Valero Energy Corporation — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Greetings, and welcome to the Valero Energy Corp. First Quarter 2024 Earnings Conference. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Homer Bhullar, Vice President, Investor Relations and Finance. Thank you. Please go ahead.
Good morning, everyone, and welcome to Valero Energy Corporation's First Quarter 2024 Earnings Conference Call. With me today are Lane Riggs, our CEO and President; Jason Fraser, our Executive Vice President and CFO; Gary Simmons, our Executive Vice President and COO; and several other members of Valero's senior management team.
Thank you, Homer, and good morning, everyone. We are pleased to report strong financial results for the first quarter despite heavy planned maintenance across our refining system. Our team's ability to optimize and maximize throughput while undertaking maintenance activities illustrates the benefits from our long-standing commitment to safe and reliable operations.
Thanks, Lane. For the first quarter of 2024, net income attributable to Valero stockholders was $1.2 billion or $3.75 per share compared to $3.1 billion or $8.29 per share for the first quarter of 2023.
Gulf Coast at 1.79 million to 1.84 million barrels per day. Mid-Continent at 410,000 to 430,000 barrels per day. West Coast at 245,000 to 265,000 barrels per day and North Atlantic at 430,000 to 450,000 barrels per day.
[Operator Instructions] Today's first question is coming from Theresa Chen of Barclays.
I want to get a sense of your product supply and demand outlook from here, maybe talking on Lane's earlier comments. And specifically, what is happening with respect to diesel and jet margins from the recent pullback? And where do you think we'll go from the here?
It's Gary. I can -- I'll give you some insight as to what we're seeing in the market today and then some thoughts on your final question. Overall, we continue to see strong light product demand. In our system, we've seen gasoline sales trending at levels equal to last year. Diesel sales in our system are actually trending about 2% higher than last year.
Really helpful. And maybe following up on the point about Russia, and I appreciate you going through the dynamics on the diesel exports and such. Maybe looking at the naptha side of things. So if the naptha export starts to fall off as well, what does that imply for octane economics? And in light of maybe more naphtha from some of the new refining capacity added, like what is the net impact and the translation to gasoline margins as a result?
Yes. So I think in order to see any meaningful changes in the price of naphtha or discount to gasoline, you really need to see pet-chem demand pick back up for naphtha and a lot of that is just tied to crude flat price. As long as crude flat price is high, it's hard for naphtha to compete as a feedstock into pet-chems.
The next question is coming from Neil Mehta of Goldman Sachs.
Another really strong quarter. And I wanted to ask about the cash flow payout as you're well above the numbers that you've targeted as the floor and so I guess the $1 billion of repurchase level, do we view that as a sustainable run rate? And how do you think about how investors should anchor to a payout guidance?
Neil, this is Jason. I'm going to ask Homer to address that question.
Yes, Neil, I think given the strength of our balance sheet in the first quarter and the fact that we're not really looking to build more cash, we had a pretty strong payout at 74%. And you'll remember, last quarter was 73%, which ended the year at 60%. So I think you can think of the 40% to 50% range as a long-term through-cycle commitment.
Okay. That's helpful, Homer. And then follow-up is just on DGD. There was a pull forward of the SAF projects. So it looks like project is tracking well for '24 start-up. So just how -- once it comes into service, what's the back of the envelope of how we should think about the incremental economics? And what type of premium margins do you think you could sustain on SAF barrels?
Yes, this is Eric. The project -- like you said, the project construction is going well. Start-up will be in the fourth quarter. As far as what we see in uplift, I think if you look to see what the state and federal tax program benefits are, there's a lot of credits that have been stated in the IRA, whether it's 45Z or BTC or PTC. And then in Europe, you've got the Argus quote that I'll kind of give you a good feel of what that product is going to be worth.
The next question is coming from Roger Read of Wells Fargo.
Yes. Probably to come back on some of the macro stuff here. Crude differentials, we've got some, I guess, discipline out of OPEC, we've got TMX starting up, I guess, almost any day now, we have some tightness from some other places that typically have exported heavier crudes to the Gulf Coast. So just curious what you're seeing on the crude, call it, availability front and expectations on differentials?
Yes, Roger, this is Gary. I think we saw crude differentials move a little bit wider in the first quarter, which we expected and that was mainly just driven by demand with heavy turnaround season in the U.S. Gulf Coast. Demand was off a little bit and allowed the differentials to widen.
Fair enough. And then to follow up on your earlier comments about the structure of the diesel market, the need for cracks to go up. This time last year, we saw gasoline, for a little while, move above -- gasoline cracks move above diesel cracks, we have that seasonally again. But is there any reason that you would lean into a max gasoline over a max diesel or a blended sort of outlook relative to what you've been doing over the last couple of years here?
No. I think a lot of that gets driven by availability of intermediate feedstocks, VGO. In a tight VGO market, then you're kind of forced more to swing either gasoline or diesel. So far, availability of VGO has been okay. We've been able to fill all the conversion units, but we'll have to see how that goes moving forward.
The next question is coming from Manav Gupta of UBS.
Congrats on a strong quarter again, guys. My first question here is the bear thesis on refining somewhere was [indiscernible] and it looks like it's not played out these assets from what we read and hear, one of them doesn't have enough hydrogen, the other doesn't even have an FCC. So most likely will not be providing products to the market, maybe even year-end 2024.
Yes. So we see it exactly like you've described. This year was the year where you had kind of a peak in terms of new capacity additions. And then from this point forward, you get to where global petroleum demand outpaces new refinery capacity additions significantly, and we see several years of tightness.
Perfect. The other point is that we generally see big projects get delayed, cost overruns, you are somewhere unique. Your projects get announced and the actual start date keeps moving forward from the announcement, which is absolutely unique to you. And I'm just trying to understand like -- how are you doing this? And I'm hoping I get an answer which is more than we have the best people because we already know that. So help us understand how are you pulling forward your projects?
Manav, it's Lane. That's what I was going to say. But it speaks to the culture. Our culture is very much about high discipline, high accountability and teamwork. We make sure we get the right people into the right jobs and hold them accountable and making sure that they're -- and when I say the right people, they have to be people who are, a, competent; and b, they're willing to work with the other team members who may not necessarily be under them or adjacent to them and ultimately working on behalf of Valero.
The next question is coming from Ryan Todd of Piper Sandler.
Maybe a follow-up a little bit on some of the crude mix questions from earlier. I mean with TMX, there's a lot of focus on what the impact is going to be, particularly on complex Mid-Con refineries that are going to have to run more light sweet crude going forward.
Yes. So this is Gary. So globally, TMX doesn't have that much of an impact. It's just rebalancing the barrels. I think you see some of the heavier barrels from South America that were going to the West Coast won't travel there and they'll probably go more to the Far East and some more TMX barrels starting to go to the West Coast.
And that's probably something that's happening on a broader sets across the system with general global crude mix being lighter, right?
Yes. I think overall, the average crude gravity is up about 1.5 numbers, which certainly results in lower utilization because especially most new capacity all was designed for medium and heavy sour crudes.
Maybe switching gears to Diamond Green Diesel. I mean as you think about the broader -- obviously, we've been through a soft spot here on renewable diesel margin with RINs and LCFS pricing low. As you think about the outlook into the back part of this year and into 2025, can you maybe walk through how you view some of the moving pieces that could tighten up that market and improve kind of the relative profitability of whether it's renewable diesel or then eventually SAF in 2025?
Yes. I think the rest of this year, it's really going to be a question of what some of the other startups look like. We've seen in the news, a lot of announcements of slowdowns, project delays, even some shutdowns. If that capacity comes off-line or slows down, how does that balance versus some of the projects that are starting up in the overall D4 RIN balance at the end of the year?
The next question is coming from John Royall of JPMorgan.
So my first question is on turnarounds, I guess, for Valero and maybe in terms of expectations for the broader industry. Given you and others had a heavy turnaround quarter in the spring, should we expect a lighter fall season and maybe that global supply won't come on as expected, but we could see more supply in the second half coming out of the U.S. because it just lower turnaround than usual?
John, this is Greg Bram. I'll talk about our turnaround activity. Particularly, in the first quarter, we had a pretty heavy turnaround load. You can really see that when you look at our throughput, particularly the Gulf Coast through being much lower. It's just reflective of the work that we had going on.
Great. And then I just had a follow-up on Neil's question on returns of capital and probably for Jason or Homer. You're essentially at a full free cash flow payout now. That's what we saw in the first quarter and Homer's comments suggested that -- that's the expectation going forward.
Well, this is Jason. Yes, I can take a stab at that. I mean, we do think about that. And really, we ask you to look more at our actions rather than that statement and -- because we've been above it in the majority of time over the past several years. But we also view that more as a long-term indication through the cycle.
The next question is coming from Jo Laetsch of Morgan Stanley.
Congrats on a strong quarter. So I wanted to go back to SAF. Are you seeing enough demand from customers to potentially support an additional project? And then if so, would this -- would any potential announcement come after the first facility is online? Just trying to think about timing overall.
Yes. I think the -- what we're seeing in terms of the commercial interest exceeds our current capacity with the first project. As we've said, we're doing engineering on the second project. In terms of timing, that's always for us, that's always an issue that we're not going to talk about that until we've decided internally on committing to that.
Great. Yes, that makes sense. And then I was hoping to go back and dig into your comments on Asia refining dynamics earlier, just given the decline in margins that we've seen over the past couple of months. Do you think we're close to a floor over there? And then we've also seen China exports tick up in recent months, how do you think that's been impacting U.S. margins?
Yes. So I think my comment there, when you have cracking margins in Singapore negative and you have hydroskimming margins in Europe negative, it kind of tells you we've hit a floor, we need the capacity to run and I think you'll see margins start to tick back up.
The next question is coming from Paul Cheng of Scotia.
The first question, I think, is either for Gary or for Lane. Peer mix start up, and so that's going to bring the WCS, which is mostly the main mix in [indiscernible] heavy oil with really heavy [indiscernible] barrels and [indiscernible]. So when that happens, will your system be able to convert all your -- if the price is right, can your system convert all your heavy intake and the medium intake into using a some form of combination of WCS plus some light barrel or that is not as simple? And also whether the industry will be able to, say, eliminate all the import from the heavy barrel from, say, [indiscernible] from the Middle East, replacing with WCS? That's the first question.
Yes, Paul, this is Gary. I think what we anticipate there's a lot of coking capacity on the West Coast. I'll just use our Benicia refinery as an example. Benicia was really designed to run A&S. And we think with the barrels that are coming off TMX both the heavies and the lights, you'll be able to blend those together to form something that looks a lot like A&S. And we would expect most West Coast refiners will be doing something similar to that.
Okay. And second question then, Gary, can you give us some maybe your [ comments ] that what you see in the Mexican market for both gasoline and diesel?
Yes. So our sales in Mexico have been consistent with historic levels. We're selling just over 100,000 barrels a day. We expect demand in Mexico remains very strong. We would expect to see that kind of ramp up later this year when we get our marine terminal in Altamira up and running, that will make us more competitive in the north and allow us to continue to grow volumes in Mexico.
Gary, do you have an export number you can share in the first quarter.
Yes. So we did 103,000 barrels a day of gasoline exports. We did 153,000 barrels of diesel exports and 25,000 barrels a day of jet exports. The diesel number in the first quarter was down year-over-year, quarter-over-quarter, and I wouldn't read that as lack of demand. That was really a result of the heavy turnaround activity and just we didn't have barrels available for export.
The next question is coming from Matthew Blair of Tudor, Pickering, Holt.
Could you talk about your M&A appetite for refining assets? I think it's been about a decade since you did a major deal. Has anything changed regarding your overall outlook on M&A?
This is Lane. Not really. I mean we always look at everything. I mean if you look at the most prompt sort of big deal that's out there [indiscernible] we sorted as a corporation decided not to engage in that. For whatever reason, whoever the successful buyer they can sort everything out wants to liquidate some of the assets, we'll certainly look at them at that time.
The next question is coming from Jason Gabelman of TD Cowen.
I had 2 market-based questions. The first, just wanted to get a sense of what you're seeing on the West Coast as we move into the summer now that another asset will be permanently shut down there? Are you seeing ratable exports coming from overseas product-wise into that market or do you expect kind of heightened volatility and elevated prices there?
Yes. So this is Gary. I would tell you, in the first quarter, we saw a little lower demand, at least in our system, California for gasoline, which I think was related to weather. We've seen demand kind of return to normal patterns. And it's very difficult to just speculate and put barrels on the water to import the California market.
Got it. And then my second question, just going back to the commentary around the global lighting crude slate. And you had previously made a comment that crude gravity over the past few years has gone up 3 to 4 points and that's maybe reduced global capacity available by 3 to 4 percentage points. Can you just comment on that dynamic?
I don't know that I can quantify that. Certainly, that is our view that as the crude gravity goes higher, there's a lot of refining capacity around the world that was designed for a heavier gravity crude diet. It causes some derate crude units, but quantifying it. I don't know that I can do that. I don't know, Greg, if you have?
I don't have any rules of thumb either.
At this time, I would like to turn the floor back over to Mr. Bhullar for closing comments.
Thank you, Donna. Appreciate everyone joining us. Obviously, please feel free to contact the IR team if you have any follow-up questions. Thank you, everyone, and have a great day.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or log off the webcast, and enjoy the rest of your day.