Valero Energy Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

Key Takeaways

  • Q2 net income attributable to Valero stockholders was $1.9 billion ($5.40/share), down from $4.7 billion ($11.57/share) in Q2 2022, with refining operating income falling to $2.4 billion from $6.2 billion year-over-year.
  • Refineries ran at 94% throughput capacity utilization, while tight product supply and demand drove U.S. Wholesale system sales to a record of over 1 million barrels per day in May and June.
  • Port Arthur Coker project started up in April and is operating at full capacity, boosting the refinery’s ability to process additional heavy crude and residual feedstocks.
  • Renewable Diesel segment posted record operating income of $440 million and sales of 4.4 million gallons per day, with the Port Arthur SAF upgrade on schedule for 2025 completion.
  • The company returned 53% of adjusted net cash from operations to shareholders via dividends and buybacks, and ended the quarter with an 18% net debt-to-capitalization ratio and $5.4 billion of available liquidity.
AI Generated. May Contain Errors.
Earnings Conference Call
Valero Energy Q2 2023
00:00 / 00:00

There are 22 speakers on the call.

Operator

Greetings and welcome to the Valero Energy Corp. 2nd Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

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

Speaker 1

Good morning, everyone, and welcome to Valero Energy Corporation's Q2 2023 Earnings Conference Call. With me today are Lane Riggs, our CEO and President Jason Fraser, our Executive Vice President and CFO Gary Simmons, our Executive Vice President and COO and several other members of Valero's senior management team. If you have not received the earnings release and would like a copy, you can find 1 on our website at investorvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business 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 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 earnings release and filings with the SEC. Now I'll turn the call over to Lane for opening remarks.

Speaker 2

Thank you, Homer, and good morning, everyone. Before we discuss quarterly results, I want to thank Joe Gorder for everything he's done to build upon Valero's 43 year history. Joe steered a repositioning of our strategy and the commitment to shareholder returns through capital discipline, innovation and strong execution. I'm grateful for his leadership and proud of what Valero has accomplished, and I'm honored to build on that foundation as we continue to advance our position as a leading manufacturer of liquid Moving on to quarterly results. We are pleased to report solid financial results in the 2nd quarter, underpinned by our strong Our refineries ran well with throughput capacity utilization of 94%, Refinery margins were supported by continued tight product supply and demand balances.

Speaker 2

Product demand was strong with our U. S. Wholesale system setting a sales record of over 1,000,000 barrels per day in May June. We also had a positive contribution from the Port Arthur Coker project, Which was started up in early April and is operating well and at full capacity. The new coker has increased the refinery's throughput capacity Enhance its ability to process incremental volumes of heavy crude and residual feedstocks.

Speaker 2

Our Renewable Diesel segment set records for operating income and Sales volumes in the 2nd quarter driven by incremental production volumes from Diamond Green Diesel Port Arthur. The Diamond Green Diesel sustainable aviation fuel project at Port Arthur is progressing on schedule. Plant is expected to have the ability to upgrade 50 percent of the current 470,000,000 gallon annual renewable diesel production capacity to Sustainable Aviation Fuel or SAF. It's expected to be complete in 2025 and is estimated to cost $315,000,000 With half of that attributable to Valero. With the completion of this project, DGD is expected to become one of the largest manufacturers of SAF in the world.

Speaker 2

These projects expand our long term competitive advantage, and I want to commend our projects and operations team for their dedication and execution. We also continue to evaluate other opportunities while maintaining capital discipline and honoring our commitment that all projects meet a minimum return threshold. On the financial side, we returned 53% of the adjusted net cash provided by operating activities to shareholders through dividends and share repurchases in the 2nd quarter. And we ended the 2nd quarter with a net debt to capitalization ratio of 18%. Looking ahead, we expect low global light product inventories and tight product supply and demand balances to continue to support refining fundamentals.

Speaker 2

Global demand for transportation fuels has recovered substantially with gasoline and diesel demand now comparable to pre pandemic levels and jet fuel demand continues to increase steadily. In closing, we remain committed to the core strategy that has been in place under Joe's leadership for nearly a decade. Our focus on operational excellence, capital discipline and honoring our commitment to shareholder returns has served us well and will continue to anchor our strategy going forward. So, Homer, with that, I'll hand the call back to you.

Speaker 1

Thanks, Lane. For the Q2 of 2023, net income attributable to Valero stockholders was $1,900,000,000 or $5.40 per Share compared to $4,700,000,000 or $11.57 per share for the Q2 of 2022. 2nd quarter 2022 adjusted net income attributable to Valero stockholders was $4,600,000,000 or $11.36 per share. The refining segment reported $2,400,000,000 of operating income for the Q2 of 2023 compared to $6,200,000,000 for the Q2 of 2022. Adjusted operating income was $6,100,000,000 for the Q2 of 2022.

Speaker 1

Refining throughput volumes in the Q2 of 2023 averaged 3,000,000 barrels per day, implying a throughput capacity utilization of 94%. Refining cash operating expenses were $4.46 per barrel in the Q2 of 2023, lower than guidance of 4.6 primarily attributed to lower than expected natural gas prices. Renewable diesel segment operating income was 4 $40,000,000 for the Q2 of 2023 compared to $152,000,000 for the Q2 of 2022. Renewable diesel sales volumes averaged 4,400,000 gallons per day in the Q2 of 2023, which was 2,200,000 gallons per day higher than the Q2 of 2022. The higher sales volumes in the Q2 of 2020 3 were due to the impact of additional volumes from the start up of the DGD Port Arthur plant in the Q4 of 2022.

Speaker 1

The ethanol segment reported $127,000,000 of operating income for the Q2 of 2023 compared to $101,000,000 for the Q2 of 2022. Adjusted operating income for the Q2 of 2022 was $79,000,000 Ethanol production volumes averaged 4,400,000 gallons per day in the Q2 of 2023, which was 582,000 gallons per day higher than the Q2 of 2022. For the Q2 of 2023, G and A expenses were $209,000,000 and net interest expense was 148,000,000 Depreciation and amortization expense was $669,000,000 and income tax expense was $595,000,000 for the Q2 of 2023. The effective tax rate was 22%. Net cash provided by operating activities was 1 $500,000,000 in the Q2 of 2023.

Speaker 1

Excluding the unfavorable change in working capital of $1,200,000,000 in the second quarter And the other joint venture members share of DGD's net cash provided by operating activities, excluding changes in its working capital, Adjusted net cash provided by operating activities was $2,500,000,000 Regarding investing activities, we made 458,000,000 Capital investments in the Q2 of 2023, of which $382,000,000 was for sustaining the business, including costs for turnarounds, catalysts and regulatory And $76,000,000 was for growing the business. Excluding capital investments attributable to the other joint venture members' share of DGD, capital investments attributable to Valera were $433,000,000 in the Q2 of 2023. Moving to financing activities, we returned over $1,300,000,000 to our stockholders in the Q2 of 2023, Of which $367,000,000 was paid as dividends and $951,000,000 was for the purchase 8,400,000 shares of common stock, resulting in a payout ratio of 53% of adjusted net cash provided by operating activities. Last week, we announced a quarterly cash dividend on common stock of $1.02 per share payable on September 5, 2023 to holders of record at the close of business on August 3, 2023. With respect to our balance sheet, we ended the quarter with $9,000,000,000 of total debt, dollars 2,300,000,000 of finance lease obligations and $5,100,000,000 of cash and cash The debt to capitalization ratio net of cash and cash equivalents was 18% as of June 30, 2023.

Speaker 1

And we ended the quarter well capitalized with $5,400,000,000 of available liquidity, excluding cash. Turning to guidance, we expect capital investments attributable to Valero for 2023 to be approximately $2,000,000,000 which includes expenditures for turnarounds, catalysts and joint venture investments. About $1,500,000,000 of that is allocated to sustaining the business and the balance to For modeling our 3rd quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.77000000 to 1.82000000 barrels per day Mid Continent at 450,000 to 400 70,000 barrels per day West Coast at 240,000 to 260,000 barrels per day And North Atlantic at 435,000 to 455,000 barrels per day. We expect refining cash operating expenses in the Q3 to be approximately $4.70 per barrel. With respect to the Renewable Diesel segment, we expect sales volumes to be approximately 1,200,000,000 gallons in 2023.

Speaker 1

Operating expenses in 2023 should be $0.49 per gallon, which includes $0.19 per gallon for non cash costs Our ethanol segment is expected to produce 4,400,000 gallons per day in the 3rd Quarter, operating expenses should average $0.39 per gallon, which includes $0.05 per gallon for non cash costs such as depreciation and amortization. For the Q3, net interest expense should be about $145,000,000 and total depreciation and amortization expense should be approximately $690,000,000 For 2023, we expect G and A expenses, excluding corporate depreciation, to be approximately 9 25,000,000 That concludes our opening remarks. Before we open the call to questions, Please adhere to our protocol of limiting each turn in the Q and A to 2 questions. If you have more than 2 questions,

Operator

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

Speaker 3

Guys, just want to quickly start with and congratulate Gary, for the promotion and the new rule and all our best wishes are with you. The first question I have for you is that When we look at DJD, you guys have a track record of bringing projects online before time. So is there a possibility a year down the line, You could take a look at it and say, we would like to have similar upgrades possible at BJD-one and More sustainable aviation fuel on a go forward basis?

Speaker 4

Yes. Hey Manav, this is Eric. Obviously, that is a possibility because those are cookie cutter units and we could do the exact same project At St. Charles that we are currently underway at Port Arthur. It's too early to talk about any numbers or commitment, but yes, that's definitely something we're looking at and something that we could do.

Speaker 3

The second question here is, the DOE data is telling us whatever it is And there are obviously some concerns around demand out there, but the cracks are telling us a completely different story. The cracks are telling us the demand Product is remarkably strong. So just wondered if you could highlight some of the what you're seeing in terms of demand in various regions?

Speaker 5

Yes, Manav, this is Gary. We do believe that the DOE is understating gasoline demand, but even their data is showing on a 4 week average basis, Gasoline demand up about 3%. But if you look at our numbers, of course, Lane mentioned, we had record volumes in both May June of over 1,000,000 barrels a day. We're seeing gasoline sales in our system up 14% year over year, up 22% from pre pandemic levels. Gasoline inventory year over year is 7,500,000 barrels, so it's trending at the low end of the 5 year average range.

Speaker 5

Typically, this time of year, you have an open arb to Ship barrels from Europe into the United States, but with inventory low in Europe that arb is closed, which is hindering imports and we see strong export demand From the U. S. Gulf Coast into South America. So the fundamentals around gasoline look very good. Diesel inventory is up 6,000,000 barrels, but continues to trend below the 5 year average range.

Speaker 5

Diesel inventory is flat, where historically this time of year we start to see diesel building. Again, while the DOE reflects weaker diesel demand year over year, it looks like the weekly data is continually being revised up. So although we certainly think that we had a weaker heating oil season, diesel demand looks fairly similar to last year. So we move forward a lot of encouraging signs around diesel, where we saw weaker tonnage index in the Q2. The June data reflects that the tonnage index is picking back up.

Speaker 5

We'll start to see more agricultural demand as we get into harvest season and more heating oil demand as we get into colder weather. Continue to see very good export demand from the U. S. Gulf Coast into South America. Some of that has fallen off as we've replaced some supply with Russian barrels, but Largely been replaced with more export demand from the U.

Speaker 5

S. Gulf Coast into Europe. Jet demand also picking up and had Pretty strong. All the airlines are reporting very strong demand. Jet trading at a $0.10 per gallon premium in the U.

Speaker 5

S. Gulf Coast on a rent adjusted basis So yes, the fundamentals look very, very good.

Speaker 3

Thank you so much for a detailed response. Thank you.

Operator

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

Speaker 6

Hey, good morning. Thanks for taking my question. So my first one is just on the coker. It sounds like you're running full now in the start up when But maybe you can just go through any puts and takes around profitability. I know heavy dips have come in, for example, but diesel cracks are improving recently.

Speaker 6

And Should we think about there being a structurally higher Gulf Coast capture now and any way to think about quantifying that?

Speaker 7

Hey, John. This is Greg Bram. So as Lane mentioned, the coker started up in April. And I think it's probably worth noting, the project and operating Great job bringing that unit online safely without incident, and that's after we accelerated the schedule last year to be in a position to Capture value from that project here in 2023. We've ramped it up to full capacity over the course of the quarter, and it's running well and meeting expectations.

Speaker 7

And I think with that, you can take kind of the guidance we've given in the past and think about where the market is today and adjust accordingly. I don't think we have really A new or different view because the project is really doing what we expected it to do.

Speaker 6

Great. And then maybe along the same lines, it would be great to get your thoughts on heavy and medium sour diffs from here with OPEC plus cutting and the 2nd round of the SPR release is now over. What are your thoughts on whether we'll see a widening from here on Mediums and heavies or will we likely stay in the current environment we're in from a sourdisperspective?

Speaker 5

Yes, this is Gary. I think we have seen the discounts widen back out some as we've moved throughout the Q3. I There's some reason for optimism. As we head into fall turnaround season, had 2 and 3, you'll see some decreased demand For heavy sour crudes, which will help the differential some. I think we'll see some more production growth out of Western Canada as they come out of maintenance season, which will put more barrels back on the market.

Speaker 5

Should continue to see a ramp up in Chevron production from Venezuela heading into the U. S. Gulf Coast. And then finally, there's some seasonal factors, which should help the discounts As well, high sulfur fuel for power burn will begin to wind down seasonally, which will put more high sulfur fuel on the market, Help the discounts there. And then as we transition into winter weather, you would expect to see higher natural gas prices, which changes the economics For some refineries around the world that have been processing medium and heavy sour crudes, which should help the discounts as well.

Speaker 8

Thank you.

Operator

Thank you. The next question is coming from Theresa Chen of Barclays. Please go ahead.

Speaker 9

Good morning. On the SaaS front, would you mind giving an update on the Navigator BlackRock CCS project? And How is the permitting and right of way procurement process going?

Speaker 10

Theresa, it's Rich. I'll start out by saying that the Navigator project is progressing. They've got parallel proceedings in front of each of the states respective utility boards and or counties, And the regulatory proceedings in Iowa are taking longer than they anticipated. And so Navigator is not expecting regulatory approval until the back half 2024, which will naturally push their timeline back. And they've not announced And they haven't given any update on a new start up schedule.

Speaker 9

Thank you. And in terms of additional SAP opportunities in the DGD facilities, Eric, can you just opine a bit more on how would you think about like the key hurdles it would take to cross to commercialize additional FIDs?

Speaker 4

Yes, I think what I would say about SaaS is the airlines are still in very much an educational phase of this. What they're still trying to wrestle with is, I think there's a good understanding of it's going to come from RD. They're starting to understand the credit markets and Because it's voluntary, they've got options on do they want to accept allocation, do they want to accept which model do they want to Operate under where in the world do they want to run these barrels. And I think the learning that everyone is working through right now is Conventional jet is a fungible product. And so the SAF will naturally move into fungible markets just like jet fuel does.

Speaker 4

But as airlines wants the specific molecule at their particular location, particular airport, even at the airports, It then becomes a fungible product. So all of that becomes a conversation of, okay, how do you then take that sort of real life logistics And apply it into these policies and goals and how do you want to set up a commercial deal with that. So there's still a lot of details being worked through So I think airlines are still we're still working through a lot of those details. I don't see any Drop in interest or demand, we see demand still growing strongly through 2,030. So I think there's still a lot of upside in this outlook.

Speaker 4

I think it's But we have to work through these commercial details and logistical details.

Speaker 11

Thank you.

Operator

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

Speaker 12

Thanks. Good morning, everybody. Gary, perhaps I could pick on you a little bit given your recent good news. Congrats from me as well. But diesel, a couple of months ago, the world was coming to an end in terms of consensus And today, we're back at winter type premiums for distillate crack.

Speaker 12

So I know you touched on already in some of your comments, but Can you maybe speak to what you're seeing that's driving that strength? And I want to address specifically what you're seeing in Asia Is the widest split as strong as it is today?

Speaker 5

Yes, I think you definitely saw, as China ramped up and they didn't have the Domestic demand keep up with that initially. You saw a lot of Chinese exports. Some of those barrels were making their way into Europe. And then you had some Trade flows that needed to rebalance with the Russian sanctions. So initially, we saw decreased demand from Latin America, and so diesel was starting to back up in the U.

Speaker 5

But if trade flows have rebalanced, the Russian barrels that are making their way into Latin America, that gap has largely been filled by increased demand from Europe. So if you look for in our system in the Q2 of last year, our exports pretty comparable to the Q2 of this However, last year, 95% of our volume went to Latin America, 5% to Europe. Q2 of this year, we had 60% of our exports go to Latin America with 40% to Europe. So you're starting to just see a big pull of diesel from the U. S.

Speaker 5

Gulf Coast into Europe. We saw in the Q2 and thus far in the Q3 that's continuing and today that's the real difference.

Speaker 12

So I hope this isn't A second question is just kind of a clarification question. So are you suggesting that Russian exports are Starting to they're starting to slow, which I think was the expectation. Is that am I reading your comments correctly?

Speaker 5

We have seen Russian exports slow. I don't know if that's just maintenance activity occurring in Russia, what's driving it, but we have Seeing some of the South American demand that we feel like we lost to Russian barrels that those countries are back inquiring for supply from us again.

Speaker 12

Okay. Thank you. My follow-up is on capture rates. And it seems to us, I mean, refining looked in line with consensus for this quarter, That's with pretty weak capture in the Mid Con and North Atlantic. So I'm curious if you can walk us through whether that's Transitory if there was anything specific in the quarter and how you see it trending so far in the Q3?

Speaker 12

Whoever wants to take that. Thanks.

Speaker 7

Yes, Doug, this is Greg. So as you mentioned, overall capture rates were pretty consistent with what we'd expect from a 1Q to 2Q move. I should mention from the earlier question, in the Gulf Coast, the coker was a positive impact, the new coker on capture rates in the Gulf. As you mentioned in the Mid Con, lower there, primarily due to turnaround activity, and you can see that in our lower throughput rates in 2nd quarter Versus the Q1. And then in the North Atlantic, we tend to always see a seasonal shift in the value of Canadian distillates Up in that market, strong in the winter and then coming off in the spring summertime.

Speaker 7

So that was one of the effects we saw there. Then the one that was a bit more unique To this particular period was just higher costs for Syncrude coming out of Canada, primarily Impacted by some maintenance and also the wildfires they had up there.

Speaker 12

And how is it trending in Q3?

Speaker 7

Yes, we're starting to see it moderate a bit, but it will take some time. That usually is not just a very short, short term effect, But we expect that it will start to improve.

Operator

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

Speaker 8

Good morning, all. Congratulations, Gary.

Speaker 13

Can Keep going a little bit with the outages. On the OPEC cuts, can you talk a little bit about the impact they've been having on markets from your perspective? The Mexican explosion was another obvious one. Just commentary on how disrupted the crude market is from a buyer's point of view right now. And I got you on Russia.

Speaker 13

You seem to more or less address that already through Doug. Thanks.

Speaker 5

Yes. So certainly, the big move in Crude markets has been the OPEC plus production cuts, 4,500,000 barrels a day off the market. And I think you're seeing that as global oil demand picks up and Those barrels are not yet back on the market. You're seeing flat price trend higher and you've definitely seen it in the quality differentials as well. But in addition to the OPEC plus There were a number of other issues that you mentioned.

Speaker 5

We had maintenance in Canada on the wildfires in Canada, the platform fire in Mexico. You kind of went from a seller out of the SPR to a buyer into the SPR. So all of those things had a significant impact on Quality differentials in the second quarter, and we're seeing some of those things start to reverse as we move into the 3rd quarter.

Speaker 13

Got it. And then on the outages In refining, can you talk a bit I mean, there was reports of lots of different things happening, not least because of the heat in Texas. Could you talk a bit about anything that happened with you guys in the quarter, but also how the industry perhaps was a perhaps throughput was a bit distorted

Speaker 7

Paul, this is Greg. I don't know that we can speak a whole lot to what What's going on elsewhere, our operations were very good for the quarter, good mechanical availability in line with Kind of our typical first quartile type of performance. So the weather has had Just a very modest impact on any of our operation.

Speaker 13

Got it. And then just finally a quick one. The 14% you talked about wholesale up Is obviously you're taking market share. It seems to be driven by your renewable fuels, right? Is that how do we explain the difference between your Strength of sales versus the overall market being way below that?

Speaker 5

No, that wouldn't include really what we're talking about On renewables, that would be strict strictly our U. S. Wholesale volumes. I think some of it was due to rationalization that

Speaker 14

occurred in the industry that allowed us to be more competitive.

Speaker 5

But we've gone That allowed us to be more competitive. But we've gone through and in many locations, renegotiated terminal agreements that just allow us to be more competitive In some regions where we haven't been historically and capture additional market share.

Speaker 13

Got it. Thanks very much.

Operator

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

Speaker 8

Great, thanks. Maybe a question on the renewable diesel side. I mean, can you talk obviously, very strong Can you talk about sales in the quarter, which were stronger than we had expected? Also had a very strong capture rate, which was much improved and certainly I think some benefit from fast pricing there. But can you talk about Sales, what are the drivers there, implications as we look forward to the back half of this year, both on sales and kind of margin and capture in the renewable diesel side?

Speaker 4

Yes. We definitely had there's always some timing of ships in our numbers for the quarter, but We do also have the unit running above its original design capacity. So, we are running higher rates at DGD3, As well as seeing strong sales throughout the world as we move into a lot of production moving into Canada with its new CFR That went live in July and then there's other states that are coming on beyond California. So overall, yes, we did see increased sales due to the combination of some timing of ships and then obviously we're running above design rates.

Speaker 8

And on the margin capture side, any general comments on What you're seeing, I mean, headline indicators have been falling, but your capture was much improved?

Speaker 4

Yes. On the margin capture side, we definitely saw fat prices lower in the second quarter. We saw waste oils become advantaged Again, so that improves a lot of our capture rate. If we talk a little bit about RINs and LCFS, those have been pretty much As expected, LTF market has been relatively flat. The EPA came out with its new RIN outlook and it was largely unchanged.

Speaker 4

But overall, that's mostly a product. Gary mentioned we've seen strong ULSD demand. That's The basis of the Formula Plus, I would say, more attractive fat prices as you already mentioned.

Speaker 8

Thanks. And maybe on a different note, with the start up of the Port Arthur Coker and the capital rolling off from that in terms of growth CapEx, You obviously have the SaaS project underway, but what types of projects might compete for growth capital going forward? Is it more likely to be Incremental SaaS capacity, are there things on the refining side that you're looking at, whether it's something to increase octane production or anything like that on the margin side They could compete for capital as you think about the next couple of years?

Speaker 2

Yes, this is Lane. So you can really expect us Continue to optimize and look at opportunities around our existing assets. We've been doing that. Some of them are big or flashy, but in cumulative, they'll have an effect Our overall performance and we continue to gate those just like we always have. And then this other side of the business, our renewable side, we're looking at The potential always to gate and develop innovative projects that are sort of in the transportation fuel space that leverage our operations excellence and our project

Operator

Thank you. The next question is coming from Joe Leche of Morgan Stanley. Please go ahead.

Speaker 15

Great. Thanks everybody for taking my questions today. So I want to go back to capture rate here. So we noticed just on the West Coast, refining margins were really strong during the quarter. Could you just touch on some of the drivers here and how we should think about the setup for the Q3?

Speaker 7

Yes, this is Greg. So on the West Coast, We had great operations out there. But really, the thing to note there is Benicia has a very, very high gasoline yield in terms of its products mix. So When gasoline is very strong relative to distillate products out in the West Coast, we see strong capture rates out there, driven by Venetia's yield. That's the primary

Speaker 15

Great. That's helpful. And then just my second one is just on OpEx and just the drivers higher OpEx in Q3 versus 2Q. Is that on the net gas side or how should we think about that?

Speaker 2

This is Lance. It's really driven by slightly a higher outlook for natural gas in the Q3 than the Q2.

Speaker 15

Perfect. Thank you.

Operator

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

Speaker 1

Hello, good morning

Speaker 16

and congrats to everybody on there. The new roles here. Hi, Roger. I'd like to hit the diesel question a slightly different way. Last winter, we saw So going back, I think you all addressed this on the last call, but what do you think The missing demand was last year from a weather standpoint.

Speaker 16

And so when we think about the upcoming winter and We always just model normal weather. So what will we potentially be looking at from a demand step up?

Speaker 5

Roger, we have modeled that, but I don't have the number in front of me and I don't want to give you a bad number, but we can follow-up with you With Homer and get you the number we had on heating oil demand.

Speaker 16

Okay. That's helpful. The other is We have, I think somebody mentioned earlier, seeing diesel move back up over gasoline. Can you give us an idea of how you've run-in terms of being max So these or I should say max distillate or max gasoline as we've been coming through this summer?

Speaker 7

Roger, we've been mostly in max gasoline mode, but we've been watching that movement between those two products. And we'll make that One of the things maybe just to keep in mind is on that swing cut, As you keep that heavier part of the gasoline in the gasoline pool, it pulls in more butane into the blend pool. And when you look at where butane prices are currently, that's

Speaker 16

Yes, NGLs are definitely a help and a hurt depending on which The argument here on there. Okay. Thanks, guys.

Speaker 8

Thanks.

Operator

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

Speaker 11

Hi, good morning. Congratulations to everyone with the new role.

Speaker 3

Ming, I

Speaker 11

have to apologize because I joined late. So if my question already been Just let me know and I will look at the transcript. Two questions. First, with the heavy oil And medium sour has also come down my mass discount. It doesn't seem like it's really that attractive Today, is it really possible for you guys to run those barrels?

Speaker 11

And if it is not, Is there any way that for you to further minimize that what is the minimum that you have to run? The second question In the law of Atlantic, is there any reason why the margin capture dropped so severely In the Q2, I mean, not just comparing to the Q1, but comparing to the last couple of years that you've been running, So you call it 100%, 95% to maybe 120%. And so is there any Hello, Jason? Or there is some one off unique circumstances that we are seeing? Thank you.

Speaker 2

Hey, Paul. Mr. Brand is going to answer that.

Speaker 7

Hey, Paul, I'll start with the first one on the different crudes. If I understood your question, we see incentive to run the heavy grades as well as the lights right now. Incentive to move to continue to process the heavy grades. The medium sours have probably been the one that have been least attractive, And we would need to see those be have a wider discount to the light sweet grades before we would start to make a shift there. On your question your capture rate question.

Speaker 11

Actually, before we go into the capture, can I ask that how much that you can Maybe further minimize on the medium sour?

Speaker 7

Yes. We can minimize quite a bit. Paul, one thing to keep in mind is There's different parts of the country, different parts of even the Gulf Coast region where the medium sours particular grades will still be attractive to run and we'll process those In the places where that medium grade is not as attractive, the easiest way to think about is in a lot of cases, we can run a combination of heavy and Lights to essentially kind of mirror what a medium grade looks like, but do that at a lower cost than buying the medium sour crude itself.

Speaker 11

Okay. We do.

Speaker 7

Okay. And then your capture rate, was that around the North Atlantic?

Speaker 11

North Atlantic. Yes.

Speaker 7

Yes, Paul, primarily the one thing that was unique about the Q2 was the higher crude cost. And again, driven by Higher prices for Syncrude out of Canada, both maintenance and wildfire related. That was probably the thing that caused That region to look different this quarter than it would typically for a second quarter period.

Speaker 11

But same crew is probably what, 50% 20% at most or for your entire More than 90 input, right?

Speaker 7

No, it's much higher than that, Paul.

Speaker 11

Oh, yes, much higher? So that your Quebec city is really running that

Speaker 7

Yes. Our Quebec refinery runs a combination of Canadian crudes and then waterborne crudes that we bring up from the Gulf Coast.

Speaker 11

Okay. We do. Thank you.

Operator

Thank you. The next question is coming from Nitin Kumar of Mizuho Securities, please go ahead.

Speaker 17

Hi, good morning all and thanks for taking my question. I just want to start with,

Speaker 14

Can you comment on the recent

Speaker 17

EPA decision to deny RFS waivers for small refiners? And how does that look for your ethanol business? I think you mentioned volumes were flat, but can you talk a little bit about pricing for ethanol?

Speaker 14

This is Rich Walsh. I can talk, I guess, a little bit about the E and K decision and then when it comes to pricing, I'll hand it back off to Eric Honeyman. I mean, we don't have any small refiner exemptions In play, and so it's a bit of a non factor for us. I mean, really not A lot more to share on it in that regard.

Speaker 4

Yes. And then as far as the commercial impact of that, it's a bit we see the same thing, bit of a non event. And we really don't know the compliance posture of those small refiners. So it's not we don't see a big impact

Speaker 17

Sorry, what I was actually referring to is On your commercial side, whether you were seeing any improved demand for ethanol,

Speaker 11

because those guys don't have

Speaker 17

the exemption. I guess I'll ask a different question as well. Just on the sustaining CapEx, you mentioned $1,500,000,000 for this year. Are you seeing anything on the regulatory That could increase that or increase the intensity of your sustaining CapEx in the future, thinking of things like stringent particulate emission Standards or anything like that?

Speaker 2

This is Lana. When you look at our history on our sustaining capital and some of these things, we are actually ahead of our competitors, So with respect to regulatory capital, we're in good shape and we're still willing Stick with our $1,500,000,000 of sustaining on average that doesn't mean it can ebb and flow really with turnaround timing.

Speaker 17

Thank you.

Operator

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

Speaker 18

The strategic vision has been very clear and consistent. We would just love your perspective as you step into this What are the 2 or 3 things that you're most focused on to take Valera to the next level?

Speaker 2

Hey, thanks Neil. So I mean, Jill and I really I worked with Joe on the strategy for the last 9 years. Obviously, Jill and I go way back before that. So it's not like I've been a part of the current strategy. It's been successful.

Speaker 2

I don't think you should expect us to deviate substantially from where we've been strategically. Lee, in terms of my areas of focus, I think the first area of focus is just making sure everybody understands exactly that, right? We are we have we've been very successful And our execution, maintaining our operations excellence, our ability to execute squarely and be great executed the projects. And I want to make sure That continues and I want to make sure that we stay disciplined, we stay predictable and those are all the things that I think I need to make sure what's going on for The foreseeable future. Now that I'm going to it's like Joe, keep working in this innovative project space, look for our opportunities to spend Our strategic capital and some of these opportunities that are around our assets whether they're Diamond Green or SAF or some of the other things that we obviously I've been ahead of everybody else and we think we can continue to be that company.

Speaker 18

Thanks, Lynn. And the follow-up is just around return of And just maybe you could provide an update. It was another quarter where you were able to return cash in excess The brackets that you talked about historically and how are you thinking about with the stock having done well here more recently, We'll continue to lean into the buyback versus reinvest back in the business and talk about the dividend as well.

Speaker 19

Yes. I don't think there's any revisiting of our approach to capital due to the current really strong performance. I'm sorry, with regard to like buybacks and dividend, we're going to continue our same approach as well. As far as going above our long term target of 40% To 50% return to shareholders, historically, back before the pandemic, we had been at the high end or above our target range pretty regularly. And then last year, we got back to the 45% midpoint of our range, while at the same time getting our debt back down to pre pandemic levels and building cash.

Speaker 19

So we got ourselves back in A good posture that we were comfortable with. And we would also say with that accomplished, we'd be at the midpoint or above going forward. In the second Quarter, like you said, we were up above our 50% range. We had a 50% 53% payout. Year to date, we're at a 52% payout.

Speaker 19

So this year, we've clearly trended above 50%. And going forward, as in the past, as I said back before COVID, this was an unusual circumstance We won't hesitate to pay out above the upper end of the range for the year, but we think that's the best use of our excess cash under the circumstances. On the dividend, we continue to have the same approach to it. We want our dividend to be positioned. We want our yield to be positioned competitive versus our peers.

Speaker 19

We We wanted to be growing and sustainable through the cycle. So that continues to be our approach on the dividend. That's how we'll set it and then the buybacks will continue to serve as

Operator

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

Speaker 20

Yes. Hey, thanks for taking my questions. First, I wanted to ask on the renewable fuel standard as well and The outlook for RIN prices and the impact to the business, there's a decent amount of concern that there's going to be an oversupply of RINs Next year and that has implications both for Diamond Green Diesel, as well as, on refining and the ability to capture Some of the pass through of the ring cost in the crack. So I was wondering if you have any comments Around your RIN outlook as it relates to impacts to both of those segments given some risk 2 RIN prices moving lower next year? And I have a follow-up.

Speaker 20

Thanks.

Speaker 4

Yes, this is Eric. On the RIN prices, The EPA held the ethanol requirement of 15,000,000,000 gallons, which as we've seen over the last several years is beyond the blend wall, which means The D4 RIN will be used to fulfill that obligation. Given our outlook, we don't see a big change in RIN prices or RIN supply. You see that is relatively business as usual.

Speaker 20

I mean, I guess if I could just Pushed back a little bit, there is a lot of new renewable diesel capacity coming online next year. So it does seem like there's going to be a lot more RIN supply. I don't know if that enters into your thought process as you look at next year.

Speaker 4

Yes. We're not going to speak on everyone else's projects, but we do see that a lot of the RD projects are taking Longer to come up and their projects are being slowed down. So our outlook is the expected growth curve of RD is not going to be as aggressive as A lot of predictions.

Speaker 20

Okay. Thanks. I appreciate that. And then my follow-up is just going back to the outlook On cracks and I think a lot of investors have been surprised at the strength we're seeing in cracks and so kind of 2 parts to this. 1, Do you think the kind of hotter than normal weather globally has supported diesel demand at all?

Speaker 20

You've Already mentioned that you're not going to comment on refining operations of your peers in the warm weather. So wondering if there's been a demand impact though from the hot weather? And then the second part is, can you talk about just given you mentioned inventory product inventories are low, The path forward to rebuilding those given the global capacity seems to be running all out. How does the world restock Gasoline and diesel, which are at or below historical levels? Thanks.

Speaker 5

Yes, Jason, this is Gary. I don't know that we can see that the warmer weather has caused a significant change in diesel demand. I think where inventories are low in the United States, we're seeing the same thing globally. Low diesel inventories and a pull from the United States into especially And the Europe very high, as a result of low inventories globally. Moving forward, I don't know really where the path is in In terms of restocking the inventory, you look, we're 35,000,000 barrels below the 5 year average.

Speaker 5

Last year at this time, we were 35,000,000 barrels below the 5 year average. So we really aren't making a dent in it. If you look going forward, yes, there's new refining capacity coming online. But when you look at The stated nameplate capacity, that new refining capacity and you look at the estimates of global oil demand growth, it doesn't look like a significant impact on the

Operator

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

Speaker 21

Hey, good morning. Thanks for taking my questions. Do you have any thoughts on the expected impact on RG margins in 2025 When the BTC converts to a PTC, as we look at it, it appears the dollar per gallon subsidy Would go down with the PTC, but then it seems like you might be helped out by just less competition from foreign RD imports. Does that make sense on your end? And is there anything else you would add there?

Speaker 4

Yes, I think you've got that surrounded. The one thing I would add is When you go to a carbon intensity basis for the PTC, that will advantage Diamond Green Diesel because we run the lowest CI feedstocks. So Whatever the PTC becomes, we will still have the highest capture of PTC versus our peers. So there's no doubt that it becomes a fraction of a dollar based on CI, but we'll still have the most advantaged platform.

Speaker 21

Great. Thank you. And then on the ethanol side, is an alcohol to jet SAF project still a long term possibility? And could you if so, could you compare that to What you're doing currently at DGD, like how did the 2 production techniques compare in terms of capital cost, operating cost, Scale and do airlines distinguish between the 2 different types of fuel?

Speaker 4

Yes, I think, yes, that's a lot of questions there. Well, what I would say is, so the first question of, Is there a pathway to take ethanol into jet fuel? The answer is yes, post sequestration. That is a it does allow ethanol to become a viable feedstock into that market. It's way too early to talk about numbers and capital and all of that from a project standpoint.

Speaker 4

But if you look at it from the airline standpoint, they do see that the 1st barrel of SAF that they will get ratably We'll be RD based. There is as that conversion goes through the RD markets, The next barrel could be from an ethanol source, but that's like you said, that is much further out there on the timeline. So, yes. And then if you look at in terms of is the technology there and is there a capability there and then will airlines differentiate This is an RD based barrel from a SAF standpoint, but a lot of work to be done first on How RD will price SAF into the market and then these are all much further down the timeline.

Speaker 21

Understood. Thanks for your comments.

Operator

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

Speaker 1

Thanks, Donna. Appreciate everyone joining us today and please feel free to contact the IR team if you have any follow-up questions. Have a great day, Everyone.

Operator

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

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