First of all, thanks, Joe, Lane. Thank you, and the entire Valero management for coming to Vail. It is tough times, but thank you so much for coming up. When you show up, you tell the world we are open for business, and I think that matters a lot.
Yeah.
With that, I would let you present, sir.
Thank you. Thanks, Manav. Thanks, everybody, for coming. Interesting period, huh? Awful week last week. But the sun is shining, and the sun will shine again. It is hard to figure out how serious this coronavirus deal is. We can talk more about the effects we have seen on our business, and we should do that. But it just seems like we are living in a world today where everything gets over-hyped. IMO was probably over-hyped. This coronavirus thing may turn out to be a real serious issue, but right now, it does not seem to be all that bad, but we are reacting like the world is going to end. Then we got the political situation. We have got Chinese tariffs. We have got Venezuelan sanctions, Iranian sanctions, OPEC cuts. Let us try to figure out something else that we could throw on top of this to make the markets more challenging to deal with.
But that is where, in my opinion, a company like Valero, who has an incredibly good management team, we can maneuver through these kind of challenges. Very important. So with that, okay, here is my message to you guys. Do not get discouraged. The sun is going to shine again, and what you have in front of you is an incredible opportunity. We are trying to figure out how we are going to take advantage of it, and you guys should be doing the same thing. So with that, I will go through a disclaimer that says nothing I say really matters. But you guys have all seen this, the safe harbor statement before, so I will not go through that. But who are we? Well, we are a large refining and renewable fuels production company. We are the largest global independent refiner, and we have got the largest renewable fuels business in North America.
We have three reporting segments, and that is what you see here. You see our Refining segment, which I am sure most of you are familiar with, our Renewable Diesel segment, which we continue to invest in, and it continues to grow. Then we have our Ethanol segment. We are the second-largest ethanol producer, I believe, in the United States, with about 112,000 bbl a day of production. Here is our geographic footprint, and you can see that we are geographically diverse. The teal-colored states or blue-colored states are those that we have a marketing presence in. Where you see the logo, that is where we have a branded marketing presence. You can see we have significant refining capacity all the way from the West Coast, concentration in the U.S. Gulf Coast. We have our Mid-Continent plants, and then we cover the Atlantic Basin out of Quebec City and Pembroke.
Then you can see now we have added the pipelines and the ethanol plants in there also. We have the markets covered pretty well. Globally, we have the markets covered out of the Gulf Coast. This is our very simple strategy that we have consistently executed now going on six years. It has three components to it. One is being the best operator in the business. We focus on operational excellence above all else. The second thing is continuing to invest in high-return projects that allow earnings growth. Then the third is our commitment to our stockholders, and we do this through our disciplined capital allocation strategy. These things are very easy to explain. They are just hard to execute. What I will show you here now over the next several slides is what we have done.
This is the capital allocation framework that we put in place, I believe it was in 1984. Or excuse me, 2014. I sounded like Joe Biden there for a second, didn't I? Sorry, Joe. 2014. But the overriding constraint here is to maintain a strong balance sheet with an investment-grade rating and a debt- to- capital that is very manageable. Then we have our non-discretionary use of cash, which goes to sustaining CapEx, and then the dividend. Those are things that we will use that strong balance sheet to defend. Then we have competition among the remaining cash flow that we produce among growth CapEx, acquisitions, and cash returns. This framework has worked for us during the really good times where we had really high margins. In the more challenging times, we were operating at margins that were around mid-cycle or below.
We are very confident of its ability to be applied, and we will adjust between these components, but that framework is what guides us. How have we done on that allocation framework? You can see by the bar charts on the left, you can see what we have done with the dividend, and you will note that that bar has continued to increase. You can see our sustaining CapEx. Those have been pretty consistent over the years. Our growth CapEx have come down some over the last five years. Then our buybacks, and our buybacks vary based on the free cash flow we produce. We always say that the buybacks essentially are the flywheel that we use to allocate cash under.
If you see the pie chart there on the right, you can see the allocation between our sustaining CapEx and our growth CapEx with the target, again, of $2.5 billion a year. We say that generally, $2.5 billion is a number that we are comfortable spending year in and year out. It is essentially what we do. This is our commitment to cash returns to our shareholders. You can see how we have done on the buybacks. We have brought down our absolute share count in a significant way, and we have had a steady increase in the dividend over the years. The dividend yield that we are looking at here is extraordinarily high, I would say.
If you would have told me we would be at a 5.5% dividend yield early in the year, I probably would not have believed it, but with what we have had happen over the last week, it has created an incredible opportunity for an investor who is looking for yield, because this dividend is very sustainable. Anyway, that is what we have done on that front. Operationally, safety and reliability are something that we focus on constantly, and our personnel safety stats here are something we are very proud of because we work very hard at it, and we had the best ever employee safety results in 2019. If you look over our Tier 1 Process Safety, it continues to be excellent year in and year out. If you look at these stack charts down at the bottom of the page, this is how we stack up relative to the peer group.
Well, it is really the 84 refineries, I think, that are out there that are evaluated by Solomon every year, and you can see how we stack up. We are first quartile as an entire portfolio in many of these categories, which is pretty impressive when you get down to it, because we have 14 or 15 refineries that are included in that group. The more of our refineries that are first quartile makes it more difficult for the others. So, you can see we have done well, and maybe one of the key things to look at here is the consistent improvement that we have had in our personnel and our maintenance and our non-cash OpEx and so on. Every year, we continue to focus on improvement here, and you can see how we have done over a 10-year cycle.
It is pretty impressive, and that is a real tribute to Lane and his group. Reliability. Those things we just looked at and the capital that we spend every year on sustaining CapEx lends very well to having strong and high mechanical availability. Again, this stack chart you see with the quartiles on the left, this is how we stack up in the Solomon survey. Again, that is our entire portfolio of assets. Some are better than others, but overall, they are all very solid and we have had good results. If you look at this bar chart on the right, you can see that this relentless focus that we have on being the low-cost operator continues to pay off, and we continue to have the lowest cash operating cost among the peer group.
And obviously, in a market where you oftentimes are working very hard because the margins aren't very high, you have a situation here where being the low-cost producer is a true competitive advantage. And we're low on cash operating costs without cutting back on our capital expenditures, our maintenance CapEx. We don't short our plants on maintenance. Anyway, we're in a good place there. Now, another thing that we feel we're advantaged on. I don't know if that's me getting chimed or, "Oh, can you bring home salmon tonight?" I do feel like Joe Biden. Sorry about that, y'all. Anyway, advantage crude supply. We used to have, and you guys, probably many of you remember this chart. We used to show our crude supply in the Gulf Coast and the Mid-Continent.
With the way that the markets have shifted here, we feel it's more relevant right now to show our Gulf Coast refining capacity. And you can see that Valero has the largest throughput capacity of any other refiner in the U.S. Gulf Coast. Then if you look here on the chart on the right, you can see very clearly the ranges of feedstocks that we can run. And we have tremendous flexibility within the system to adjust, and that's been so critically important with the market being the way it is and the things that I mentioned earlier. You've got very low supplies of medium sour. You've got heavy sour, where the discounts haven't been there. You've got an abundant supply of light sweet crude, which is really great that we added those two crude topping units a couple of years ago.
We have tremendous flexibility to adjust to what the market is giving us. And we can talk more about that later, and I'm sure Lane will be answering questions on feedstock supply here in a few minutes. Okay, this goes to the point I mentioned earlier that a strong U.S. Gulf Coast Atlantic Basin presence allows you to move a fungible product wherever there's demand globally. And these dots that we've got on here are actually markets that we're moving barrels into. This isn't a wish list. This is where barrels are actually going.
We have focused on, if you had a view of the world that said, "Gasoline demand in the U.S. is going to be flat to declining because of CAFE and other efficiency standards going forward, and diesel's based on economic activity." If you had that view, this is what you want to see on a chart. You want to see companies that have the ability to continue to run at high utilization rates and move their barrels into higher net back markets. And that's what Valero has spent a lot of time and a lot of energy focusing on over the last several years. We've built the infrastructure, as you can see here on the right, to do product exports. We could export more than we do today.
You say, "Well, why aren't you exporting more?" I tell you because the arb was more valuable to keep the barrels here than it was to put them into a different market. You will see that in some of our results, our export numbers from last year. We have tremendous capacity to increase the exports as we are today, and then we have a couple projects, like the Pasadena terminal and so on, that would allow us to export more in the future if we chose to do that. I mentioned growth projects to you before, and I also showed you how much money we are spending on growth CapEx. It is about $1 billion a year on growth CapEx. If you look at the projects that were completed in 2019, they produced about $350 million of EBITDA.
That includes those three projects that are listed there, and then some other optimization projects. If you look at the list of projects that we currently have underway, the Pasadena terminal is a deal we are doing with Magellan that will provide us with greater access to export markets. The St. Charles alky is going to produce high- octane products that we fully expect we are going to need more of in the future. Pembroke cogen is. We did the Wilmington cogen a couple of years ago. We are doing a Pembroke cogen now to lower our energy costs in those markets. The Diamond Pipeline expansion is underway. We have the Diamond Green Diesel 2, and so on. The Port Arthur coker, those are two major projects we have.
We have some really good projects that we are working on right now, and then we have other projects that Lane and the team have under the development. A lot of that focus is on the renewable fuels business and moving barrels into Mexico and other markets that are short. If you look at this chart on the right, this chart illustrates the incremental EBITDA that Valero will produce based on our return thresholds in kind of a constant $1 billion a year of CapEx. So far, we have been able to achieve these results. So, we feel very good about sharing this and about our activities that we are undertaking to continue to grow earnings into the future. One of the projects I mentioned here was the Port Arthur coker, and it is a big project.
We are going to spend $975 million to get 55,000 bbl a day of capacity. We have talked about this many times, and Lane can be specific with you, but it is not an IMO-driven project. It was a project to make the refinery more efficient, to create two trains, particularly during a turnaround cycle where we used to have to cut back the refinery material, and now we will be able to run it more aggressively. What is interesting about this project is it is a high- return, high- IRR project, but it is also a high- EBITDA- producing project based on the fact that we had some of the equipment in place, and it is a bolt-on project to the existing refining operation. So big project and a very good project, and it still looks really good even in today's market conditions. Renewable Diesel.
This has probably been one of the more talked about things that we're involved in. As I mentioned, we're the largest renewable diesel producer in the U.S. We just finished an expansion last year, which had great results. We've got another project underway, and we're looking at a third. The numbers that we're getting on this were good. $1.26 a gallon margin is what we were forecasting, and we've been in that range or a little higher recently. Then you throw on top of that $1 a gallon of blender's tax credit, and you're at an over $2 a gallon margin on this. It's a pretty incredible business. You say to me, "Well, why aren't you doing a million barrels a day of that instead of gasoline?" There's a lot of constraints associated with it, and one of them is the feedstock supply.
We've got a very low- carbon intensity feedstock supply based on our relationship with Darling. We could run soybean oil and other feeds to these, but it's not going to have as low a carbon intensity as the feedstock supply that we currently have. We're looking very carefully at the portfolio, figuring out where we can do these projects, where we again, have some kind of feedstock supply advantage in getting it in and getting the products out, and that's what's leading us to look at Port Arthur for a third plant. Anyway, excellent investment that we've got. We run them well, and we're going to continue to do investments in this area in the future. Then our Ethanol business, let me just say, we have very good plants. We have good management running these plants, but the financial results have absolutely been challenged.
That's because right now there's an oversupply of ethanol in the U.S. Plants, I don't know that there's a lot of plants under construction now, but there were a lot built. You've just got a situation where you have oversupply. The industry was adjusting to this oversupply by exporting a lot more ethanol in the last several years than they had historically, and we're building out the infrastructure to do more of that. The Chinese tariffs certainly had an effect on that. We think this is a temporary situation and we'll be exporting significantly again as the year goes on, and that's what we need to make this business more profitable. Anyway, the ethanol business is part of our portfolio. We think ethanol is going to be part of the fuel mix going forward, so we don't feel bad about it.
It's just not earning the type of returns right now that we'd like to see. Okay, IMO. IMO is still a tailwind, I think, right now. We're seeing it develop. I don't know. We've talked to many of you guys for the last several years, and our view on this always was that it would be beneficial to the diesel market, but we would see more of the impacts on it on the feedstock supply. Okay? Whether it be resids or whether it be heavy and medium sour discounts, we expected that's where we would see more of the impact. I think that's probably been true so far. This is one where, in our minds, clearly the industry is still trying to adjust to.
So it is too early to throw up your hands and say, "This is not going to be anything." It was overhyped for a period there, and I do not think it is going to be as good as the hype, and it is not going to be as bad as some might fear now. It is going to be somewhere probably in the middle of that range. Anyway, we continue to be very well positioned to deal with this, both from a feedstock supply perspective. Diesel demand, we think, is going to strengthen. Then, one of the things that we talked about, and I know Lane talked about this extensively, was the fact that we might see a positive impact from IMO on gasoline. I think we are seeing that as you move feeds that would typically go into a cat into a blended fuel.
Anyway, so far, we are not at all uncomfortable with what we have seen there. But we, too, would like to see it materialize and settle out in a more material way. Then the two bar charts here on the right just show how we are positioned to deal with this from a resid upgrading capacity and also from a conversion capacity on distillate. So we find ourselves in a pretty good place. Okay. I gave my little prelude speech, which is kind of do not overreact. What you are seeing here is numbers for 2016. This is not our forecast for 2020, okay? This is just how 2016 looked, and you can see where we were. The whole point here is, in a low- margin environment, does Valero do okay? Okay? You know in a high- margin environment, we all do okay.
But how do we fare in a low- margin environment? Because our portfolio, as many point out, is not as diversified as some. It is leveraged more to refining. So this shows you how we did relative to the peer group in all of these different categories in a low- margin environment. Then you can see how we did on average free cash flow in the period from 2012 to 2019. So you say, "Well, how do you achieve these results?" Well, we have got good assets. We have got a great team operating those assets. We are disciplined about what we do. Again, we continue to focus every day on operating the business, and we face these issues head- on, and we continue to focus on operating costs and everything else that it takes to be the best refiner in the business.
Hopefully that puts your minds at ease on some of the issues we are dealing with today. Then the volatility of earnings. Again, we are not as diversified, so maybe our multiple should not be as high as some. Well, this again shows you how we fared in that regard. Again, our earnings per share, our EBITDA, and our free cash flow volatility over a 10-year period, which I think that goes back to when we had MPC and Phillips 66 become independent players. So we thought it was relevant to show this over that time period, and you can see how we have done. We have done very, very well. Then the total shareholder return, I liked where that chart was a week ago much more than I like where it is today.
But again, as I said, I think what we're dealing with today is an incredible opportunity rather than a crisis as far as Valero stock price goes. Okay. For all the reasons that we've talked about, we do think we're a compelling investment. You can see where we are on dividend yield, on our EBITDA CAGR, and so on. I don't need to read those to you. We find ourselves very well positioned. The things that haven't changed. We have a premier asset portfolio, and we have great operations. We're managing the risks of this business very aggressively. We do what we say we're going to do, and we're going to remain disciplined with our growth strategy and with our capital allocation. We've made a commitment that we're going to return 40%-50% of our adjusted free cash flow. Correct?
That's how we call it, adjusted free cash flow? It was so much easier for me when we did it as net income. Anyway, our adjusted free cash flow. You can count on the fact that we're going to continue to do these things. In a climate that we're dealing with today, where there's a lot of uncertainty and a lot of hype on issues, and you got a very challenging political environment, these are the things that I think you can hang your hat on. With that, I'll stop. Manav, I guess we'll turn it back over to you, huh?
[audio distortion]
Yeah. That's what we've seen so far. We definitely initially saw where the crude markets were impacted. It's probably about a month ago, where [ANF] discounts fell, Latin American, Brazilian discounts fell. So we've seen it definitely in the crude markets.
The product markets we haven't entirely seen other than some of the jet demands kind of off. You can see in the DOE, you can see the yield on jet and on crude with jets obviously down. But in terms of just our experience so far, it's been primarily a crude market phenomenon more than a product demand market.
Also by IMO.
Well, we talked about this as we got into IMO. There was a conversation around how FCCs were obsolete in gasoline. We always felt that as you settled out, Very Low Sulfur Fuel Oil would be primarily a blend of VGOs, atmos tower, VTBs, some diesel, some things, right? And that that would have to then it is essentially you are cutting to meet that demand, you are having to cut or at least compete with FCC capacity and therefore gasoline demand. We always felt all along it was going to be supportive of gasoline, and it is going to be through those feedstocks connectivity to an FCC or fluid catalytic cracking unit. That is what you are seeing. We have seen it this entire first quarter. A big chunk of our system along the Gulf Coast, we had signals to have our FCCs cut.
The other part that is supportive right now is you are seeing a lot of unplanned downtime in the Gulf Coast with respect to FCC. In the prompt market, that is just. And you guys see the same OPIS reports that we do, and we can see them in the market in terms of their positions on VGO. But really, that at some point will recover, but this issue around VGO competing, whether it goes into the Very Low Sulfur Fuel market or it goes through an FCC, it is just something we are going to have. It has, in our mind, been supportive of gas crack thus far.
[audio distortion]
We have always had the strategic view that Tier 3 would put pressure on octane because that is just what it does. When you are hydrotreating cat gasoline and some of these other components, it just lowers the octane in the process.
We took the strategic view that that is why we did both alkys. One we finished last year with the Houston alkylation unit. The St. Charles alky we will finish at the end of this year. Our view was the octane market is going to be tight, and then one of the best ways to take advantage of that is through the oil shale revolution is the NGLs. There is a huge arbitrage between NGL, namely, in this case, butane and transportation fuel. What it does is it makes the best component we have in gasoline, which is alkylate. We have always thought that we are well-positioned for it. We still believe octane is going to be tight. I think you really will not see this until butane is completely out of the pool, but I believe you will definitely see octane be a challenge.
We have seen alkylate go into storage, which it normally does, but there is not a big carry trade out there right now because we have a prompt gas crack, but you are still seeing people try to put alkylate into storage because I think everybody recognizes that out there in the future, we are going to need some octane.
[audio distortion]
Yes. We are, and we have not ramped up our [Port Arthur] facility all the way yet, but we will. Because of that, we agreed that is going to be a way you clear the heavy sour barrels. They widened out quite a bit in the fourth quarter. They sort of leveled out here at the nine off, 10 off. I am sure it still works for them to clear the barrels from Hardisty. They have to take that risk. But we definitely are seeing our rail.
We have been ramping up our rail volumes at Port Arthur through the fourth quarter and through first quarter as well. We are expanding the, well, us and our partner, Plains, are expanding the Diamond Pipeline. That is a great project for us because we can, with not a whole lot of additional money, raise the capacity of getting the ability at Cushing all the way down into that region, the New Orleans region. We will benefit from that. It lowers our cost of delivering crude into Memphis. I think long term, when you see at some point, which is like 2022, I believe, some of the owners of Capline put a stipulation on putting it in heavy sour crude. I think ultimately that is where we will see a lot of the benefit.
It is a couple of years from now, but in the nearer term, it is another outlet for domestic shale crudes, getting them into that market. Today, you have to either go to Corpus and put it on the boat and get it over, or you get it into the Port Arthur area and either go through the Ho-Ho line or [audio distortion], there are other ways. This will allow the domestic crude to end up in the New Orleans area.
[audio distortion]
I do not want to put my thoughts too much into what Pemex did, so everything I am going to say is just speculation. But what you saw with the formula is they had a lot of, it was not even volatility. It was event-driven, and they had exposure to two things by virtue of the formula.
But one was obviously the, it was Brent, WTS, and 3.5 weight percent fuel oil. Well, 3.5 weight percent fuel oil at some point is going to, it already is, as of now, it is basically an illiquid thing that barely trades in the Platts eWindow. So I am sure they saw, "Hey, we got to get off that just by virtue that we are going to get into something that is not even a meaningful traded physical barrel anymore." Secondly was Midland would have these incidents where it would be very discounted because all these pipelines were bottling it up, and then it would finally clear, and it would go from being way under WTI to back up to nominally a WTI level.
When they were using the K factor to try to get it back into the market, these events would suddenly put them out of the market. One way or the other, whether Midland is dumping or Midland is getting to where its strength, it was making their ability to market their crude a challenge and making their customers, I am sure, a little bit antsy about that, right? This allows them to more directly manage their OSP versus the market.
[audio distortion]
We have always had a lot of experience running resids. We do it all the time. It just depends on your configuration. Can you desalt these feedstocks? So different refineries can do this differently. Can you desalt them? A lot of people claim that they can put them directly to their vacuum unit.
Most refiners are not in a position to do that unless they have a long experience like we have at our Corpus refinery. We have a desalter for a vacuum tower. Will people change? Most people will have to put them into their crude units as a crude substitute.
Oh, we are done.
Yeah, three seconds. Two, one.
Oh. Well, thank you.
Of course.
I hope you have the same chair next year.
It's interesting. I'll give you some background. I heard that Dr. Fauci, I was at a business council meeting a week ago in D.C., and he got up and spoke. What we're dealing with is a kind of a strain of flu, right, with the coronavirus. It's spreading. It's gotten hyped. We were talking about it on the airplane, do you think it would've been this hyped if we weren't in an election cycle with a strong economy and somebody trying to make this an issue, right? Who knows? Based on what I see, if the treatment right now is wash your hands with soap and water and try to stay healthy and I heard on the news a guy's treatment for his coronavirus was Gatorade for three days, and he was okay.
This is one of those things that, could it be serious? I guess it could. It's more the Chinese impact than anything. We're all trying to figure out, is the data we're getting out of China good and real? Is it going to last a long time? Is it going to force their economy to screech to a halt? The U.S. economy right now is strong, and as Lane mentioned, we're really not seeing any big impact on demand for our products. Except for jet.
Except for jet, yeah.
The products that we are moving into Mexico, there does not seem to be any impact there and so on. I would not anticipate that we are going to see a recession. The question is how long does this last, and seasonally, does it phase out? That is why, frankly, we are looking at this as an opportunity. This whole market is all up. Personally, I am looking at this as an opportunity. What should I be buying out there? Because people have gotten beaten down, and Valero is no different this week than we were two weeks ago. Our operation is absolutely no different. We have the same people in place, and they are running the business, and we are making money.
Anyway, it is one of these deals that is a little bit like we had at the end of 2018 when we had the IMO hype, and it just started selling off so hard. You know, you would love to be able to come out and say something. I would love to come out and say to you guys, "Do not worry about this. It is not an issue. Everything is going to be okay." I guess that is kind of what I am doing. I am not a doc, so I cannot speak to it directly. My guess is this is going to be short-lived. It is over-hyped. Sure. Might I get coronavirus? Could well happen. Is it going to kill me? History that we have seen so far with this virus would say no, it is not.
Anyway, I hope next year you are sitting in that same chair, and I hope I am here to say we were right again.
Any chance you are going to go border running?
Yeah, fat chance.
That is the first time I have ever heard that question. All right.
Honestly, I think the first thing they would do is go out and look at his crazy [habits], the guy. He likes firearms. He hunts. He does all this stuff. I would be dead meat before I got started, right? You run a good conference. Thank you for doing this, and you guys for braving it, because I am sure a lot of people probably canceled out. It is great that you came. We are not going to win this battle by everybody hunkering down and putting their heads in the sand. Anyway, thanks. Is that it? Okay.