Valero Energy Q1 2024 Earnings Report

Valero Energy EPS Results

• Actual EPS: $3.82
• Consensus EPS: $3.18
• Beat/Miss: Beat by +$0.64
• One Year Ago EPS: $8.27

Valero Energy Revenue Results

• Actual Revenue: $31.76 billion
• Expected Revenue: $32.02 billion
• Beat/Miss: Missed by -$257.41 million
• YoY Revenue Growth: -12.80%

Valero Energy Announcement Details

• Quarter: Q1 2024
• Date: 4/25/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, April 25, 2024
• Conference Call Time: 10:00AM ET

Valero Energy (NYSE:VLO) is a San Antonio, Texas–based integrated downstream energy company that manufactures and markets transportation fuels, petrochemical feedstocks and other industrial products. The company’s operations focus on refining crude oil into finished fuels such as gasoline, diesel and jet fuel, as well as producing asphalt and other refined product streams for commercial and industrial customers.

In addition to refining, Valero has significant operations in renewable fuels, including the production of ethanol and other biofuels, and it manages an extensive logistics network of pipelines, terminals, rail and marine assets to move feedstocks and finished products. The company supplies product through wholesale channels and a branded retail network, supporting retail sites and commercial customers across its operating regions.

Valero’s business is geographically concentrated in North America, where it operates refining and renewable fuels assets, while also maintaining a presence in select international markets. Its integrated model spans procurement, processing, distribution and marketing, which allows the company to respond to regional demand patterns and regulatory requirements affecting fuels and low‑carbon product lines.

Founded in the late 20th century, Valero has expanded through a mix of organic investment and strategic transactions to become one of the larger independent refiners and fuels producers in its markets. The company is governed by an executive leadership team and board of directors; for the most current information on management, corporate governance and recent developments, consult Valero’s public filings and corporate website.

Valero Energy Q1 2024 Earnings Call Transcript

Key Takeaways

• Q1 net income was $1.2 B ($3.75/share), down from $3.1 B ($8.29/share) in Q1 2023, and refining operating income fell to $1.7 B from $4.1 B.
• The Diamond Green Diesel Sustainable Aviation Fuel project at Port Arthur is ahead of schedule and now expected to be operational in Q4 2024, positioning Valero as one of the world’s largest SAF manufacturers.
• Valero increased its quarterly dividend by 5% to $1.07 per share, repurchased approximately $1.0 B of stock in Q1, and has reduced its share count by over 20% since year-end 2021, resulting in a 74% payout ratio.
• The company repaid $167 M of senior notes at maturity, ended Q1 with a debt-to-capitalization ratio of 17%, and held $5.3 B of available liquidity (excluding cash), maintaining strong financial flexibility.
• For 2024, Valero guides total capital investments of approximately $2.0 B (half in low-carbon fuels), expects Q2 refining cash operating costs of about $4.55/barrel, and targets renewable diesel sales of roughly 1.2 B gallons.

Presentation

[Operator]

Greetings and welcome to the Valero Energy Corp first quarter 2024 earnings conference. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

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. If you have not received the earnings release and would like a copy, you can find one on our website at investorvalero.com. Also, attached to the earnings release are tables that provide additional financial information on our business segments and reconciliations and disclosures for adjusted financial metrics mentioned on this call. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call. I would now like to direct your attention to the forward-looking statement disclaimer contained in the press release.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

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

[R. Lane Riggs, CEO and President at Valero Energy Corporation]

Thank you, Homer, and good morning, everyone. We are pleased to report strong financial results for the first quarter despite heavy plant maintenance across our refining system. Our team's ability to optimize and maximize throughput while undertaking maintenance activities illustrates the benefits from our longstanding commitment to safe and reliable operations. Refining margins remain supported by tight product balances, with supply constrained by seasonally heavy refining turnarounds and geopolitical events. Product demand was strong across our wholesale system, with diesel demand higher and gasoline demand about the same as last year. We continue to execute strategic projects and enhance earnings capability of our business and expand our long-term competitive advantage. The DGD Sustainable Aviation Fuel, or SAF, project at Port Arthur is progressing ahead of schedule and is now expected to be operational in the fourth quarter of 2024.

[R. Lane Riggs, CEO and President at Valero Energy Corporation]

With the completion of this project, Diamond Green Diesel is expected to become one of the largest manufacturers of SAF in the world. In addition, we are pursuing shorter cash cycle projects that optimize and capitalize on opportunities to improve margins around our existing refining assets. These projects are focused on increasing feedstock flexibility, optimizing the value of our product mix, and maximizing utilization of existing conversion capacity. On the financial side, we repaid the $167 million outstanding principal amount of our 1.2% senior notes that matured on March 15th. In January, we increased the quarterly cash dividend on our common stock from $1.02 per share to $1.07 per share. Looking ahead, we expect refining margins to remain supported by tight product balances and seasonably low product inventories ahead of the driving season.

[R. Lane Riggs, CEO and President at Valero Energy Corporation]

Longer-term, product demand is expected to exceed supply, even with the startup of new refineries this year and the limited announced capacity additions beyond 2025. In closing, we remain focused on things that have been a hallmark of our strategy: maintaining operating excellence, executing our projects well, discipline around our capital investments, and our commitments to shareholder returns. So with that, Homer, I'll hand the call back to you.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

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. First quarter 2024 adjusted net income attributable to Valero stockholders was $1.3 billion, or $3.82 per share, compared to $3.1 billion, or $8.27 per share for the first quarter of 2023. The refining segment reported $1.7 billion of operating income for the first quarter of 2024, compared to $4.1 billion for the first quarter of 2023. Refining throughput volumes in the first quarter of 2024 averaged 2.8 million bbl per day. Throughput capacity utilization was 87% in the first quarter of 2024. Refining cash operating expenses were $4.71 per bbl in the first quarter of 2024, lower than guidance of $5.10 per bbl, primarily attributed to lower energy costs and higher throughput.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

Renewable diesel segment operating income was $190 million for the first quarter of 2024, compared to $205 million for the first quarter of 2023. Renewable diesel sales volumes averaged 3.7 million gal per day in the first quarter of 2024, which was 741,000 gal per day higher than the first quarter of 2023. The higher sales volumes in the first quarter of 2024 were due to the impact of additional volumes from the DGD Port Arthur plant, which started up in the fourth quarter of 2022 and was in the process of ramping up rates in the first quarter of 2023. Operating income was lower than the first quarter of 2023 due to lower renewable diesel margin in the first quarter of 2024. The ethanol segment reported $10 million of operating income for the first quarter of 2024, compared to $39 million for the first quarter of 2023.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

Adjusted operating income was $39 million for the first quarter of 2024. Ethanol production volumes averaged 4.5 million gal per day in the first quarter of 2024, which was 283,000 gal per day higher than the first quarter of 2023. For the first quarter of 2024, G&A expenses were $258 million, net interest expense was $140 million, depreciation and amortization expense was $695 million, and income tax expense was $353 million. Effective tax rate was 21%. Net cash provided by operating activities was $1.8 billion in the first quarter of 2024. Included in this amount was $160 million unfavorable impact from working capital and $122 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD. Excluding these items, adjusted net cash provided by operating activities was $1.9 billion in the first quarter of 2024.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

Regarding investing activities, we made $661 million of capital investments in the first quarter of 2024, of which $563 million was for sustaining the business, including costs for turnarounds, catalysts, and regulatory compliance, and the balance was for growing the business. Excluding capital investments attributable to the other joint venture member share of DGD and other variable interest entities, capital investments attributable to Valero were $619 million in the first quarter of 2024. Moving to financing activities, we returned $1.4 billion to our stockholders in the first quarter of 2024, of which $356 million was paid as dividends and $1 billion was for the purchase of approximately 6.6 million shares of common stock, resulting in a payout ratio of 74% for the quarter. Through share repurchases, we have reduced our share count by over 20% since year-end 2021.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

With respect to our balance sheet, as Lane mentioned, we repaid the $167 million outstanding principal amount of our 1.2% senior notes that matured on March 15th. We ended the quarter with $8.5 billion of total debt, $2.4 billion of finance lease obligations, and $4.9 billion of cash and cash equivalents. The debt-to-capitalization ratio net of cash and cash equivalents was 17% as of March 31, 2024. We ended the quarter well capitalized with $5.3 billion of available liquidity excluding cash. Turning to guidance, we still expect capital investments attributable to Valero for 2024 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance, and joint venture investments. About $1.6 billion of that is allocated to sustaining the business and the balance to growth, with approximately half of the growth capital towards our low-carbon fuels businesses and half towards refining projects.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

For modeling our second quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.79-1.84 million bbl per day, Mid-Continent at 410-430 thousand bbl per day, West Coast at 245-265 thousand bbl per day, and North Atlantic at 430-450 thousand bbl per day. We expect refining cash operating expenses in the second quarter to be approximately $4.55 per bbl. With respect to the renewable diesel segment, we expect sales volumes to be approximately 1.2 billion gal in 2024. Operating expenses in 2024 should be $0.45 per gal, which includes $0.18 per gal for non-cash costs such as depreciation and amortization. Our ethanol segment is expected to produce 4.5 million gal per day in the second quarter. Operating expenses should average $0.38 per gal, which includes $0.05 per gal for non-cash costs such as depreciation and amortization.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

For the second quarter, net interest expense should be about $140 million, and total depreciation and amortization expense should be approximately $710 million. For 2024, we expect G&A expenses to be approximately $975 million. That concludes our opening remarks. Before we open the call to questions, please limit each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions.

[Operator]

Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that's star one to register questions at this time. Today's first question is coming from Teresa Chen of Barclays. Please go ahead.

[Teresa Chen, Managing Director and Senior Equity Analyst at Barclays]

Good morning. I'd love to get a sense of your product supply and demand outlook from here, maybe touching on Lane's earlier comments. Specifically, what is happening with respect to diesel and jet margins from the recent pullback, and where do you think we'll go from here?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Hey, good morning, Teresa. It's Gary. I can, you know, I'll, I'll give you some insight just to what we're seeing in the market today and then, then some thoughts on, on your final question. Overall, you know, 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. So I think when we look at all the data, we would expect gasoline demand to be flat to, to slightly up from last year. Vehicle miles traveled data is encouraging, would indicate we could see some gasoline demand surprise to the upside. Diesel demand flat to slightly down compared to last year. However, again, some of the freight indices appear to be turning and indicate we could start seeing better demand.

[Gary Simmons, EVP and COO at Valero Energy Corporation]

And then jet fuel demand up, you know, year-over-year. I think, you know, that isn't really consistent with the selloff and, and distillates like you're seeing. And I think some of that's just attributable to the fact that the, the market appears to be reacting to headlines. So in particular, you know, you have the drone attacks in Russia. Diesel gets very strong. But then there's a lag in the supply chain, so the physical markets aren't really seeing that interruption in diesel. In fact, you know, Russian exports following the drone attacks was actually higher. And so now we're finally getting to the point where Russian exports are starting to fall off, but the markets have kind of dismissed that, and we've sold off pretty hard. I think diesel's too weak.

[Gary Simmons, EVP and COO at Valero Energy Corporation]

You know, and the two things I would point to, you know, on diesel being too weak: Hydroskimming margins in Europe are negative. Cracking margins in Singapore are negative. And, you know, unless something significant has happened on the demand side that we don't see, we need that capacity to run, which would indicate margins are going to have to get, get stronger from here on.

[Teresa Chen, Managing Director and Senior Equity Analyst at Barclays]

Really helpful. Thank you, Gary. 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 naphtha side of things. So if, you know, their naphtha exports start to fall off as well, what does that imply for octane economics? And, you know, in light of maybe more naphtha and some of the new refining capacity added, like, what is the net impact, and the translation to gasoline margins as a result?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Yeah. So I think, you know, 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 chem. And so when that happens, then naphtha's trying to find a home into, to gasoline, which creates, you know, strong octane in order to be able to get it blended into the gasoline pool.

[Teresa Chen, Managing Director and Senior Equity Analyst at Barclays]

Thank you.

[Operator]

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

[Neil Mehta, Managing Director and Head of Americas Natural Resources Equity Research at Goldman Sachs]

Good morning, team. Another really strong quarter. And I want 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 billion-dollar 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?

[Jason Fraser, EVP and CFO at Valero Energy Corporation]

Good morning, Neil. This is Jason. I'm going to ask Homer to address that question.

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

Yeah, Neil. I think given the strength of our balance sheet, you know, in the first quarter and the fact that we're not really looking to build more cash, we had a, you know, pretty strong payout at 74%. And, you know, you'll remember last quarter was 73%, which ended the year at 60%. So I think, you know, you can think of the 40%-50% range as a long-term through-cycle commitment. But in periods where fundamentals are strong, balance sheet is good, like it is now, and sustaining growth CapEx and the dividend is covered, you can think of that as a floor. So the 40%-50% as a floor. And I think reasonably expect any excess cash flow to continue to go towards buybacks.

[Jason Fraser, EVP and CFO at Valero Energy Corporation]

Okay. That's helpful, Homer. And then follow-up is just on DGD. There was a pull forward of the SAF project, so it looks like the project is tracking well for 2024 startups. 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 bbl?

[Eric Fisher, SVP of Product Supply and Trading and Wholesale at Valero Energy Corporation]

Yeah. This is Eric. The project continues like you said. The project construction's going well. Startup 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 all kind of give you a good feel of what that product's going to be worth. We've got strong interest in sales, and we do not see a problem moving it at returns that are going to meet our project return threshold.

[Operator]

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

[Roger Read, Senior Energy Analyst at Wells Fargo]

Yeah. Thank you. Good morning. Probably to come back on some of the macro stuff here. Crude differentials, you know, we've got some, I guess, discipline out of OPEC. We've got TMX, you know, 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, you know, call it availability front, and expectations on differentials.

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Yeah, Roger. This is Gary. I think, you know, 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, with heavy turnaround season in the U.S. Gulf Coast. Demand was off a little bit and allowed the differentials to widen. But we, we believe that the differentials will be relatively tight through most of the year until you get the OPEC production back on the market. At least the consultant, you know, supply-demand balances would indicate maybe third, third or fourth quarter of this year, you'll start to see OPEC production ramp back up. I would tell you we're not having, you know, any trouble in terms of availability of feedstock. It's, it's just more narrow differentials than what we would like.

[Roger Read, Senior Energy Analyst at Wells Fargo]

Fair enough. 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, you know, 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, you know, over the last couple of years here?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

No. I think, you know, a lot of that gets driven by availability of intermediate feedstocks, VGO. You know, in a tight VGO market, then you're kind of forced more to swing either gasoline or diesel. So far, availability of VGO's been okay. We've been able to fill all the conversion units, but we'll have to see how that goes moving forward.

[Roger Read, Senior Energy Analyst at Wells Fargo]

Okay. Thank you.

[Operator]

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

[Manav Gupta, Executive Director at UBS]

Congrats on a strong quarter again, guys. My first question here is, you know, the bear thesis on refining somewhere was Dos Bocas and Dangote, and it looks like it's not played out. These assets were, from what we read and hear, one of them doesn't have enough hydrogen, the other doesn't even have an FCC resid. So most likely, it will not be providing products to the market maybe even year-end 2024. But my point is, even if they do start providing to the market products to the market somewhere in 2025, are these the last two ones that you are aware of, or there's a big wave coming after this? So I'm trying to understand, is even if these two come on, they don't really change the global supply dynamic. So after this again, we could see the markets tightening up again.

[Manav Gupta, Executive Director at UBS]

If you could help us out there?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Yeah. So we see it exactly like you've described. You know, 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.

[Manav Gupta, Executive Director at UBS]

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 dates keep 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, you know, "We have the best people," because we already know that. So help us understand how are you pulling forward your projects?

[R. Lane Riggs, CEO and President at Valero Energy Corporation]

Well, hey, Manav, it's Lane. That's, that's what I was going to say. But, you know, it speaks to the culture. Our culture is very much about high discipline, high accountability, and teamwork. You know, we make sure we get the right people into the right jobs and hold them accountable. And, you know, and making sure that they're and when I say the right people, they have to be people who are, A, competent, and B, who are willing to work with the other team members who may not necessarily be under them or adjacent to them, and, and ultimately, you know, working on behalf of Valero. And we and we have a high level of visibility with upper-level management because we're, we're, we're a pretty flat organization. So we all know the status of the projects.

[R. Lane Riggs, CEO and President at Valero Energy Corporation]

We all understand where we are in the development cycle, and once the project starts. I mean, it's not like there's, and it's just ultimately, it's about alignment, competency, and accountability. And, that's really the secret sauce. You just got to execute, you know?

[Manav Gupta, Executive Director at UBS]

Thank you, sir.

[Operator]

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

[Ryan Todd, Managing Director at Piper Sandler]

Thanks. 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 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. In some ways, it's similar to what's happened across the broader refining system that's been running more and more light crude, across a system that's not always optimized for this. I mean, can you talk about what you think that this might mean for the optimization of the global refining system? Is, you know, with more light-sweet crude, what sort of impact does this have on utilization or optimization or general supply, as we think about broader, broader market?

[Jason Fraser, EVP and CFO at Valero Energy Corporation]

Yeah. So this is Gary. So globally, you know, TMX doesn't have that much of an impact. It's just rebalancing the bbl. I think you see some of the heavier bbl 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 bbl starting to go to the West Coast. So globally, not a big impact. We definitely see that heavy-sweet differentials, you know, will come in because, you know, for a period of time here, we'll have the logistics to completely clear Western Canadian production. And that could cause some switching of mid-continent refiners that they back off on some of the heavies and go to a lighter diet.

[Jason Fraser, EVP and CFO at Valero Energy Corporation]

Yes, to your, you know, basically to your comment, certainly in the Gulf Coast, as we've tried to run a lighter diet, it's resulted in lower overall utilization because we hit light-end limits on the crude units.

[Ryan Todd, Managing Director at Piper Sandler]

Okay. Thanks. And you that, that's probably something that's happening on a broader sense across the system with general global crude mix being lighter, right?

[Jason Fraser, EVP and CFO at Valero Energy Corporation]

Yeah. I think, you know, overall, the average crude gravity's up about 1.5 numbers, which certainly, you know, results in lower utilization because especially most new capacity always designed for medium and heavy sour crudes.

[Ryan Todd, Managing Director at Piper Sandler]

Good. Thanks. 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 margins, you know, 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?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Yeah. I think, the rest of this year, it's really going to be a question of, you know, what some of the other startups look like. You know, we've seen in the news a lot of announcements of slowdowns, project delays, even some shutdowns. As that capacity comes offline 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? It's a little difficult to throw a dart and know exactly how that's going to end. What we can see is veg oil, whether it's BD or RD, is negative. Ag products all look very long right now. We do see we were expecting more competition on waste oils. We haven't seen as much of that as we thought we would considering the announced startups.

[Gary Simmons, EVP and COO at Valero Energy Corporation]

So, you know, how all that balances out for the rest of the year, the thing there is we don't see any change in the RVO obligation. So, you know, it's still a question of how much capacity is going into a fixed credit bank, in a fixed obligation. And so, longer term, if you look at 2025, I think I would think the long-term outlook of RD is still positive because, you look at the number of LCFS programs that are still being contemplated by legislation this year. The Canadian ramps in Canada and the UK continue to be strong. The SAF mandates that are kicking in in 2025 in Europe and the UK are going to create demand.

[Gary Simmons, EVP and COO at Valero Energy Corporation]

And for us, you know, diversification of your product away from California and your ability to diversify your product slate into SAF are going to be very beneficial to DGD. So I still like the longer-term outlook of 2025 and beyond. 2024 is a little hard to predict. I think it still sits it probably still stays long in the D4s, net, net. So it might continue to be sort of a tough year. We think the second quarter, you know, from a margin standpoint, looks a little better from price lag standpoint. But the back half is still hard to tell with all the moving pieces. But long term, I think you still see a positive outlook sort of 2025 and beyond.

[Ryan Todd, Managing Director at Piper Sandler]

Okay. Thank you.

[Operator]

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

[John Royall, Executive Director at JPMorgan]

Hi. Good morning. Thanks for taking my question. So my first question's 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, 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 just lower turnarounds than usual?

[Greg Bram, SVP of Supply Chain Optimization at Valero Energy Corporation]

Hey, John. This is Greg Bram. And I'll talk about our turnaround activity. Particularly in the first quarter, you know, we had a pretty heavy turnaround load. You can really see that when you look at our throughput, particularly the Gulf Coast throughput, being much lower. It's just reflective of the work that we had going on. You know, looking forward, as you know, we've always got turnaround activity going on in our system to varying degrees. The first quarter tends to be the heaviest period. Other periods of the year will be lighter. And that's just kind of driven by what we see from a margin standpoint. And there's certain times of the year, like the holiday season, where you're tending not to try to go into that kind of work that's very intensive.

[Greg Bram, SVP of Supply Chain Optimization at Valero Energy Corporation]

As far as, you know, different periods of time, yeah, it won't speak so much to our plans. We have the same information others see about industry turnarounds. It looks like the fourth quarter will be kind of more in the typical range of outages, but it's early to tell. A lot of things will change between now and when we get to the fall season. And so we'll see where that lands. But people at least are indicating something that looks like the more typical turnaround level of activity.

[John Royall, Executive Director at JPMorgan]

Great. Thanks, Greg. 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. I know you've characterized the 40%-50% as a floor, but is there any thought to changing that framework, given that, you know, you have your balance sheet where you want it? And you seem to be kind of in this new era on returns of capital that don't seem to be kind of peeling back to the old way of looking at things.

[Jason Fraser, EVP and CFO at Valero Energy Corporation]

Well, this is Jason. Yeah. I can take a stab at that. I mean, we do think about that. And really, we'd 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. I know we talk about sometimes that's a target, and it is. But we don't see any problem with being above it over a consistent period of time. And you should expect us to kind of behave, as you said, the last couple of quarters are probably the best indication of the future is how we're going to behave with regard to cash.

[John Royall, Executive Director at JPMorgan]

Yeah. Fair enough. Thank you.

[Operator]

Thank you. The next question is coming from.

[R. Lane Riggs, CEO and President at Valero Energy Corporation]

We lose them.

[Jason Fraser, EVP and CFO at Valero Energy Corporation]

Hey, Donna. Are you still there?

[Operator]

I'm sorry. Yes. I'm sorry. The next question is coming from Joe Laetsch of Morgan Stanley. Please go ahead.

[Joe Laetsch, Executive Director at Morgan Stanley]

Hey, all. Good morning. And thanks for taking my questions and 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 any potential announcement come after the first facility is online? Just trying to think about timing overall.

[Eric Fisher, SVP of Product Supply and Trading and Wholesale at Valero Energy Corporation]

Yeah. I think 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, you know, that's always for us an issue that we're not going to talk about until we've decided internally on committing to that. But, you know, what I'd say from a macro view, you can clearly see we know the units are cookie-cutters of each other. The project is nearly identical. The execution time and all of that is going to be very similar. So it's not a technically challenging project or something that would be difficult to fund. It's a question of how we see this market developed and when we decide to commit to it internally is when we would say something externally.

[Joe Laetsch, Executive Director at Morgan Stanley]

Great. Yeah. That makes sense. And then I was hoping to go back and dig into to 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?

[Jason Fraser, EVP and CFO at Valero Energy Corporation]

Yeah. So I think, you know, 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, you know, start to tick back up.

[Joe Laetsch, Executive Director at Morgan Stanley]

Great. Thank you all.

[Operator]

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

[Paul Cheng, Managing Director at Scotia]

Hey, guys. Good morning.

[R. Lane Riggs, CEO and President at Valero Energy Corporation]

Morning, Paul.

[Paul Cheng, Managing Director at Scotia]

The first question. Good morning. The first question, I think, is either for Gary or for Lane. TMX startup, and so that's going to bring the WCS, which is mostly the man-mixed synthetic heavy oil with really heavy bottom and a lot of light bbl but no middle. 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 some form of combination of WCS plus some light bbl? All that is not as simple. And also whether the industry will be able to, say, eliminate all their imports from the heavy bbl from, say, LATAM or from the Middle East, replacing it with WCS. That's the first question.

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Yeah, Paul. This is Gary. I think, you know, what we anticipate, there's a lot of coking capacity on the West Coast. I'll just use our Benicia refinery as an example. You know, Benicia was really designed to run ANS. And we think with the bbl 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 ANS. We would expect most West Coast refiners will be doing something similar to that.

[Paul Cheng, Managing Director at Scotia]

Okay. Second question, Gary, can you give us some, maybe your color on what you see in the Mexican market for both gasoline and diesel?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Yeah. So our sales in Mexico have been consistent with historic levels. We're selling just over 100,000 bbl 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. You know, that'll make us more competitive in the north and allow us to continue to grow volumes in Mexico.

[Paul Cheng, Managing Director at Scotia]

Hey, Gary. Do you have an export number you can share?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Export?

[Paul Cheng, Managing Director at Scotia]

In the first quarter? Yeah. Yeah. So we did. That you export?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Yeah. So we did 103,000 bbl a day of gasoline exports. We did 153,000 bbl of diesel exports and 25,000 bbl a day of jet exports. The diesel number, you know, in the first quarter was down year-over-year, quarter-over-quarter. 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 bbl available for export.

[Paul Cheng, Managing Director at Scotia]

Thank you.

[Operator]

Thank you. The next question is coming from Matthew Blair of Tudor, Pickering, Holt. Please go ahead.

[Matthew Blair, Managing Director at Tudor, Pickering, Holt]

Hey. Good morning. 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, your overall outlook on M&A?

[R. Lane Riggs, CEO and President at Valero Energy Corporation]

This is Lane. Not really. I mean, we always look at everything. I mean, if you look at the most prominent sort of big deal that's out there, it's Citgo. We've sort of as a corporation decided not to engage in that. You know, for whatever reason, whoever the successful buyer if they can, you know, sort everything out, wants to liquidate some of the assets, we'll certainly look at them at that time. But in terms of philosophy, we look at everything. But we also, as a company, because we have done so much buying refineries and merging and acquiring, we understand the full cost to make a refinery run it, certainly at the level that we expect. And so, you know, ultimately, that goes into our valuation models.

[Matthew Blair, Managing Director at Tudor, Pickering, Holt]

Sounds good. I'll leave it there. Thanks.

[Operator]

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

[Jason Gabelman, Managing Director at TD Cowen]

Hey. Morning. I had two 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?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

Yeah. So this is Gary. I would tell you, you know, 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 bbl on the water to import to the California market. So we don't think a lot of people are doing that. And you need to see the market react before you would go ahead and put bbl on the water for import into California. So we think there will be a lot of volatility. And it really is all dependent on how refineries on the West Coast run throughout the driving season.

[Jason Gabelman, Managing Director at TD Cowen]

Got it. And then my second question, just going back to the commentary around the global lightening crude slate. And you had previously made a comment that crude gravity over the past few years has gone up 3-4 points. And that's maybe reduced global capacity available by 3-4 pp. Can you just comment on that dynamic?

[Gary Simmons, EVP and COO at Valero Energy Corporation]

I don't know that I can quantify that. You know, we certainly, that is our view that as the crude gravity goes higher, you know, there's a lot of refining capacity around the world that was designed for a heavier gravity crude diet. And it causes some derate of 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 with them either.

[Jason Gabelman, Managing Director at TD Cowen]

Okay. I'll leave it there. Thanks.

[Operator]

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

[Homer Bhullar, VP of Investor Relations and Finance at Valero Energy Corporation]

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. Have a great day.

[Operator]

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or lock off the webcast and enjoy the rest of your day.

Participants

Executives

• Eric Fisher, SVP of Product Supply and Trading and Wholesale
• Gary Simmons, EVP and COO
• Greg Bram, SVP of Supply Chain Optimization
• Homer Bhullar, VP of Investor Relations and Finance
• Jason Fraser, EVP and CFO
• R. Lane Riggs, CEO and President

Analysts

• Jason Gabelman, Managing Director at TD Cowen
• Joe Laetsch, Executive Director at Morgan Stanley
• John Royall, Executive Director at JPMorgan
• Manav Gupta, Executive Director at UBS
• Matthew Blair, Managing Director at Tudor, Pickering, Holt
• Neil Mehta, Managing Director and Head of Americas Natural Resources Equity Research at Goldman Sachs
• Paul Cheng, Managing Director at Scotia
• Roger Read, Senior Energy Analyst at Wells Fargo
• Ryan Todd, Managing Director at Piper Sandler
• Teresa Chen, Managing Director and Senior Equity Analyst at Barclays