, we haven't really had to lean into the balance sheet for shareholder returns. I mean, in fact, if you look back to 2020, we've been able to fund all of our uses of cash, including over $6 and a half billion of capital investments, we paid down over four billion of debt, and over 17 billion of shareholder returns over that period, all through cash flow from operations. In fact, we've actually built cash since 2020.
Speaker Change: Hey John , this is Jason. Good morning.
Homer: I might just ask Homer to answer that one for you. Sure. So, John , we haven't really had to lean into the balance sheet for shareholder returns. I mean, in fact, if you look back to 2020, we've been able to fund all of our uses of cash, you know, including over $6.5 billion of capital investments.
Homer: We've paid down over four billion of debt and over 17 billion of shareholder returns over that period all through cash flow from operations In fact, we've actually built cash since 2020
Homer Bhullar: So I think consistent with what we've been guiding to, given the strength in our balance sheet and our current cash position, we continue to lean into buybacks with a payout ratio of 87% for the second quarter and 80% year to date, again, all funded within cash flow despite a lower margin environment. So I think looking forward, in periods where the balance sheet is strong as it is now, we've got sustaining capex, the dividend, and strategic capex covered, you can reasonably think of our 40% to 50% as a floor and continue to expect any excess free cash flow to go towards share buybacks.
Speaker Change: So I think consistent with what we've been guiding to, you know, given the strength in our balance sheet and our current cash position, we continue to lean into buybacks with a payout ratio at 87% for the second quarter and 80%.
Homer: [inaudible]
Homer: Strategic CapEx covered, you can reasonably think of our 40-50% as a floor and continue to expect any excess free cash flow go towards share buybacks.
Homer Bhullar: Thank you. Our next question is from Doug Leggate with Wolf. Thank you for having me on, Gary. I appreciate all your comments about the macro, but I'm afraid I'm gonna ask another question, if you don't mind. The, the, everything you've said makes an enormous amount of sense, except for the fact that, globally, on a net basis, we're now back to a net surplus in terms of refinery additions, compared to right before COVID.
Homer: Our next question is from Doug Leggate with Wolf Research. Please proceed.
Douglas George Blyth Leggate: Thank you for having me on and Gary I appreciate all your comments about the macro but I'm afraid I'm going to
Douglas George Blyth Leggate: I'm going to ask another one if you don't mind.
Douglas George Blyth Leggate: Everything you've said makes an enormous amount of sense, except for the fact that it seems that globally, on a net basis, we're now back to a net surplus in terms of refinery additions.
Homer Bhullar: And obviously, Dan Goethe is part of that. But you know, we've had whiting come back online, and utilization, it seems, is now running pretty well. So, I'm just curious as to how you think that cleans up.
Douglas George Blyth Leggate: Do we need another turnaround, you know, capital event like a turnaround cycle to see some of those closures? Or do you see it differently?
Douglas George Blyth Leggate: and obviously Dan Goethe is part of that, but you know we've had whiting come back online and you know, utilisation it seems is now running pretty well.
Speaker Change: So I'm just curious as to how you think that cleans up. Do we need another turnaround, you know, capital event like a turnaround cycle to see some of those closures or do you see it, do you see it differently?
Gary K. Simmons: No, I think we see it the same way. I think you'll see, you know, some, some improvement in economic activity, which will improve diesel demand. And then for us, you know, we've had the impact of Dengote and Desbocas starting to be absorbed in the market. Offsetting that, you know, there are 600,000 barrels a day of announced refinery closures. We're not sure when the timing of those will actually occur, but as you start to see more refinery rationalization occur, it'll again tighten up the supply and demand balances longer term.
Speaker Change: No, I think we see it the same way. I think you'll see, you know, some improvement in economic activity, which will improve diesel demand.
Speaker Change: And then for us, you know, you've had, you know, the impact of Dan Gauthier and Des Bocas starting to be absorbed in the market. Offsetting that, you know, there are 600,000 barrels a day of announced refinery closures. We're not sure when the timing of those will actually occur, but you start to see more refinery rationalization occur.
Gary K. Simmons: Okay, thank you. My follow-up is kind of related to that because, you know, you guys are and will probably continue to be the cost leader in terms of your system. You know, best in class in the U.S. for sure.
Speaker Change: It will again tighten up the supply-demand balances longer term.
Speaker Change: Okay, thank you. My follow-up is kind of related to that because, I mean, you guys are, there's no question you guys are and will probably continue to be the cost leader in terms of your system, you know, best in class in the U.S. for sure.
Speaker Change: The issue we're trying to figure out is where the vulnerabilities are across the U.S. in terms of the marginal refinery. And I guess for you guys, we're curious what's going on in the West Coast, because just last week...
Wayne: The issue we're trying to figure out is where the vulnerabilities are across the US in terms of the marginal refinery. And I guess for you guys, we're curious what's going on on the West Coast because just last week, we had the lowest margin since COVID on the West Coast, and Benicia is obviously out there. We thought it was going to do better because of TMX. So can you maybe help us understand what the role of Benicia is in the portfolio and what you see in the West Coast dynamics currently? Hey Douglas, this is Wayne.
Speaker Change: We had the lowest margins since COVID on the West Coast and Benicia is obviously out there. We thought it was going to do better because of TMX. So can you maybe help us understand what is the role of Benicia in the portfolio and what do you see in the West Coast dynamics currently?
Wayne: I'll start and then I'll let Gary follow up on the TMX question. When you think about our portfolio, the West Coast clearly is the highest cost region we operate in. It's just by virtue of everything that goes on on the West Coast, it's the most expensive to operate within it. Historically, the way it worked there was you'd have marginal economics, and then the balances would be such that you'd have an outage, and you would experience a period of higher margins, and then it would go back.
Wayne: Hey Doug, this is Wayne. I'll start and then I'll let Gary follow up on the TMX question. When you think about our portfolio, the West Coast clearly is the highest cost region we operate in.
Douglas George Blyth Leggate: It's just by virtue of everything that goes on on the West Coast, it's the most expensive to operate with. And historically...
Wayne: So it was really almost a call option on West Coast spreads. You know, if it is a harder place to operate, it is a more expensive place to operate. And so when you look across the U.S., I would expect that it's probably one of the places that you would ultimately see some refinery closures as it shakes out. And then I'll let Gary.
Gary: You know the way it worked there is you'd have marginal economics and then the balances would be such that you'd have an outage and you would sort of experience a higher, a period of higher, higher margins and then it would go back. So it's really almost a call option on West Coast spreads and
Gary: It is a harder place to operate, it is a more expensive place to operate, and so when you look across the U.S., I mean, I would expect that's probably one of the places that you would ultimately see some refinery closures as it shakes out. And then I'll let Gary...
Gary K. Simmons: Yeah, the only thing I'd add to that is, you know, we did have the view that with some of the refinery conversions to make renewable fuels, you would see, especially gasoline, pretty tight. But if you look from April through the end of June, gasoline imports into the West Coast were up 70,000 barrels a day. And I think, you know, that combined with a little softer demand is why you're seeing that margin environment on the West Coast that we're seeing today. As far as TMX, you know, TMX started up at the beginning of May. It didn't load its first cargo out until the end of May. We didn't load our first cargo out until June.
Gary: Yeah, the only thing I'd add to that is, you know, we did have the view that with some of the refinery conversions to make renewable fuels that you would see especially gasoline pretty tight, but if you look from April through the end of June , imports, gasoline imports into the West Coast were up 70,000 barrels a day, and I think, you know, that combined with a little softer demand is...
Gary: Why you're seeing that margin environment on the West Coast that we're seeing today.
Gary K. Simmons: So, really, any impact you're going to see from TMX wasn't reflected in our second quarter results. You won't start to see that until the third quarter. Alright guys, thanks so much for the answers. Our next question is from Roger, as well as Fargo. Yeah, good morning, everybody.
Speaker Change: As far as TMX, you know TMX started up beginning of May, they didn't load the first cargo out until the end of May, we didn't load our first cargo out until June , so really any impact you're going to see from TMX wasn't reflected in our second quarter results, you won't start to see that until third quarter.
Speaker Change: Alright guys, thanks so much for the answers.
Unknown Executive: Um, maybe you take a slightly different direction here politically. Um, at the end of June, the Supreme Court took out Chevron deference. There's a lot of ways to interpret that and some of the other things going on politically with the election, but I was just curious if you had any thoughts about, you know, on the policy front on that, I guess you call it, the judicial front, how that might affect any parts as we think about, you know, some of the cafe standard stuff and then, you know, it has been mentioned that the challenges and getting permits to do things on the expansion
Speaker Change: Our next question is from Roger Read with Wells Fargo. Please proceed.
Roger David Read: Yeah, good morning everybody.
Speaker Change: Maybe you take a slightly different direction here policy-wise. At the end of June , the Supreme Court took out Chevron deference.
Roger David Read: There's a lot of ways to interpret that and some of the other things going on politically with the election But I was just curious if you had any thoughts about you know on the policy front on on that I guess you call it judicial front how that might
Speaker Change: affect any parts as we think about, you know, some of the CAFE standard stuff, and then, you know, has been mentioned the challenges in getting permits to do things on the expansion side.
Unknown Executive: This is Rich Walsh, and you never get a great legal question like this on an earnings call, so this is exciting. And so I'm going to try not to get too wonky here, but with Chevron deference, right, under that program, the courts were required to give agencies complete deference as to their interpretations of their own authority, and so it made it really difficult for the judiciary to kind of rein in the administrative state.
Speaker Change: This is this Rich Walsh and so hey you never you never get a great legal question like this on an earnings call so this is exciting and so I'm going to try not to get too wonky here but you know I you know I just you know with Chevron deference right the you know
Speaker Change: Under that program, the courts were required to give agencies complete deference as to their interpretations of their own authority, and so it made it really difficult for the judiciary to kind of rein in the administrative state.
Richard Joe Walsh: And so what you see the Supreme Court doing is they really basically restored meaningful judicial review over this, so now judges are required to use their best reading of the statute, and while the agencies have historically viewed that they're entitled to this deference, and the agencies generally believe they've got the right reading of the statute, I think everybody's going to kind of come to the realization that the range of interpretation that's going to be acceptable is not going to be as So as a practical matter, how that works is...
Speaker Change: And, you know, and, you know, while the agencies, you know, have historically viewed that.
Roger David Read: You know, they're entitled to this deference, and the agencies generally believe they've got the right reading of the statute. I think everybody's going to kind of come to the realization that.
Roger David Read: The range of interpretation that's going to be acceptable is not going to be as wide. And you're clearly going to have judges who are empowered now to kind of look at the statute and not just defer to the agency on it. So, you know, as a practical matter, how that works is...
Richard Joe Walsh: I think you're going to see, you know, less agency overreach in terms of how they interpret it, and you're certainly going to see less political swings in the agencies in terms of how they, you know, often shift back and forth depending on the administration. And then I think, you know, if you kind of pair that together with the major questions doctrine, you're really looking at it. You know, kind of trying to, I think what the court's trying to do is put policy back in the hands of the legislature and back in the hands of Congress and not, you know, let it be really policy-driven at the administrative level.
Roger David Read: You know, less agency overreach in terms of how they interpret it, and you're certainly going to see less political swings in the agencies in terms of how they, you know, often shift back and forth, depending on the administration.
Speaker Change: And then I think, you know, if you kind of pair that together with major questions, doctor,
Speaker Change: You know, kind of trying to, you know, I think what the court's trying to do is put policy back in the hands of the legislature, back in the hands of Congress, and not, you know, let it be really policy-driven at the administrative level.
Richard Joe Walsh: And so, and just as a practical matter, we've seen that already happen. The Supreme Court sent back nine cases already asking the lower courts to review, you know, their decisions in light of not giving deference to the agency. So when you talk about our existing litigation, you know, we really don't talk about the litigation specifically, but I would say, you know, you've seen some pretty extreme interpretations here, you know, in particular, the administration taking the position that it can, without congressional mandate, go in and mandate electrification of vehicles.
Speaker Change: and so and just as a practical matter we've seen that already happen the Supreme Court sent back nine cases already asking the lower courts to review you know their their decisions in light of not giving deference to the agency so when you talk about our existing litigations you know we
Speaker Change: We really don't talk about the litigation specifically, but I would say, you know, you've seen some pretty extreme interpretations here, you know, in particular, you know, the administration taking the position that they, without congressional mandate, can go in and mandate electrification of vehicles.
Richard Joe Walsh: It's hard to see how the courts give them deference on that question, and it's certainly hard to see how that's not already covered under the major questions doctrine in the West Virginia case. I feel like I'm getting a little wonky here, so let me just kind of wrap that up with that thought.
Speaker Change: You know that's it's hard to see how that how the courts give them deference on that question And it's certainly hard to see how that's not already covered under the major questions doctrine in the West Virginia case So, you know feel like I'm getting a little wonky here. So let me Let me just kind of wrap that up with with with that thought
Richard Joe Walsh: No, that's that I appreciate that. And yeah, it is; it is one of those types of topics. So the only follow-up really had on that, and I think you kind of answered it, the timing to have impacts of this could be like what the next 12 to 24 months, or does it take long? Well, you know, there's already a California waiver case queued up in front of the Supreme Court on a cert petition. Now the D.C. circuit dismissed that one based on, you know, a standing type issue, but they really were trying to avoid, I think, you know, addressing the underlying question.
Speaker Change: No, I appreciate that, and yeah, it is one of those types of topics. So, the only follow-up I really had on that, and I think you kind of answered it, is
Speaker Change: The timing to have impacts of this could be, you know, like, what, the next 12 to 24 months, or does it take longer?
Speaker Change: Well, you know, there's already a California waiver case queued up in front of the Supreme Court on a CERT petition.
Speaker Change: It was the D.C. Circuit dismissed that one based on a standing type issue, but they really were trying to avoid, I think, addressing the underlying question. There's a number of cases coming up. There's a CAFE case that's already been argued in front of the D.C. Circuit that specifically
Unknown Executive: So it'll be, there's a number of cases coming up. There's a CAFE case that's already been argued in front of the D.C. circuit that's specifically queued up. So I think these changes will happen quicker than people traditionally expect from the judiciary. Sounds great. Thank you.
Speaker Change: queued up. So I think these changes will happen quicker than people traditionally expect from the judiciary.
Unknown Executive: Our next question is from Ryan Todd with Paper Santa...
Speaker Change: Sounds great. Thank you. Turn it back.
Ryan M. Todd: Thanks. Maybe one back on refining supply and demand. Clearly, part of the issue in the second quarter here has been supply driven. The system has been running really, really well with high utilization rates. Are you seeing, just curious as you listen to this, are you seeing run cuts across any parts?
Speaker Change: Our next question is from Ryan Todd with Paper Sandler. Please proceed.
Speaker Change: Thanks.
Speaker Change: Maybe one back on refining supply-demand. Clearly, part of the issue in the second quarter here has been supply-driven. The system's been running really, really well with high utilization rates.
Ryan M. Todd: Are you seeing, just curious as you listen to that, are you seeing run cuts across any parts?
Speaker Change: of the globe that you can see have an impact on the supply side.
Speaker Change: As we look at your third quarter guidance, it implies lower throughput versus 2Q. Is that maintenance? Is there some commercial activity there? I'm just curious as you see, kind of how you see dynamics on the supply side here into the third quarter, as a possible tailwind for margins.
Greg: of the globe that you can see having an impact on the supply side. And as we look at your third quarter guidance, which implies lower throughput versus 2Q, is that maintenance? Is there some commercial activity there? Just curious as you see kind of how you see dynamics on the supply side here into the third quarter as a possible tailwind from our, Hey, Ryan, this is Greg. I'll talk about our system.
Greg: So you do see that our throughput guidance considers planned maintenance activity we have in the quarter. So particularly if you take a look at the North Atlantic, you see that there. Otherwise, I would just say for our system, we're optimizing our refineries in light of these market conditions, just like we always do. So some of that might be reflected in the guidance as well. But you can definitely see where the planned maintenance activity is having an impact. Okay, thanks.
Speaker Change: Hey Ryan, this is Greg. I'll talk about our system. So you do see that our throughput guidance considers
Greg: Planned Maintenance Activity we have in the quarter. Particularly if you take a look at the North Atlantic, you see that there.
Speaker Change: Otherwise, I would just say for our system, we're optimizing our refineries in light of these market conditions, just like we always do, so some of that might be reflected in the guidance as well, but you can definitely see where the planned maintenance activity is having an impact.
Lane Riggs: And then maybe... On a broader question, I mean, you've argued for generally tight global refining markets and higher for longer-type mid cycle margins. Has anything from the 2024 margin environment that we've seen this year changed this view, or do you still view that kind of as consistent with the outlook going forward? This is Lane.
Speaker Change: Great, thanks. And then maybe...
Speaker Change: On a broader question, I mean, you've argued for generally tight global refining markets and probably a higher for longer type of mid-cycle margins.
Speaker Change: Has anything from the 2024 margin environment that we've seen this year changed this view or do you still view that kind of as consistent with the outlook going forward?
Lane Riggs: I think if you sort of listen to Gary's opening comments and think about what we have said is that we do believe going forward, you're going to have a higher margin of army, you're seeing, we're seeing refinery make cuts at what at least we would have historically thought was a mid cycle, so that, you know. Which is an interesting thing to say, well, you know, there are fringes out there that are seeing marginal economics in a historically mid-cycle economic environment.
Lane: This is Lane. I think if you sort of listen to Gary's opening comments and you think about what we have said is that we do believe going forward, you're going to have a higher margin of army. We're seeing refinery make cuts at what at least we would have historically thought was a mid-cycle.
Lane Riggs: And so that would tell you, we don't know where the lows are, but you're saying those indicate that the call on refining is, because of that, there's some surroundings that are cutting in this space. So, you know, it just reinforces our view that you have a higher margin for a cap going, or higher mid-cycle going. Thanks, man, from Manav Gupta with UBS. Good morning,
Speaker Change: And so that, you know, which is an interesting thing to say, well, you know, there are refineries out there that are seeing marginal economics in a historically mid-cycle economic environment.
Speaker Change: And so, that would tell you, we don't know where the lows are, but you're telling, those indicate that the call on refining is, because of that, there's some surroundings that are cutting in this space. So, you know, it just reinforces our view that you have a higher margin for a cap going, or higher mid-cycle going forward.
Manav Gupta: My first question is your outlook on the Gulf Coast heavy sour differential. It looks like OPEC will start adding volumes somewhere in the fourth quarter and then continue to do so in 2025. And then also there's a bigger refining asset in that area, which uses a lot of that crude, which will hopefully be closing down in early 2025. So your outlook, the medium-term outlook for the heavy sour differentials on the Gulf Coast. Emanov, this is Gary.
Lane: Thanks, Lane.
Speaker Change: Our next question is from Manav Gupta with UBS. Please proceed.
Manav Gupta: Good morning guys. My first question is your outlook on the Gulf Coast heavy sour differential. Looks like OPEC will start adding volumes somewhere in the fourth quarter and then continue to do that in 2025. And then also there's a bigger refining asset in that area which uses a lot of that crude which will be hopefully closing down in early 2025. So your outlook, medium-term outlook for the heavy sour differentials on the Gulf Coast.
Gary K. Simmons: So I think in the short term, we've seen heavy-sour differentials move a little wider. That was mainly a mid-continent refiner that had a complete power outage that decreased the demand for Canadian heavy. As we move through the third quarter, you'll see turnaround activity in the mid-continent, especially.
Speaker Change: Hey Manav, this is Gary. So I think, you know, in the short term, we've seen heavy solar differentials move a little wider, you know, that was mainly a mid-continent refiner that's had a complete power outage that's decreased the demand for Canadian heavy.
Gary K. Simmons: Also, there is decreased demand for Canadian heavy, which is supportive of the differentials. And then, longer term, I think the two things you pointed out: for meaningful, sustainable, wider heavy-sour differentials, you really need more OPEC production back on the market. We're unsure exactly when that occurs, but our view has been late this year and early next year you start to see more OPEC barrels on the market, which will create wider heavy-sour differentials. The other thing I'd point out is even with where the differentials were in the second quarter, we saw a significant economic uplift by running heavy-sour crews in the second quarter, even with where the differentials were.
Speaker Change: As we move through the third quarter, you'll see turnaround activity in the mid-continent especially.
Speaker Change: Also decreased demand for Canadian Heavy, which is supportive of the differentials. And then longer term, I think, you know, the two things you pointed towards.
Manav Gupta: for Meaningful, Sustainable.
Manav Gupta: We're unsure exactly when that occurs, but yeah, we, you know, our view has been late this year, early next year, you start to see more OPEC barrels on the market, which, you know, will create wider heavy sourd differentials.
Manav Gupta: The other thing I'd point to is, you know, even with where the differentials were in the second quarter, we saw a significant economic uplift by running heavy sour crudes in the second quarter, even with where the differentials were.
Gary K. Simmons: Perfect, so my follow-up here is, as you're approaching your completion on the SAF unit, are there any preliminary estimates we should think about how much of an uplift this change going from RE to SAF could provide for you guys? Hey Manav, this is Eric.
Speaker Change: Perfect. So my follow-up here is, as you are approaching your completion on the SAF unit, are there any preliminary estimates we should think about how much of an uplift could this change going from RE to SAF provide for you guys?
Eric: We're not going to give out specifics like that, but I would say, you know, you can look at the various programs, the state programs, the federal tax credits around, whether it's BTC or PTC, and then the mandate in the EU and the UK all kind of give you an indicator of what that uplift will be. Argus has got a quote that you can look at. What we would say is that there is a premium for SAF over RD and it's all going to be, give us a margin that will be stronger than RD, and it's in our outlook that it will meet the economics of our project. So all of that looks pretty positive. Thank you so much.
Speaker Change: Hey Manav, this is Eric. We're not going to give out specifics like that. I would say you can look at the various programs.
Speaker Change: The state programs, the federal tax credits around whether it's BTC or PTC, and then the mandate in the EU and the UK all kind of give you an indicator of what that uplift will be. Argus has got a quote that you can look at. What we would say is that there is a premium of SAF.
Speaker Change: Over RD, and it's all going to be, give us a margin that will be stronger than RD. And our outlook is it will meet the economics of our project. So all of that looks pretty positive.
Gary K. Simmons: Our next question is from Theresa Chen with Barclays. Morning, I wanted to go back to one of Gary's comments earlier on demand across your footprint, the 10% year over year uptick on the diesel side, which is not representative of the broader market. Can you give some color on how you've been able to take market share, which seems to be on a continued basis at this point?
Speaker Change: Thank you so much.
Speaker Change: Our next question is from Theresa Chen with Barclays. Please proceed.
Theresa Chen: Morning. I wanted to go back to one of Gary's comments earlier on demand across your footprint. The 10% year-over-year uptick on the diesel side, which is not representative of the broader market,
Eric: Well, I guess I just say our wholesale team has done a great job first, you know, growing our market share. And then some of that has also been due to some of the refinery rationalization that took place, you know, especially during the COVID period; it's allowed us to grow our market share as well. Got it. And following up on renewable fuel economics, Eric, can you provide an update on your outlook for the different subsidy prices over the near to medium term, especially with the election around the corner? Yeah, that's something everyone's trying to figure out, and it's a really difficult dart to throw these days.
Theresa Chen: Can you give some color on how you've been able to take market share, what seems to be on a continued basis at this point?
Speaker Change: Well, you know, I guess I just say our wholesale team has done a great job first, you know, on growing our market share and then some of that has also been due to some of the refinery rationalization that took place, you know, especially during the COVID period. It's allowed us to grow our market share as well.
Eric: Got it. And following up on the renewable fuel economics, Eric, can you provide an update on your outlook for the different subsidy prices over the near to medium term, especially with the election around the corner?
Eric: I think one of the things we should look at is... The RIN market still looks oversupplied to us. So as we kind of get into the back end of 24, it looks like the RIN market is long, the California LCFS market will remain long, and therefore, we think, with fat prices starting to increase, we see compression in RD margins in the back half of 24. The policy things that are coming up, LCFS might expand with California.
Eric: Yeah, that's something everyone's trying to figure out and it's a really difficult dart to throw these days. I think one of the things we look at is...
Speaker Change: The RIN market still looks oversupplied to us, so as we kind of get into the back end of 24, it looks like the RIN market is long, California LCFS market will remain long, and therefore we think, with fat prices starting to increase,
Eric: They're still saying that it's going to be a 2025 change. The RIN update for 2026 got pushed to March 25, but with all the expectations that AG has on RFS volumes, we expect that will probably be some sort of increase. So I think longer term, in sort of the next one to two years, we see a lot of tailwind for DGD in terms of credit prices, specific to our platform. We are obviously diversifying into SAF. That's going to be a diversification away from RD, and that includes a premium to RD. So that looks pretty strong.
Eric: We see compression in RD margins in the back half of 24.
Eric: The policy things that are coming up, LCFS might expand with California, they're still saying that's going to be a 2025 change.
Eric: The RIN update for 2026.
Eric: got pushed to March of 25, but with all the expectations that ag has on the RFS volumes, we expect that will probably be some sort of increase.
Eric: So I think longer term, in sort of the next one to two years, we see a lot of tailwind for DGD in terms of credit prices.
Eric: Specific to our platform,
Eric: And then, The other thing that will be interesting, because this is being looked at now, is whether we are going to have a BTC or PTC transition on January 1. And as we've said in the past, the RIN and the BTC have a relationship that, Previously, when we discussed the BTC going away, we expected the RIN to increase to keep the biodiesel producer at breakeven. So when you think about a BTC to PTC transition where the PTC is less than a dollar, there is some view that the RIN will have to pick up the difference in order to keep the biodies
Eric: We are obviously diversifying into SAF. That's going to be a diversification away from RD. That includes a premium to RD. So that looks pretty strong.
Eric: transition January 1. And as we've said in the past, the RIN and the BTC have a relationship that
Eric: Previously, when we discussed the BTC going away, we expected the RIN to increase to keep the biodiesel producer at break-even.
Eric: So, when you think about a BTC to PTC transition where the PTC is less than a dollar, there is some view that the RIN will have to pick up the difference in order to keep the biodiesel blender break even. So,
Eric: You have a little bit of a discussion of the market, and the credits look long, but the relationship between BTC, PTC, and the RIN has always been somewhat of a factor in rebalancing the market. How fast that happens, how soon that happens, the timing of that given the elections, those are all kind of up in the air, but I think structurally, as you look forward, all of this looks pretty good for DGD. Thank you for that nuanced response. Our next question is from Paul Cheng with Scotiabank. Hi, good morning.
Eric: You know, you have a little bit of a discussion of the market and the credit and the credits look long but the relationship between BTC, PTC and the RIN
Eric: has always been somewhat of a factor of rebalancing the market. How fast that happens, how soon that happens, the timing of that given the elections, those are all kind of up in the air. But I think structurally as you look forward, all of this looks pretty good for DGD.
Paul Cheng: I think this is for Gary. Yeah, good morning. This is for Gary.
Speaker Change: Thank you for that nuanced response.
Gary K. Simmons: Gary, can I go back into your comment about TMAX's first low in May, and so now just two months later. From where you stand, do you think the impact on the West Coast market from TMAX is now fully refracted in the marketplace, or do you think over the several months that you have sufficient indication of the crude defense in that market? Secondly, maybe this is either for Gary or for Ling, as the market normally... How does it impact the way your refining operation runs in terms of the sustainable maximum run rate, crew lay, or product yield, whatever? If you can give some comments, that would be great. Thank you. Yes, I'll start with TMX, Paul.
Speaker Change: Our next question is from Paul Cheng with Scotiabank. Please proceed.
Paul Cheng: Oh yeah, good morning.
Paul Cheng: I think this is for Gary. Good morning. This is for Gary. Gary, can I go back into your comment about T-Legs first roll in May, and so now there's two months.
Paul Cheng: From what you can see, do you think the impact on the West Coast market from the TMAX is now fully reflected in the marketplace? Or do you think over the several months that you have sufficient...
Speaker Change: Indication to the crude defensible in that market. Secondly, maybe this is either for Gary or for Ling, as the market normalizes,
Speaker Change: How does it impact the way how your refining operation run in terms of the sustainable maximum run rate, crew lay or product yield, whatever that you can give some comment. That would be great. Thank you.
Gary K. Simmons: Yeah, I think you know that it took a little while for the West Coast market to respond to TMX. If you look, though, at where ANS was trading prior to the TMX startup and kind of where September is trading relative to Brent, you know, ANS has come off in the $1.50 to $2.00 range, which is in line with what we thought the impact TMX would have on West Coast crude costs. I just don't think you'll see that show up until the third quarter. I'll take a shot at the second one.
Speaker Change: Yes, I'll start with TMX, Paul. Yeah, I think you know that it took a little while for the West Coast market to respond to TMX.
Speaker Change: If you look though at where ANS was trading prior to the TMX startup.
Speaker Change: And kind of where September is trading relative to Brent, ANS has come off in the $1.50 to $2.00 range, which is in line with what we thought the impact TMX would have on West Coast crude costs. I just don't think you'll see that show up until more third quarter.
Lane Riggs: Paul, this is Lane. You know, I don't really see as the world sort of settles on some other place that impacts our operations. We always take signals from the market, we focus on being reliable, we focus on execution, we don't change turnarounds and do things like that based on whether we think the market's good now, not later. You know, our idea of operational excellence means that we wake up every day, we try to wear the hat, and will execute in a way that we're the best operator that we can be, which we think we are the best operator out there, and so I don't really profoundly see any change based on necessarily some sort of different refining algorithm.
Lane: I'll take a shot at the second one. Paul, this is Lane. You know, I don't really see, as the world sort of settles on some other place that impacts our operations, we always take signals from the market. We focus on being reliable. We focus on execution. We don't move turnarounds and do things like that based on whether we think the market's...
Paul Cheng: Good now, not later.
Paul Cheng: We'll execute in a way that we're the best operator that we can be, which we think we are the best operator out there. And so I don't really profoundly see any change based on necessarily some sort of different refining outlook.
Unknown Executive: Thank you. Our next question is from Joe Lee. Hi, everyone. Good morning.
Joe Lee: And thanks for taking my questions. So on the refining side, and on the export side, specifically, would you mind just giving us an update on Mexico? And if I remember right, I think there was a new terminal opening there this year as well. Yeah, so this is Gary.
Speaker Change: Our next question is from Joe Leach with Morgan Stanley . Please proceed.
Joseph Gregory Laetsch: Hi everyone, good morning and thanks for taking my questions. So, on the refining side and on the export side specifically, would you mind just giving us an update on Mexico? And if I remember right, I think there was a new terminal opening there this year as well.
Gary K. Simmons: I would tell you our volumes to Mexico were down a little bit. We've been fairly consistently, you know, sending about 100,000 barrels a day. In the second quarter, that was more like 87,000 barrels a day. You know, for us, it's just another knob we have in optimizing our Gulf Coast system. And with where PMX was pricing the barrels, we have better alternatives. It's not a shift.
Lane: Yeah, so this is Gary. I would tell you our volumes to Mexico were down a little bit. We've been fairly consistently, you know, sending about 100,000 barrels a day. In the second quarter, that was more like 87,000 barrels a day.
Gary K. Simmons: Moving forward, we do think you'll see some growth in our Mexico volumes. Our terminal that we'll utilize in Altamira will start up before the end of the year. It will allow us to be more competitive in the northern Mexico market and allow us to continue to grow our volumes there. Great. Thanks for that. And then, shift over to RD.
Speaker Change: You know, for us, it's just another knob we have in optimizing our Gulf Coast system.
Speaker Change: and with where PMX was pricing the barrels, we had better alternatives, it's not a shift.
Speaker Change: Moving forward, we do think you'll see some growth in our Mexico volumes. Our terminal that we'll utilize in Altamira will start up before the end of the year. It will allow us to be more competitive in the northern Mexico market and allow us to continue to grow our volumes there.
Unknown Executive: So I know you talked about this a little bit earlier, and feedstock costs have been high over the past couple of months. But could you talk a little bit more about what you're seeing on the feedstock cost side as well as availability here with some of the new startups? Yeah, we have noticed that there is growing competition for waste oils. We're still the largest importer of foreign waste oils.
Speaker Change: Great, thanks for that. And then shifting over to RD, so I know you talked about this a little bit earlier and feedstock costs have been high over the past couple of months, but could you talk about a little bit more about what you're seeing on the feedstock cost side as well as availability here with some of the new startups?
Unknown Executive: So if I compare it to last year, there was a pretty good arb of foreign feedstocks over domestic feedstocks being more advantageous. What we see is that that's largely incorporated, and now domestic feedstocks look to be the most attractive from a cost standpoint. From a CI standpoint, those are still all the most advantageous feedstocks for RD, but we do see overall feedstock prices, particularly waste oil feedstocks, starting to increase. So I would say it looks like feedstock prices have bottomed out here in the second quarter.
Speaker Change: Yeah, we have noticed that there is growing competition for waste oils.
Speaker Change: We're still the largest importer of foreign waste oils.
Speaker Change: So if I compare it to last year, there was a pretty good arb of foreign feedstocks over domestic feedstocks.
Speaker Change: being more advantaged. What we see that is that's largely incorporated and now domestic feedstocks look to be the most attractive from a from a cost standpoint.
Unknown Executive: They're starting to trend up a little bit in the third quarter, largely due to some of the startups that we see in California. Our next question is with Goldman Sachs. Good morning, team. And thanks for all the great color.
Speaker Change: From a CI standpoint, those are still all the most advantaged feedstocks for RD, but
Speaker Change: particularly waste oil feedstocks starting to increase. So I would say it looks like feedstock prices have bottomed out here in the second quarter. They're starting to trend up a little bit in the third quarter, largely attributed to some of the startups that we see in California.
Unknown Executive: Staying on refining. I just love your guests' perspective on the coking market, especially in light of Fort Arthur coming online, which was a really good asset, and just your perspective on fuel oil and the opportunity around coking and how those margins can start to normalize over time. What's the sequence of events that will get that to happen? Hey Neil, this is Greg.
Thanks for the time.
Our next question is from Neil Mehta with Goldman Sachs. Please proceed.
Good morning team and thanks for all the great color.
Stan on refining. I just love your guests perspective on the coking market, especially in light of
Port Arthur coming online, which was a really good asset and just your perspective on, you know, fuel oil and the opportunity around how coking and how that those margins can start to normalize over time. What's the sequence of events that will get that to happen?
Greg: So, you know, we still see good value in coking margins. Gary talked about where the heavy sour crude market has been. You know, that's with our coker online and with the industry running the way it has. So, I don't think that we see anything that's a big step change going forward.
Hey Neil, this is Greg. So, you know, we still see good value in coking margins. Gary talked about where the heavy sour crude market has been. You know, that's with our coker online and with the industry running the way it has.
Greg: As Gary mentioned, as you get some more medium sour heavy crude into the market later this year, that should enhance that value. But right now, it's still a strong opportunity for us. Thank you. And then the follow-up is around Asia and specifically around China. As we look at oil demand data, one of the things that's disappointed our model has been Chinese domestic demand. Do you see that as you look at the data? And that's part of the contribution to some of the softness in PAD-5, and can the Asian refining margin lift? in the absence of strong Chinese.
So, I don't think that we see something that's a big step change going forward, as Gary mentioned, as you put, as you get some more.
Medium Sour, Heavy Crude into the market later this year, that should enhance that value. But right now, it's still a strong opportunity for us, still beats our other modes of operation and something we're looking to maximize.
Thank you. And then the follow-up is around Asia, and specifically around China. As we look at oil demand data, one of the things that's disappointed our model...
has been Chinese domestic demand. Do you see it, as you look at the data, as a part of the contribution to some of the softness in PAD-5, can the Asian refining margin lift?
Gary K. Simmons: And you know, this is Gary. We don't have a lot of visibility into the markets in the Far East, but you know, I would tell you certainly what you read is in China, especially diesel demand is down, you know. We see as much as 10%, you know, a lot less construction activity there. But, you know, for the most part, it looks like they've adjusted refinery runs to be somewhat balanced on exports.
in the absence of strong Chinese demand.
And, you know, this is Gary. You know, we don't have a lot of visibility into the markets in the Far East, but, you know, I would tell you certainly what you read is in China, especially diesel demand is down. You know, we see as much as 10%, you know, a lot less construction activity there.
Speaker Change: But, you know, for the most part, it looks like they've adjusted refinery runs to, say, somewhat balanced on exports. Now, we would say exports are up slightly, but for the most part, they've adjusted refinery runs to balance demand, and we haven't seen a significant step change in their exports.
Gary K. Simmons: Now, we would say exports are up slightly. But for the most part, they've adjusted refinery runs to balance demand, and we haven't seen a significant step change in their exports. Thank you, sir. Our next question. Hey, morning.
Unknown Executive: Thanks for taking my questions. I wanted to go back to wholesale channel growth. And it's been pretty consistent over the past few years. And I'm wondering if you can provide some sort of earnings estimate in terms of an uplift from selling through that channel relative to maybe some pre-COVID period or other baseline you have available. And if you expect that growth to continue? Yeah, the only comment, you know, we don't really give a lot of detail around our wholesale margins. Obviously, the growth is because that's our most positive net return for our Gulf Coast system and our US system. And that's why I continue to push it to grow.
Thank you, sir.
Our next question is from Jason Gabelman with TD Cowen. Please proceed.
Jason Daniel Gabelman: Hey, good morning. Thanks for taking my questions.
I wanted to go back to the wholesale channel growth, and it's been pretty consistent over the past few years, and I'm wondering if you can...
Provide some sort of earnings estimate in terms of an uplift from selling through that channel relative to maybe some pre-COVID period or other baseline you have available, and if you expect that growth to continue.
Unknown Executive: So that should be reflected in capture rates going forward, but we don't really give a lot of detail on what those margins are. Can you provide on a volumetric basis how much it's grown and how much more you think you could push through that channel? Yeah, I can roughly estimate, roughly three years ago, we were fairly consistently in the 850,000 barrel to, you know, range and now, you know, over a million barrels a day.
Yeah, the only comment, you know, we don't really give a lot of detail around our wholesale margins.
Obviously, the growth is because that's our most positive net back for our Gulf Coast system and our U.S. system, and that's why I continue to push it to grow. So that should be reflected in capture rates going forward, but we don't really give a lot of detail on what those margins are.
Can you provide, on a volumetric basis, how much it's grown and how much more you think you could push through that channel?
Unknown Executive: So somewhere in the neighborhood of 150,000 barrels a day of growth and wholesale is what I'll tell you over the last few years. And Jason, there's also, yeah, Jason, there's a page, I think page 24 in the deck, which goes all the way back to 2012 for more calls.
Yeah, I can, you know, roughly, I mean, you know, you look three years ago, we were fairly consistently in the 850,000 barrel to, you know, range, and now, you know, over a million barrels a day, so somewhere in the neighborhood of 150,000 barrels a day of growth and wholesale is what I'd tell you over the last few years.
Unknown Executive: All right, great. Thanks. And then specifically on the results and refining, I think co-products were a pretty decent headwind to capture. I'm wondering how much that shaved off capture rates in 2Q and if you're seeing any reversal of those headwinds going into 3Q, especially as crude has started to fall. Yeah, Jason, this is Greg.
And Jason, there's a page, I think page 24 in the deck, which goes all the way back to 2012 for more call archives.
Alright, great, thanks. And then, just specifically on the results and refining, I think co-products were a pretty decent...
Greg: You're right. That was a headwind. I don't know that I have the exact amount, you know, and that will come and go over time. Certainly was working against us in the second quarter. All right, thanks. Our next question is from Matthew Blair. Good morning. Thanks for taking my question. Maybe just stick with CAPTCHA.
Headwind to capture. I'm wondering how much that shaved off capture rates in 2Q and if you're seeing any reversal of those headwinds going into 3Q, especially as crude has started to fall.
Yeah, Jason, this is Greg. You're right, that was a headwind. I don't know that I have the exact amount, you know, and that will come and go over time. Certainly was working against us in the second quarter.
All right, thanks.
Matthew Robert Lovseth Blair: You know, I think it makes sense that your capture was lower quarter over quarter just due to those challenges in the co-products. But at the same time, I believe that the Q2 capture was the lowest absolute number in like five or six years. So has anything changed structurally in your capture compared to just like last year? There were a few things going on in the second quarter that I think had some impact specific to this period.
Our next question is from Matthew Blair with Tudor Pickering and Holt. Please proceed.
Good morning. Thanks for taking my question. Maybe just speaking on CAPTCHA.
You know, I think it makes sense that your capture was lower, quarter over quarter, just due to those challenges in the co-products, but at the same time, I believe that the Q2 capture was the lowest absolute number in like five or six years. So has anything changed structurally on...
Matthew Robert Lovseth Blair: One, we always talk about the seasonal RBP change in gasoline and how that can have a negative impact on margin captures because you pull the butane out of the gasoline that you were able to do in the wintertime. So certainly that was a piece.
on your capture compared to even just like last year?
So this is Greg. There were a few things going on in the second quarter that I think had some impact specific to this period. One, we always talk about the seasonal RVP change in gasoline.
Unknown Executive: We also saw crude market backwardation fairly strong in the second quarter, which impacts crude cost, the acquisition cost for crude. That was probably 80 to 90 cents a barrel relative to the prior quarter and even looking back at some of the other periods in time. We talked about the co-products, naphtha, and propylene, in particular. And I think the other thing may be worth noting that is a bit unique to the second quarter. We always pride ourselves on being able to secure some of those opportunity feed stocks that we can run in our system, particularly in our Gulf Coast system with all the flexibility we have there.
and how that can have a negative impact on margin capture as you pull the butane.
Out of the gasoline that you were able to do in the wintertime. So certainly that was a piece.
We also saw, you know, crude market backwardation.
fairly strong in second quarter, which impacts crude cost, the acquisition cost for crude. That was probably $0.80 to $0.90 a barrel relative to prior quarter, and even looking back at some of the other periods in time.
We talked about the co-products.
NAPDA propylene in particular. And I think the other thing may be worth noting that is a bit unique this second quarter. We always pride ourselves on being able to go secure some of those opportunity feedstocks that we can run in our system, particularly in our Gulf Coast system, with all the flexibility we have there.
Unknown Executive: And I would just tell you in the second quarter, just the way the market played out, there just wasn't a lot of that opportunity to be had. Not that we weren't looking for it. It's just the way the market shaped up. And so that's a bit unique from what we've seen in the past.
And I would just tell you in the second quarter, just the way the market played out, there just wasn't a lot of that opportunity to be had. Not that we weren't looking for it, it's just the way kind of the market shaped up. And so that's a bit unique from what we've seen in the past.
Unknown Executive: And I would expect we'd see those kinds of opportunities when we look forward to going in future periods. Great, thanks for the color. And then on the ethanol side, if I could ask, how sustainable do you think this recent uptick in ethanol margins is? And also, is there an update on the Summit Carbon Capture Project? When do you expect that to start up and benefit your ethanol plants? Thanks. Sure, on the ethanol side, this increased margin is really a result of cheap natural gas prices as well as cheap corn.
Great, thanks for the color. And then on the ethanol side, if I could ask,
How sustainable do you think this recent uptick in ethanol margins is, and also is there an update on the Summit Carbon Capture Project? When do you expect that to start up and benefit your ethanol plants? Thanks.
Unknown Executive: If you look at all of the carryout numbers for this year, with Brazil having a record crop, and the U.S. having a record crop forecast, the carryout is going to be pretty large. That means we're still carrying a fairly large inventory of corn from last year. The harvest that's coming up is going to be another large inventory. I see corn fairly cheap, barring a weather event between now and harvest or something dramatic in Brazil.
Sure, on the ethanol side, this increased margin is really a result of...
cheap natural gas prices as well as cheap corn.
If you look at all of the carry-out numbers for this year with Brazil having a record crop,
The U.S. having a record crop forecasted, the carryout is going to be pretty large.
That means, you know, we're still carrying a fairly large inventory of corn from last year. The harvest that's coming up is going to be another large inventory. So I see corn fairly...
Unknown Executive: I'm positive on the ethanol outlook for the rest of this year and into next year. After that, it's always harvest to harvest to see what the next outlook will look like after that. As far as Summit, that's not our project. That's really a question for Summit. They just got their approval in Iowa. We still view carbon sequestration as a supportive strategy for ethanol, but we're just a shipper on that project
Chief Barring, you know, a weather event between now and harvest.
or something dramatic in Brazil. So I think the, I'm positive on the ethanol outlook for the next, for the rest of this year and into next year. After that, it's always, you know.
Harvest to Harvest of what, you know, the next outlook will look like after that. As far as Summit, that's not our project. That's really a question for Summit. You know, they just got their approval in Iowa. We still view carbon sequestration as a supportive strategy for ethanol, but that's, you know, we're just a shipper on that.
Unknown Executive: If and when that gets put in the ground, we'll happily hook up to it and provide volume to that system, but we don't really have a whole lot of insight into the project itself. Great, thank you. Thank you. We have reached the end of our questions session. I'll back over to you.
Unknown Executive: Great, thank you. Thank you.
on that project. So, you know, if and when that gets put in the ground, we'll happily hook up to it and provide volume into that system, but we don't really have a whole lot of insight into the project itself.
Unknown Executive: We have reached the end of our question and answer session.
Homer Bhullar: I would like to turn the conference back over to Homer for closing remarks.
Unknown Executive: Great. Thank you.
Unknown Executive: Great, thank you, I appreciate everyone joining us today. As always, feel free to contact the IR team if you have any additional questions. Thank you, and have a great week. Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you.
Unknown Executive: Appreciate everyone joining us today. As always, feel free to contact the IR team if you have any additional questions.
Great, thank you.
Unknown Executive: Thank you, and have a great week. Thank you.
Thank you. We have reached the end of our question and answer session. I would like to turn the conference back over to Homer for closing remarks.
Unknown Executive: This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Great. Thank you. Appreciate everyone joining us today. As always, feel free to contact the IR team if you have any additional questions. Thank you and have a great week.
Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
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