Greetings, and welcome to the Valero's Second Quarter 2021 Earnings Conference Call. At this time, all participants are on 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 Bohler, Vice President, Investor Relations and Finance.
Thank you, sir. Please go ahead.
Good morning, everyone, and welcome to Valero Energy Corporation's 2nd 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 I would now like to direct your attention to the forward looking statement disclaimer contained in the press release. 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 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. Thanks, Homer, and good morning, everyone. Our systems flexibility and the team's relentless focus on optimization in a weak, but otherwise improving margin environment enable us to deliver positive earnings in the second quarter. More importantly, cash provided by operating activities more than covered our cash used in investing and financing activities for the quarter. Even without the cash benefits from our 2020 income tax refund and the proceeds from the sale of a portion of our interest in the Pasadena terminal.
There was a significant increase in mobility in the 2nd quarter, driving higher demand for refined products, particularly in the U. S. In fact, we are seeing demand for gasoline and diesel in excess of pre pandemic levels in our U. S. Gulf Coast and Mid Continent regions.
Jet demand continues to ramp up as well and is around 80% of 20 nineteen's level. We responded with higher refinery utilization With the easing of lockdowns in the region, we exported 410,000 barrels per day of products from our system in June, which is the highest volume since 2018. Our Renewable Diesel segment continues to perform exceptionally well and once Again, set records for renewable diesel margin and sales volumes. Highlighting Diamond Green Diesel's ability to process a wide range The results of the consolidated feedstocks and Valero's operational and technical expertise. Our ethanol segment also performed well and provided solid operating income in the 2nd quarter as demand for ethanol increased along with higher gasoline production.
Carbon sequestration project with BlackRock and Navigator is moving ahead and has garnered strong interest from additional parties In the binding open season, Valero is expected to be the anchor shipper with 8 ethanol plants connected to this system. This project serves to help achieve our goal to lower the carbon intensity of our products, while providing solid economic returns. Our Diamond Green Diesel 2 project at St. Charles remains on budget and is scheduled to be operational in the middle of Q4 of this year. This expansion project is expected to increase renewable diesel production capacity by 400,000,000 gallons per year, Bringing the total capacity at St.
Charles to 690,000,000 gallons per year of renewable diesel And 30,000,000 gallons per year of renewable naphtha. And our Diamond Green Diesel 3 project at Port Arthur is also progressing well and is now expected to be operational in the first half of twenty twenty three. With the completion of this 470,000,000 gallons per year plant, DGD's total annual capacity is expected to be 1,200,000,000 gallons of renewable diesel and 50,000,000 gallons of renewable naphtha. Our refinery optimization projects remain on track with the Pembroke Cogen project expected to be completed in the Q3 of this year And the Port Arthur Coker project expected to be completed in 2023. Looking ahead, We have a favorable outlook for refining margins as product demand continues to improve with increasing global vaccinations and mobility.
In addition, there has been significant refinery capacity rationalization in the U. S. In the last couple of years And we expect further closures of uncompetitive refineries, particularly in Europe. We believe that product demand recovery, Coupled with significant refinery rationalization should be supportive of strong refining margins. We also expect See wider, medium and heavy crude oil differentials as OPEC plus increases crude supply, which should further provide support to refining margins.
And as low carbon fuel policies continue to expand globally, we remain well positioned. With the current projects in progress, we expect to In addition, we continue to explore and develop opportunities in carbon sequestration, Sustainable aviation fuel, renewable hydrogen and other innovative projects to strengthen our long term competitive advantage. So with that, Homer, I'll hand the call back to you.
Thanks, Joe. Before I provide our 2nd quarter financial results summary, I'm pleased to inform you that we recently published an updated stewardship and responsibility report, which now includes our Sustainability Accounting Standards or SASB disclosures. In addition to being on track to achieve our previously announced target to reduce and offset 63% of our global refining greenhouse gas emissions by 2025 through investments in board approved projects. The report includes a new target to reduce and offset 100% of our global refining greenhouse gas emissions by 2,035. These targets are consistent with our strategy as we continue to innovate and leverage our global liquid fuels platform to expand our long term competitive advantage with investments in economic low carbon projects.
And now turning to our quarterly summary. Net income attributable to Valero stockholders was $162,000,000 or $0.39 per share for Q2 of 2021 compared to $1,300,000,000 or $3.07 per share for the Q2 of 2020. 2nd quarter 2021 adjusted net income attributable to Valero stockholders was 197,000,000 or $0.48 per share compared to an adjusted net loss of $504,000,000 or $1.25 per share for the Q2 of 2020. For reconciliations to adjusted amounts, please refer to the financial tables that accompany the earnings release. The refining segment reported $349,000,000 of operating income for the Q2 of 2021 compared to $1,800,000,000 for the Q2 of 2020.
2nd quarter 2021 Adjusted operating income for the refining segment was $361,000,000 compared to an adjusted operating loss $383,000,000 for the Q2 of 2020. Refining throughput volumes in the Q2 of 2021 averaged 2 point 8,000,000 barrels per day, which was 514,000 barrels per day higher than the Q2 of 2020. Throughput capacity utilization was 90% in the Q2 of 2021. Refining cash operating expenses of $4.13 per barrel were $0.26 per barrel lower than the Q2 of 2020 primarily due to higher throughput in the Q2 of 2021. The Renewable Diesel segment operating income was $248,000,000 for the Q2 of 2021 compared to $129,000,000 for the Q2 of 2020.
Renewable diesel sales volumes averaged 923,000 gallons per day in the Q2 of 2021, which was 128,000 gallons per day higher than the Q2 of 2020. The segment set another record for operating income and sales volumes. The ethanol segment reported operating income of CAD99 1,000,000 for the Q2 of 2021 compared to CAD91 1,000,000 for the 2nd Quarter of 2020. The Q2 2020 adjusted operating loss was 20,000,000 Ethanol production volumes averaged 4,200,000 gallons per day in the Q2 of 2021, which was 1,900,000 gallons For the Q2 of 2021, G and A expenses were $176,000,000 and net interest expense was $150,000,000 Depreciation and amortization expense was $588,000,000 and income tax which was higher than our Q2 of 2020, primarily due to the remeasurement of our deferred tax liabilities, primarily as a result of an increase in the U. K.
Statutory tax rate that will be effective in 2023. Net cash provided by operating activities was CAD 2,000,000,000 in the Q2 of 2021. Excluding the favorable impact from the change in working capital of $1,100,000,000 and our joint venture partner's 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 $809,000,000 With regard to investing activities, we made 5 $48,000,000 of total capital investments in the Q2 of 2021, of which $252,000,000 was for sustaining the business, including costs for Excluding capital investments attributable to our partners' 50% share of Diamond Green Diesel and those related to other variable interest entities, Capital investments attributable to Valero were $417,000,000 in the Q2 of 2021. Moving to financing activities, we returned $401,000,000 to our stockholders in the Q2 of 2021 through our dividend, resulting in a payout ratio of 50% of adjusted net cash provided by operating activities for the quarter.
Earlier this month, our Board of Directors also approved a regular quarterly dividend of $0.98 per share payable in the 3rd quarter. And as Joe noted, we were able to cover all of our investing and financing activities, which includes our dividend and capital investments in the 2nd quarter, With cash provided by operating activities even without the benefit from the cash tax refund and the proceeds from the sale of a portion of our interest in the Pasadena terminal. With respect to our balance sheet at quarter end, total debt and finance lease obligations were $14,700,000,000 And cash and cash equivalents were $3,600,000,000 The debt to capitalization ratio net of cash and cash equivalents was 37%. At the end of June, we had $5,000,000,000 of available liquidity excluding cash. Turning to guidance, we expect capital investments attributable to Valero for 2021 to be approximately $2,000,000,000 which includes expenditures for turnarounds, catalysts and joint venture investments.
About 60% of our capital investments is allocated For modeling our Q3 operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1,600,000 to 1,650,000 barrels per day Mid Continent at 4 35,000 to 4 55,000 barrels per day West Coast at 250,000 to 270,000 barrels per day And North Atlantic at 450,000 to 470,000 barrels per day. We expect refining cash operating expenses in the 3rd quarter to be approximately $4.45 per barrel. With respect to the Renewable Diesel segment with the anticipated start up of DGG GD2, in the middle of the Q4, we expect sales volumes to average 1,000,000 gallons per day in 2021. Operating expenses in 2021 should be $0.50 per gallon, which includes $0.15 per gallon for non cash costs such as depreciation and amortization. Our ethanol segment is expected to produce 3,700,000 gallons per day in the 3rd quarter.
Operating expenses should average $0.43 per gallon, which includes $0.06 per gallon for non cash costs such as depreciation and amortization. For the Q3, net interest expense should be about $150,000,000 and total depreciation and amortization G and A expenses, excluding corporate depreciation, to be approximately $850,000,000 and the annual effective tax rate
Thank you. Ladies and gentlemen, the floor is now open for questions. Our first question is coming from Phil Gresh of JPMorgan. Please go ahead.
Yes. Hi, good morning.
Good morning, Phil.
Nice job in the organic dividend coverage despite choppy refining margins here. Joe, I know you touched on some of this in the opening remarks around the macro environment. June was obviously pretty tough. July is getting better here. What do you think needs to happen going forward to see sustainable improvement in margins back to more normalized levels?
Is it Just demand and differentials or do we need some of these closures you were referencing in your remarks, just any additional thoughts?
Hey, good morning, Phil. This is Gary. As you talked about, Joe talked about mobility increasing in the second quarter. We saw good recovery in mobility in the domestic markets and with the recovery in mobility we saw on road fuel demand basically recovered to pre pandemic levels. The issue we really had in the second quarter was the pace of recovery in the U.
S. Was just much faster than what we saw in most of the other major demand centers throughout the world. And so where our margins started to track up as demand improved, Eventually, our market began to dislocate from the global markets and we incentivized imports. And so we saw very high levels of imports later in the quarter, Caused inventory to build and as inventory built, we eventually saw margin disruption. I think the good news for us as we go into the 3rd quarter Is that at least the markets we have good visibility into, we're seeing mobility increase in those markets like we did in the U.
S. In the second quarter. With the increase in mobility, we're seeing demand take off quite nicely. We certainly see that in our Canadian markets in the UK and the markets we go to in Latin America. I think that's what you really need to have sustained margin recovery is the global market global demand to pick up.
So thus far, in July, we've seen margins that are better than we saw in the Q2. And so that's certainly encouraging. Then on the crude side, you talked a little bit about the differentials. I think you know to see meaningful move in the differentials, we need OPEC barrels back on the market. Of Course, it was good to hear OPEC plans to put 400,000 barrels a day back out on the market sometime post August.
And I think to some degree, the markets are already reflecting that. If you look at the heavy Canadian differentials in the Gulf today, The 4th quarter has about $0.75 wider discounts than what we see in the prop market. Again, that $0.75 wider discounts in the face of Backwardation in the Brent market. So if you look at that discount as a percent of Brent, it's a fairly meaningful move that we would see as we get later in the year.
Got it. Okay. Thanks for that color. I just want to switch over to renewable diesel for the second question. The indicator margins We're down sequentially, obviously, because of the soybean oil based indicator.
Regardless, you put up another record quarter there, Up sequentially, again, presumed from the advantaged feedstock benefit. But how do you see the sustainability of this trend? Were there any transitory factors in the quarter or structural things you're thinking about moving forward?
Phil, this is Martin. I think if you step back and just Think about our renewable diesel segment, right? Our refining expertise has been a critical component to the development and operations of renewable diesel and ultimately The success of that business, you have to also keep in mind that we were an early mover in the space and have accumulated decades' worth of knowledge, which is A lot more than almost all of our peers. Our operating reliability has been very good and that's helped differentiate Diamond Green. We also use the same reliability processes at renewable diesel that we have applied to our refining system.
And then finally, structurally on the pricing, Diamond Green as well as other producers, you would expect them to have stronger results when prices are going up, the RIN price, the LSD price going up, Because that value you see immediately and there's going to be a lag in the cost of sales on the feedstock. So with this increasing price environment helped us somewhat.
Got it. Okay. Thank you.
Thank you. Our next question is coming from Doug Leggate of Bank of America, please go ahead.
Thanks, fellows. Good morning. Let me also add My observations are on the cash flow numbers. Sorry, I've got a phone number. I didn't expect to go second in the queue.
All right. Hopefully, you can hear me okay. Joe, the or maybe Jason for this one. On the cash flow, obviously, as things improve in the second half of the year, you've shown us The cash coverage is going to be there, but you still have the cash return commitment to investors, Well, your balance sheet is somewhat elevated. So can you walk us through how you will prioritize the incremental cash returns, let's see, over the next Year or so.
Will the balance sheet take priority beyond dividends? That's my first question as a follow-up, please.
Okay. Yes, sure. I'll be glad to talk to you about it. As Joe said, this quarter was a big step change for us in a couple of ways. We made money The first time we had enough cash to cover all of our needs.
So that's a great place to be in and we're glad to be back there again. We did put on the $4,000,000,000 of debt last year and we have said as things normalize, it will initially focus on 2 things. 1st, building our cash balance back up to $3,000,000,000 plus in that range and then second, starting to work to get our leverage down. So our June 30 cash balance was about $3,600,000,000 so we're in line there. We're in a pretty good spot and we're starting Working on the second prong, which is looking at our debt repayment.
We said a few times before, we would look at redeeming the strong 3 year floaters that are callable as early as this fall, so that would likely be our first step and that's still true. That's definitely something We're looking at it. And then as we move forward further into this year and beyond that, we'll continue to look at other liability management opportunities. And as earnings and cash generation continue to normalize, as you said, which is the way we hope things continue to move, we'll have increased optionality the more cash we have. But maintaining our credit ratings is also a priority for us and we're targeting to have a net debt to cap around 3 times in a normalized environment, But to get more to your question, we also still remain committed to our capital allocation framework.
Our Shareholder payout ratio was 50% this quarter and we continue to target this 40% to 50% ratio on an annual basis. We do expect to be able to meet that as we move forward through the recovery in Beyond, even as we work on our deleveraging strategy. So we think we're going to be able to do both of them, would be your answer. We're not certainly not going to have to sacrifice the dividend, and I don't think we'll have to sacrifice the target, the 40% to 50% target either. Yes.
I guess I was thinking more about the discretionary beyond the dividend, but Jason, that's a very full and clear answer. So thank you for that. Joe, I wonder if
I could bring it back
to you. I don't know if you want to take this or someone else, but in your prepared remarks, you talked about The perennial prospect of refinery closures ex U. S. I guess specifically, but These are typically triggered by capital events, turnarounds, things of that nature, as you know, for the more vulnerable refineries. I'm just wondering, the fact that you were prepared to prove that in your prepared remarks, do you have any particular thoughts or insights or What visibility that's giving you some comfort that it might happen this time around at an accelerated pace?
And I'll leave that. Thanks.
No, Doug, that's a good question. And I don't think we've got any particular insight that anybody else doesn't have into Specific assets, I think we can all look at them and say where the vulnerabilities are. I know Lane has spoken about this many times. You just want to share your thoughts?
Yes. I mean, Doug, how we think about it is we think about regions that have, what I would say, structural disadvantages and we've talked about them for Europe, it's the East Coast, U. S. West Coast and it's Latin America and they all have slightly different reasons for their disadvantages. The reason we focus on those areas is a flange up or we have operations in those areas and we think about how those Areas will change over time and how we will respond to it.
Obviously, when we have operations in those areas, we stress test and we try to understand the cash flow That we did our assets generate through an entire economic cycle. And as you alluded to and we've said before, the things that drive assets Are these big you start with you have an issue whether it's trade flow or reliability or whatever and you layer in Chunky capital, whether it's regulatory capital or a big turnaround, that's when these assets really fall that Operator start to think about what they're going to do. And as Joe said, we don't sit there and this refinery over here or this refinery over there. We just sort of think of it regionally And where we think those issues and work closures might ultimately happen.
Appreciate the answers, fellows. And I assume the Valero portfolio is
We always work very hard to make sure that we maintain our ongoing competitive advantage in all the markets that we operate.
Touching on DGD again. Just in light of the very strong profitability we've been seeing for many quarters in a row, Given that LCFS credit crisis have seen some volatility and faltering recently, how do you see that
The credit bank in California has been pretty stable now for 5 quarters. But the other thing is, if you think California, We haven't seen any data from them since the end of 2020, right? So there's a lag. Tomorrow, we'll actually see the Q1 data. So you might see, but it's And then the other thing that I think you have to think about, do we worry about that too much?
Not really, because If you had something that happened where there was a prolonged shift where the price went down in California, I'm pretty sure the response My carb would be to move the goalpost to actually raise the carbon reduction targets because they have signaled several times They're pretty content with the $200 type per ton carbon price. So we would just expect Quicker carbon reduction if there was a long term shift in that price, which would then raise the price back up.
Got it. That makes sense. And then on the broader renewables front, I wanted to ask about your endeavors there, many You have under development and specifically on renewable hydrogen, what kind of projects are you planning to do there?
Hi. So this is Lane. So what we're doing there, again, is in our St. Charles and Port Arthur refineries. As those projects flange up to our Diamond Green Diesel projects, We look for ways to essentially make renewable hydrogen from the LPGs that come off those units and then turn to get them into an SMR Then the hydrogen go back and lowers the carbon intensity of the product out of both of those units.
Thank you.
Thank you. Our next question is coming from Roger Read of Wells Fargo. Please go ahead.
Yes. Thank you. Good morning.
Hi, Roger.
I guess I'd like to come back maybe to the first kind of question or first discussion there with you, Gary, as you were looking at The way things are improving, we've definitely seen inventories come down hard in the Europe market. And I was Wondering as you look at that, as you look at the mobility improving in some of those areas, what is the what would be the expectation for imports over the next, I don't know, let's just say 2 to 3 months to keep it a reasonable timeframe and what that could mean for Margins potentially being measurably stronger in Q3 than they were for at least the end of Q2.
Yes, Roger. So I think I'd point to as you know the arb to import gasoline from Europe has really been closed most all of July. And so that's been encouraging to see. I think the last set of DOE data is really the first time we saw reflected in the data imports falling off. But it really has more of an impact than just the imports because we've also seen that we're again much more competitive in the Latin American markets.
Not only was Europe exporting the United States, but they were pushing into Latin America and Causing us to lose some of the exports we typically send to that market. But as things have picked up in Europe, they're not only not sending barrels to the U. S, but we're Seeing our exports ramp up into Latin America, so what I would say is more normalization of trade flows, which will help inventories continue to draw and support Better crack spreads.
Great. Thanks. And then the other question a little off the typical beaten path here, but You're obviously moving aggressively, more expansions in renewable diesel as we've seen. A lot of talk about sustainable Aviation fuel is one of the areas. I was just curious, is there anything you're looking at in that front?
Are the economics of sustainable aviation as Tractive is renewable diesel as you look at them? And then what would be the, I guess, to some extent interchangeability between Renewable diesel and sustainable aviation fuel.
Yes. So this is Martin. If you look at that, Roger, To make renewable jet or SAF, you have to have some additional equipment. I mean, there's a few ways to do it, but you're either going You're probably going to add a reactor and you're certainly going to add the fractionator. So that's additional capital.
And then that what's your yield pattern changes a little bit where you make So at the end of the day, to get back to equal to renewable diesel, you're going to have to get some help on the SAF side with some additional Pricing mechanism and additional green premium there. So right now, we don't see the economic incentive to make SAF. That being said, obviously, we're studying it. We're looking at everything. We're looking how the landscape changes, what's It's going through in all parts of the world and legislative processes or regulatory processes.
So we'll keep watching it and we fully expect to be making it at some So I don't think it's a question of if, but it's more about when.
Thank you.
Your next question is coming from Sam Margolin of Wolfe Research, please go ahead.
Hi, everybody. How are you doing?
Hi, Sam.
My first question is for Martin. If I could ask you to go into a little bit more detail about that yield comment you made At DGD, just given the per gallon value of all the different credits flowing in, a yield outcome is very powerful. So If you're able to, can you just give a little more detail around that and how sustainable it is and whether how far off sort of your Plans you are in terms of yield outcomes and production efficiency?
Well, Sam, I would say our yield is right on track with What we expect, the and it's really not so much the yield, it's more just about the timing. We've been in a market with a huge increase in ULSD price, a huge increase in the RIN Year to date and fat price has also been up, but you've had a bigger escalation in the RIN than you've had in the fat price. And we've also been helped by the discount, our feedstocks by running the 100 percent waste feedstocks. We're certainly buying at a price significantly lower than soybean oil. So what I'm saying on the timing is just in a rising market like that, you're going to immediately See the ULSD price and your revenue, you're going to immediately see the RIN price.
And there's just a lag in the feedstock Price and hitting cost of goods sold. So you're going to see a little better margin environment and rising prices.
Hey, Sam, this is Lane. I'll add to it a little bit. We have been working with catalyst suppliers in terms of improving the yield Of the current units and essentially trying to maximize renewable diesel versus LPG versus naphtha versus some of the off gases. So we have seen our yields improve over the life of or sort of our overall operating experience from 2013.
Okay, understood. Thank you. And then Joe, in your prepared remarks, you had a comment about light heavy differentials Potentially bottoming and starting to expand here as OPEC volumes come back. I think I'm still looking at the Sulfur penalty, it's still very wide. Is there a signal around high sulfur fuel oil discounts and what that means for when actual supply of Sour expands, is the expansion of that advantage going to be faster than normal?
Or are you still thinking about it as kind of the normal relationship between Kind of supply versus differentials?
No, I think some of the movement you've seen in high sulfur fuel really 2 primary drivers on high sulfur fuel 1, just the prospect of getting more OPEC barrels onto the market caused high sulfur fuel to weaken some. And then some changes in the tax policies in China caused them to kick out some high sulfur fuel blend stocks, which caused high sulfur Fuel to move weaker. Today, it's one of the more economic feedstocks we're running in our system. High sulfur fuel and high sulfur fuel blend stocks
Our next question is coming from Neil Mehta of Goldman Sachs.
Yes. Good morning, everyone. The first question here is just is probably for Martin on the ethanol side. You had strong results at that business segment. Can you just talk about what you think the sustainability of this ethanol recovery is and the moving pieces from feed
Sure, Neil. Yes, I mean, 2nd quarter was obviously really good. And if you look at the Weekly inventory data in the second quarter, what was happening through most of the quarter is the inventories just kept drawing. And Typically, when inventories draw, you're going to get a better margin and it's pretty good correlation there in the U. S.
Ethanol industry. So when we But the weekly data now in June starting into May and through June, we've seen that turn the other way. So margins now are lower than they were in the Q2. How long is this going to last? I'm not sure we're starting to see some run cuts in the industry now.
We've signaled some lower guidance for Q3 on runs versus what we did in Q2. So we'll see where I turn. So I mean really what we're looking at long term though in ethanol is carbon sequestration and we feel like that It's going to differentiate us from the industry between the 45Q tax credit that's worth about $0.15 a gallon Getting into LCFS markets, that's more like $0.50 a gallon gross. So we're well positioned there with what we're doing with Navigator and Black And then we're also looking at some stand alone projects at our Eastern ethanol plants for carbon sequestration. So that's really our end game is
Yes. No, that's great. And then the follow-up is just a big picture question and I don't know if this is for Joe or Lane, but As I think about the demand side of the equation for both gasoline and diesel has come back really nicely. Obviously, we're still waiting here on Global Jet. Margins until recently didn't perform.
It just strikes us that the refining system in the United States was Running too hard ahead of product. Do you believe that discipline in the U. S. Refining system Has broken down or do you see that as still a structural tailwind for the space that independent refiners will generally run at relatively low level So the utilization relative to demand enabling favorable inventories is a big picture question, but one of the structural benefits certainly The refiners over the last couple of years has been the discipline around runs.
Yes. So, Neal, this is Lyan. What I would say is Independent refiners will be much more disciplined than the industry was a decade ago and it's just because we at the end of the day, we have to manage our assets To cash flow and to make money, I think what you've seen, there was a clear signal in April May to raise utilization. It was a big The markets were signaling that what really happened and Gary talked about it earlier is it was just a bug light, right. I mean, the U.
S. Recovered, We were out, our mobility had gone way up and it attracted imports from areas that were still essentially in lockdown. So you had surplus capacity in Europe And some of these other places that attracted imports. I wouldn't say that the United States was refining industry had gotten lack of discipline. It was operating for the signals.
It was really to make issue that we have. There's capacity out there that essentially could get pointed to the U. S. And as some earlier caller mentioned, The European fundamentals look better. So today, what you're seeing is even though margins are up, we're not really they are as close to the United States coming out of Europe.
Our next question is coming from Paul Cheng of Scotia Howard Weil. Please go ahead.
Hey, guys. Good morning. Good morning, Paul.
Couple of quick questions. Maybe this is for Gary. Gary, Mexico, The recent action by AMLO, does it cause any concern from you guys' standpoint and whether it will Slow down your investment in the near term to take away and see attitude or that you think it just Continue to be business as usual and you will push forward. And with the maybe elimination or cancels Large number of the import and export lines, have you seen the market dynamic change there? So that's the first question.
The second question is for Lane. Just curious, I mean, you guys and the industry have done a remarkable job In changing the our debt to use the flexibility of the system, refining system to run different type of crude Over the last several years, even for Gulf coal heavy oil refiners shipped substantially more to the light. And during the pandemic, Substantially reduced jet fuel and even distillate and trying to get into gasoline. But a lot of times that, that deway from the design standard model. So along that way, while it's Doable.
Have you seen any inefficiency or any cause create as such that the margin capture become Maybe perhaps a bit worse off. Thank you.
Okay, Paul, I'll start and if Rich Walsh wants to add anything to it, I'll let him end on Mexico. Really, our strategy is unchanged. The one thing I would say is we're not really investing in Mexico. We partnered with IEnova And others that are really making those investments and then we sign long term agreements to utilize the assets that they're investing in. But overall, I think the strategy that we're using in Mexico is what they had intended when they started energy Reform.
They wanted to see investment in infrastructure in their country and a lot of others are really not doing that, kind of taking advantage of the legislation. We are investing in the country and I think what we are doing in Mexico is exactly what was intended with the change in the regulation. So our strategy is still very much intact. Veracruz is fully operational now. We have our terminal in Mexico City was commissioned during the Q2.
We will commission our terminal in Puebla In the Q3, we've also started to bring jet fuel into Veracruz and we'll start jet fuel sales in the Q3 as well. So Things are going very well for us in Mexico. Rich, I don't know if you want to add anything.
I think that sums it up.
All right. So Paul, to answer your second question, The industry did, I think, at least particularly we, I would say Valera learned a lot going into the pandemic in terms of how to operate our refiners maybe differently And actually demonstrated more flexibility as you would expect us to figure out how to operate. I think in terms of margin capture, what you'll see is Coming out of it is going into it, we had contango, right? So as you there was structural contango in the crude markets And as we're coming out of it, we've gone flat to slight backwardation. So I think what you'll see kind of moving ahead, you have a combination of Slight backwardation and obviously high flat price will cause some of the byproducts to maybe have some margin capture We'll affect margin capture.
It really affects so much our ability to generate EBITDA as much as we think in terms of margin capture. In terms Of anything that's happened post pandemic, if anything, we just learned a lot more about how to manage our Business even more carefully than we had before.
All right. Thank you.
Thank you. Our next question is coming from Manav Gupta of Credit Suisse. Please go ahead.
Hey, guys. Just They're taking within Valero. And also wanted to congratulate you, Joe. We know the capital discipline and shareholder returns are 2 strong pillars on which you have to build this new Valero. So it was personally very important for you to achieve full dividend coverage.
And so congrats on getting there despite a tough macro.
Yes. No, thanks Manav. And John and Homer are both going to need a lot of luck.
My quick question here is, Lane or Joe, is we have seen North Atlantic here actually Sometimes outperform your Mid Con, do very strong. And this quarter came in a little weaker. I'm hoping it was just a turnaround. And it's nothing to do with that one of the refineries is located in Europe and Canada. And just if you could give us some color on why North Atlantic was slightly weaker quarter over quarter?
Yes. So you actually you hit the main issue. Both refiners are actually in turnaround in the Q2. Their results were affected by that.
Okay. Thank you for taking my question.
Thank you. Our next question is coming from Ryan Todd of Piper Sandler. Please go ahead.
Thanks. Maybe one on You announced that you moved at the time into the Diamond Green Diesel Phase 3 startup from the second half to the first half of twenty twenty three. What's allowed you to accelerate that? And then maybe can you talk about The general environment out there, I think most people probably would have taken the over for most of the capacity expansion start dates out there. I guess within that overall environment, what are you seeing that's allowing you to kind of execute better than expected on your projects?
Sure. This is Martin. I think one thing you have to remember now is DGD III is pretty much a carbon copy of DGD II, so that helped us. I mean, all the major equipment, we changed a little bit, but just tweaks. So we had a lot of the engineering done sooner than you typically would have.
Now, obviously, we knew that when we funded it, but just getting out in the market, while steel prices and everything were up, we kind of beat All that to the market. So we had placed orders before that happened. The delivery is good. I mean, the shop Space is there, the labor situation is really good on the Gulf Coast where we're building. So all those things and then just Having experience, we moved over experienced contractors from DGD-two that had just built one of these units.
So All the work, the structural work, concrete work, structural steel is already going up. So we just got a really quick start out of the gates And we expect to be able to maintain that. So I'd say in a nutshell, that's it, an experienced construction team and getting out in
This is Landon. I want to emphasize what Martin just said. I mean part of what We're able to do here is it's not just really in this space, but we have a really good project execution group. And they just we're in the process of building Diamond Green 2 and we learned and it's actually accelerated and brought in its schedule. So we just took all that and transferred to And this just sort of speaks to our capability to not only operate well, but we can execute projects very well and in this Not just in our refining space, but also in the renewable diesel space.
Thanks. I mean, congratulations on it's pretty impressive though. Maybe a separate question on RINs and the RVO. I mean, there's been obviously a lot of noise lately, a lot of volatility in those markets Following the Supreme Court's ruling on SREs and with the upcoming RVO, any with yourselves involved now in a material way on both sides of the issue, on the gasoline side and on the biofuel side. Any thoughts as we head into how you think the ETA is going to try to balance things or how you look at the market playing out with RBOs in the over the next couple of years?
This is Rich Walsh. I'll take a crack at that. There is a lot of noise on this, but when you really Sort it all out, it comes down to EPA is going to have to issue these RBOs. They're clearly kicking them out to get past a lot of the infrastructure discussion and Not to have this issue rear up in the middle of their efforts to try to push forward their infrastructure bill. So We would expect that once you kind of clear this, EPA is going to have to issue an RVO.
We're almost all the way through 2021. By the time they could get a rule proposed and out, the year is almost going to almost certainly be past it. So you're looking at maybe a 2021, 2020 2 combined rule or at least coming out at the same time. And I think that will and the other reality is they recognize that they need to set an RVO that's achievable and obtainable. So we expect them to do that.
On the SREs, the Supreme Court ruling really focused on only one issue was appealed up and That was on these continuity of the SRE ruling. The other aspects of the 10th Circuit ruling that kicked those SREs back to EPA You know, are still there and EPA has got them back under and they haven't issued an SRE since 2018. I think the prospect for SREs probably doesn't really change with the Supreme Court ruling and the EPA still got a whole host of other issues that they have to Sort through that came out of the 10th Circuit ruling that was still that still stands. And so, How do you guess what's going to happen on this? I mean, the reality is they've just got to set an attainable and achievable mandate and that's what they'll have to do.
I want to follow-up on Martin's response On the LCFS question, Martin, I think you said that you expect CARB to move the goalpost to keep Credit price is around 200 a ton. So just two follow ups on that. 1, mechanically, do you know how that would work? Does CARB have unilateral authority to do something like that? Or do they need legislative approval?
Or is there like a public comment period? And then 2, what would you expect the refiner response to be if that happened? Just thinking about Valero, you have 2 refineries in the state Are incurring LCFS costs or some other refiners in the state that currently don't have RD production. So is that something that refiners Would fight, could they fight it, any more color there?
Well, what's different in with the CARB regulations and with the CFS to answer your last question first. That obligation goes down to the rack so that the price is passed on For the refiner in California, which is a contrast to the way the RFS works. So that's I wouldn't expect to see a fight from the refiners on that. The other question is more interesting. Carb has there's been several statements out there about moving the goalpost.
Now to answer your specific question, I'm not sure I can What is required there, we're going to do a little looking into that. But my understanding is they have the ability to do that, but we'll have to check on that.
Yes, I mean that's
Great. Thank
you. I'll leave it there.
Our next question is coming from Jason Gabelman of Cowen. Please go ahead.
Hey, morning. I wanted to ask on 2Q, 2 aspects that could have been transitory. First on biofuel blending and there was some thought that Maybe blending biofuels instead of buying RINs minimizes The cost of RINs you incur, but it's unclear if the actual sales and costs flow that way or not. So can you just Kind of elaborate on if you're still seeing the same benefit from blending, as you historically have in that It avoids having to go out and buy out RINs or are you incurring some costs that is similar to having to go out and And then the second question also on kind of transitory items on the co product Impacts on 2Q. Are those headwinds dissipating and turning into tailwinds as oil prices are declining?
Or are different products moving in different ways? Thanks.
I think on your First question, whether you're out buying the RIN or doing the blending, you're kind of achieving the same thing. So the market price is Price of the RIN is what it is. So either way, I'd say you get to the same result.
Yes. On the second question, There are byproducts that we make in the refineries that don't move lockstep with crude price, things like asphalt, pet coke, sulfur, LPGs. In the long haul, they do. It takes a longer. In other words, once crude moves up or moves down, they have a tendency to sort Take longer to get to their equilibrium state with crude.
So you'd expect it for whatever reason if crude prices were down, those would improve. I don't know that we don't We're not speculating that prices will be down for the entire quarter, but that is how it works.
Sorry, can I just follow-up on that first answer quickly? Is that to say there's no real benefit from going out and blending biofuels versus buying RINs? Because I was Under the assumption and if you're blending biofuels, you're sidestepping buying RINs and there's kind of an embedded benefit in doing that?
Well, I would say there's a benefit, right? I mean, you can't I mean, obviously, everybody just can't buy RINs. You're going to have to move the bio So certainly, we're looking at both sides of that equation. But if the market is functioning properly and people are certainly, There's people that have to meet obligations, so you're going to have some blending. And in a properly functioning market, I'm just saying you're going to get to the same place, but you're going to do both.
All right. I'll leave it there. Thanks.
Thank you. At this time, I'd like to turn the floor back over to Mr. Bohler for closing comments.
Thanks, Donna. We appreciate everyone joining us today. Please stay safe and healthy, and Feel free to contact the IR team if you have any additional questions. Have a great day, everyone. Thank you.
Ladies and gentlemen, thank you for your participation.