Q3 2024 Valero Energy Corp Earnings Call
Greetings and welcome to Valero Energy Corp, third quarter 2024 earnings Conference call.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: <unk> and answer session will follow the formal presentation.
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A reminder, this conference is being recorded it is now my pleasure to introduce your host Homopolar, Vice President of Investor Relations and finance. Thank you you may begin.
Homopolar: Good morning, everyone and welcome to Valero Energy Corporation's third quarter 2024 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 <unk> Senior management team.
Homopolar: If you have not received the earnings release and would like a copy you can find one on our website at Investor Valero Dot com.
Homopolar: 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.
Homopolar: If you have any questions. After reviewing these tables, please feel free to contact our investor relations team after the call.
Homopolar: 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.
Homopolar: Under Federal Securities laws.
Homopolar: 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.
Lane: Now I'll turn the call over to lane for opening remarks.
Lane: Thank you Homer and good morning, everyone.
Lane: Our third quarter results reflect a period of heavy maintenance in our refining segment during a relatively weak margin environment.
Lane: Our refineries operated at 90% throughput capacity utilization in line with our guidance for the quarter.
Lane: Product demand across the system remains strong with our U S wholesale volumes exceeding 1 million barrels per day for the second consecutive quarter.
Lane: On the strategic front, we remain committed to executing projects that continue to enhance the earnings capability of our business.
Lane: Expand our long term competitive advantage I'm.
Lane: I am proud to report that the Diamond Green diesel sustainable aviation fuel or theft project.
Lane: Now mechanically complete and is in the process of starting up the project was completed on schedule and under budget and is a testament to the strength of our projects and operations teams.
Lane: On the financial side, we continue to honor our commitment to shareholder returns.
Lane: A strong payout ratio of 84% for the quarter and the year to date payout of 81%.
Lane: Looking ahead, improving diesel demand against the backdrop of blow light product inventories should support refining margins increases in OPEC, plus crude suppliers should widen our sour crude oil differentials and further increase margins.
Lane: Longer term, we expect product demand exceeds supply with the announced refinery shutdowns next year unlimited capacity additions beyond 2025, supporting long term refining fundamentals.
Lane: In closing.
Speaker Change: Our focus on operational excellence capital discipline and honoring our commitment to shareholder returns has served us well and will continue to anchor our strategy going forward, so with that Homer I'll hand, the call back to you.
Homer: Thanks Blayne for.
Speaker Change: For the third quarter of 2024 net income attributable to Valero stockholders was $364 million or $1 14 per share compared to $2 6 billion or $7 49 per share for the third quarter of 2023.
Speaker Change: The refining segment reported $565 million of operating income for the third quarter of 2024 compared to $3 4 billion for the third quarter of 2023.
Speaker Change: Refining throughput volumes in the third quarter of 2024 averaged two 9 million barrels per day or 90% throughput capacity utilization.
Speaker Change: Refining cash operating expenses of $4 73 per barrel in the third quarter of 2024.
Speaker Change: Renewable diesel segment operating income was $35 million for the third quarter of 2024 compared to $123 million for the third quarter of 2023.
Speaker Change: Renewable diesel sales volumes averaged $3 5 million gallons per day in the third quarter of 2024, which was 552000 gallons per day higher than the third quarter of 2023.
Speaker Change: The ethanol segment reported $153 million of operating income for the third quarter of 2024 compared to $197 million for the third quarter of 2023.
Speaker Change: <unk> production volumes averaged $4 6 million gallons per day in the third quarter of 2024, which was 255000 gallons per day higher than the third quarter of 2023.
Speaker Change: For the third quarter of 2020 for G&A expenses were $234 million net interest expense was $141 million depreciation and amortization expense was $685 million and income tax expense was 96 million the effective tax rate was 20%.
Speaker Change: Net cash provided by operating activities was $1 3 billion in the third quarter of 2024 <unk>.
Speaker Change: Included in this amount was $166 million favorable change in working capital and $47 million of adjusted net cash provided by operating activities associated with the other joint venture members share of DVD.
Speaker Change: Excluding these items adjusted net cash provided by operating activities was $1 1 billion in the third quarter of 2024.
Speaker Change: Regarding investing activities, we made $429 million of capital investments in the third quarter of 2024 of which 338 million was for sustaining the business, including costs for turnarounds catalysts and regulatory compliance and the balance was for growing the business.
Speaker Change: Excluding capital investments attributable to the other joint venture member share of DVD and other variable interest entities capital investments attributable to Valero or $394 million in the third quarter of 2024.
Speaker Change: Moving to financing activities, we returned $907 million to our stockholders in the third quarter of 2024 of which $342 million was paid as dividends and $565 million was for the purchase of approximately $3 8 million shares of common stock, resulting in a payout ratio of 84% for the quarter.
Speaker Change: Year to date, we have returned $3 $7 billion to our stockholders in the form of dividends and buybacks, resulting in a payout ratio of 81%.
Speaker Change: Well above our long term minimum commitment of $40 to 50%.
Speaker Change: In fact since the start of 2021, our total cash flows from operations have exceeded our total uses of cash over this period, including capital investments over $4 billion of debt reduction and over $18 billion returned to stockholders through dividends and share buybacks.
Speaker Change: With respect to our balance sheet, we ended the quarter with $8 4 billion of total debt to $5 billion of finance lease obligations and $5 2 billion of cash and cash equivalents.
Speaker Change: The debt to capitalization ratio net of cash and cash equivalents was 17% as of September 32024.
Speaker Change: And we ended the quarter well capitalized with $5 3 billion of available liquidity excluding cash.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: For modeling our fourth quarter operations, we expect refining throughput volumes to fall within the following ranges.
Speaker Change: Gulf Coast at 183 to $1 88 million barrels per day.
Speaker Change: Mid continent at 425 to 445000 barrels per day.
Speaker Change: West Coast at 230 to 250000 barrels per day, and North Atlantic at 380 to 400000 barrels per day.
Speaker Change: We expect refining cash operating expenses in the fourth quarter to be approximately $4 60 per barrel.
Speaker Change: With respect to the renewable diesel segment, we still expect sales volumes to be approximately $1 2 billion gallons in 2024.
Speaker Change: Operating expenses in 2024 should be 45 per gallon, which includes <unk> 18 per gallon for noncash costs, such as depreciation and amortization.
Speaker Change: Our ethanol segment is expected to produce $4 7 million gallons per day in the fourth quarter operating expenses should average 37 per gallon, which includes <unk> <unk> per gallon for noncash costs, such as depreciation and amortization.
Speaker Change: For the fourth quarter net interest expense should be about $140 million and total depreciation and amortization expense should be approximately $690 million.
Speaker Change: For 2024, we expect G&A 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. If you have more than two questions. Please rejoin the queue as time permits to ensure other callers have time to ask your questions.
Speaker Change: 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 line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the hill.
Speaker Change: Before pressing the star Keys again, Thats Star one to register a question at this time.
Speaker Change: Today's first question is coming from Manav Gupta of UBS. Please go ahead.
Manav Gupta: Hey, good morning, good morning.
Manav Gupta: Good morning. My first question here is can you talk a little bit about the demand for key products and how that is trending as we are coming to a close in 2024.
Gary: Sure Manav. This is Gary obviously, a much weaker refinery margin environment and we are you know in the third quarter than we've seen in the last couple of years the.
Gary: The interesting thing to US is it looks like the underlying market fundamentals actually improved during the third quarter and have continued to improve as we move into the fourth quarter despite that.
Gary: Proving market fundamentals market sediment seized obtain turned more negative hino driving crack spreads even lower.
Gary: To us in the markets, where we have a presence things look very similar to what we've seen the past couple of years Lane alluded to our sales in the third quarter through wholesale over 1 million barrels a day, we averaged a $1 eight in the third quarter, which is actually up year over year gasoline sales were fairly flat year over year diesel sales actually increased.
Gary: Year over year.
Gary: Thus far in the fourth quarter, we've actually seen about a 40000 barrel a day increase in sales to our wholesale channel. So it's actually gone up you kind of compare that to get an indication of demand with some other indicators vehicle miles traveled are up about 1% so that kind of matches with our numbers, even the Doe data, although there's a lot of noise week to week. If you look at the year to date.
Gary: <unk> demand numbers from the Doe would kind of show gasoline demand is flat to slightly up and so we think thats kind of where we are.
Gary: Again, I said diesel sales in our system up a little bit year over year again, if you look at some of the other indicators of demand, especially the freight indices would indicate demand for diesel as a little bit softer compare that to the Doe numbers in the year to date, <unk> numbers, which show diesel demand down close to 100000 barrels a day I think we think thats pretty close some of that.
Gary: GAAP in diesel demand has been made up by an increase in jet fuel demand you know about half of that so net net I think in the U S. We feel like total light product kind of flat to slightly down year over year.
Gary: Markets outside the U S, where we have significant market presence in Canada, UK, Mexico, all very similar trends I think all three of those markets have witnessed a year over year growth in gasoline demand year over year growth in jet demand and a decline in diesel demand so demand looks pretty strong outside those markets. We continue to see good.
Gary: Export demand.
Gary: Gasoline exports in the third quarter about 100000 barrels a day typical markets Latin America, and Canada diesel exports in the third quarter were 260000 barrels a day again kind of South America and Europe. So we continue to see demand that looks very similar to what we've seen in the last couple of years in the markets, where we have a strong presence.
Speaker Change: So, let's say getting to my quick follow up is if there are no real red flags, yet in demand and its mightily software and you had such strong outside why did we suddenly hit this environment Glenn the cracks are kind of trending below mid cycle and in that and do you see different transient if the demand holds and the tax should be.
Speaker Change: Able to get back to mid cycle or maybe even higher.
Speaker Change: Yes, Manav I would say some of this typically on the third quarter earnings call you tend to have a little more negative market sentiment and there is some some reasons for that each year around labor day, you typically had some hurricane hype in the market that tends to go away as people view youre out of hurricane season, you've gone through RVP transition.
Speaker Change: You start RVP transition on gasoline swelling, the gasoline pool labor day kind of marks the end of driving season. So you can certainly understand some negative market sentiment around gasoline and typically the fourth quarter and first quarter tend to be driven more by strength in the distillate cracks I think we came into this year and although the U.
Speaker Change: The us economy has been fairly resilient.
Speaker Change: We've seen some pockets of economic weakness throughout the globe, which has driven down diesel demand a little bit and cause the pessimism around diesel cracks. If you look at where things are though you know the fundamentals look strong we're going into the year with very low inventories gasoline.
Speaker Change: Inventory 10 million barrels.
Speaker Change: Below where we were last year at this time below the five year average.
Speaker Change: Some of the key things we tend to be focused on in the gasoline markets. At this time of year market structure market structures backwards. So there is no incentive to produce and store summer grade gasoline typically in the fourth quarter. The first quarter, you will have a positive trans Atlantic Arb to ship from Europe to New York Harbor at least on paper that Arb has closed throughout.
Speaker Change: The fourth quarter.
Speaker Change: Export demand for gasoline remained strong.
Speaker Change: We're seeing good export demand into Latin America. So things look good for gasoline I don't think youre going to see any big moves in the gas crack anytime soon but you know as long as inventory remains in check you get back into driving season RVP transition, we respect gas cracks to respond on the distillate side again like gasoline the key thing is.
Speaker Change: Although we've seen a little bit less demand than we'd hoped for distillate inventories are trending towards the lows that we've seen the last couple of years I think you saw economic run cuts throughout parts of the world that took some supply off the market here recently, we've had turnaround activity decreased supply as well so it put us in a pretty good position heading into winter.
Speaker Change: And I think if he has some uptick in demand from heating oil demand with some colder weather youll see distillate cracks respond as well.
Speaker Change: Thank you so much for taking my questions.
Speaker Change: Yeah.
Speaker Change: Thank you. The next question is coming from John <unk> of Jpmorgan. Please go ahead.
Speaker Change: Hi, good morning, Thanks for taking my question.
Speaker Change: My first question about capital allocation.
Speaker Change: We're very aggressive on your buyback program and <unk>.
Speaker Change: Despite what's been a down tick in cracks you've been pretty clear on your framework and sort of a mid cycle and above environment.
Speaker Change: I mean, we stay in this lower margin environment can you talk about how your approach to returning capital.
May or may not change in terms of that 70 or 80%.
Speaker Change: CFO type range that you've been in and would you use your balance sheet, a little bit lower parts of the cycle.
Speaker Change: Good morning, John This is Jason I wanted to ask <unk> to respond to your questions. Thanks, Susan Hey, John Yeah, I mean, I think in this environment, we're in and with the strength of our balance sheet. You should absolutely should continue to expect us to be in our posture as I mentioned in the opening remarks, you can go back to 'twenty sort of 2021, we've been able to fund.
Speaker Change: All of our uses of cash including capital pay.
Speaker Change: Paid down over $4 billion of debt and returned over $18 billion to shareholders over that period, all through cash flow from operations. So turning to where we are now let me start by reiterating that the 40% to 50% is a minimum commitment not at target. So we're always going to honor that as you noted we've consistently been well above that.
Speaker Change: Despite the pullback in margins and I think you can attribute that attribute our ability to do that.
Speaker Change: Because of our low cost profit profile, and then disciplined use of capital.
Speaker Change: Given the strength of our balance sheet and our cash position I think you should rest comfortable that the 40% to 50%. We will continue to be a floor and all excess free cash flow will go towards buybacks.
Speaker Change: Okay.
Speaker Change: Great. Thanks for the color there and then my next question is just on California.
Speaker Change: We've got news of a new closure out there, which all other things equal will be a good thing for those who remain but there are some new legislative pressures there and you've also mentioned strategic alternatives I think in your 10-Q.
Speaker Change: I was wondering if you could just give us an update on.
Speaker Change: How youre thinking about continuing to operate as a refinery in California, and what those strategic alternatives might be.
Speaker Change: Hey, Jonathan Lane, I'll, let rich start with.
Speaker Change: At this time.
Speaker Change: Whether when and which one of these various policies that the.
Speaker Change: The state keeps proposing coming out of these legislation. So we'll just kind of have to we'll have to kind of see how that plays out a lot of these are driven by a lot of political rhetoric.
Speaker Change: You see.
Speaker Change: Coming out of the out of the state and I think when we see that passed from the legislature in the political arena back over to the CEC for implementation.
Speaker Change: I think you see them struggle with a lot of these ideas there.
Speaker Change: There are ideas that.
Speaker Change: The sound good politically, but when you start putting them into the market realities.
Speaker Change: It has the potential to make things even.
Even more costly for consumers so the.
Speaker Change: The reality is that California policies costs, the state a number of refineries.
Speaker Change: Including this most recent announcement and so you can't have policy that that impair supply and then expected to lower prices for customers. So.
And consumers so.
Speaker Change: Recall all of these regulations haven't a caveat in them that require.
Speaker Change: The CEC to implemented only if they find that the actions will lower cost for consumers and that that's going to be the challenge for them. So.
Speaker Change: And on strategy, we've been consistent for over a decade, probably even longer than that.
Speaker Change: In terms of or how we managed through the west coast.
Speaker Change: Largely driven by California policy, we've minimized strategic Capex, we'd make sure we maintain a really reliable operation through our maintenance capex, which in turn positions us as a core call option on west coast cracks.
Speaker Change: Third California's increasing regulatory pressure on the industry.
Speaker Change: It really considering everything all in all all options are on the table.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question is coming from Theresa Chen with Barclays. Please go ahead.
Theresa Chen: Good morning can you unpack.
Theresa Chen: Some of the earlier comments on the evolution.
Theresa Chen: Global product supply over that more I guess medium to long term and taking into account our continuing to Brandon facilities abroad, as well as plant closures in 2025, how do you think.
Theresa Chen: Brands and do you expect changes in trade flows as a result.
Speaker Change: Yeah Theresa I can try so overall when we look at 2025, we see about a million and 40000 barrels a day of new refining capacity coming online.
Speaker Change: And so far there's about 740000 barrels a day of refinery closures announced.
Speaker Change: So net net about 300000 barrel a day.
Speaker Change: Net capacity additions.
Speaker Change: And then forecast for total light product demand. We're looking at is about an increase in 700000 barrels a day. So for next year really it all comes and it becomes about timing when do those refineries close when did the new capacity come online. So it gives a lot of uncertainty in the next year, even the demand side is a little uncertainty and a lot of the economic stimulus in China how law.
Speaker Change: Long does it take to come into effect, but we see tightening balances through next year and then when you get past next year, you kind of have a fairly extended period, where when you look at net capacity additions and total light product demand growth Theres, a pretty good gap. There. So we see an extended period with with tighter and tighter balances around the refining margins.
Speaker Change: Helpful. Thank you and then turning to debt.
Speaker Change: Renewable plans and would you be able to provide an update on how the SaaS unit and is operating at following its recent in service and in any other.
Speaker Change: Commercial discussions to broaden this offering as well as your views on the subsequent prices. Thank you.
Speaker Change: Okay.
Speaker Change: Yes, I would say this is Eric <unk>, so the SaaS startup looks great.
Speaker Change: As we said in the call. The project finished ahead of schedule from our original timing that we had for <unk> of next year and it finished under under budget. So.
Speaker Change: Project execution for Valero once again demonstrates the exceptional ability to beat expectations.
Speaker Change: And then.
Speaker Change: Do you expect that performance as we go into full operation. So so far startup looks very good I don't think we have any doubt it's going to meet its.
Speaker Change: Design capability in.
Speaker Change: Commercially we're we're seeing a lot of interest in continued contracting of the product.
Speaker Change: Both from our SDK standpoint, as well as a blended SaaS standpoint, I don't know Gary if you wanted to comment on any of that now I'm not going to go into a lot of details, but theres been some press releases with some of the airlines southwest jet Blue about.
Speaker Change: Contracts that we signed in addition to that we're dealing with freight carriers, there's been an announcement with DHL. So not going to go into a lot of the commercial details there, but when we made the decision to fund the project. We said we expected it to exceed our minimum return threshold of after tax 25% still confident with the contracts we have in place and the volumes sold at will.
Speaker Change: Do that.
Speaker Change: Thank you.
Thank you. The next question is coming from Doug Leggate of Wolfe Research. Please go ahead.
Speaker Change: Thank you I appreciate you taking my questions guys.
Speaker Change: Gary I Wonder if I could go back to the balances question Nordson in perfect.
Speaker Change: Precise.
Speaker Change: Our assessment that we're all trying to make here, but but I wanted to use Valero as an example.
Speaker Change: <unk> Europe.
Speaker Change: You're obviously youre mechanical availability has been one of the hallmarks of the investment case.
Speaker Change: 18 third quarter, 99%.
Speaker Change: 1990, 4% pre COVID-19.
Speaker Change: 22, 95%, 95% last year my point is that.
Speaker Change: You guys, obviously got a lot of.
Speaker Change: Upside to your potential utilization and the same is probably true them.
Speaker Change: Anyone who's cutting runs at this point, Singapore or whatever so when you think about supply additions what are you assuming for the response of.
Speaker Change: Ah potentially oversupplied market raising utilization and someone who is more challenged refinery and I guess, what I'm getting at is.
Speaker Change: Is it reasonable to assume we need on the run the refinery closures before we get back to that above mid cycle that you were talking about.
Speaker Change: Yes, we look at historic refinery utilization rates and we look at the balances and kind of assume it's going to be in line with historic.
Utilization rates. However, I do think you can see a lot of refining capacity in the world. That's underwater some of that is in need of a lot of capital investment and so I think you will see additional refinery closures as well.
Speaker Change: Okay, So I guess to be.
Speaker Change: Is that something you think you have any insight to or are you guessing.
Speaker Change: No we can't name refineries that would close but you can kind of see that refineries that are under pressure.
Speaker Change: Some in Europe, some in the far east and our expectation is you'll see some additional announced closures coming.
Speaker Change: Got it okay.
Speaker Change: As my follow up if you don't mind and Thats going back to your comments about California.
Speaker Change: We've had.
Speaker Change: AVX to one I guess is it the title of it.
The inventory question and it seems that.
Speaker Change: When Phillips 66 shutdown road deal there was an equal and opposite.
Speaker Change: Part from imports that seem to offset any potential tightness in the west coast.
Speaker Change: So I guess as you look at your portfolio overall, and particularly the west coast.
Speaker Change: How do you see the cost competitiveness is the only asset in <unk> area in your portfolio that lost money this year.
Speaker Change: This past quarter.
Speaker Change: And any color you can give on how you're thinking about portfolio adjustments going forward.
Speaker Change: Oh, Hey, Doug plan I sort of alluded to it before is clearly our highest cost structure operation historically, they've had been challenged with respect to cost accrued what do you think about opex the regulatory environment.
The supply situation in the West coast.
Speaker Change: It's always a challenge.
Speaker Change: Challenging so very different than maybe some of the other areas that we operate in and again, what we've historically done is tried to position the asset to be a call option for when things get out of balance because of supply chain. So long.
Speaker Change: So.
Speaker Change: With respect to these regulations will just have to see what they actually finally tried to do but clearly the California regulatory environment, putting pressure on operators out there and how they might think about going forward with their operations.
Speaker Change: Alright, we will keep watching guys. Thanks for taking my question I appreciate it.
Speaker Change: Thank you. The next question is coming from Roger read of Wells Fargo. Please go ahead.
Roger Read: Yes, thanks, good morning.
Roger Read: I'm going to come back in and Hammer in the California question as well.
The most recent 10-K and 10-Q you put out you.
Roger Read: <unk> highlighted issues with California from asset value on an ongoing.
Roger Read: Concern kind of question.
Roger Read: With Philips closing down their unit or announcing the closure of their unit, California, obviously hypersensitive about the price of fuels to consumers regardless of what their policy.
Roger Read: May do does it impact your ability you think going forward. If you have to make a hard decision on our California refining unit.
Roger Read: That someone else went first I mean sort of does it invite more political interference and how would that work.
Roger Read: Right.
Speaker Change: I mean, I don't I don't know that that really factors into our thinking necessarily I mean, I think what we would be looking at as you know.
Speaker Change: What are the regulatory programs that California puts forward a lot of a lot of these programs are announced I mean, the initial one the margin cap was announced almost two years ago and theres still been collecting information and studying the market I mean, I think one of the one of the realities is theirs.
Speaker Change: The market's incredibly efficient until you until you interfere with it and I think.
Speaker Change: California is I think starting to realize that as the more they interfere the worst the situation gets and so that's that's I think the challenge there. So I think we have to wait and see what theyre going to do and what they decide I mean, it's their choice and and then we just have to we just have to react to that and what others do.
Speaker Change: That's their decision we have great assets out there and we have great people operating them. So I think I think we like.
Speaker Change: Like our position.
Speaker Change: Appreciate that rich youre more of an optimist than me because I don't really believe.
Speaker Change: Quite grasp all the impacts of policies in terms of the outcomes.
Speaker Change: The follow up question I'd, just like to ask.
Speaker Change: Probably to Gary diesel demand does look like it's starting to improve here in the U S. The last kind of let's call. It two months worth is there anything youre seeing that.
Speaker Change: In terms of information or is there anything youre seeing as you look at that in a more short term basis versus like your full year commentary on demand.
I think both gasoline and diesel we saw a little bit of demand softness and it's picked up as the year has gone on I've mentioned over the last two weeks, we've actually seen a surge. So in the last two weeks, we have about a 5% year over year increase in diesel demand.
Speaker Change: Consistent with your comments and I think youre seeing some of that in Europe as well you can see the 211 in Europe has gone up two or $3 in the last few weeks kind of indicating that some of that topping capacity. The diesel from some of that hydro skimming topping capacity as needed to supply the market as things are getting tight heading into winter.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. The next question is coming from Paul Cheng of Scotiabank. Please go ahead.
Paul Cheng: Hey, guys good morning.
Paul Cheng: Hi.
Paul Cheng: I.
Paul Cheng: One job.
Paul Cheng: One question is on kind of form they also.
Paul Cheng: I think Gary and.
Historically that we find that doesn't just shut down the refinery just because they're not making money, but typically we're way in Q.
Paul Cheng: That's a substantial capex.
Paul Cheng: Our language climate, maybe major China, while before that <unk> being pushed to Omega Heartbeat session. Just curious that in your op and ensure we finally.
Speaker Change: Can you share what that what that may be the timeline say at what point that would be the next major capital outlay that you need to put that you will have to make a decision or is that more likely that will make you tend to have a decision, but that is a viable ongoing business or not.
Speaker Change: Yes, Dan.
Speaker Change: Yes, Hey, Paul's line volume for that as a good try.
Speaker Change: We don't normally provide outlooks with respect to our turnaround activity, but your premise is correct I mean clearly.
Speaker Change: Not only is the cost structure out there is higher than the cost of the turnaround out there.
Speaker Change: Significantly higher and so.
Speaker Change: Wave any big outlay on turnarounds and the West coast.
Speaker Change: And the way you think about assets going forward. It will in any other app that really in the world for that matter is largely driven by the next big capital outlay, but in terms of guidance on when we're going to do our next turnaround is the general policy, we just don't do that.
Speaker Change: Okay understand.
Speaker Change: Europe.
Speaker Change: Or that you are north Atlantic.
Speaker Change: The margin catching in almonds, and it's interesting because I mean, Europe the market conditions quite difficult.
Speaker Change: <unk>.
Speaker Change: So is the strong margin capture is really driven by.
Speaker Change: Your.
Speaker Change: Youll, Quebec City refinery all of that is I mean, Europe is also doing let's just help us understand.
Speaker Change: Over the past.
Speaker Change: Two or three years quite frankly that Youre law of Atlantic Oftentimes.
Speaker Change: Surprise us on the upside so trying to understand what's going on there.
Greg: Hey, Paul its Greg So, yes, a couple of things that impacted the north Atlantic and the third quarter. One we had some very good results from the commercial team.
Greg: That helped contribute and then the second thing you talked about Quebec, but really crude cost for that region, sometimes it's Quebec, sometimes it's pembroke.
Greg: But crude costs were fairly favorable some of that with some of the Canadian grades coming into Quebec. Some of that was just the relative value of the grades were running versus dated Brent and so while that market might've been challenge remember that.
Greg: The capture is relative to kind of a market based.
Greg: Referenced crack and so we take into account where the market's at.
Greg: Putting that together and we performed pretty well relative to that reference.
Greg: Okay.
Greg: Okay, I think I said low beta.
Two questions.
Greg: That's it for me.
Speaker Change: I appreciate that.
Greg: Paul.
Speaker Change: Thank you. The next question is coming from Tdm Salisbury of Bank of America. Please go ahead.
Tdm Salisbury: Hey, good morning, you referenced the grilling OPEC supply next year, primarily benefits the alero and heavy Sarah guests, but I believe also in some of the high sulfur intermediate margins and you can see them as feedstocks and can you just go over the different ways that increasing opex, if I could manifest in different markets and your exposure there.
Speaker Change: Yes, so we see several bright spots in terms of supply fundamentals around heavy sour crude.
Speaker Change: Obviously, OPEC or 180000 barrels a day on the market starting in December.
Speaker Change: Seasonally we expect Canadian production to ramp up as well, we think Canadian production could hit record highs over the winter.
Speaker Change: And then you have continued Venezuelan production growth in this time of year, you get to where you are past the period of time in the middle East where they are where they are burning fuel oil for power generation. So all of that puts more barrels on the market.
Speaker Change: Get into the first quarter and Lyondell shuts down it takes them. Some demand is way as well so all of those things should be positives in terms of quality discounts.
Okay, Great I'll leave it there thank you.
Speaker Change: Okay.
Speaker Change: Thank you. The next question is coming from Joe <unk> of Morgan Stanley. Please go ahead.
Speaker Change: Okay.
Speaker Change: Great. Thanks, Good morning, and thanks for taking my questions. So I wanted to go back to the R&D side and it continues to be a tougher margin environment for the industry overall.
Speaker Change: From a margins recently as we look towards 2025 could you just talk to how you're thinking about the moving pieces around credits, including wrens El CFS prices as well as feedstock costs as it relates to profitability.
Eric: Sure This is Eric.
Eric: It looks like a lot of good tailwind start in 2025, So, California intends to approve their L. CFS modifications November 8th with the intent to starting that Jan one that should tightened the credit bank through 2025 and increase <unk> prices.
Eric: You've got that you've got Europe, and UK, starting their fit for 55, which starts the SaaS mandate of 2% in in that region, we're watching the.
Eric: The Canadian BC election, very closely to see what they do with the CFR, but.
Eric: Nationally that will still be in play.
Eric: 2025, and all of these obligations naturally ratchet.
Eric: As you go into next year, and then lastly, the IRR with the with the switch from the blenders tax credit to the production tax credit.
Eric: Does create a lot of tailwind for us because that will switch from $1 for everyone to Ci base, where we're the most advantaged and it does not allow importers to qualify for the credit. So if you look at those two.
Eric: Benefits of the IRR that is a good <unk>.
Eric: Tailwind for DVD.
Eric: Those things are all on paper, that's waiting for a lot of policy clarification between now and the end of the year.
Eric: But the one thing we look at is that is the policy intent of all those programs and most of those take legislative action to change and so that we think will be difficult.
Eric: That means those policies probably go forward is designed at least initially so we're all waiting on seeing how that develops in the next couple of months I think the whole renewable segment is all asking for this guidance to be given so that we can move forward with plans, but all of that looks looks pretty constructive on the feedstock side, we've mostly seen.
Prices of Equilibrate there was.
Eric: Previously a lot of advantage in <unk>.
Eric: Foreign feedstocks, we have seen that largely equilibrate, we've seen the market really level out a lot of the price lag we've talked about for the last several months has evened out. So I think what youre seeing is the world is recognizing that waste oils are still the most advantaged our partnership with Darling still gives us the most advantage access to domestic fee.
Eric: Stock and some of their foreign feedstock that they now produce out of South America, and Europe, all of that looks advantaged and as we see vegetable oil and BD are going to be marginal going forward and that will set a floor in this whole space. So as the blenders tax credit goes away.
Eric: <unk> will be significantly underwater without an adjustment to the rins. So the last piece that I think is positive as the.
Eric: The expectation that <unk> will have to go up to offset the loss that BD and vegetable oil Rd takes as we migrate to the PTC. So that there's a lot of expectation that <unk> will increase.
Eric: That won't happen overnight, but that does it has a significant.
Eric: Tailwind to DVD and R&D.
Speaker Change: Great. Thanks for all of the detail there and then I just wanted to ask on the NAFTA side, specifically exports out of the Gulf Coast has been strong the past couple of months, which I think has been supportive of margins. What are you seeing on your side and how are you thinking about the outlook for naphtha here.
Speaker Change: Yes, I think Theres, a couple of things driving the relative strength in NAFTA. Some of that is with the economic run cuts or some of the hydro scammers you see less naphtha on the markets of U S. Gulf coast supplies out of step in for that but we're also seeing a bit of a pickup for petrochemical demand for naphtha, which looks to be improving and so that's also creating some of the <unk>.
Speaker Change: Export opportunity so we expect it to continue.
Speaker Change: Great. Thank you all.
Speaker Change: Thank you. The next question is coming from Ryan Todd of Piper Sandler. Please go ahead.
Speaker Change: Thanks.
Speaker Change: Maybe.
Ryan Todd: Well I know I know how much you love to talk about the concept of capture rate but.
Ryan Todd: It has been.
Speaker Change: For the entire sector, it's kind of been steadily declining over the last 18 months and some of that obviously is just the absolute level of margins coming down but.
Speaker Change: Can you maybe talk about some of the things that have been headwinds and then what needs to happen to see improvements on that and is it.
Speaker Change: It just is it absolute margins wider crude differentials crude back gradation secondary product pricing improvement any any signs of encouragement as you're looking at.
Speaker Change: End of the fourth quarter of 2025 in terms of.
Speaker Change: Improvements in <unk>.
Speaker Change: And margin capture.
Speaker Change: Yes, Brian Lane, Unfortunately get to hand, this off to Greg.
Speaker Change: Sure.
Greg: Hey, Ryan so.
Speaker Change: So I think you noted most of the key factors and we've talked about some of them already crude market backwardation, certainly has been a bit persistent and strong here, particularly late in 2024, that's certainly a factor that I think if you look back in early 2023 were actually in contango. So there is no doubt.
Speaker Change: That continuing on an ongoing basis is not something you would necessarily expect so seeing improvement there will help capture.
Speaker Change: Thinking about us in particular, and we've talked about heavy maintenance a number of quarters. Here recently, so that's definitely a factor more in some regions than others. I mean, there's always going to be some maintenance in our system industry as well. So I think there have been some heavier periods, though that have had some impact.
Speaker Change: And then you mentioned secondary products I think the ones that really come to mind, there those that related to pet Cam so things like propylene and naphtha and Gary just talked about it as we're seeing pet Chem start to improve you would expect those values to improve as well and that's going to have some positive impact on capture.
Speaker Change: Great. Thanks, and then maybe.
Speaker Change: One follow up on some of your earlier comments on sustainable aviation fuel.
Speaker Change: As we think about I mean.
Speaker Change: The message over the last couple of years, leading into this I think there was clearly an expectation that the market the SaaS market was going to be.
Speaker Change: Supplied.
Speaker Change: Which is going to be good for you guys. There's been a lot of moving pieces in that.
Speaker Change: Do you still view the market over the next.
Speaker Change: 12 to 24 months as under supplied and then as you think about.
Speaker Change: You are probably one of the few domestic producers that can qualify to sell into Europe, how do you think about.
Speaker Change: The potential optionality of.
Speaker Change: Being able to sell and to enter Europe versus kind of domestic markets and pricing here.
Speaker Change: Yes. This is Eric I think we're our view is consistent that the market is physically under supplied given the ramp in mandates that is occurring over the next year to five years.
Speaker Change: Youre, absolutely correct Europe will be the most attractive market and we do have capability of supplying into that market that will be one of our primary outlets as we startup.
Speaker Change: But I think the policies are always as I mentioned before we're waiting for a lot of clarification there.
Speaker Change: The mandate in Europe is very clear how that will be implemented is waiting on a lot of clarity on guidance for.
Speaker Change: Import codes and what duties are affecting at all these kind of details that make finishing the contract difficult, but we see that as all solvable, but between now and the end of the year for.
Speaker Change: For Gen, one compliance and I think in the U S.
Speaker Change: Clearly favors SaaS over R&D from a from a credit standpoint.
Speaker Change: We are waiting for clarity on that and as well as a lot of our customers and blenders are waiting for clarity. So that we can get the contract language perfected, but but all of that is moving forward and we're confident that's going to get solved.
Speaker Change: <unk>.
Speaker Change: Especially once we get clarity on on.
Speaker Change: This policy guidance.
Speaker Change: Okay. Thanks, Eric.
Speaker Change: Sure.
Speaker Change: Thank you. The next question is coming from Neil Mehta with Goldman Sachs. Please go ahead, yes.
Neil Mehta: Hey, good morning, Lynn and team first question is just around operating expenses.
Neil Mehta: Always been a hallmark of Polaris your ability to keep keep that opex LOE per barrel this year.
Neil Mehta: Your perspective on how some of those moving pieces as we move into the next couple of years and how youre thinking about it even geographically as well.
Greg: Hey, Neil it's Greg So we keep those expenses under control. It's one of the things we focus on every day.
Greg: A couple of parts I think that are probably notable energy costs had been low natural gas driving that that's been a help and so.
Greg: Looks like those prices will move back towards kind of a.
Greg: Our middle of the cycle kind of range here at least that's what.
Greg: Folks are thinking, but that's been helpful and inflation has made it a bit harder and we've seen the effects of that on both maintenance costs maintenance costs catalysts chemicals those kinds of things we work hard with our partners to try to make sure we keep those cost competitive.
Greg: And so as inflation moderates, we'd expect to see some of that.
Improve as well those are probably the two biggest parts to think about and really the things we focus on every day.
Speaker Change: Yes, yes understood on the energy side and then the other one is on just on the Port Arthur Coker I think when you FID Ed you talked about 325 of EBITDA and then.
Speaker Change: You talked about it actually run rating closer to $400 million. How do you. How do you think as you think about that project specifically about one the current economics and then how those economics could evolve.
Speaker Change: As you think about the path back to mid cycle.
Speaker Change: Yes.
Speaker Change: I think we still see that project.
You've given us the returns consistent with what we showed at <unk>.
Speaker Change: Current market is a little different than where we started we got real good benefits earlier. This year when we did the turnaround on the old Coker.
Speaker Change: And we expected to see some strong some strong value. There. So I don't think anything has changed in our view and then again, obviously that project is hinged on being able to run a lot of heavy sour crude.
Speaker Change: And upgraded the light products and so as the sour differentials move around that's going to give us a chance to capture some more value.
Speaker Change: Thank you I appreciate it.
Speaker Change: Thank you. The next question is coming from Matthew Blair of Tpa. Please go ahead.
Speaker Change: Thanks, and good morning, if I heard correctly I think the $4 seven.
Matthew Blair: Ethanol volume guidance for Q4, it might be an all time record and just come in at a time when ethanol margins are really crumbling on paper. So could you help us reconcile that or is that a function of.
Matthew Blair: Increasing export opportunities or maybe theres, a lag we should be thinking about on the ethanol indicator.
Speaker Change: Yes. This is Eric we have increased our ethanol production capability this year.
Speaker Change: Most of this year has been pretty positive for that expanded capability. We have also expanded our export markets again talking about policy. There is there is interest in U S ethanol, especially.
Speaker Change: A lot of our ICC qualified ethanol in Europe.
Speaker Change: We also see that because of U S corn being the most attractive feedstock.
Speaker Change: In the U S with the largest carryout and one of the largest harvests we've ever seen it is giving a lot of opportunity for ethanol exports. So that's what we're seeing is increased demand we're.
Speaker Change: Were seeing new markets for Eaton in the world.
Speaker Change: And we see Brazil is increasing its ethanol mandate as well as the SaaS mandate beginning in 'twenty five so.
Speaker Change: We've grown our capacity in anticipation of a lot of this expanded interest globally in ethanol.
Speaker Change: Sounds good and then Theres been.
Speaker Change: More chatter lately about this increasingly global tariffs.
Speaker Change: Exports are a big part of the outlook for U S. Refiners. So when you hear about the potential for <unk>.
Speaker Change: The increases in tariffs what do you think is that is that a concern going forward.
Okay.
Speaker Change: This rich Welch I'll take an effort to add that I mean, when you look at those tariffs a lot of times. They are really focused around manufactured goods in most countries don't want to increase their cost of energy that theyre trying to take in so.
Speaker Change: When you think about targets for tariffs they normally don't really.
Speaker Change: Wrap around energy and so I don't I don't know that we see.
Speaker Change: <unk>.
Speaker Change: Turns on that.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. The next question is coming from Jason <unk> of TD Cowen. Please go ahead.
Yes.
Speaker Change: Hey, good morning, Thanks for taking my questions.
Speaker Change: Wanted to circle back on the financial framework and you provided some helpful comments about the return of capital metric.
Speaker Change: Being a firm target and I'm wondering how you think about using the balance sheet in a downturn you have this $4 billion kind of target for cash for the balance sheet.
Speaker Change: Is that what you want headed into a downturn. So you could lean on the balance sheet a bit more should the market weakened.
Speaker Change: Yes. This is Jason I'll be glad to share some of our thoughts about cash.
Speaker Change: Our targeted cash balance would depend on the environment, we're in but in a normalized environment, we'd like to keep a cash balance between $4 billion to $5 billion as a guideline as you know cash to move around a lot in any quarter due to things like working capital, but we're not going to hoard cash. So I think directionally you should expect our cash balance to trend down a little from here at all.
Speaker Change: Also like to note if it wasn't for the positive impact from working capital. This quarter, we had a draw on cash by over $200 million. We also had strong buybacks for the quarter of 565 without leaning on the balance sheet, but to answer your question more directly yes, youre right that $4 billion gives us a lot more room and flexibility in a downturn.
Speaker Change: Turn to continue our approach to buybacks, so I think thats correct.
Speaker Change: A big factor in coming up with a $4 billion number.
Speaker Change: Yeah.
Speaker Change: Great. Thanks for that color and then the other just on the market we've noticed.
Pretty strong product exports for gasoline and diesel out of the U S and it's coming as Fracs.
Speaker Change: Fallen a bit here the past months and so it seems like prices are needing to fall.
Speaker Change: Clear the U S marketing keep U S inventories.
Speaker Change: Kind of at healthy levels is that a fair interpretation of what's going on in the market, where there's kind of a push from the U S on product exports rather than a pull from international sources on those products.
Speaker Change: Well, it's a good question.
Speaker Change: It would appear that what youre, saying is correct, but in the face of that gasoline inventories are really pretty low.
Speaker Change: $10 million below where we were last year, you're below the five year average to the inventories wouldn't indicate a need to push it would almost seem like it's more of a pull and we're getting an export premium and thats why the barrels are flowing.
Speaker Change #100: Okay, and when you say youre getting an export premium youre able to sell to international markets at a higher price than what youre selling add on say the U S Gulf Coast.
Speaker Change #100: Yes, we are.
Speaker Change #102: Okay, great. Thank you.
Thank you at this time I would like to turn the floor back over to Mr. Behler for closing comments.
Speaker Change #103: Thank you Donna we appreciate everyone joining us today as always please feel free to contact the IR team. If you have any additional questions have a great day, everyone. Thank you.
Speaker Change #104: Ladies and gentlemen. This concludes today's event you may disconnect your lines or log off at this time and enjoy the rest of your day.
Speaker Change #104: [music].
Speaker Change #104: Yes.
Speaker Change #104: [music].