Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to Valero Energy Corporation's second quarter 2019 earnings Conference call.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require operator assistance. Please press the star then the zero key on your Touchtone telephone.
As a reminder, this call will be recorded I would now like to introduce your host for today's conference Mr. Homer bowler Vice President of Investor Relations you may begin.
Good morning, everyone and welcome to will Aera Energy Corporation's second quarter 2019 earnings Conference call.
With me today are Joe Gorder, our chairman, President and Chief Executive Officer, Donna Titzman, Our executive Vice President and CFO Lane Riggs, our executive Vice President and COO, Jason Frazier, Our executive Vice President and General Counsel and several other members of Valeros Senior management team.
If you have not received the earnings release and would like a copy you can find one on our website at Valero Dot com.
Also attached to the earnings release are tables that provide additional financial information on our business segments.
If you have any questions. After reviewing these tables, please feel free to contact our investor relations team after the call.
I would now like to direct your attention to the forward looking statement disclaimer contained in the press release.
In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward looking statements intended to be covered by the safe Harbor provisions under federal Securities laws.
There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC.
Now I'll turn the call over to Joe for opening remarks.
Thanks over and good morning, everyone. We're pleased to report that we had good operating performance in the second quarter, Despite having major turnarounds at our Houston, Memphis and Benicia refineries.
We ran reliably during the quarter with very limited unplanned downtime.
Gasoline cracks improved significantly in the second quarter relative to the first quarter in all regions posting refining margins. However, the supplies of medium and heavy sour crude oil remains limited due to continued Venezuelan and Iranian sanctions and OPEC production curtailments, resulting a narrower crude discounts for those grades relative to Brent crude oil.
As a result, we optimized our system with additional domestic light sweet Canadian heavy and Latin American crude oils. In fact, we set another record for Canadian heavy crude oil runs this quarter with over 190000 barrels per day.
Turning to our renewable segments, the ethanol business generated positive operating income despite a weak margin environment and our growing renewable diesel business continues to generate strong results due to the high demand for renewable diesel.
We continue to deliver on our commitment to grow Valeros earnings capability through organic growth investments. We successfully completed the Houston Alkylation unit project in the second quarter as scheduled and on budget.
This project is now, allowing us to upgrade low cost in abundant natural gas liquids and refinery olefins to produce a premium outlet product and we continue to make progress on the central Texas pipelines and terminals project, which remains on track to be fully operational in the third quarter of this year.
Looking at organic growth beyond this year, we have a steady pipeline of projects to enhance the margin profitability of our portfolio. The Pasadena terminal Saint Charles Alkylation unit in Pembroke Cogeneration unit are expected to be completed in 2020.
And the Diamond Green diesel expansion in Port Arthur Coker are expected to be completed in late 2021 and 2022, respectively.
Our capital allocation strategy remains unchanged with an annual Capex for both 2019 and 2020 at approximately $2.5 billion with growth capital targeting projects with high returns that are focused on operating cost control market expansion and margin improvement.
With respect to cash returns to stockholders, we continue to target an annual payout ratio of 40% to 50%.
In the second quarter, we paid out $588 million to stockholders.
Bringing the year to date total payout ratio to 50% of adjusted net cash provided by operating activities.
Looking ahead, we're optimistic for the balance of the year with fundamental supporting continued healthy product demand vehicle miles traveled continues to increase year over year, and we expect positive market impacts from the IMO 2020 implementation as bunker fuel terminals transition to lower sulphur fuel oil with our high complexity refineries, we believe that we're well positioned to take advantage of the expected wider differentials for heavy crude oils and higher product cracks.
Lastly, we remain committed to disciplined growth and to delivering long term value to our stockholders through exceptional and environmentally responsible operations.
So with that Homer I'll hand, the call back to you.
Thanks, Joe.
For the second quarter of 2019 net income attributable to Valero stockholders was $612 million or one dollar and 47 cents per share compared to $845 million or $1.96 cents per share in the second quarter of 2018.
Second quarter 2019, adjusted net income attributable to Valero stockholders was $629 million or one dollar and 51 cents per share compared to $928 million or $2.15 per share for the second quarter of 2018.
For reconciliations of actual to adjusted amounts please refer to the financial tables that accompany this release.
Operating income for the refining segment in the second quarter of 2019 was $1 billion compared to $1.4 billion for the second quarter of 2018.
The decrease from the second quarter of 2018 was mainly attributed to significantly narrower medium and heavy sour crude oil differentials relative to Brent crude oil.
Refining throughput volumes averaged 3 million barrels per day, which was 70000 barrels per day higher than the second quarter of 2018.
Throughput capacity utilization was 94% in the second quarter of 2019.
Refining cash operating expenses for the second quarter of 2019 were $3.80 per barrel in line with the second quarter of 2018.
The ethanol segment generated $7 million of operating income in the second quarter of 2019 compared to $43 million in the second quarter of 2018.
The decrease from the second quarter of 2018 was primarily due to higher corn prices.
Ethanol production volumes averaged 4.5 million gallons per day in the second quarter of 2019 and increase of 531000 gallons per day versus the second quarter of 2018, primarily due to added productions from the three ethanol plants acquired in November 2018.
The renewable diesel segment generated $77 million of operating income in the second quarter of 2019 compared to $30 million in the second quarter of 2018.
Renewable diesel sales volumes averaged 769000 gallons per day in the second quarter of 2019, an increase of 387000 gallons per day versus the second quarter of 2018.
The increase in operating income and sales volumes were primarily due to the expansion of the Diamond Green diesel plant in the third quarter of 2018.
For the second quarter of 2019 general and administrative expenses were 199 million and net interest expense was $112 million.
Depreciation and amortization expense was $566 million and income tax expense was $160 million in the second quarter of 2019.
The effective tax rate was 20%.
With respect to our balance sheet at quarter end total debt was nine and a half billion and cash and cash equivalents were $2 billion.
Valeros debt to capitalization ratio net of $2 billion in cash was 26%.
At the end of June we had $5.4 billion of available liquidity excluding cash.
With regard to investing activities, we made $740 million of capital investments in the second quarter of 2019 of which approximately 510 million once we're sustaining the business, including cost for turnarounds catalysts and regulatory compliance.
Net cash provided by operating activities was $1.5 billion in the second quarter.
Excluding the impact from the change in working capital during the quarter adjusted net cash provided by operating activities was $1.2 billion.
Moving to financing activities, we returned $588 million to our stockholders in the second quarter.
$376 million was paid as dividends with the balance used to purchase 2.6 million shares of Valero common stock.
This brings our year to date return to stockholders to 1 billion and the total payout ratio to 50% of adjusted net cash provided by operating activities.
As of June 30, we had approximately $2 billion of share repurchase authorization remaining.
We continue to expect annual capital investments for both 2019, and 2020 to be approximately two and a half billion with approximately 60% allocating to sustaining the business and approximately 40% to growth.
The two and a half billion includes expenditures for turnarounds catalysts and joint venture investments.
For modeling our third quarter operations, we expect refining throughput volumes to fall within the following ranges.
US Gulf Coast at 1.71 million to 1.76 million barrels per day.
US mid continent at 440000 to 460000 barrels per day.
US West coast at 255000 to 275000 barrels per day.
And North Atlantic at 460000 to 480000 barrels per day.
We expect refining cash operating expenses in the third quarter to be approximately $4.05 per barrel.
Our ethanol segment is expected to produce a total of 4.3 million gallons per day in the third quarter.
Operating expenses should average 40 cents per gallon, which includes six cents per gallon for non cash costs, such as depreciation and amortization.
With respect to the renewable diesel segment, we expect sales volumes to be 750000 gallons per day in 2019.
Operating expenses in 2019, so it should be 45 cents per gallon, which includes 16 cents per gallon for non cash cost such as depreciation and amortization.
For 2019, we expect gn expenses, excluding corporate depreciation to be approximately $840 million.
The annual effective tax rate is still estimated at 23%.
For the third quarter net interest expense should be 114 million and total depreciation and amortization expense should be approximately $560 million.
Lastly, we still expect the rins expense for the year to be between 300 and $400 million.
That concludes our opening remarks before we open the call to questions. We again respectfully request that callers adhere to our protocol of limiting each turn in the queue at age two questions.
If you have more than two questions. Please rejoin the queue as time permits.
This helps us ensure other callers have time to ask their questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press the Star then the one key on your Touchtone telephone.
If your question has been answered or you wish him movies. So from the Q press the pound key.
And our first question comes from Manav Gupta from Credit Suisse. Your line is open.
Okay.
Congrats on the good quarter.
We understand the Brent Maya isn't side right now, but when you look at the forward curves of brain and three person visits played on Bloomberg yes.
Each 59 dollar lightning in the next six months Nelson said Joseph will makes a 40% of the Maya pricing formula mathematically translates to about three dollar for dollar lightening of banks My OSL.
Well the brand can why would easily be.
And on those just following the pricing formula as it exists today or do you think Pemex and Brian Stech, Stebenne and try and change the fatherland get laid off high sulfur fuel pricing from the formula.
Well good morning mid of and that's a really good question why don't we let Gary give you some insight into that.
Yes, So I guess I'll answer the question on the Formula first our discussions with PM I would indicate that they will change the formula in the coming weeks. So we do expect a change in the Formula. However, we do hold two year view on where heavy sour discounts are going.
If you look at where my head is today in the backwardation in the.
So for fuel market. It would tell you you know around a $3 discount from where heavy sour discounts are today and then if you look at the Western Canadian select quote in the Gulf.
You know even today western Canadian select is discounted 15% to Brent which is a good discount even if you compare it to a domestic light sweet alternatives such as any age.
Western Canadian select is trading at an 11% discount.
To EMEA age the forward market on the Canadian side, you know at least there's trade being down in the fourth quarter already and you're seeing western Canadian select discount at around $2.50 in the fourth quarter already so thats pretty close to the three dollar number that you were looking at.
Oh, okay.
Funnel sticking to the western Canadian select.
Canadian they doing about 25 minutes ago on their call said that a deal with the gum and just struck they could see really ramping back 250 to 300000 barrels by year end. So that's a massive volume of crude landing in the Gulf Coast Im just trying to understand if this WCS doesn't line on the Gulf Coast, but you then let's say early 2020 can you seamlessly.
Switch between WCS Maya on any heavy grades that will you are running.
Yes pretty much in we've had discussions and wouldn't you know concur with that view that the rail volume will be ramping up and had a lot of discussions with producers and we take that into our port Arthur refinery and it pretty much is a direct replacement for for Meyer.
Thank you guys and congrats on a good quarter.
Thank you.
Thank you. Our next question comes from Doug Leggate with Bank of America Merrill Lynch. Your line is open.
Thanks, Good morning, everybody good morning, Joe.
Good morning, Doug.
Joe last time, you and I sat down and we talked about your.
Under appreciated lets say flexibility on light crude.
My question is obviously, the LP units, helping a little bit when Ngls, but as we look into the second half of this year and then to 2020.
The ramp up the expected ramp up in the Permian, who is coming in a lot of question marks over what the gravity of light crudes going to look like.
On the potential for on a renewed period, though let's say dislocations in pricing.
Im just curious if you could talk through.
What valeros opportunity would be in that situation could you take advantage of that or obviously your complex system. As you know folks normally think about eurs advantage by things like WCS I'm curious as to whether or not you could to exploit that opportunity as well I've got a follow up please.
Yeah, Doug. This is Gary again, you know so we certainly are maximizing light sweet into the system.
In the second quarter, we used about 89% of our available capacity in and really what was left on the table was primarily due to turnaround activity.
As we move forward, we can we expected to utilize all of that on as the gravity gets lighter we are seeing this W.P.T.L. quote coming out which is a lighter grade of W. T I.
We started running some of that into the rivers I think in the second quarter. We ran in five to 10000 barrels a day of that and we've also purchased some for future runs at Memphis I think we're scheduled to run about 40000 barrels a day MW TL and Memphis in September . So, we're certainly moving that direction in watching the spreads and the discount is there we have a lot of flexibility to be able to take it into our system.
Okay are you retooling gallery or are you pretty much.
Just flexing within the constraints of the system.
It's pretty much within the constraints of the system. However, the new toppers, we built at Corpus and Houston give us a lot more flexibility in this area.
Great stuff.
Sure sure.
Also in addition to that when we're going to expand our factories gap.
Plant in Port Arthur as a part of the covert project. So a 2022, we will also have a prefeasibility run light sweet.
Okay I'm not that you guys will be taking advantage, where you can my follow up is.
Joel is really more of a macro question I mean, this time last year. The the optimism was perhaps a little egregious on I am all impacts.
Have you seen anything yet in terms of turning types or indicate the demand there seems to be a lot of news coming out of.
Pretty much a lot of international refiners on.
Complying fuels that they are now able to supply how is your expectation for the impact to volume on on distillate margins.
East any or are you still are you still pretty constructive on the disruptive and in part because we are going to next year and I'll leave it there. Thank you.
Thanks, Doug and you know I mean, I guess, our view all along has been that we would probably start to see something third late third to fourth quarter of this year.
It was it's been interesting to us that the forward markets really haven't reflected.
Distillate impact.
I think we're starting to see in other places, but you guys want to share your views.
No I think you are seeing people start to turn tanks and that's one of the reasons you see high sulfur fuel strength is there's just not a very liquid market today and ships are having trouble actually buying high sulfur fuel oil, which is bidding that market up today, but you see the steep backwardation.
As we approach that January timeline, and I agree with Joe you know all the estimates I still see show a fairly significant step change in diesel demand when the IMO bunkers back changes and it's not reflected in the forward curve today.
Alright, guys. Thanks for your time I appreciate it.
Thanks.
Thank you. Our next question comes from Prashant Rao with Citigroup. Your line is open.
Good morning, Thanks for taking the question.
Hi, guys I wanted to touch back on CEO Western Canadian select availability.
290000 barrels per day, and this quarter, it's still running strong there and how do you expect that discount to widen with rail and the golf I wanted to hear this answers your ability to lead into that a bit more how much could you ramp beyond the 190 and as you're looking at incremental rail contract.
Yeah.
What what sort of.
Give us some idea what sort of duration, maybe you're thinking or do you have the contracting new contract and you need and we're just going to see that.
It reflects itself in the numbers as we go forward as we take advantage of those discounts.
Yes, we have a lot of flexibility to run the heavy Canadian.
You know were primarily advantage to run it at our Texas City in Port Arthur refinery, just because we have the best logistics to be able to get into those two assets between those two refineries probably a capacity of about 300000 barrels a day to day to process. It.
We can run about 50, a day at Saint Charles and we could run some at Corpus Christi as well, but again the logistics of getting that in or are more challenged on the rail side. You know we continue to work with producers and a you know we're kind of doing deals on a delivered basis, whereas in the past we were buying barrels in western Canada shipping them ourselves.
Net volume will continue to ramp up as we get those deals done.
Okay. Thank you that's very helpful. And then just touching back on a sort of a bigger picture question.
Houston Alky project getting completed wanted to take a step back and get your views on where you guys refining.
The whole system in the country stand in terms of tier three compliant I think we're getting a few more questions and you get so much that we're looking at in refining in terms of the macro it for a few questions and maybe concerns about how tight octane is going to get by the time, we get to once you 20.
I just your updated view there what you how you think.
Stands today in terms of progress were making and then I guess relatively speaking.
Where are your position is relatively that feels like your you'd be advantage in that kind of a tight operating market, but any color you can provide there would be helpful. Thanks.
Avenues Blain, so we've always had it for TG outlook that.
The octane was going to get more valuable as tier three matured and finally came to a head your at the end of the year and combine that with sort of cheap in deals of that was that was the reason we did these projects and they're coming on line exactly the right time you are definitely thing you know we believe we're seeing.
Octane get more and more expensive in terms of where the industry is on a tier three compliant. We're trying to we're trying to we're looking at that ourselves, but you. You know if you look at have a proxy for that we still have three units that have to come online by the end of the year I'm. So there's still some more octane disruption in the industry ahead of us.
It is I mean people's implementation, though has been.
I would say somewhat muted or delayed right as you know we've been using credit yeah, there anyone credits and to the extent you credits you deferred the capital, but now we're getting to the point, where the rubber meets the road.
It's going to be a lot of makeup activity or we are going to see this.
This spread continue to.
Expand.
All right that's very helpful. Thanks, Joe Thanks, Brian Thanks, Gary I appreciate that.
The care for Sean.
Thank you. Our next question comes from Benny Wong with Morgan Stanley . Your line is open.
Hi, guys I'm just wanted to ask about the capture rate in the second quarter and this particular week in the us Gulf Coast understand the light heavy differentials probably contribute to that but just wanted to get a sense. If there is any other factors weighing on that if there is any risk of those factors persisting.
And Conversely in North Atlantic the cap is really strong has been strong for a couple of quarters.
I just wanted to get a sense is is it Europe or eight us driving that and should we expect a higher.
Capital level going forward.
Oh, Hey, Ben is the blame for John on for a while ago I call. It had been.
So.
In the Gulf Coast is a good proxy for what in terms of the capture rates were down about 20% year over year.
About 10 to maybe 12% of that is crude differentials numbers are opposed just quality.
But the remaining you know 70% of the non gasoline products, everybody sort of talks about NAFTA, how cheap it is but the other products.
But are also discounting year over year or propylene and propane.
Looking for to come to your own conclusion about what direction propylene going to and obviously propane NGL, we're just getting cheaper and cheaper with all the oil shale you know, we're still optimistic that and the rest of it you know we're optimistic as Gary alluded to that IMO 2020 will help improve the medium and heavy sour discounts or in terms of where NAFTA is going and propylene going I mean.
They are probably structurally pretty weak for at least some period of time here.
And then on the line nine or Atlantic really what you're thinking on the north Atlantic capture rate of our continued advantage position or one nine crudes.
Got it appreciate it appreciate the color there my follow up is really one of your peers have been talking about just preparing ahead of IMO 2020 was really.
Looking to take advantage of slack open capacity within their system.
Maybe re directing excess fuel was from one part of the portfolio into other areas, where there might be excess capacity is this is this something that you guys looked at within your portfolio or is there an opportunity for that seems it seems like a more of a logistical optimization exercise just curious is that something that you guys looked at.
Yes, So I guess, what you are saying is where we have fueled length potentially taking it to open coking capacity is that is that the question.
Yeah I could essentially question is do you guys have some areas, where I've used to have slack coking capacity and if there are areas, where you have fuel oil length, exactly what you're saying.
Yes, we don't make much fuel at all in our system and we pretty much keep our coking capacity full.
We are providing some flexibility with the port Arthur Coking project to take some fuel we produce at Meraux and potentially run it into port Arthur Coker when its expanded.
But to your point, where you'll actually see the week, we plan to be full both coker and are we like that we don't make much fuel is the system, but what it does is it competes with like some of the longer that today. The compete for crude capacity and we do believe you're going to see more and more of that as some of the blending components that were in three and a half way percent fuel oil what we ultimately have to probably get ran through crude units and compete with you know.
Other medium and heavy sour crudes. That's obviously why were we feel pretty good about the cost of feedstock from here going into next year as a result of IMO 2020.
Got it great color guys. Thank you.
Thank you. Our next question comes from Sam Margolin with research your line is open.
Good morning, everybody.
Yeah.
When can I ask you a follow up about the capture rate impact and not that because he touched on something that's.
Swirling around the market was there anything where you producing sort of excess NAFTA or LNG or LPG is for any reason.
Besides just the increase in light crude throughput in the Gulf Coast was there something coming out of the one two turnarounds or something having to do with the Twoq you turn around at Houston that.
Exacerbated the capture rate impact of.
The the commodity dispersion that you quoted but wouldn't that thatll be geez.
No not really I mean, we did have the turnarounds and so I'd have to go back and if anything we would run more crude and have more napa in our reformer. Her whole you know right now one of the most.
Economic units. In addition, the alky reformer and so we would have had a reformer signal hole. So you know I'd have to go look and see what the balance was on NAFTA, but we work you know directionally. If we make we we have a position on NAFTA goes we get longer as we run more and more light sweet crude.
I think exactly it's really more of a function of the crude diet and then the other factors you know a lot of the U.S. Gulf Coast NAFTA was going to Venezuela, as diluent and so certainly as that has shut off its cause NAFTA to get weaker.
Okay. Thanks, and then this is sort of an IMO.
A question there are some reports that spring up here and there about heavy sweet crude pricing and its pretty scarce and.
This isn't the case everywhere heavy suite is available, but its printing at some pretty wide premiums to Brent in certain locations is this an IMO signal or is this like an idiosyncratic.
Weird crude that that just trades off spec and that doesn't mean anything.
A unit, Okay, you're hearing I'll tag team. This is you know I think a lot of those crews or other from that goal or are Brazil, and they have a it's going to be interesting to see how they fit in the IMO 2020 universe. I mean, there are some believe that you can burn directly I mean, I'm not sure that the highest value for them necessarily but and there is some substitution effect you know as you've seen some of these heavy sour crudes come off.
You know they these are substitute crudes for coking refineries and so they certainly gotten to where that's not necessarily the.
The the the best grade if you look at they may have or they don't have a lot of nap and on so many that if the world just sort of reporting up that quality.
Yeah, I think Thats a lot of what you see today is as people it pushed a lot more of the light sweet they're getting loaded up on the top end of their distillation column and some of these medium suites, allowing them to push rate you know as long as the crack spreads are strong.
All right. Thanks, so much.
[noise]. Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.
Good morning team man.
For further detail.
First question is around renewable diesel.
And.
Just trying to figure out how we should think about this business in the context of Valero, how big do you want it to be.
And related to this segment there are some big swings on profitability one could be.
A blenders tax credit the other is how you see the low carbon fuel standard playing out in California. So just any high level thoughts on the segment, how do you see it playing out over time.
And then how should we should think about some of the swings that could drive some upside optionality.
On the profitability here.
Hey, Neal. This is this is Martin you know, we expect low carbon fuel mandates to grow across the globe in Europe , you've got the renewable energy directive now out to 2030, you've got the low carbon fuel standard in California for 2030.
Lets talk again on again off again about Canada adopting this standard. So you know we're bullish this and were actively evaluating opportunities for expansion when they make sense.
As far as the blenders tax credit you know obviously if that comes in that's a big.
A big upside for us.
If it doesn't we're still in good shape, you know we did a $1.26 EBITDA of this last quarter second quarter with no blenders tax credit.
If you look in California, they're already blending that 10% renewable diesel there's really no limit to where you can get with renewable diesel you don't meet the same specs is as hydrocarbon diesel. So we feel good about the prospects. We've got a great partner with Darling. It's a you know for the feedstock procurement in the front end processing. So we plan to keep growing the business.
Yes.
Jason anything on the blenders tax credit yeah, I'll be glad to talk about that because as you all probably know the blenders tax credit expired at the end of 2017 in both the Senate and the house tax writing committees or looking at bills to extend that they've got to build will extend for years in the Senate and the house has ability to extend it for three years and we believe it's going to get it we're not sure exactly how it will get done which are a bit little get attached to but we're confident it will get done by the end of the year, but certainly our expectation likely to the appropriations process that takes place this fall.
That's great that's an interesting business.
It's the other way did you know it it's been a while since we've we've asked about rins here they have kind of pick their head back up in terms of the de CIX rins price not enough for us to get Super concerned, but something at least to watch from the periphery. So just any thoughts in terms of how we should think about the rins market from here.
Hi, especially because theres uncertainty around.
The degree of the degree of waivers for small refinery exemption here in 2019.
Yes sure. This is Jason I'll give you color or update on some of the recent developments on the RFS front on June 15th EPA published their final rule, which granted a one pound RVP waiver you 15 year round and also based on the limited market reforms urban market. We don't think either of those is really going to radically change. The landscape. There are many reasons the 15 and taken off in the past and those are still here, even with RBC waiver by concerns about using that and older cars potential capital requirements the stations.
So and we also understand there probably be a legal challenge to whether the EPA has authority to grant that waiver as well so thats going to be additional weighed on the market as people wait and see what the though the waivers can all are the additional waiver holes, which will.
But there is definitely some question about whether the EPA has the authority to do that or whether it has to be done by Congress and as for the RIN market reforms EPA adopted.
Which are really just a public disclosure when a company goes over certain ran holding threshold and then expanding some data reporting requirements. We don't think they're going to make much of a difference it's really an adequate to improve the function of the RIN market a lot. So the bottom line is we don't think either of those is going to be a dramatic effect on the RIN market.
And regarding a smaller fighter waiver switch you mentioned, there's been a lot of discussion in the press about them lightly the volatility has been aggressively push and not have them granted this year and this is despite multiple studies. So their salaries haven't led to any real biofuel demand destruction.
But that Esarey process is very well established as part of the RFS statute and EPA has gotten got it from Congress as well as several court cases on how to administer them. So were confident he is going to continue to follow the law and hopefully we'll be announcing their decisions on a 2018 application. Soon we think for their website. They have about 38 applications pending for 2018.
Great. Thanks, Jay and thanks, Jeff.
Yeah.
Thank you. Our next question comes from Phil Gresh with Jpmorgan I'm, sorry, Yes, with JP Morgan Your line is open.
Yes, hi, good morning.
Couple of quick ones here one is.
As as we continue to see these increased flows out of the Permian to Texas Gulf Coast of light Sweet crude how are you envisioning things playing out in Corpus Christi.
Given the inflow versus outflow situation, there and the timing of certain.
Export terminals.
Yes, so Phil our focus here is really to been get connected to all the lines that make their way to corpus and we've made a lot of progress. There. So we can receive pretty much all of the lines that are coming in and then we've also doing some dock work at corpus to where we can export more to come back and Pembroke and that work will be finished in the fourth quarter as well, which will give us more control on that supply chain on exports into our system.
I really can't comment too much on it I guess, what you're kind of asking more about is is there enough dock capacity to clear.
Declare the oil and I don't know that I have a lot of insight, whether whether that's the case or not.
Okay.
Second question would just be around the grade of crude this could be coming down those pipelines a lot more of the west, Texas light that that everyone's been talking about and just kind of wondering how you think about running that grid as crude through your system versus more of a W. T I agree.
What capacity you might have to run West, Texas light and.
Given lanes comments just around the lightening of the crude slate the impact it has on NGL and that the margins coming out is that something that you consider.
Yes, so as you think about what type of crude you want to run.
Yes, Phil it's just all a matter of price, we have plenty of capacity to be able to process the barrel.
You know historically weve seen a lot of the light material that makes its way to the Gulf price such that we don't have an economic incentive to run it and it goes to the export market on some of the W.T.L. that's been making its way to corpus has been pricing at a $1.25 type discount to any age and so we've seen some incentive to buy it and if that's the case, we certainly have a lot of capacity you run it but it will depend on how the prices.
Okay all right. Thank you.
Our next question comes from Roger read with Wells Fargo. Your line is open.
Yeah. Thanks, good morning.
I guess maybe.
Good morning, guys come back lane or your comments about the Gulf coast and the light heavy.
Differentials the impact that's had but it was interesting to me in the quarter year over year, you actually had a better distillate yield relative to gasoline yield. Despite I guess running a somewhat lighter slate. So I was just wondering if you could kind of give us an idea of how that happened because it seems a little contrary to the.
Kind of the conventional wisdom run more light you get more gasoline and then maybe how that tide and also to the issue with the access NAFTA I'm, just trying to kind of understand.
Well it seems like you're running a better heavy slate in terms of product with a lighter yield yet the lights cost you on the capture in the end.
Yes, Roger Robotics.
We did have the FCC down in Houston or the whole efficacy using often complex was down from a big chunk of the quarter. Consequently, our gasoline production was off.
Turn to NAFTA, we are as you know, we again with the signals unmatched reform of the whole time right. So you know as you increment into the life, We love and I believe industries in the same spot you run more and more life. We are more of a have to be exported and ultimately it clears in the far east and so it doesn't go on the gasoline Adobe and I am sure part of what's happening right now.
You know tier three is saturating, the gasoline and lowering our paying for those.
There's been a bunch of NAFTA everybody's trying to figure out a way to getting out the back into the gasoline pool that you need all came to do that right now the industry is trying to figure out the balance of again, a tier threes, giving us.
Okay.
Maybe as a quick follow up on that what or who are aware is our best to incremental source of octane outside of the U.S.
Well that's a good question, we've seen some imports, but I can't tell you exactly where that's come from historically, India excesses outlet and we see some trade flow of barrels from India coming over the other thing you see today is that.
In Italian lean and Xylene is is is using as a gasoline blend component.
With where prices you've had in it.
Well in NAFTA with volumes Internet game plan to that's another source of octane, which is a good point on that issue you have around that at some point on on the reformulated gap when fuel who will read the pockets dilemma.
Well, it's we're out with really important mid allows you as you get more out within the pool of allows you to incrementally raise the amount of aromatic so at that point as well.
But yes.
[laughter] now I could probably spend the whole call and these kind of contingencies.
But the fact that.
[laughter] as of as a follow up question ethanol really weak you did the acquisition.
I remember very close to the very beginning of the year is very end of last year, but it's been a tough period here in ethanol, we've seen some competitors shutting down some of their plants and refinancing their companies and everything.
Obviously your size, you're not worried about making it through the process, but I was just wondering light at the end of the tunnel is that 2020 thing is as you know we have to know how the 19 corn crop turned out is it you know the trade issues with China can maybe an order of what matters in magnitude of those events if you could.
Hey, Roger this is mark Yeah, Mark, but if you look at the you know this is the latest corn crop it really the history of the records, which go back 40 years. So you got the latest corn crop and right now. So so he December seaborne price was 370, a bushel in early May went to 470, a bushel by mid June now its back down to.
Already so there's just a lot of uncertainty how big is the crop and what really matters is the carry out at the end of this 2019 crop year and nobody knows at this point, there's still whether that could be impacted.
So it's going to be hard to have.
Real big ethanol margins for this crop year to the U.S. now obviously of China opens up that helps a lot. That's a little different story right. They have a 10% mandate and and that would make a big difference on the exports right away.
Absent that.
You know you're going to see you saw our forward guidance is lower than we ran us or you are going to trim a little bit a lot of people are going to have to train more you know we've got a great fleet.
And you know in the long term.
When you relying on a crop these things happen right. We've had five years now our yields have been above trend and and then do for one below it so well get through this obviously, we're still bullish about ethanol long term. It's a it's a great octane component as part of the fuel mix to stay.
We'll be there with it.
Two things I would add to what Martin said first of all.
You know the industry is just over produce for what gets blended today. That's the fundamental problem here. So what have we done well, we've ramped up exports as an industry network care become a factor in these things and it takes a while to developed markets, but we have been Valero has been very aggressive exporting ethanol to be aggressive going forward.
The other thing Jason spoke to this earlier was the whole E 15 issue.
I mean, the ethanol industry broadly has this notion that you know, allowing 15, which as we said will be challenging.
Is going to solve the problem frankly.
I think the solution to this problem is a higher octane fuel that help.
With cafe and that could be a nationwide standard like 95 Ron.
It would require more ethanol will be blended into the fuel mix. It would take all the arguments on of what copper feel we're going to produce and market broadly and if we could just get everybody to think about it as one of the things were amazingly. The autos are onboard the retail marketers are on board refiners are okay with that.
At the ethanol industry will see that this was a good solution for this problem that were facing perhaps we can make some progress but there is a genuine distrust and we're going to have to get over that but we will continue to bash away on this because I agree with Martin ethanol is going to be part of the fuel mix for a very long time and and.
And it will recover.
Yeah, probably part of the problem of building it on a mandate as opposed to a market incentive to pull more product and all right well. Thank you.
You bet it Roger you got it.
Thank you. Our next question comes from Paul Cheng with Scotia, Howard Weil. Your line is open.
Hey, guys. Good morning. This is this Paul Chang.
And then if I am not [laughter], Hey, welcome back my friend, it's good to hear thank you.
Thank you.
Yes.
Yeah, well I mean, you guys to.
Two quick question.
Maybe this is either for military.
I know that you guys don't produce and all in all we see.
But when you're looking at the bunker fuel mother cat going into the very lows.
Sulphur fuel oil.
Do you know what that I mean, how are you guys going to go around to get there I mean, you're going to pick the biggio, what that you're trying to Brent hi, So first few oriented that.
And what do you think the industry oppose you it's going to be.
Yes, so Paul we've been we've been working very hard to develop low sulfur fuel oil brand blends we worked with several or several shipping companies. We currently have I think three shipping companies burning our low sulfur fuel blend. So we've been working hard to be able to produce compliant fuel.
Gary do you can you share with us that the mean what is the path forward that the approach that you're going to take.
Because it seems like very very efficient.
To trying to use the high sulfur fuel oil venue based Oh channel.
Oh, so for diesel into that or it seems like that the modem extends to using the BG open. If that's the case, we will have a major problem up that much lower gasoline yield.
Yes that that's exactly right Paul So what we're looking at is some of these low sulfur.
Heavy streams that we've typically run to our cat crackers.
Taking some of those barrels out and being able to blend component compliant low sulfur fuel with those rather than taking a high sulfur fuel stream.
I have a moment of language both the two places that were doing that really are at or Pembroke in Quebec, and when we really don't start with a high school for the we start with something that's maybe a moderate fall for an impediment crude economics, and then we start blending enough.
I see.
Gary I think that you guys for the industry as a whole do anything how much is to meet you are they going to pick though for this purpose.
I don't know that we have a macro view that we've sort of talked all along I mean about the.
Idea that biggio at some point, we will have to maintain parity into NFC feed into the gasoline and obviously back to the low sulfur fuel oil market and therefore, it is supportive of gasoline to your point earlier at all it will essentially cause is a linkage between EFI fee economics, and then you know just straight up low sulfur fuel oil into into the bunker marketing because you're going to be connected to diesel, but I think a lot of people thought they'd be disconnected, but theyre not its really through the beauty of in terms of how much.
No there are compatibility issues resolved sorts of things around the that everybody is working on it.
I have to see how much of it.
How much how much you can get into the blunt.
The final question I mean, even if we can 60 diesel issue I mean do we so taking high sulfur fuel oil seems like it's still going to be a problem.
Do you guys have I mean, you don't produce ammonia did you like a net buyer off do we see it. So yes, we see probably crash starting to see will usually be quick for you.
Any idea that I mean, what is really to try to use that we can do with day or the excess hi, Sophie.
It's primarily power generation on that or the other and we don't know that market up to that or how much can be absorbed.
I think.
Our you know it all depends on OPEC and how much it produces.
And how much substitution than they can do instead of where they were burning per they come to us for the industry be able to feed the high sofa, we'd see back into the queue.
And use it as a fee I mean, you guys don't already doing some but.
The industry as a whole do we havent gone up opportunity doing that.
I think everybody everybody is on the learning curve on that we've been doing it a long time, we run a lot of reserves and we have a we have a pretty good understanding as you get into is you got to find a way to run and maintain your defaulter operation. That's heavier doesn't have the wife, thus, we don't give mixing and there's other challenges it depends on the configuration refiner and I'm sure as it gets disrupted the marketplace will be a lot of automobile everybody ill try to accelerate and figure out how much of that going on.
Thank you.
Hey, Paul It was good to see or hear you back and you return to our [laughter] well I wanted to maybe talk I do not know I only got that long.
Yes, [laughter] got our lab three important [laughter] take care bye.
Thank you.
Thank you. Our next question comes from Patrick Swim with time, Sam Salmon Energy. Your line is open.
Hi, guys. Thanks for taking my question I really wanted to ask you about capital spending trends so far this year.
If I'm doing my math right. It looks like you spent about 1 billion and a half so far out of the two and a half billion 2019 target, which implies to me that you're spending is going to drop off into the second half of the year.
I was hoping you could just walk me through the moving pieces there and if this is a reflection of lower turnaround activity levels or lower project spending or whatever those pieces might be.
I spoke at length about we've got a pretty heavy turnaround period.
And we don't have nearly as much turnaround activity for the rest of the year and then two years, if not as productive those last two or three months of the year because of all the holidays.
So it's really a combination of.
It's not that unusual to find ourselves in the situation and you know I mean and things will move a little bit within this sometimes we're slightly below sometimes we're above but but I mean, the two and a half billion dollar numbers, just kind of our novel expectation or what we're going to spend and again you kind of do it as you have to so on to that point I mean, when we had the two bleak had been issued over turnaround that we had planned in the first quarter of 20.
20 that we had to bring into this year. So we had to bring Oh, no number 80 or $90 million of turnaround spend from one year to the next and so some things like that can happen.
Okay, Great that's really helpful.
My follow up question is essentially I know you guys aren't directly impacted by this but I was hoping you could frame up any expectations you have for a longer term market impacts from the potential closure of the P.S. refinery on the east coast.
Yes, so obviously, it's going to tighten the market there.
350000 barrel a day refinery.
That refinery produced a lot of premium gasoline 35000 barrels a day of premium gasoline and our strategy in that region has been able to need to supply the market primarily from Pembroke and so we have good logistics assets in place to be able to take advantage of that that short and Pembroke is a refinery that has a lot of capability to produce octane and so thats, primarily what we're working on today.
Alright, great. Thanks, guys.
Thank you. Our next question comes from Jason Haberman with Cowen Your line is open.
Yeah, Hey, thanks for taking the questions I actually wanted to follow up on the Philadelphia energy refinery closure.
So obviously gasoline margins strengthened the fire and have come back a bit and I'm wondering.
What you attribute the increase do and if you think thats going to be sustained.
Through three Q.
It seems like there is a lot of gasoline supply in the market. So I wonder if it's a matter of months those imports kind of hit the east coast margins are going to fall back off or maybe there's somewhat of an upturn shortage that could support gasoline margins.
Through the rest of Threeq, you and I have a follow up thanks.
Yes. This is Gary I think our view is you know if you look at the daily stats for the last couple of weeks. It looks like demand has been down but our view is that demand will be revised backup word and that you will see actually net exports fall off and a lot of that is the reason that you pointed to.
After the fire and announced closure you had a three cents a gallon open RFP to ship gasoline for northwest Europe to New York Harbor, and so it incentivized imports there.
PADD five we saw imports even after the.
Refinery utilization came back and in the Us Gulf Coast with the octane strength, we're seeing some import components into the U.S. Gulf coast as well.
So demand is good but the the net exports mainly due to imports either being down is kind of what's caused the build that we've seen the last couple of weeks and it does look like that you know the market is cooling off some and you're already seeing signs that that's reversing especially in PADD. Five you know weve gone from seeing imports. It looks like a couple of refiners are putting export cargoes together and you're seeing barrels from California flow into the Arizona market to help clear that as well. So I do think it's a trend you will see reverse.
Do you have a view if the world is kind of maxed out on how much octane.
It can produce right now.
Yes, I think the combination of the things Lane talked about you know with tier three gasoline, destroying some octane and then globally refiners running at a very light diet and accessing NAFTA and trying to fit you know NAFTA back into the pool is caused octane to be very tight globally.
Got it and if I could just ask a follow up Mexico is.
Working to revamp its existing.
Refineries in addition to building a new one but assuming they're successful on the former it could have implications for us product exports.
His valero thinking of kind of continuing its strategy to push its logistical reach into new markets similar to what it did.
In Peru with regard to combat the potential for the Mexican market.
To close up a bit to the U.S. for product exports.
Yes. So we currently you know are exporting about that we sell ourself about 30000 barrels a day direct sales into Mexico that will continue to ramp up you know we're building our marine terminal in very reason had a strategy in the north as well you know for Mexico to do much on revamping the refining system. It involves a lot. It's not just the refineries, but it's also a lot on logistics and able to to get you know logistics that were meant to move crude out now to move crude in so it's going to be a long time coming before they can do much in terms of revamping their refining system, yeah that and then I agree with Gary completely and then if you look at the new plant that they have in mind, obviously, the capital cost is going to be much higher than they had originally forecasted and you know if you're if you're a country and you want to do something as a matter of national Pride and economic returns are the primary driver to the investment then something like that probably makes sense, but.
Certainly the most efficient way for Mexico to supply shortages from the U.S. Gulf Coast.
All right. Thanks for the time.
Thank you and we have a question from Matthew Blair with Tudor Pickering Holt Your line is open.
Hey, Joe I think you could say that Valero has the the biggest investment in new alkylation capacity in the industry just with your projects that Houston in Saint Charles could you talk about how this will change your overall net exposure in alcoholic are you net short today and after these projects are done would you become that long.
Yeah, Hey, Matthew Gary Your line.
Yes, so I don't know that it's all a matter of economics of where output freight. So we have flexibility to where we can sell alcohol direct.
The additional output in the pool allows us to make more are Bob versus C., Bob and it also allows us to make a lot more export grades that are required in some of the the Latin American market. So it will be all a matter of price of what path. We choose to go we have flexibility to do any of those things.
Sounds good and then I think the top end of your throughput guidance for Q3 19 is about 4% below what you did last year I think that the turnaround schedule lightens up in this quarter could you just talk about what the constraints or you know why you know why the volumes are coming in fairly low for Q3.
[noise] as of late and we don't really good we just give the ranges, we don't really give sort of any sort of maintenance.
Guidance so.
No we don't normally give that guidance.
They are acquiring or what they are yeah.
What goes into the volume forecast so there's less.
I mean does this reflect what give me sort of economic run cuts.
No.
Okay. Okay. Thanks.
Thank you and I'm showing no further questions at this time I'd like to turn the call back to Mr. Homeware Butler for any closing remarks.
Thanks, Catherine we appreciate everyone joining us today, obviously, if you have any further questions feel free to reach out to the Investor Relations team. Thank you everyone.
Ladies and gentlemen, thank you for participating in today's conference. This concludes todays program you may all disconnect everyone have a great day.
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