Valero Energy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

Key Takeaways

  • Valero delivered a record Q3 EPS of $7.49 on net income of $2.6 billion, up from $7.19 per share a year ago, driven by robust refining margins and product demand.
  • Refinery throughput averaged 3.0 million barrels per day with 95% utilization, generating $3.4 billion of operating income and underscoring operational reliability.
  • Renewable diesel segment operating income declined to $123 million in Q3 2023 from $212 million in Q3 2022, despite sales volumes rising by 761,000 gallons per day, due to weaker margins.
  • The Diamond Green SAF project at Port Arthur remains on schedule for 2025 completion, costing $315 million (Valero share 50%) and set to make DGD one of the world’s largest sustainable aviation fuel producers.
  • Valero finished Q3 with a 17% net debt-to-capitalization ratio and returned 68% of adjusted net cash flow to shareholders via dividends and $1.8 billion of share repurchases.
AI Generated. May Contain Errors.
Earnings Conference Call
Valero Energy Q3 2023
00:00 / 00:00

There are 18 speakers on the call.

Operator

Greetings, and welcome to the Valero Energy Corp. 3rd Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

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

Speaker 1

Good morning, everyone, and welcome to Valero Energy Corporation's Q3 2023 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. If you have not received the earnings release and would like a copy, you can Find 1 on our website at investorvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business 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.

Speaker 1

In summary, it Statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future Are forward looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our earnings release and filings with the SEC. Now, I'll turn the call over to Lane for opening remarks.

Speaker 2

Thank you, Homer, and good morning, everyone. We are pleased to report strong financial results for the Q3. In fact, we set a record for Q3 earnings per share. Mining margins were supported by strong product demand against the backdrop of low product inventories, which remained at 5 year lows despite high refinery utilization rates globally. The strength in demand was evident in our U.

Speaker 2

S. Wholesale system, which matched the Q2 record of over 1,000,000 barrels per day of sales volume. Our refineries operated well and achieved 95% throughput capacity utilization in the 3rd quarter, which is a testament to our We continue to prioritize strategic projects that enhance the earnings capability of our business And expand our long term competitive advantage. The DGD Sustainable Aviation Fuel or SAF project at Port Arthur Remains on schedule and is expected to be complete in 2025. Once complete, we The Port Arthur plant has the optionality to upgrade up to 50% of its current 470,000,000 gallon annual renewable diesel production capacity at SAF.

Speaker 2

Project is estimated to cost $315,000,000 with half of that attributable to Bolero. With The completion of this project, Diamond Green Diesel is expected to become one of the largest manufacturers of SaaS in the world. On the financial side, we honored our commitment to shareholder returns with a payout ratio of 68% of adjusted net cash provided by operating activities through dividends and share repurchases in the Q3. And we ended the Q3 with a net debt to capitalization ratio of 17%. In closing, while there are broader factors that may drive volatility in the market, we remain focused on things we can control.

Speaker 2

This includes operating our assets efficiently in a safe, reliable and environmentally responsible manner, Maintaining capital discipline by adhering to the minimum return threshold for growth projects and honoring our commitment to shareholder returns. With that, Homer, I'll hand the call back to you.

Speaker 1

Thanks, Elaine. For the Q3 of 2023, net income attributable to Valero stock Holders was $2,600,000,000 or $7.49 per share compared to $2,800,000,000 or $7.19 per share for the Q3 of 2022. Adjusted net income attributable to Valero stockholders was 2 point $8,000,000,000 or $7.14 per share for the Q3 of 2022. The refining segment reported 3 point $4,000,000,000 of operating income for the Q3 of 2023 compared to $3,800,000,000 for the Q3 of 2022. Refining throughput volumes in the Q3 of 2023 averaged 3,000,000 barrels per day, implying a throughput capacity utilization of 95%.

Speaker 1

Refining cash operating expenses were $4.91 per barrel in the Q3 of 2023, Higher than guidance of $4.70 per barrel, primarily attributed to higher than expected energy prices. Renewable diesel segment operating income was $123,000,000 for the Q3 of 2023 compared to $212,000,000 for the Q3 of 2020 Renewable diesel sales volumes averaged 3,000,000 gallons per day in the Q3 of 2023, which was 761,000 gallons per day higher than the Q3 of 2022. The higher sales volumes in the Q3 of 20 23 were due to the impact of additional volumes from the DGD Port Arthur plant, which started up in the Q4 of 2022. Operating income was lower than the Q3 of 2022, primarily due to lower renewable diesel margin in the Q3 of 2023. The Ethanol segment reported $197,000,000 of operating income for the Q3 of 2023 Compared to 1,000,000 for the Q3 of 2022.

Speaker 1

Ethanol production volumes averaged 4,300,000 gallons per day in the 3rd quarter of 2023, which was 831,000 gallons per day higher than the Q3 of 2022. Operating income was higher than the Q3 of 2022, primarily as a result of higher production volumes and lower corn prices in the Q3 of 2023. For the Q3 of 2023, G and A expenses were $250,000,000 and net interest expense was 149,000,000 Depreciation and amortization expense was $682,000,000 and income tax expense was 8 $13,000,000 for the Q3 of 2023. The effective tax rate was 23%. Net cash provided by operating activities was $3,300,000,000 in the Q3 of 2023.

Speaker 1

Included in this amount was a $33,000,000 favorable change in working capital and $82,000,000 of adjusted net cash provided by operating activities Associated with the other joint venture member share of DGD. Excluding these items, adjusted net cash provided by operating activities was 3 $2,000,000,000 in the Q3 of 2023. Regarding investing activities, we made 394,000,000 Capital investments in the Q3 of 2023, of which $303,000,000 was for sustaining the business, including costs for turnarounds, catalysts and regulatory And $91,000,000 was for growing the business. Excluding capital investments attributable to the other joint venture members' share of DGD, Capital investments attributable to Valero were $352,000,000 in the Q3 of 2023. Moving to financing activities, we returned $2,200,000,000 to our stockholders in the Q3 of 2020 3, of which $360,000,000 was paid as dividends and $1,800,000,000 was for the purchase of approximately 13,000,000 shares of common stock, resulting in a payout ratio of 68% of adjusted net cash provided by operating activities.

Speaker 1

This results in a year to date payout ratio of 58% as of September 30, 2023. With respect to our balance sheet, we ended the quarter with $9,200,000,000 of total debt, dollars 2,300,000,000 of finance lease obligations and $5,800,000,000 of cash Cash equivalents. Debt to capitalization ratio net of cash and cash equivalents was 17% as of September 30, 2023. And we ended the quarter well capitalized with $5,400,000,000 of available liquidity excluding cash. Separately, as reported by Navigator last week, they canceled their CO2 pipeline project.

Speaker 1

We still see carbon capture and storage as a Strategic opportunity to reduce the carbon intensity of conventional ethanol, which would also qualify as a feedstock for sustainable aviation fuel. Without carbon capture and storage, conventional ethanol does not have a pathway into SAF under today's policies. We continue to evaluate other projects to sequester CO2. Turning to guidance, we still Expect capital investments attributable to Valero for 2023 to be approximately $2,000,000,000 which includes expenditures for turnarounds, catalysts and joint Investments. About $1,500,000,000 of that is allocated to sustaining the business and the balance to growth.

Speaker 1

For modeling our 4th quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.77000000 to 1.82000000 barrels per day Mid Continent at 445,000 to 465,000 barrels per day, West Coast at 245,000 to 265,000 barrels per day And North Atlantic at 470,000 to 490,000 barrels per day. We expect refining cash operating expenses in the Q4 to be approximately $4.60 per barrel. With respect to the Renewable Diesel segment, we expect sales volumes Approximately 1,200,000,000 gallons in 2023. Operating expenses in 2023 should be $0.49 Which includes $0.19 per gallon for non cash costs such as depreciation and amortization. Our ethanol segment is expected to produce 4,400,000 gallons per day in the 4th quarter.

Speaker 1

Operating expenses should average $0.39 per gallon, which includes $0.05 per gallon for non cash costs such as depreciation and amortization. For the Q4, net interest expense should be about $145,000,000 and total depreciation and amortization expense should be approximately For 2023, we expect G and A expenses to be approximately 925,000,000 That concludes our opening remarks. Before we open the call to questions, please adhere to our protocol of limiting each turn in the Q and A to 2 questions.

Operator

Thank you. The floor is now open for questions. A confirmation tone will indicate your line is in the question Today's first question is coming from Theresa Chen of Barclays. Please go ahead.

Speaker 3

Good morning and thank you for taking my questions. I 1st, I'd like to ask about your outlook for near term refining margins and specifically on the gasoline side. We've seen significant volatility recently, Especially early in October. What do you think explains the recent downside? And how does that compare with demand across your footprint, maybe going back Lane's earlier comments on your wholesale system and just generally how do you think definitely margins trend going forward?

Speaker 4

Hey, good morning, Theresa. This is Gary. Yes, I think you had several factors that contributed to the sharp sell off in gasoline. You kind of had the market view that Hurricane season was over. You were approaching RVP transition and then the DOE put out some fairly pessimistic Demand numbers and so all that kind of hit it once and caused a fairly significant sell off in gasoline.

Speaker 4

In terms of the outlook going forward, We would expect gasoline to kind of follow typical seasonal patterns, weaker cracks kind of the Q4 and Q1. The thing we're really looking at is, you know, the fundamental that looks good to us is the It looks good to us as the market structure still doesn't really support storing summer grade gasoline, putting gasoline in New York Harbor for Driving season next year. So as long as that's the case, our view would be then when you get to driving season next year, demand picks back up, you'll see cracks respond.

Speaker 3

Thank you. And on the crude oil side, in terms of light heavy differentials, Given the heightened geopolitical risks in the Middle East and coupled with the incremental Venezuelan production following the recent sanctions And taking also into account the potential near term startup of DASBOCUS, how do you think about the impact Of all these variables on light heavy differentials and how do you see this evolving from here?

Speaker 4

Yes. So really the key driver on the light heavy differentials Continues to be the 4,500,000 barrels a day that OPEC Plus has off the market. So, we saw fairly tight differentials in the 3rd quarter. They have moved wider despite the geopolitical issues that you've discussed. Some of that is just typical seasonal patterns.

Speaker 4

You've had less high sulfur fuel burn for power generation in the Middle East. So high sulfur fuel discounts have widened some. We've seen some turnaround activity, especially D and PADD II that push some heavy seller back on the market causing differentials to widen out. Freight markets actually have a fairly significant impact Differentials as well. So freight moving higher is causing the differentials to move, but we kind of see until the OPEC plus Comes back on the market that you'll have narrower heavy sour differentials and they'll follow typical seasonal patterns.

Operator

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

Speaker 5

Hey, everyone. Thanks for taking the question. This might be one question, but in 2 parts, which I know You guys love. So it goes back to the gasoline comment, and it just seems like the market might be More seasonal than it had been in the past just because of the way consumers kind of travel and work. And then But at the same time, your system has gotten a little more diesel oriented with the Port Arthur Coker and Valero has a history of really strong sort of capture results and execution results in the Q4 when there's typically a lot of volatility and locations around all these markets.

Speaker 5

So the question is, do you think that this kind of enhanced seasonality in gasoline is We should get used to in future years and in terms of your configuration and position within that, Is it arguably better than it was sort of before you brought on some recent projects? Thank you.

Speaker 4

Yes. So on the first part of the question in terms of even more seasonality around gasoline, I can't say that we're really seeing that. We did see sales Throughout our wholesale system fall off a little bit after Labor Day, but they've actually recovered quite nicely and we're back into that 1,000,000 barrels a day of sales. Gasoline sales year over year are up 2% in the current market from where they were last year at this time. Diesel sales are up a little stronger at 8%.

Speaker 4

So I don't think it really is a seasonability factor that's impacting gasoline, at least in the domestic markets.

Speaker 2

So it's Wayne on the left side. On the second part, Sam, it's we really had a view since I'm going to say the early 20 teens where we saw the diesel would be Fuel of the Future, it's the economic driver. So not only did we do the coker that you alluded to here recently, we also Built the 2 big hydrocrackers. We revamped the 2 big hydrocrackers. This is all in an effort to make our system more robust and its ability to move around And specifically, Bill, to move towards making more and more disciplined out of our assets.

Speaker 5

All right. Sounds good. Thank you so much.

Operator

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

Speaker 6

Thanks, guys. Lynn, thanks for having me on. I've got a couple of questions, if I may. I guess the first one is, I guess about the Port Arthur Coker and more generally, what you're seeing going on in the Gulf Coast as it relates to heavier advantaged Sour Crude Spreads. And I guess my point is does Bocus obviously looms large in the horizon, but Maya seems to have behaved very differently From your indicator from WCS, and I realize that's largely your benchmark.

Speaker 6

So I'm just curious, are we seeing the capture rate From the coker that you anticipated and what's your prognosis, I guess, for those advantaged crude spreads that Obviously, a big factor in that project.

Speaker 2

I'm going to hand this off to Gary and Greg. I think Gary, you might answer the heavy sour part and then Greg

Speaker 4

Yes. So we've seen heavy sour discounts widen back out. In Canada, they're back on apportionment on the pipelines. It looks like forecast for fairly robust production in Canada. You're seeing the Venezuelan back And then our view is even when the focus does start up, it may take some mile off the market, but probably increases fuel yield from Mexico.

Speaker 4

And so that coker, we can use that as a feedstock as well. And I'll let Greg address the capture question.

Speaker 7

Yes. And Doug, what I'd say about Coker, it operated very well for the quarter, certainly consistent with our expectations. And so the project is generating good strong economic value, both by lowering feedstocks, Some of the things Gary is talking about and also enabling us to increase throughput.

Speaker 6

Sorry, guys. On DAS forecast, is that impacting Spreads on the Gulf Coast materially?

Speaker 4

I don't think there's any impact today.

Speaker 6

Okay, thanks. My follow-up is a quick one, maybe it's for Jason, but another $1,800,000,000 of buybacks, you've now bought back I think about 15% of your shares In the last year and a half, you still got plenty of cash on the balance sheet and we know this sector is notoriously seasonal. I'm just curious how we should think about your Deployment or strategy of buybacks into seasonal periods, when you get perhaps get more opportunistic?

Speaker 8

Yes. Thanks, Doug. Yes, if it's okay, I'll talk about our approach to buybacks is driven by our thoughts around Cash, the dividend debt, so I'll walk you through that and how we're looking about thinking about the rest of the year and then we can see if there's more you want beyond that. So on cash, as you said, we ended the quarter at $5,800,000,000 We've indicated minimum target of $4,000,000 So we're very comfortable with us being in that current range now. On the debt side, we always proactively look at our portfolio through a liability management lens on an ongoing basis, but we certainly don't have any needs to pay down any Debt at this time, net debt to caps as of September 30 was 17%.

Speaker 8

So it's a bit under our target range. So we're in good shape there. And on the dividend, we maintain the dividend, it's competitive, growing and sustainable through the cycle and we feel like we're in a reasonable range now. I wouldn't want to get into more specifics So timing or potential dividend increases at this time. And then that brings us to buybacks.

Speaker 8

And you know our approach to buybacks is to have the annual target of 40% to 50% of adjusted net cash from operations and we view the buybacks as a flywheel supplement in our dividend to hit whatever our target is for the year. In the Q3, we had a 68% payout year to date through the Q3, we're at 58%. So I would say under these conditions, even given the softer seasonality in the 4th quarter, You should definitely expect us to pay out over 50% for the year. And you may recall, prior to the Pandemic, that was a fairly regular practice. The 5 years before the pandemic, I think we averaged like a 57% payout.

Speaker 8

So in these periods where we have Greatly above average free cash generation that will probably continue to be our practice.

Speaker 6

A clarification, Wayne, if you don't mind that The fact you're already above 50%, the high end of your payout, does that preclude stepping into Additional buybacks for the balance of this year?

Speaker 8

No, no, it doesn't. We look at it on an annual basis, I would think we'll be over 50 for the year. So it definitely does include the timing. Thanks so much.

Operator

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

Speaker 9

Good. Thanks. Maybe could you talk to a

Speaker 2

little bit about what

Speaker 10

you're seeing in renewable diesel markets? Q2 margins were obviously quite soft, indicators been weak. Can you talk was there any impact from hedging losses in the Q3? And maybe Could you help us, if there were kind of rough estimate of maybe what that was? And then can you just more broadly Talk about what you're seeing in terms of supply demand in the marketplace, impact of RIN pricing and RVO Limitations, etcetera.

Speaker 11

Sure, Ryan. This is Eric. I think we saw the RIN prices drop pretty Quickly, kind of in that September and into October and really as you stare at that drop, it was kind of on the news that Yes. There was the anticipation of a couple of big startups at the end of the year that have now been delayed. It was also on the news That there was going to be with Russia freezing out its exports that It would force the U.

Speaker 11

S. To export more, therefore drop the obligation. So the combination of all that news kind of caused a precipitous drop in the RINs Kind of right at the end of the quarter and into the beginning of Q4, the real margin loss there is really because as Fat prices have since adjusted in the spot market, but obviously there's a lag of our fat prices that kind of carried on that You have since started to catch up with this drop in credit prices, but we'll see that continue to carry through the Q4. But overall, I think that's really what we're seeing. The spot margin is clean back up.

Speaker 11

That prices continue to come off. You really see all of that being it's kind of a return to profitability here in the Q4. So That's really what we see going on in the RD market.

Speaker 10

Okay. Thank you. And then maybe And switching on the refining side, as we think about PADD V, you all said it was Really quite strong through Q3 on a relative basis across the country and into the early parts of the Q4. Can you talk maybe about what you're seeing overall in terms of kind of supply demand in PADD V across your operations there? There's a lot of moving pieces with some refineries that are that have transitioned off the market from conversions coming right now.

Speaker 10

So how do you as

Speaker 4

you look forward over the next, do

Speaker 10

you expect that market to stay relatively tight for the foreseeable future? And how do you think about relative to your operations there?

Speaker 4

Yes, Ryan, this is Gary. I think our view of PADD 5 is that with the renewable diesel coming into the market, the market should be well supplied on the distillate side, but it's going to be very tight on gasoline. You just don't have the gasoline production that you used to have with the refinery conversions. And so when one refinery goes down, it's going to create a

Operator

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

Speaker 12

Guys, you, Anun, for your capital discipline and You look at a lot of projects and in the end very few actually make it through the funnel. We are somewhere in October. You guys haven't talked about a major project Yet and I'm just wondering if 2024 would then be more of a quick hit projects. I mean, Coker has already come online. So when I look at 2024, Should we think of the year where you could be doing more quick hit projects versus a mega project, but generally can go on for 3 to 4 years?

Speaker 2

Hey Manav, this is Lane. So the way I would say, I agree with you and that's but we still believe we can we'll spend somewhere between $500,000,000 to $1,000,000,000 a year strategic But when you look at sort of what's the nature of those certainly in the refining side, they are going to be shorter cash cycle types of projects Instead of a big like a coker type project, there'll be a series of small projects. And then when you further drill down and what do we look for, we look for refining projects to lower our cost to produce. We also like projects that improve our reliability and then of course we like the whole renewable line in terms of its ability for us To drop the carbon intensity of our fuels. And as you also said, we're very careful about our communication on projects.

Speaker 2

We like to be a little closer to FID or at FID before we really talk about them.

Speaker 12

Perfect. Just a Quick follow-up. We have seen some sanction relief on the Venezuelan side. You were buying from Chevron even before that and Chevron had been Giving the indications that they could ramp up over there. So can you help us understand like what kind of volume incremental volumes could come to Market from the Venezuelan side in probably next 2 or 3 years?

Speaker 4

Yes, this is Gary. So if you look, there's About 250,000 barrels a day of exports from Venezuela, most of that volume is going to Far East, but with the lifting of sanctions, it has the The sanctions, it has the potential to make its way to the U. S. Gulf Coast.

Operator

Thank you. The next question is coming from John Royall of JPMorgan. Please go ahead.

Speaker 9

Hi, good morning. Thanks for taking my question. So we've talked about coastal light heavy dips and how they've tightened up pretty significantly. Can you remind us how much flexibility you have in your system

Speaker 7

Hey, John, this is Greg. So We can flex quite a bit. What you'll tend to see us do is when the medium grades look attractive, we'll ramp that up and kind of back down in both the lights and the heavies. Conversely, when heavy sours get more attractive relative to the medium grades, we'll ramp up the heavies. I don't remember the exact percentages.

Speaker 7

We can get those to you. I I think they might actually be in our deck. They're in our deck. Yes, it's 30. But that tends to be what drives us to kind of swing between those different grades.

Speaker 9

Great. And then maybe you can talk about the beat and utilizations in 3Q. You didn't call out anything in particular, but You're above the high end in I think every region but one. It seems like the system ran quite well. Are there any moving pieces to call out, maybe Maintenance getting pushed out or anything of that sort or is it just better than expected operations?

Speaker 2

I would say we didn't the 3rd quarter is always going to be a period where you don't have a lot of turnaround activity. I mean, some of it might leak over from the second or you might Start a little bit going into the 4th, but each system industry wide, we're not unique in that sense. Most of your Turnaround work is either done in the 1st and second or the 4th quarters and so it should be a high utilization and obviously we've emphasized reliability, gosh, for the last More than a decade we have the programs that we have, so you would expect us when we're not having turnaround to have a pretty high level of utilization of our assets.

Speaker 13

Thank you.

Operator

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

Speaker 14

Hey, good morning all. Thanks for taking my questions today. So I wanted to start on the diesel side. You talked about gasoline cracks, I don't think we hit on diesel much. It just remained really strong here.

Speaker 14

So just curious what your thoughts on the setup for diesel here into the winter? We have low inventories in both the U. S. In Europe, in last year, we kind of had a similar level of tightness and were bailed out by a warmer winter. So just curious on your thoughts on the setup for diesel margins?

Speaker 4

Yes. So diesel demand remains very strong. I guess I mentioned diesel sales in our system are up about 8% year over year. Our view of the broader markets is that diesel demand in the U. S.

Speaker 4

Is probably down about 1% year to date from where it was last year, and that's mainly due to the warmer winter we had last year. Our guys estimate we lost about 125,000 barrels a day of diesel demand due to the warmer weather. So inventories remain below the 5 year Average level demand remains good. So you're heading into winter with low inventories and we would expect strong diesel cracks through the winter and could get very strong

Speaker 14

And then shifting gears a little bit. So we've talked a little bit about RD margins being pressured here. So I was just hoping you could touch on some of the regional dynamics that you're seeing And economics of selling into other states on the West Coast or potentially Canada to offset maybe lower LCFS prices that we've seen in California?

Speaker 11

Yes, we absolutely see California has become kind of the floor of the RD market. We see more opportunity In Oregon, Washington and Canada, that's kind of the growth opportunities. And so, we absolutely Look to maximize our product sales into those markets. California continues to talk about raising the obligation for 2,030. They've sort of pushed off a lot of their they're still doing a lot of their conferences and workshops on that.

Speaker 11

We still fully expect that at some point they are going to announce the changes to be effective sometime next year and that will increase The LCFS price in California. So, but in the meantime, we continue to look at again, you kind of mentioned that We still have the advantages being on the Gulf Coast. You have access to all the global feedstocks. You have access to all the global markets. So, it gives us a lot of capability to go to different markets and we continue to see waste oils advantage versus vegetable oils from a CI standpoint.

Speaker 11

So, You look at that low cost producer on the Gulf Coast, that just continues to be kind of the winning formula for being able to have flexibility to go to different markets In the RDE space.

Speaker 14

Awesome. Thanks for taking my questions this morning.

Operator

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

Speaker 8

Good morning. Elaine, first question is for you. It's just, it's been a couple of months since you stepped to the job As CEO, just we love your perspective on early observations recognizing the strategy. It's been very It's been a

Speaker 2

Sure has been a couple of years, Neil. But it's been Great. You always got to remember, I was an integral part of really Joe's team really from the beginning of his CEO tenure. As you've mentioned, It's been a very successful one. So, are there things that I'm trying to do maybe a little bit differently?

Speaker 2

I'd say I put my thumb on the scales on certain Maybe a little bit and I maybe unweight others, but largely speaking, our strategy is the same because it was successful and It's currently successful. I don't know that I have any real plans to deviate from that. Obviously, the world can change and we would respond accordingly. But The world looks at least this business looks a whole life like it did a year ago. So and our outlook is pretty much unchanged.

Speaker 8

Now that's that we definitely appreciate the consistency. The second question, it's a very it's a smaller part of your business, but it's always you can Great volatility in earnings of ethanol. Just curious on your outlook for that business and where do How far away are we from mid cycle as you think about

Speaker 11

it? Yes. The ethanol currently obviously has had a good year this year With lower corn prices and low natural gas prices. So, the ethanol margins have been, I would say, higher than what we would call a mid cycle. But it's not really exceptionally higher than mid cycle.

Speaker 11

It's actually been fairly strong, but I would say looking back historically, Ethanol is always kind of a steady drumbeat business. We do see that the biggest opportunity here is still This low carbon opportunity and some of the growth in other markets in the world, again, we are 30% of the export capability of ethanol for the U. S. And so we see this interest In the world, lowering its carbon footprint by increasing its ethanol blending. So Canada has become an E10 country almost overnight.

Speaker 11

There's talk about that going to E15 next year. We're seeing other countries that are starting to look at incremental ethanol funding and then there's a lot of 1st in ethanol as a feedstock into chemicals and solvents and paints. And so, I think we still see a lot of good opportunities for ethanol globally That I think will keep us in a very strong margin environment. And then obviously, I mean so much of that depends on weather I mean, obviously, no one can control that, but the U. S.

Speaker 11

Is a big ag country. We have a lot of capability To grow a lot of corn and so as long as that holds up, then I think ethanol has got a good outlook.

Speaker 8

Thanks. Great color.

Operator

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

Speaker 13

Hey, guys. Good morning.

Speaker 2

Good morning.

Speaker 13

2, hopefully, quick questions. First, Maybe either it's for Ling or Gary. Look like the ad paying and nether Branding economic right now is really good. With the winter grade, if we're looking at your system, What is the incremental percentage of the gasoline supply will increase as a result of those branding for you versus, let's call it, 3rd quarter, the level or that Q4 last year, whatever is the comparison you want to use. And secondly, that Want to see what is if you can give us any color that how's the turnaround cycle look like for you next year And whether that complaint to this year going to be about the same lighter, heavier And also that whether you think the industry is going to have a normal cycle next year after the catch up this year or that the Catch up is going to continue into next year.

Speaker 13

Thank you.

Speaker 4

So if I understand correctly, the first was how much really does Clean pools well as you get a higher RVP gasoline. Is that what you're asking, Paul?

Speaker 13

Yes. I mean that every year that When we go to the winter grade, obviously, you see more branding, but that with the economic look like it's actually very attractive For the branding, and I assume that given the winter grade, it will also allow you to have more flexibility if you want to Brand the strict method into the system and it looks like it's very economic also.

Speaker 7

Yes, Paul, this is Greg. So you're right. You definitely increased the amount Primarily butane that you blend into the gasoline, it ranges depending on which region you're in and the change in specs, it's in the 5% to 10% range. And then you're right that to the extent that butane has a higher octane than the pool, it does allow you to put more of the lower octane components into the blend, NAFTA being one of those right now that looks pretty attractive.

Speaker 13

And Paul, I don't know. Yes, got it. Please go ahead. No, I was just going

Speaker 2

to answer your I think it was your second question around turnarounds. We sort of had a policy for a while that we don't give any real outlook on our turnaround or the industry

Speaker 13

Okay. And if I can just go back into the earlier question Great answer. Any kind of say, because that's when it is more Economic, it tends to brand more, but on the other hand, gasoline prices not great right now. So I'm trying to understand that how the 2 years going to impacting in your thinking or your action here?

Speaker 2

I think so if I understand, Paul, back to winter blending, obviously naphtha is cheap, butane It's relatively cheap and we always look at economic signals to try to determine how much gasoline we're producing. And that compares to for the reformulated They might require less butane and then there's specs that you hit. I mean, you would think you would get near 10% butane and full, but a lot of We hit other specifications in the finished gasoline besides RVP. And so I mean, that's fair.

Speaker 8

Yes, that's fair. Yes.

Speaker 13

Very good. Thank you.

Operator

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

Speaker 15

Good morning. Thanks for taking my questions. I wanted to first go back to uses of cash Sure. Returns of cash, I should say. And I know, Valero has 40% to 50% payout ratio.

Speaker 15

It seems like you're returning a majority of the excess cash post dividends via buyback, Maybe 2 thirds of that excess cash. Is that kind of how we should think about return of cash moving forward essentially All of the excess cash or majority of it beyond what you pay out in the dividend is going to be going towards the buyback for the foreseeable future. And I think some color around that could help the market bring some of that potential future buyback value forward. And I have a follow-up. Thanks.

Speaker 2

Hey, Jason, this is Lane. Look directionally you're correct. We still have to we use some of our cash obviously goes to sustaining our asset. So that's something We're committed to, we want to make sure that we're A, that we're we have the earnings potential or assets stay in a posture that we can always generate the right With the market conditions and second, we maintain the dividend. And then we do believe we still have this sort of $500,000,000 $2,000,000,000 of strategic capital.

Speaker 2

To the extent, all that's done, All the excess cash will go to buybacks.

Speaker 15

All right, great. Thanks. And my second one It's kind of on the strategic growth outlook. We've seen some of your larger peers use equity To buy up companies recently and if I think about some of the potential areas you could expand into like chems, like low carbon fuels, Those valuations have come down relative to where Valero trades. And I know Valero doesn't typically use equity to acquire other companies.

Speaker 15

But given what's going on with Navigator Pipeline and looking at your potential future growth opportunities, Are you taking a closer look at strategic M and A and using equity given Your stock and refiners in general have held up pretty well relative to other potential step out opportunities? Thanks.

Speaker 2

This is Blaine again. I would say that we look at all these opportunities and all the business lines that I alluded to earlier and we have an entire group, our innovation group It's constantly looking at how can we bolt on and leverage our existing footprint, which obviously we have a big footprint in ethanol, we

Speaker 16

have a

Speaker 2

pretty big footprint Renewable diesel and we're also looking at everything else, everything is on the table. We're always looking at it, but we're also very careful in terms of How we talk about it and how we're going to announce things. In terms of how we finance it, it's just a matter of when we As the world evolves, we'll come up with the best way that we think to finance something, but obviously all these things have to go through our investment gated process.

Speaker 15

Got it. Thanks for the answers.

Operator

Thank you. The next Question is coming from Roger Read of Wells Fargo. Please go ahead.

Speaker 16

Yes. Thank you. Good morning. Maybe to follow-up on Mr. Gabelman's question there.

Speaker 16

If we think about acquisitions, latest news says Sitgo It is potentially going to be on the auction block beginning of next year. So just curious how you think about a greater footprint within refining Any kind of a possibility?

Speaker 9

So you know what

Speaker 2

hey, Rogers, this is Lane. So as you know our history, we were A big consolidator in the industry going back to 2000. That's really our last major acquisition was sort of 2013 that's when our base became somewhat like it looks today. So we understand probably as well as any operator out there What it takes to buy something or to merge something and get it on our system and all the costs associated with it. And we always look at everything that we think within reason.

Speaker 2

I mean, we always analyze everything and we haven't bought anything like I said since 2013, any refining assets, you never say never. We look at everything and we'll again, like I alluded to on Jason's question, we'll run it through Processes and figure out whether anything makes sense for us or not.

Speaker 16

Yes, I'd imagine the data will be unchanged.

Speaker 8

I'm not

Speaker 2

clear on that Roger, they got to compete with Everything else including buybacks, right? So anyway.

Speaker 16

Right, right. No, I mean the data room is going to have to be interesting at a minimum. Second question I have, it's unrelated, but kind of a follow-up on some of the things going on, on the renewable fuel side. We've seen a lot of downward moves or We saw a strong downward move, I should say, in the D4, D6 RINs kind of latter part of Q3 and the early part of Q4. Looks like the market is more or less sort of adjusting to that on some of the feedstock and other issues.

Speaker 16

But I was just curious if you all had any read throughs on what Cause that decline and whether or not this decline sort of reflects current situation or is there more downside risk to RINs given demand date versus production numbers and obviously an increasing volume of renewable diesel coming in 'twenty four from the industry.

Speaker 11

Yes. I think, as I mentioned before, there's this kind of constant talk about Oncoming production, increased rates, startups, projects that has always said at some point the D4 is going to be under pressure, Especially since the EPA did not raise the D4 obligation in their last set rules. So, what I think though is Yes. And then we combine that with there was this kind of a rush, I think, looked like to me kind of a rush to sell RINs in the 3rd quarter With that narrative combined with that Russian announcement that they were going to ban exports, which kind of quickly evaporated. So, there's I think kind of a more of a temporary View that the D4 RIN was going to drop even more and like you've observed, it's kind of Recovered in fat prices have also since adjusted.

Speaker 11

We clearly see that biodiesel and veg oil, RD is negative now. That's one of the things we've always said is that the lower CI waste oil play was always going to be more advantageous. So even at these lower credit values, we're still the advantage platform. So as you go into 2024, Obviously, obligations all reset. It's hard to tell exactly where that's going to go.

Speaker 11

There's no doubt that RD will continue to grow. We do see that for us, you're going to see RD continue to grow. As we talked before, Canada is a big outlet, which takes a lot of this RIN exposure away. And then you also obviously have the SAF project coming on where we'll diversify into a different market. And so and then, And if for some reason SAF doesn't work, that product also meets Arctic diesel grades that again go to Nordic countries and Canada.

Speaker 11

So, there's no doubt that there's going to be a continued pressure on the RINs for both the D4 and D6, but Our strategy has always been there's other markets that you can minimize the impact of that. And then with our platform, we're still the most advantaged from a cost and

Speaker 16

I appreciate that coastal advantage as always. Thanks guys.

Speaker 9

Thanks, Roger.

Operator

Thank you. Our last question for today is coming from Matthew Blair of Tudor, Pickering, Holt. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking my questions. Circling back to the R and D margins in Q3, Are you able to quantify the impact from DGD2 fire on the reported $0.65 gallon EBITDA margin?

Speaker 4

No. We usually don't give that

Speaker 11

kind of detail. I would say it wasn't large. I just kind of leave it at that.

Speaker 9

Sounds good. And then on the refining side, could you talk about your product exports in Q3 and so far into Q4? And do Do you expect any negative impacts from this announcement from Mexico a couple of days that you're looking to restrict refined product imports into the country?

Speaker 4

Yes. I'll take the first part of it and then let Rich Walsh handle the second part. Yes, our exports, if you look at the exports In the Q3, we did 389,000 barrels a day, 281,000 of distillate, 108,000 of gasoline. Based on second quarter, the volumes are up. Based on historic numbers, they trended up as well, to our typical export Most of the gasoline went to Latin America, about 70% of the diesel in Latin America and about 30% to Europe.

Speaker 4

And those are remaining at those levels as we move into the Q4.

Speaker 17

This is Rich. I'll just answer the second half of it. On this It's actually rightfully aimed at import smuggling that's going on. So You have individuals that are trying to bring product gasoline diesel into Mexico, but describing it as something that has a lower tariff like a paraffin, Something like that and importing it in and that's resulting in them getting a lower tariff. So this decrease really focused in on that.

Speaker 17

For Valera, we're properly All of our gasoline and products, and we're paying the full and proper tariff for it. So and then also all of our fuel comes out of our own system and it's all high quality and meets the specs. So we have a lot of interaction with Authorities are aware of the legitimacy of our operation and so we don't expect this initiative to be an issue for us.

Speaker 13

Sounds good. Thank you.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Bhullar for closing comments.

Speaker 1

Thanks, Donna. Appreciate everyone joining us today. And as always, if you have any further questions, please feel free to contact the

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