Valero Energy Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 27, 2022

Key Takeaways

  • Positive Sentiment: Valero delivered Q4 net income of $1 billion, reversing a loss of $359 million in Q4 2020 and generating record refining segment operating income of $1.3 billion.
  • Positive Sentiment: The ethanol segment set a new high with $474 million of operating income, driven by strong prices, robust demand and low inventory levels.
  • Positive Sentiment: Diamond Green Diesel Phase II commenced ahead of schedule and on budget—raising annual renewable diesel capacity to 700 million gallons—with Phase III now expected online in Q1 2023.
  • Positive Sentiment: Financial discipline was maintained, with $1.3 billion of long-term debt reduced, $4.1 billion in cash on hand and a net debt-to-capitalization ratio of 33% at year-end.
  • Positive Sentiment: Management remains optimistic on refining margins for 2022, citing low global product inventories, strong demand and capacity rationalization.
AI Generated. May Contain Errors.
Earnings Conference Call
Valero Energy Q4 2021
00:00 / 00:00

There are 19 speakers on the call.

Operator

Greetings, and welcome to the Valero's 4th Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Homer Boaler, Vice President, Investor Relations and Finance.

Operator

Thank you. Please go ahead.

Speaker 1

Good morning, everyone, and welcome to Valero Energy Corporation's 4th quarter 2021 earnings conference call. With me today are Joe Gorder, our Chairman and CEO Lane Riggs, our President and COO Jason Fraser, our Executive Vice President and CFO Gary Simmons, our Executive Vice President and Chief Commercial Officer 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 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 says that statements in the press release and on this conference call that state the company's or management's expectations Or predictions of the future are forward looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC. Now I'll turn the call over to Joe for opening remarks.

Speaker 2

Thanks, Homer, and good morning, everyone. We saw continued improvement in our business during the Q4 with refining margins supported by strong product demand. In our system, we ended the year with gasoline demand at pre pandemic levels and demand for diesel actually higher than pre pandemic levels. We also saw a significant jet fuel recovery as domestic and international travel opened up, increasing from approximately percent of pre pandemic levels at the beginning of the year to approximately 80% at the end of the year. Product inventories were low as a result of the refining capacity rationalization that's taken place in the last 2 years And weather related impacts from Winter Storm Yuri and Hurricane Ida.

Speaker 2

On the crude oil side, OPEC plus increased production throughout the year With improving demand, supplying the market primarily with sour crude oils, resulting in wider sour crude oil discounts to Brent Crude Oil. As a result of all these dynamics, we saw a steady recovery in margins throughout the year, particularly for our complex refining system. In regards to our ethanol segment, ethanol prices were near record highs in the quarter, supported by strong demand and low inventories. Strong margins coupled with solid operational performance across all of our segments generated record quarterly operating income for our ethanol In fact, we've set records for process safety for 3 consecutive years. These milestones are a testament To our long standing commitment to safe, reliable and environmentally responsible operations.

Speaker 2

And despite the pandemic and weather related challenges in 20 21, our growth projects remained on track. We started up the Pembroke cogeneration unit in the Q3 of 'twenty one, Which provides an efficient and reliable source of electricity and steam and enhances the refinery's competitiveness. In addition, the Diamond Green Diesel Expansion Project, DGD-two, commenced operations in the 4th quarter, On budget and ahead of schedule. The expansion has since demonstrated production capacity of 410,000,000 gallons per year of renewable diesel As a result of process optimization above the initial nameplate design capacity of 400,000,000 gallons per year. This expansion brings DGD's total annual renewable diesel capacity to 700,000,000 gallons.

Speaker 2

Looking ahead, the DGD-three project at our Port Arthur refinery is progressing ahead of schedule and is now expected to be operational in the first Quarter of 2023. With the completion of this 470,000,000 gallon per year plant, DGD's total annual capacity is BlackRock and Navigator's large scale carbon sequestration project is also progressing on schedule and is still To begin start up activities in late 2024. Valero is expected to be the anchor shipper with 8 ethanol plants connected to this system, Which should provide a higher ethanol product margin. The Port Arthur Coker project, which is expected to increase the Refinery's utilization rate and improved turnaround efficiency is expected to be completed in the first half of twenty twenty three. On the financial side, the guiding framework underpinning our capital allocation strategy remains unchanged.

Speaker 2

We remain disciplined in our allocation of capital, which prioritizes a strong balance sheet and an investment grade credit rating. In 2021, we took measures to reduce Valero's long term debt by approximately $1,300,000,000 We ended the year well capitalized with $4,100,000,000 of cash and $5,200,000,000 of available liquidity, excluding cash, And our net debt to capitalization was 33%. We continue to honor our commitment to stockholders, Defending the dividend across margin cycles and delivering a payout ratio of 50% in 2021. And as recently announced, the Board of Directors has approved a quarterly dividend of $0.98 per share for the Q1 of 2022. Looking ahead, we remain optimistic on refining margins.

Speaker 2

With low global light product inventories, strong product demand, Global supply tightness due to significant refining capacity rationalization and wider sour crude oil differentials. We also remain optimistic on our low carbon businesses, which we continue to expand with the growing global demand for lower carbon intensity Products. We've been leaders in the growth of these businesses and maintain a competitive advantage with our operational and technical expertise. In closing, our team's simple strategy of pursuing excellence in operations, deploying capital with an uncompromising focus on returns And honoring our commitment to stockholders has driven our success and positions us well. So with that, Homer, I'll hand the call back to you.

Speaker 1

Thanks, Joe. For the Q4 of 2021, net income attributable to Valero stockholders was $1,000,000,000 $2.46 per share compared to net loss of $359,000,000 or $0.88 per share for the Q4 of 2020. Q4 2021 adjusted net income attributable to Valero stockholders was also $1,000,000,000 or $1.06 per share for the Q4 of 2020. For 2021, net income attributable to Valero stock Holders was $930,000,000 or $2.27 per share compared to a net loss of $1,400,000,000 or $3.50 per share in 2020. 2021 adjusted net income attributable to Valero stockholders Was $1,200,000,000 or $2.81 per share compared to an adjusted net loss of $1,300,000,000 or $3.12 For reconciliations to adjusted amounts, please refer to the financial tables that accompany the earnings release.

Speaker 1

The Refining segment reported $1,300,000,000 of operating income for the Q4 of 2021, Compared to a $377,000,000 operating loss for the Q4 of 2020. 4th quarter 20 21 adjusted operating income for the refining segment was $1,100,000,000 compared to an adjusted operating loss of $476,000,000 For the Q4 of 2020. Refining throughput volumes in the Q4 of 2021 averaged 3,000,000 barrels per day, Which was 483,000 barrels per day higher than the Q4 of 2020. Throughput capacity utilization was 96% in the Q4 of 2021 compared to 81% in the Q4 of 2020. Refining cash operating expenses of $4.86 per barrel in the Q4 of 2021 We're $0.46 per barrel higher than the Q4 of 2020, primarily due to higher natural gas prices.

Speaker 1

The Renewable Diesel segment operating income was $150,000,000 for the Q4 of 2021 compared to $127,000,000 For the Q4 of 2020. Adjusted renewable diesel operating income was $152,000,000 for the Q4 of 2021. Renewable diesel sales volumes averaged 1,600,000 gallons per day in the Q4 of 2021, Which was 974,000 gallons per day higher than the Q4 of 2020. The higher operating income and sales volumes were primarily The Ethanol segment reported record operating income of $474,000,000 for the Q4 of 2021, compared to $15,000,000 for the Q4 of 2020. Adjusted operating income for the Q4 of 2021 was 4 $5,000,000 compared to $17,000,000 for the Q4 of 2020.

Speaker 1

Ethanol production volumes averaged 4 point 4,000,000 gallons per day in the Q4 of 2021, which was 278,000 gallons per day higher than the Q4 of 2020. And as Joe mentioned earlier, the higher operating income was primarily attributed to higher ethanol prices, which were supported by strong demand and low inventories. For the Q4 of 2021, G and A expenses were $286,000,000 and net interest expense was 152,000,000 G and A expenses of $865,000,000 in 2021 were largely in line with our guidance. Depreciation and amortization expense was $598,000,000 and income tax expense was $169,000,000 for the Q4 of 2021. The annual effective tax rate was 17% for 2021, which reflects the benefit from the Net cash provided by operating activities was 2 point $5,000,000,000 in the Q4 of 2021 $5,900,000,000 for the full year.

Speaker 1

Excluding the favorable impact from the change in working capital of $595,000,000 in the 4th quarter and $2,200,000,000 in 2021 And the other joint venture members' 50% share of Diamond Green Diesel's net cash provided by operating activities, Excluding changes in DGD's working capital, adjusted net cash provided by operating activities was $1,800,000,000 for the 4th quarter $3,300,000,000 for the full year. With regard to investing activities, we made $752,000,000 of total capital investments in the Q4 of 2021, Of which $353,000,000 was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance and $399,000,000 was for growing the business. Excluding capital investments attributable to the other joint venture members' 50% share of Diamond Green Diesel and those related to other variable interest entities, capital investments attributable to Valero were $545,000,000 in the Q4 of 2021 $1,800,000,000 for the year. Moving to financing activities, we returned $401,000,000 to our stockholders in the Q4 of 2021 through our dividend and 1.6 1,000,000,000 through dividends in the year, resulting in a 2021 payout ratio of 50% of adjusted net cash provided by operating activities for the year. And our Board of Directors recently approved a regular quarterly dividend of $0.98 per share, demonstrating our sound financial position and commitment to return Cash to our investors.

Speaker 1

With respect to our balance sheet at year end, total debt and finance lease obligations were $13,900,000,000 And cash and cash equivalents were $4,100,000,000 The debt to capitalization ratio net of cash and cash equivalents was 33%. In the Q4, we completed a series of debt reduction and refinancing transactions that together reduced Valero's long term debt by $693,000,000 These debt reduction and refinancing transactions, Combined with the redemption of $575,000,000 floating rate senior notes due 2023 in the 3rd quarter, Collectively reduced Valero's long term debt by $1,300,000,000

Speaker 3

At the

Speaker 1

end of the year, we had 5 $200,000,000 of available liquidity excluding cash. Turning to guidance, we expect capital investments attributable to Valero for 20 $22,000,000,000 which includes expenditures for turnarounds, catalysts and joint venture investments. About 60% of our capital investments is allocated to sustaining the business and 40% to growth. Approximately 50% of our growth capital in 2022 is allocated to expanding our low carbon businesses. For modeling our Q1 operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.66000000 to 1.7 1,000,000 barrels per day Mid Continent at 395,000 to 415,000 barrels per day West Coast at 185,000 to 205,000 barrels per day And North Atlantic at 430,000 to 450,000 barrels per day.

Speaker 1

We expect refining cash operating expenses In the Q1 to be approximately $4.80 per barrel. With respect to the Renewable Diesel segment, We expect sales volumes to be approximately 700,000,000 gallons in 2022. Operating expenses in 2022 should be $0.45 per gallon, which includes $0.15 per gallon for non cash costs, such as depreciation and amortization. Our ethanol segment is expected to produce 4,200,000 gallons per day in the Q1. Operating expenses should average $0.44 per gallon, which includes $0.05 per gallon for non cash costs, such as depreciation and amortization.

Speaker 1

For the Q1, net interest expense should be about $150,000,000 and total depreciation and amortization Excluding corporate depreciation to be approximately $870,000,000 That concludes our opening remarks. Before we open the call to questions, we again respectfully request that callers adhere to our protocol of limiting each turn in the Q and A to 2 questions.

Operator

Thank you. The floor is now open for questions. Our first question today is coming from Theresa Chen of Barclays. Please go ahead.

Speaker 4

Good morning. Thank you for taking my questions. Joe, I'd like to revisit your comments earlier about the refining margin outlook through 2022. I mean, clearly, we Seem to have a pretty positive setup with lean global inventories and significant amount of refining rationalization that's happened Since and even slightly before the pandemic began, while demand continues to recover and remain resilient. So looking through the rest of this Can you just give us a sense of puts and takes on the variables that could detract from this thesis, either risk To the downside or upside from here?

Speaker 2

Sure, Theresa. Thanks a lot. Why don't we let Gary take a look at take a crack at this?

Speaker 5

Sure, Theresa. If you look, I mean, I'll just kind of go through some of the things we're seeing in our system. We saw good recovery last year, both gasoline and diesel and even good recovery in jet fuel demand. And we expect that, that And diesel and even good recovery in jet fuel demand, and we expect that, that rebound to continue through 2022. We started the year, gasoline demand is Off a little bit from what we would expect.

Speaker 5

Some of that is just seasonality. But even if you go back to 2019, where we were in 2019 at this time of year, we're off about 7% With the spike in COVID cases and also some weather impacting gasoline demand as well. But I would tell you already, our 7 day average is only off about 3% of where it was in 2019. So it looks like this latest surge in COVID cases were already coming out of it. And so with where gasoline inventories are, very bullish gasoline moving forward, as you already pointed out, we expect to see gasoline demand Back to 2019 levels, which was close to peak gasoline demand, and we'll be trying to feed that demand with significantly less refining capacity.

Speaker 5

So we expect the gasoline markets to be very tight. When you move to diesel, of course, diesel inventories are not only low in the United States, but they're low globally. Diesel demand actually in our system has been about 7% of where it was in 2019. So some of those factors, in particular weather, That are negatively impacting gasoline are actually are having a positive impact on diesel demand. So we see very strong diesel demand.

Speaker 5

And we actually don't see a clear path in the near future to be able to restock those inventories with turnaround activity that's occurring in the industry Along with the rationalization that's occurred. So for us, both gasoline and diesel look very constructive moving throughout The year, jet demand will be the unknown. Our expectation is that as we get through this wave of COVID, much like we saw last year, domestic Air travel will pick back up fairly rapidly, but it will be a longer period of time before international travel picks back up. So although we expect To be close back to 2019 levels by the end of the year, probably not fully recovered. I think to me, when you talk about the wildcard, really the wildcard for this year is What happens in the crude markets?

Speaker 5

Obviously, a lot of tightness in the crude markets today, certainly having an impact on differentials. And so for us, it's kind of when do we see OPEC begin to ramp up production. As global oil demand picks up, we would Expect OPEC to increase production. A lot of that will be medium and heavy sour barrels, which would be constructive to wider differentials moving throughout the year as well.

Speaker 4

Great color. Thank you. So I got to ask the capital allocation question. You have been so

Speaker 5

consistent on your messaging as well as execution around this.

Speaker 4

And with the progress As well as execution around this. And with the progress that you've made on reducing debt, generating free cash flow for the past couple of quarters and Generally positive momentum on the near term refining outlook. Are we at an inflection point where we may soon see a step up in cash return to shareholders?

Speaker 6

Jason? Yes. This is Jason. I'll take that. And you're right, we've made good progress on our goals.

Speaker 6

We have said when we started coming out of this situation, We rebuild our cash, the target keeping more on hand around $3,000,000,000 We've done that. We had $4,100,000,000 at the end of the year. We also said we're really going to start working on delevering. And in the 3rd and 4th quarters of last year, we did 2 delevering transactions, paid off About $1,300,000,000 net brought our net debt to cap down to 33% at the end of the year, and our goal is to ultimately get back to our 20% to 30% Long term target we've had and the pace is going to depend on margins and cash generation. But getting on to buybacks and the return of cash to shareholders, As you said, things are looking better now.

Speaker 6

For 2021, the payout was 50% with just the dividend and some minimal buybacks related to the Employee plans, but with the margin increase in the Q4 and they're continuing to be strong during the Q1 so far, if this pattern of recovery does continue, We do anticipate we'll be doing buybacks this year to meet our target. And we feel we can both continue to our pattern or our goal of having aggressive debt pay down this And also meet our shareholder return commitment via projects via buybacks, I'm sorry. We definitely don't think they're mutually exclusive. It's all different by our framework and targets we've had in place for several years.

Speaker 4

Thank you.

Speaker 2

Thanks, Trisha.

Operator

Thank you. Our next question is coming from Manav Gupta of Credit Suisse. Please go ahead.

Speaker 7

Thank you, guys. I just I had first question was on DJD. What we are seeing out there is Number of projects getting delayed, long lead equipment not getting through, everybody is kind of lagging. You are an exception. Your project keeps moving forward.

Speaker 7

And I know, Ju, you always tell me you have the best people, but besides best people, what else are you doing right, which is allowing you to move the timeline forward

Speaker 2

Well, I

Speaker 8

don't should we even

Speaker 2

say anything?

Speaker 8

I'm still going to say We have the best people, but this is the payment office is laying. We also completed Diamond Green too, right? So we have We have a really good understanding what the project execution looks like. We have the same business partners that are largely executing Diamond Green. And we've been able to really improve the schedule and it's really just we've been we've built 2 of these, we're in our 3rd And it's just a really good team all the way around, not just our people and our business partners as well.

Speaker 8

And we also permitting, we permit these even better. So Yes.

Speaker 2

And Lane, there's been a lot of lessons learned as we went through 1. And so, I mean, that's what

Speaker 8

I mean. We've built 1. We've built we just finished 2, and we've learned all through all those things. We are definitely We have the advantage of being an early mover in this space.

Speaker 7

Perfect, guys. My second follow-up very quickly here is, Looks like your partner is moving ahead with kind of an acquisition, which would give you guys more used cooking oil, more animal fats. At this stage, I think there was a plan at some point to get in more animal fats from internationals to feed DJD3. How is the feedstock situation looking for DJD3? Are you very close to what you would need when DGD 3 is up and running in terms of feedstock now?

Speaker 9

Yes, Manav, this is Martin. Obviously, our plan is to continue to feed DGD 1, 23 with waste feedstock, we feel good about that. The market feedstock markets tightened up relative to soybean oil. And we knew that was coming with the start up of DGD II. We changed trade flows.

Speaker 9

We've moved everything around, and that's had an impact on the market. And frankly, when we contemplated DGD 2 and 3, we expected feedstock to appreciate relative to soybean oil And we expected carbon pricing to appreciate. So we're kind of where we expected to be here. And yes, the feedstock situation, It's a moving target, but it's all tied to global GDP growth. And Just to sum it up, yes, we expect to be able to feed it.

Speaker 7

Thank you for taking my questions.

Speaker 2

Thanks, Manav.

Operator

Thank you. Our next question is coming from Phil Gresh of JPMorgan. Please go ahead.

Speaker 10

Yes. Hi, good morning. Hey, Joe. The Gulf Coast refining margins in the 4th quarter were the best since 2015, if I have that right. And they're even better than 4Q 'nineteen when we were talking about IMO 2020 and feedstock advantages and things like that.

Speaker 10

So I was just curious if there's anything more to elaborate on about the strength of the Gulf Coast margins that we saw in the quarter and how you think about the sustainability of that?

Speaker 5

Yes. So I think a lot of typically in the Gulf Coast when we see stronger capture rates, it's tied to feedstock optimization. And so certainly, we've been doing a lot around some of those fuel blend stocks and running more of those in our system, which has helped support our supported higher capture rates.

Speaker 10

Got it. Okay. And then second question, just a follow-up on some of the commentary there on renewable diesel. The gross margins there down sequentially. It sounds like you expected some of that, but Yes, the capture rate, the indicator there was, I think, a bit lower than maybe some had expected.

Speaker 10

Were there any transitory factors there In your opinion, in the quarter as you started up Phase 2 and whether it's with feedstock or other factors or Is this how you think about kind of a run rate moving forward?

Speaker 9

Sure, Phil. This is Martin. So margin capture in 2021 was all about the feedstock price. In first half of twenty twenty one, feedstock prices were low relative to soybean oil, which Resulted in some really high margin capture. In the 4th quarter, the prices were high relative to soybean oil, and that gave us a lower margin capture at 75 With the start up of DGD2, we're going to have tighter Prices for a while.

Speaker 9

We expect feedstock to be around soybean oil going forward for the immediate future, and then we'll see how that plays out in the next few months after that. We expect it to be right around soybean oil, which would infer closer to this 100% type margin capture. And that's what we experienced throughout 2019. If You go back and look at those numbers, we average right around 100% margin capture. So that's kind of how we expect things to shake out in the next few months.

Speaker 9

Great.

Speaker 10

Very helpful. Thank you.

Operator

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

Speaker 11

Yes. Good morning, everybody.

Speaker 2

Hi, Roger.

Speaker 7

Joe and team, thanks. I want to

Speaker 11

come back if possible to the crude tightness comments, just What you're seeing in terms of differentials, what you'd expect and then are we highly dependent here On OPEC putting more oil in the market or is there some other factor at work? And one of the reasons I ask is some of the closures that we saw on the refining side Tended to be a light sweet unit. So if physical demand is down on that side, is that also accounting for some of the tightness of the differentials?

Speaker 5

Yes, Roger, it's Gary. I think there's a number of factors that contributed to the tightness, not simply OPEC. We saw the winter weather have an impact on heavy Canadian production from Western Canada. We had disruptions from supply in Ecuador. There's been pipeline issue between the pipeline between Iraq and Turkey that took barrels off the market.

Speaker 5

So a number of factors. We think going forward, again, Not only getting the OPEC production ramping up, we expect to not only see the Western Canadian production come back, we actually think it will grow With some of the logistics projects coming back on and so most of that production that was off the market is coming back. In addition to that production coming on the market, the OPEC Production growing, will take some of the pressure off the crude markets and certainly pressure off the crude differentials.

Speaker 11

Thanks for that. And then my unrelated follow-up question is coming to you, Jason. I'd like the Insight on the possibility of getting back the more normal cash returns model in 'twenty two. I was curious though given the significant Improvement in working capital in 2021, are we at risk of seeing some of that reverse in 22 or when you think about the outlook, do you assume a neutral working capital event and maybe we should assume Something going the other way.

Speaker 6

Yes. Well, our movements in working capital generally follow flat price. When we're forecasting, we just assume neutral Cash flow working capital is our basis.

Speaker 11

So just a quick reminder, if prices go up, Positive prices go down, it's going to eat working capital?

Speaker 6

Right. That's right.

Speaker 11

Okay, great. Thank you.

Operator

Thank you. Our next question is coming from Prashant Rao of Citigroup. Please go ahead.

Speaker 3

Good morning. Thanks for taking the question. I wanted to circle back on the capital allocation piece a little bit. You've done a great job reducing debt. It looks like you'll be able to take another chunk out this year.

Speaker 3

You've got high balance sheet cash. It sounds like you're very positive on buybacks. I just sort of wanted to ask about the dividend. I know it might be a bit premature at this point, but Given that we're looking at what could be an above mid cycle year in earnings, you've gotten debt controlled and the yield is starting to come in currently just Yes. Annualized a little bit under 5% and could be tighter than that if the share price continues to work.

Speaker 3

Is taking a hard look at the dividend something that A potential increase is something that you might think of this year? Or is it too soon to start talking about that?

Speaker 6

Yes. This is Jason. It's probably a little soon given what we just came through. But we always look at it, our commitment is to have a sustainable dividend with a yield at the high end of our peer And that's where it is now. Where the peers are and the market is, we think it's in a good place.

Speaker 3

Okay, perfect. And then just Prashant, you remember

Speaker 2

at this time last year, there was a big question on sustainability of the dividend, right? It's a lot can change in a short period. Now you never questioned it. You always had faith. But anyway, it's interesting how things come around.

Speaker 3

It's true. It's like a different world altogether, right, Joe?

Speaker 2

Yes, sir. It is.

Speaker 3

Just another quick question. Ethanol, I would say historically high performance here. This is the best quarter we've seen Since he's been reporting quarterly results out of ethanol, just wondering a little bit about the strength of carryover. I think when we discussed this a couple of months back, There were some cautious read across as to what happens in 2022 given how volatile the ethanol market is and all the puts and takes. I was just wondering if Big picture, how to think about how where we level set where we are entering 2022 to think about what the cadence might be there, some of that strength carrying over, but also there's a lot going on in terms of Policy, gasoline demand, a whole bunch of factors there.

Speaker 3

So just wonder if we could get some color and maybe a little bit of clarity as to how we should be thinking about that as we look into 'twenty two?

Speaker 9

Sure, Prashant. This is Martin. Well, obviously, Q4 was a great quarter for ethanol. You look at it, what really set that up is we 3rd quarter, the margin started off really weak, and we were also at end of crop beer corn. So that this wasn't corn available in the industry.

Speaker 9

It's pretty very low stocks. So there was a lot of run cuts, a lot of early maintenance taken And the plants really didn't rebound. And I'm talking across the industry. I'm not talking just Valero and get rates back up until early October. And then rates exceeded.

Speaker 9

I mean, in early October, rates exceeded the 5 year averages. But what was interesting is even with high rates, inventory just never built. When you have a low inventory situation, that leads to high margins and that's what we saw. So now the last Few weeks of the year and the 1st few weeks of 2022, we've had significant inventory build. So the margins have come off dramatically.

Speaker 9

With that being said, we're still probably where we typically are in the Q1 for ethanol margins. And I think What we always are looking at ethanol now though is the longer term and that's the carbon capture that's going to provide a great opportunity for us Both from the 45Q and the LCFS and also we're producing started to produce more and more gallons of Cellulosic ethanol from corn fiber. So we're optimistic about both of those. We're Just confident that ethanol is going to remain a part of the domestic fuel mix. We expect higher octane blends in the future, namely 95 RON, which means more ethanol blending.

Speaker 9

And globally, the renewable fuel mandates are going to drive export growth. So we feel really good about ethanol going forward, maybe not this quarter, next quarter, but longer term, we feel really good about ethanol.

Speaker 3

Makes sense. Thanks so much for the time. Appreciate it.

Operator

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

Speaker 12

Hey, good morning, everyone. Happy New Year, Joe.

Speaker 2

Thanks, Doug. Same to you.

Speaker 12

Joe, I'm sorry, I'm going to hit the capital allocation question one more time, maybe from a slightly different angle. Excuse me one second.

Speaker 10

Excuse me.

Speaker 12

So, the balance between dividends. Yes, I got something going on. The balance between dividends and buybacks is really what I'm kind of focused on here because you could easily buy back 5 plus percent of your stock. That's a pretty healthy dividend growth for an ordinary business, and I'll remind your business. So I'm just kind of curious how you think about the balance going forward as you reconsider the right level of debt perhaps And the right balance between that 40% to 50% cash allocation to cash returns between the dividend and the buyback.

Speaker 12

I know it's a broad question, but I'm just kind of curious how you I guess what's behind this, Joe, is in years gone by, there's been criticism of buybacks at a high price level. I'm wondering if the buyback is more a tool to manage the dividend burden going forward?

Speaker 2

Yes. No, Doug, it certainly would be. And when you think about where the yields been, particularly last year, I mean, we've been flushed with cash last year, we'd have bought back a ton of shares, but we weren't. Right. And you're right.

Speaker 2

It is a double edged sword, right? We end up with good cash flows and typically a high stock price all at the same time. So that's why it's hard to create a formulaic approach to how we look at doing this. And so I think Jason has laid it out. Coming out of COVID, we had a very specific set of priorities that we wanted to put in place.

Speaker 2

And I think he covered those. What I'll do is, look, we got a good strong CFO. We'll see what he thinks here. You got anything You'd like to share?

Speaker 6

Yes. Everything you said was accurate. And we have to be have a balanced dividend because as we've Proven through the last downturn, we're going to defend it in the downturn. So you have to be wary of making it too high and the buybacks could be the flywheel.

Speaker 2

Yes. So Doug, I wouldn't say I mean, we always look at the dividend and we'd like to increase it. I think there's a time when it will be right to do that. And it's a burden that we've been able to carry. Certainly, it's easy in a good margin environment like we have today.

Speaker 2

But in the down margin environment, As Jason said, we defended it and it was a bit of a load, but we're committed to it and we just don't want to get over extended.

Speaker 6

It's well positioned versus the peers. Our first step is to look versus our peers. We committed to be up near the top of the end and as long as we're the highest, that box

Speaker 12

Yes, yes. Guys, I want to be respectful to everyone else. And I'm going to take my second question on the same topic, if you don't Fine, because I'm looking at, for example, what some of the Canadians have done. Think about asset companies that have long life Sustainable assets, obviously, your business is very similar to that in some respects in terms of the annuity nature. So I wonder then, whether some folks did question your dividend last year, not as I might add, but Why then wouldn't you use your balance sheet, take your balance sheet to a much stronger level so that kind of concern Can be taken out of the investment case.

Speaker 12

So in other words, why is 20% to 30% the right level? Why not go lower given the shock that we all saw in the past year? I'll leave it there. Thanks.

Speaker 2

No, Doug, that's a fair question. And I can tell you that's one of the things that Jason and Homer are looking at consistently. The capital markets were very assessable last year, even in the downturn, and Rates were so attractive that we were able to really do a good job of financing the business through this. But again, you never really know, Jason.

Speaker 6

Yes, that's right. One thing we do to address this Hold a higher cash balance, but we also want to have an efficient capital structure and debts pretty cheap right now. Going to 0 debt would give you the maximum flexibility and kind of resilience, but then you have the cost of higher cost.

Speaker 2

But Doug, are you proposing that we would like lever up to buyback

Speaker 12

Well, it's really more of that. So you're opportunistically positioned To lean on the balance sheet when you need to without the market speculating about the dividend is really more because I think your business can support An annuity dividend discount model type of approach, but the balance sheet needs to be right sized to achieve that. And again, I was just really trying to take that volatility out of The go forward investment case, but I've taken my quota of time, Joe. So I appreciate the answers and

Speaker 2

Oh, sure. Okay, we'll see you soon.

Operator

Thank you. Our next question is coming from Paul Sankey of Sankey Research. Please go ahead.

Speaker 13

Good morning, everyone. Hi, Paul. Joe, could I ask you guys about Europe, just from your perspective as a major refiner there? What's going on as regards to demand, the impact of natural gas prices, crude slates, the whole bit? Thanks.

Speaker 2

Thanks, Paul.

Speaker 5

Yes. So this is Gary. I guess what we're seeing in terms of demand is they're kind of ahead of where we are in recovery from The latest spike in COVID cases, if you look at our 7 day in the U. K, we're up about 10% of where we were month to date. So starting to see good recovery in mobility and gasoline demand in the system.

Speaker 5

Again, very similar situation on diesel. ARA stocks are very low, so diesel looks very constructive as well. On the natural gas side, you see Some switching of crude diets as a result of the high natural gas prices, still $30 an MMBtu in Northwest Europe. So you see some People kicking out medium and heavy sour grades of crude running more light sweet. I think where we've seen it the most is optimization around hydroprocessing Capacity.

Speaker 5

So people idling and cutting hydrocracking capacity as a result of very high natural gas prices, which again Puts less diesel on the market and is one of the reasons why we're experiencing all the tightness around diesel that we are.

Speaker 13

Excellent answer. Thank you. Could I just follow-up with California? We've seen margins come off Quite a bit there, but more importantly, could you talk a bit about how renewable diesel will play through in that market where You're exposed to both sides of that. I just wonder what your perspective is because we could see a situation obviously where the market gets quite challenged, I think,

Speaker 12

Bye Renewables. Thanks.

Speaker 9

Thanks, Paul. Yes. Paul, this is Martin. Renewable diesel has held up really well from a demand side in California. It's kind of amazing to me going through COVID what we've seen out there.

Speaker 9

Obviously, deficits have decreased and they've decreased because of Less car Bob or gasoline use and less diesel use. But renewable diesel for the first half of the year, and that's the latest stats we have, is running 23% of the diesel pool in California. So it's we're blending in an R23 statewide, which is Pretty amazing. A lot of imports coming into California too of renewable diesel. So, it's kind of held up remarkably well.

Speaker 9

You can say, well, maybe that's why the credit price is down. But I think really the credit price has got a lot more to do with just less deficits than it has to do With additional credits from renewable diesel. So that's a great market for us. I think What really got hurt demand wise was more in Europe on renewable diesel and probably more in Canada too with just the kind of waiting for the CFS. So we expect those 2 to rebound and with that more demand globally.

Speaker 9

Understood.

Speaker 13

Could you just throw the answer Forward a little bit, as we look over the next couple of years in terms of how the supply demand balance might play out. And I'll leave it there. Sorry not to make you laugh today, Joe.

Speaker 2

We'll have a chance for that here pretty soon, won't we?

Speaker 9

I think if you play it forward, there's really nothing that stops renewable diesel from you can blend it Really, any rate with renewable diesel, right, there's 85% renewable diesel sold in California today. I think CARB's projections are to get somewhere around R40 by 2,030. I think a lot of people think that's that it could be higher than that. So that's California, but you've also got other states considering LCFS. You've got the CFS in Canada that we're looking forward By the end of this year, and the Canadian diesel market is twice the size of California's market.

Speaker 9

So that's going to be A big market for us and we expect that people will over generate credits early When they can, right? That's what happened in California. There was early credit generation, building up a credit bank, and we expect to see the same thing in Canada, which is good for renewable diesel demand.

Speaker 13

Great. Thanks. All the best for 'twenty two guys. Thank you.

Speaker 2

Thanks, Paul.

Operator

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

Speaker 14

Hey, guys. Good morning.

Speaker 2

Good morning, Paul.

Speaker 14

Two questions, please. First is for Martin. I think Mahindra, renewable diesel, another product seems to be getting some excitement by some of your peers, SAF. Just want to see whether the company have any interest in where the economy and what leads to change in order for the economic to be Compatible with renewable diesel from your standpoint for you to be interested. And if at that point, What kind of investment you will need to make in order to make the switch?

Speaker 14

So that's the first question. The second question is probably for Ming. Law of Atlantic, the 4th quarter margin capture was really good. Yes, Greg. Just want to see if there's any one off events and also that would be in the 2 Facility in Europe and also that in Quebec City, I mean, which is a stronger You need in terms of the margin capture in the 4th quarter.

Speaker 14

Thank you.

Speaker 9

Okay. It's Martin. I'll get started there, Paul. I think we were all looking at the Build Back Better bill and what was in that on a tax credit basis for SABP. And what we saw that incentive level proposed in that bill was not sufficient to attract additional investment Make SAF versus the base case of producing renewable diesel with an existing unit.

Speaker 9

However, we're still progressing SAF production through our gated engineering process, and concurrently, we're developing customers. There are plenty of customers interested in SAF, but a favorable tax credit, something else Going to be required or tax credit or something else to really get over the hump to where SAF is economic to produce relative to producing renewable diesel. That being said, we're still confident that SAF production is a question of when and not if. We think the margins will eventually work. The SAF is the only way to reduce the carbon intensity of air travel.

Speaker 10

Hey, Martin.

Speaker 14

How big is the sorry, Nate, just wanted to follow-up on what Martin said. How big is the gap in terms of the incentive for you to fund SAF to be attractive enough Compared to the renewable diesel and also technically that what kind of investment you need to make and how big is the investment For you that to make DGT, that to be able to produce, let's call it 20% or 30% in SAF?

Speaker 9

Yes. On the GAAP, I mean, we're somewhere probably around this $0.70 a gallon GAAP still, Paul, to make it economic. On the investment, we're still going through our gated process. We don't have a number on that yet. We have preliminary numbers, but we don't have a number that we're ready to share yet.

Speaker 14

Okay. Thank you. Lane?

Speaker 8

All right. So yes, so what's interesting about the 2 refineries we have in the Atlantic Basin is Quebec is seasonally stronger in the 4th and the first quarter. It's largely a distillate It's very specialized distillate producing refinery in ways configured, whereas Pembroke is really more of a gasoline producing configured refinery. So That's kind of how they work out. So really in terms of the Q4 performance, it's really Quebec well on their margin capture.

Speaker 8

And obviously, you have The issues around high natural gas prices over in the UK, obviously, that helped sort of hurt their margin capture, Ken Brooks.

Speaker 14

And Ning, is there any one off item that is benefiting in the quarter or It's just that you guys have done a phenomenal job in the operation and be able to fully capture the benefit of the market.

Speaker 8

Well, I like the second answer, but it's

Speaker 10

yes,

Speaker 8

Quebec ran really they both ran really well in

Operator

Our next question is coming from Sam Margolin of Wolfe Research. Please go ahead.

Speaker 15

Hey, good morning, everybody. Thank you.

Speaker 2

Hey, Sam.

Speaker 15

Wanted to just circle back to the industry capacity questions. A few Other analysts on the call have alluded to a lot of closures over the past 12 months, but there's some third parties and some managements In the industry that are suggesting that the number of closures is even higher than any of us are aware of or any kind of report that we would see Mike, confirm. And so I wonder what your thoughts on that are? And then secondly, this is a 2 part question, but only one. Theoretically, where cracks are today, you would think that capacity rationalization would stop here or slow down.

Speaker 15

But there There's other factors that are that may be driving some closures. So if you think that this trend could continue based on non economic factors, Would love your input on that too. Thanks.

Speaker 8

Hey, Sam, it's Lane. So, we are trying to study the data right now because what we see is a similar Issue in terms of what where utilization is versus closures. And again, it's just sort of what we're sort of preliminarily Deciding or looking at as we think that there's probably some slowdowns that are occurring maybe because of maintenance deferrals or turnaround deferrals In the industry, we don't that's not something we know, but it's a theory as to what you're seeing. And certainly, where margins are now, the call on Capacity is pretty much max. So other than the turnarounds and the outages, the refinery utilization All to be in this 90% to 95% range.

Speaker 8

Once you get all the DOE data worked out, make sure all the refineries you think shouldn't be in and everything, That's kind of where we see it as well.

Speaker 15

Okay. Thanks so much.

Operator

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

Speaker 16

Great. Thanks. Maybe just one quick follow-up on your comments on California from earlier. I know you had talked about some of the Longer term or at least issues with low carbon fuel standard credits. Do you have a view on For the next 12 months, where you think the LCFS credits go from here?

Speaker 16

We've gone from 200 to 150 ish. Do you see further downside? Or do you think we

Speaker 9

Stabilize here. That's a good question. This is Martin. What's difficult about this is you're always driving with your rearview mirror, right? The The data lags by 6 months and not complain about that.

Speaker 9

It makes sense. It's a lot of data. So we're always kind of we've got at the end of this month, we'll get the 3rd quarter data. I think what's interesting is when you look at it, the credit price obviously depends on credit generation versus deficit generation. And COVID certainly reduced deficit generation and it has been since the Q2 of 'twenty.

Speaker 9

So you have to think the credit prices have been reduced by COVID. And then the other thing that's interesting to me is when you look at the credit generation in 2 Q 'twenty one, I'd say that certainly surprised me to the upside. But when you dig into that, there's really 2 line items in the credit generation that Stand out. The first was that Bio CNG, Bio Compressed Natural Gas was 13% of all The 2Q 'twenty one credits and that line item was up 190% versus 2019. And second, off road electricity generated 9% of all credits.

Speaker 9

Now this is off road, not on road. And that was up 146% versus 2019. And more interestingly, on the off road, 71% of those credits came from e forklifts. So when you think about the Bio CNG, the off road, the e forklifts, you just wonder if that pace of credit generation can continue or the infrastructure and just really the Gets in the way, right? I don't know how many times you can replace your forklift to get an e forklift, but it seems like that would run out at some point.

Speaker 9

So we'll see how that shakes out. But if you think about those two line items, that's what 21%, 22% of the credits in California from 2 line items there, which really were very small in the past. So That's just kind of interesting data. And then the other is that biodiesel, renewable diesel and on road electricity credit generation As a percent of total credits, we're all flat for 2Q 'twenty one versus 2019 as a whole. That's just a little color.

Speaker 9

Hopefully, that helps.

Speaker 16

Yes. Thanks. That's great. And then maybe just one overall, I know you've talked a lot about What you've seen generally in terms of demand, particularly here in the U. S, any comments in terms of what you're seeing on the product export side that may indicate what you're seeing On international product demand, particularly in your primary export markets?

Speaker 5

Yes, this is Gary. So I would tell you, we're probably seeing we're not seeing the Recovery in Latin America quite as fast as we've seen in North America or the U. K. So demand is still down a little bit. We're seeing good export demand into the region.

Speaker 5

I would expect in the Q1, our exports will be down a little bit, not Really an indication of demand in Latin America, but more a function of maintenance activity occurring, especially in the U. Gulf Coast during the quarter and really good domestic demand, but the demand is there in Latin America and our typical export markets.

Speaker 16

Great. Thanks, guys.

Operator

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

Speaker 17

Hey, good morning. Thanks for taking my questions. I wanted to dovetail off a comment that was just made, Maintenance in the Gulf Coast, it looks like guidance for throughput is down quarter over quarter for 1Q and 4Q about 300,000 barrels a day. You just discussed what maintenance activity you're going to have in 1Q if there are other One time items impacting that guidance. And if you think that's indicative of the industry as a whole, just given it seems like there was a lot of maintenance delayed Due to COVID over the past couple of years.

Speaker 17

And then my second question is hopefully one you can answer Kind of on geopolitics and what's going on with Russia. Valero imports a lot of Intermediate feedstock from Russia. And can you just discuss maybe the margin kind of enhancement that provides? And how you're more broadly thinking about both the risks and opportunities these geopolitical Issues with Russia present for your company? Thanks.

Speaker 8

So, this is Lane. I'll take the first one. So, We don't really comment directly on our turnaround activity going into the quarter. The volumes are the proxy for that, so you can just sort of You know, decide what that means. And we certainly don't we also don't comment on our peers on what we think they're doing with respect to turnarounds.

Speaker 8

This is just sort of a policy for us.

Speaker 2

Gary, you want to talk about Russia?

Speaker 5

Yes. So obviously, we don't really until Any kind of sanctions are announced, we don't really know what they would entail. What I can tell you is that when we've seen things like this happen in the past in other locations, It simply results in a change in trade flows. So what we would expect to happen here is some of those intermediates that we're running today will We run somewhere else throughout the world and wherever those end up going, they'll kick out feedstocks that make it available for us to run. So Certainly, as a commercial team, we're looking at what those are today and making sure we have them approved in our system and are ready to run them if we need to in the future.

Speaker 17

Got it. Thanks.

Operator

Thank you. Our next question is coming from Kainer Laina of Morgan Stanley, please go ahead.

Speaker 18

Yes, thanks. Maybe sticking with major exporters, was wondering what you guys made of the discussion around Pemex potentially ending crude exports. And what do you see as the implications? Do you think it's Likely to occur and what do you think the implications on particularly the Gulf Coast refining industry would be?

Speaker 5

Yes. So this is Gary. I think Lane has been pretty public on our views on being able to meaningfully change refinery reliability and utilization. He's I said 2 turnaround cycles and a lot of capital. So it looks like their goals are pretty aggressive.

Speaker 5

But if they're able to increase refinery utilization, If the Dose Focus refinery starts up, certainly, it would decrease the amount of crude for export. Our view is that the first destinations to be cut will really be European And Asian destinations for export from Mexico. It goes first. Our experience has been that As they increase refinery runs in Mexico, they increase the export of high sulfur fuel oil and that's a good Feedstock for our high complexity U. S.

Speaker 5

Gulf Coast system that actually serves as a nice complement to a lot of the light sweet grades we run-in our U. S. Gulf Coast system. We've had a long standing great relationship with Pemex, and we expect that to continue long into the future.

Speaker 18

Got it. Helpful context. Maybe just returning to the capacity question, but in a global sense. The The closures, obviously, you had sort of a net decline in some areas and you're sort of, at least in theory, flipping back to growth At a global capacity level over the next couple of years here, I mean, do you are you concerned about that? Do you see that meaningfully altering the to your Earlier point, product flows or crude flows, just how do you think about that impact on your margins?

Speaker 8

This is Lane. I mean, we read the same journals you guys do in trade magazines, and we have people that keep up with refinery closures and refineries Obviously, the Middle East has some refineries starting up. China has some. I guess, we sort of believe that China has this longer plan of having larger refineries run instead of what we call the TPOP Refineries. But at the end of the day, it's hard to really sort of Have a real strong view on where all this really heads.

Speaker 8

I always go back to The Indian Refinery Alliance is starting up, and we were concerned then. And we were always curious that we're going to put U. S. Refineries Strauss calculated their import parity into our market. At the end of the day, what happened is most of the barrels stayed in the region.

Speaker 8

So you just these are Simple things to work through. But what we do is we run our assets. We make sure they're competitive not only here in the U. S, but everywhere in the world. And we know that as long as there's rent out there in this industry, we'll get our share of it.

Speaker 18

Fair enough. Thank you. I'll turn it back.

Speaker 2

Thanks, Conor.

Operator

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

Speaker 1

Great. Thanks, Donna. Thanks, everyone, for joining us today. Obviously, if there's anything you want to follow-up on, feel free to thank the IR team. Thank you, and have a great week.

Operator

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

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