Welcome to the Valero Energy Corporation reports 2013 First Quarter Conference Call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question -and -answer session. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Ashley Smith. Mr. Smith, you may begin.
Hey, thank you, John, and good morning. Welcome to our first quarter conference call. With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Joe Gorder, our President and COO; Gene Edwards, our Chief Development Officer; Kim Bowers, Chairman and CEO of CST Brands; Clay Killinger, CFO of CST Brands, and several other members of Valero's senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at valero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments. If you have any questions after reviewing these tables, please feel free to contact me after the call. Before we get started, I would 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 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 have described in our filings with the SEC. As noted in the release, we reported first quarter 2013 earnings of $654 million or $1.18 per share. First quarter operating income was $1.1 billion versus operating loss of $244 million in the first quarter of 2012. We adjusted operating income of $367 million, excluding a $611 million non-cash asset impairment loss taken in the first quarter of 2012.
The increase was mainly due to higher refining margins in the U.S. Gulf Coast, U.S. Mid-Continent, and North Atlantic regions, plus lower refining operating expenses. Our first quarter refining throughput margin of $10.59 per barrel increased about $3 versus the first quarter 2012 margin of $7.71 per barrel. The increase in refining throughput margin was partly driven by higher diesel and jet fuel margins in all regions. For example, the ultra-low sulfur diesel margin versus Brent crude oil increased by $2.73 per barrel in the U.S. Gulf Coast from the first quarter of 2012 to the first quarter of 2013. In addition, the refining throughput margin was favorably impacted by wider discounts on some crude oil and feedstocks and the operation of our new hydrocracker at the Port Arthur refinery.
Our first quarter 2013 refining throughput volume averaged 2.57 MMbpd for an increase of 11,000 bpd from the first quarter of 2012. Both quarters had significant turnaround maintenance and repair activity. Refining cash operating expenses in the first quarter of 2013 were $3.79 per barrel, which was below first quarter of 2012 due mainly to lower reliability expenses and lower operating costs at the Aruba refinery, which was shut down in the first quarter of 2012. I'd like to highlight several other items in our refining operations. The new hydrocracker at Port Arthur contributed meaningfully in the first quarter, but experienced some issues that limited the throughput and conversion rate in late February and early March. Those issues were addressed, and the unit has been running near plan rates since mid-March.
In the first quarter, we estimate the new hydrocracker at Port Arthur contributed approximately $94 million of EBITDA. We estimate the unit would have earned an additional $22 million of EBITDA or $116 million in total EBITDA had the operating issues not occurred. Assuming market prices in the first quarter of 2013 were similar to full year 2012 prices and that volumes were at planned rates of 57,000 bpd , we estimate the new hydrocracker would have generated approximately $127 million of EBITDA, which is consistent with our previously disclosed earnings potential of that unit. We are continuing to work on the new hydrocracker at our St. Charles refinery. We expect to complete that unit and begin the startup process at the end of June.
As we have mentioned previously, both of these hydrocrackers were designed to take advantage of the current environment of relatively high crude oil prices, strong diesel margins, and inexpensive natural gas prices. Also at the St. Charles refinery, startup of the Diamond Green Diesel project is planned for the end of June. This plant is designed to produce 9,300 bpd of renewable diesel from low-quality recycled cooking oils and fats using refinery hydroprocessing technology. The renewable diesel will qualify as a biomass-based biodiesel, which is a difficult specification to achieve under the Federal Renewable Fuel Standard. The project is a 50/50 joint venture between Valero and Darling International, which is a leading gatherer of used cooking oils and animal fats.
My last point on our refining operations is that in April, our Quebec refinery processed its first cargo of Eagle Ford crude oil, which we shipped from Texas on a cost-advantaged foreign -flagged ship. Preliminary results indicate that the crude oil works very well in our refinery. Our retail segment reported first quarter 2013 operating income of $42 million, an increase of $2 million versus the first quarter of 2012. U.S. retail operating income increased from $11 million in the first quarter of 2012 to $18 million in the first quarter of 2013. While Canadian retail decreased from CAD 29 million in the first quarter of 2012 to CAD 24 million in the first quarter of 2013. Our plan to spin off our retail business and unlock value for our shareholders is progressing well.
Valero has received its requested private letter ruling from the Internal Revenue Service and clearance from the Securities and Exchange Commission for the transaction. On Wednesday, May 1st, Valero will distribute 80% of the shares in CST Brands to Valero shareholders as of the April 19 record date. Those shareholders will receive one share of CST Brands common stock for every nine shares of Valero common stock. CST Brands common stock will begin regular way trading on the New York Stock Exchange under ticker symbol CST, beginning on Thursday, May 2nd. Since April 17, CST Brands has been trading on the when-issued market under the ticker symbol CSTWI and will continue trading there through May 1st. As part of the transaction, Valero will retain 20% of CST Brands' outstanding shares and also receive approximately $500 million in net cash.
This net cash amount consists of $1.05 billion from CST Brands' new debt, which is offset by the retention by CST Brands of approximately $50 million of cash and approximately $280 million from a working capital benefit, primarily as a result of the payment terms in the product supply agreements. Valero will also incur a tax liability of approximately $220 million, mainly for Canadian taxes on the transaction, which is mostly payable in the first half of 2014. Valero expects to liquidate its remaining 20% of CST Brands' outstanding shares within 18 months of this distribution. Our ethanol segment reported operating income of $14 million, for an increase of $5 million from the first quarter of 2012, mainly due to higher gross margins per gallon, which were somewhat offset by lower production.
Production averaged 2.7 million gallons per day in the first quarter of 2013, for a decline of about 770,000 gal per day compared to the first quarter of 2012. As industry supplies of ethanol declined throughout the first quarter, ethanol plant margins improved and have remained healthy so far into the second quarter. As a result of the improved margins, we restarted three of our previously shut down ethanol plants during the first quarter, and all 10 of our ethanol plants are currently operating near capacity. In the first quarter of 2013, general and administrative expenses excluding corporate depreciation were $176 million, and net interest expense was $83 million. Total depreciation and amortization expense was $430 million, and the effective tax rate was 34% in the first quarter.
Regarding cash flows in the first quarter, capital expenditures were $864 million, including $287 million for turnarounds in catalysts and including $34 million for retail. In the first quarter, we paid $111 million in cash dividends to our shareholders, which reflected the increase of $0.025 per share per quarter that we announced in January. Also in the first quarter, we purchased 6.9 million shares of Valero stock for $304 million in cash. At the end of the first quarter, we had approximately $3 billion remaining under our stock purchase authorizations. So far in the second quarter, we have purchased another 2.8 million shares of Valero stock for $118 million in cash. That brings our year-to-date stock buybacks to 9.7 million shares for $422 million. Adding dividends, that makes our year-to-date total cash return to shareholders over $530 million.
Regarding other uses of cash, we retired $180 million worth of 6.7% senior notes that matured in mid-January, and we expect to retire $300 million of maturing notes later this quarter. With respect to our balance sheet at the end of the quarter, total debt was $6.9 billion, cash was $1.9 billion, and our debt-to-capitalization ratio net of cash was 21.4%. At the end of the quarter, we had nearly $5.4 billion of available liquidity in addition to cash. Valero expects full year 2013 capital expenditures to be approximately $2.85 billion, which includes turnarounds and catalysts and also includes approximately $60 million of spending for CST Brands through April. Our 2013 estimate increased approximately $140 million from previous guidance, mainly due to the addition or acceleration of growth projects, including new logistics assets and hydrocracker expansions.
Given the competitive advantages provided by the increasing supply of cost-advantaged crude oil and natural gas, our growth spending is strategically focused in three main areas: logistics, processing cost-advantaged crude oil, and distillates focused hydrocracking. Within these areas, we are pursuing multiple opportunities to create long-term shareholder value. However, we are clearly balancing our growth investments with significant return of cash to shareholders, as well as debt reductions to strengthen our balance sheet. For modeling our second quarter operations, you should expect refinery throughput volumes to fall within the following ranges: Gulf Coast at 1.45 million to 1.5 MMbpd , Mid -Continent at 400,000 bpd- 420,000 bpd , West Coast at 270,000 bpd - 280,000 bpd , and North Atlantic at 350,000 bpd- 370,000 bpd . These throughput volumes reflect the turnaround in maintenance activity planned at the McKee, Quebec City, and Meraux refineries.
Although we are only a third of the way into the second quarter, I want to highlight some changes in the key drivers of our refining throughput margins versus the first quarter. Gasoline and diesel cracks are mixed, with some of our regions higher and other regions flat to down versus the first quarter. Crude discounts have generally narrowed versus the first quarter, particularly for light crude oil discounts such as WTI versus Brent and heavy sour discounts. In addition, the price of natural gas, a key driver for our energy costs and hydrogen feedstocks, has increased versus the first quarter. As our investors should know, these key drivers are volatile and can change substantially within a quarter. We expect refinery and cash operating expenses in the second quarter to be around $4 per barrel.
For our ethanol operations in the second quarter, we expect total throughput volumes of 3.4 million gallons per day, and operating expenses should average $0.37 per gallon, including $0.03 per gallon for non-cash costs such as depreciation and amortization. Also in the second quarter, we expect G&A expense, excluding depreciation, to be around $160 million, and net interest expense should be about $75 million. Total depreciation and amortization expense in the second quarter should be around $405 million, and our effective tax rate in the second quarter should be approximately 35%. Okay, John, we have concluded our opening remarks. We will now open the call to questions. During this segment, we request that our callers limit each turn to two questions. If you have additional questions, you can rejoin the queue.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. Our first question comes from Doug Leggate from Bank of America Merrill Lynch. Please go ahead.
Thanks, everybody. I am going to take my two, if I may. Guys, can I ask you to clarify the $2 cost, the transportation cost to Quebec that you mentioned? Is that sustainable? Is it fully loaded for gathering and processing on the Gulf Coast? Can you just help us with, to make it simple for us, what is the advantage when you actually land it in Quebec versus your prior feedstock? I have got a follow-up, please.
Okay, Doug. The $2 that we are talking about is the transportation cost. It is really the foreign flag ship to take the crude from the port in Corpus up into Quebec. I am trying to remember what the advantage was on a per-barrel basis for running that oil. I think at the time we moved it was fairly even with the alternative. I think what the guys found, and Lane can speak to this, what the guys found when they ran the oil in that plant was it cracked very well, and it was strong yields.
That is right. That is exactly right. It had better yield than we had anticipated.
All right. Thanks for that. I guess my follow-up is kind of a related question. We saw Tesoro move some facilities in place over time to move crude to the West Coast. I am just curious if you guys have got similar things in the works and if you could put in the context of how you see your deliberations over an MLP and ultimately how you would invest in infrastructure to maybe follow suit. I will leave it at that. Thanks.
All right. Well, Doug, relative to supply on the West Coast, we continue to look at the economics of moving pipeline barrels across. The dilemma that we have is if you are going to move those barrels into a U.S. port and put it on a U.S. flagged vessel, a Jones Act vessel, the cost for the shipping becomes very high. The alternative that we are pursuing, and granted, we continue to look at that, but the alternative that we are pursuing is to go ahead and do the rail economics.
That is why we have got the train activity. We bought all the rail cars, and we are looking at rail terminals in Benicia and also down in Wilmington. We find that taking it directly into the refinery, we have as good, if not better economics than we would taking it across in a pipe to the West Coast and putting it on a U.S. flagged vessel.
Okay. Those qualify for potential MLP drop-downs over time?
Yes, they would.
All right. Great stuff, guys. Thank you.
Thanks, Doug.
Our next question comes from Jeff Dietert from Simmons & Company. Please go ahead.
Good morning.
Morning, Jeff.
Congratulations on the progress on CST and rapidly approaching the distribution. I had a question on the potential for an MLP. You have obviously got a lot of growth capital focused in the logistics area with Quebec and then an additional $200 million of logistics projects in the rail cars and rail unloading facilities. Could you talk a little bit about the existing base of MLP qualifying assets and how realistic a potential MLP might be?
Jeff, this is Klesse. We have said consistently here that once we finished with retail spend, that we would look at the MLP, and that is what we intend to do. I have given in the past that we have an EBITDA base of $50 million-$100 million. So I think at this point in time, that is where we are going to stay.
All right. I understand. I was curious if I could have a quick follow-up, if you're seeing pricing differentials for domestic crudes in Houston, given Seaway and rapidly approaching Permian pipelines coming into the Houston area. Are you seeing those crudes trade at a discount to Louisiana and by how much?
Well, Jeff, it's anywhere from $1 to $2, but we are seeing the crudes traded below LLS. In fact, I don't think we're running a light sweet crude in the system, certainly in the Gulf, that's not trading at a discount to LLS.
Are you expecting bottlenecks at Houston as these Permian pipes and then ultimately Keystone comes into the market?
Yeah, I think that you're certainly going to have ample supply of these crudes in the Gulf. As far as the bottlenecks, I think, they're working very hard to alleviate that now. I guess we've got a Longhorn startup that's going to bring 75,000 bpd and then up to 225,000 bpd here very soon. Seaway is working on resolving their issues and the host of other alternatives. I do think we're going to see ample supplies, though, of this heavy sour crude in the Houston market.
Thanks, Bill. Thanks, Joe.
Okay.
Our next question comes from Robert Kessler from Tudor, Pickering. Please go ahead.
Morning, guys. One quick follow-up to that prior question. In terms of the average price delivered into Corpus, say relative to Houston or relative to LLS, is Corpus still below Houston?
Yeah.
If so, by how much?
It is, and it's basically by a transportation cost over there.
So another, what, $1.50, $2, or more than that?
Yeah.
Okay. Looking a bit longer term at Quebec City, after you come out from the turnaround and maybe on in through the end of 2013, assuming the price differentials and relative yields for the Eagle Ford crude justify replacement with the alternate supplies, how big could that be? What portion of throughput at Quebec City could you be running from, say, Texas-based crudes by the end of the year?
Well, our license that we got was for 90,000 bpd , and so that's the existing license that we have. But the crude, as Lane said, ran very well in the refinery. I would say to you, though, because obviously we're involved in Line 9 reversal, that that refinery will be on all North American crude oil here within a year or so.
Got you. Then last one for me, just coming back to the, you say, MLP-able CapEx. If I look at your 2013 budget, would it be fair to say that about $400 million at least of that would be MLP-able spend? Or what kind of number would you throw out there?
No, the number is more like it is between $500 million and $600 million is what we have in our 2013 spend.
Okay. Thank you.
Yep. Thank you.
Our next question comes from Roger Read from Wells Fargo. Please go ahead.
Hey, good morning.
Hey, Roger.
Just I would like to first hit you on the operating costs, the $4, and you mentioned obviously higher natural gas. I just wanted to confirm, is that effectively the natural gas cost or is there something else going through? Because obviously with the higher throughput expected in Q2, we would on a per barrel basis maybe see that a little lower than Q1.
Yeah, that's a key part of that increase.
Hey, this is Lane Riggs. One of the other parts of that is Quebec, which is one of our lower operating cost refineries, is in a big turnaround, so you have their capacity at lower operating costs for 200,000 bpd.
Okay. All right. That's helpful. Understood that, and very helpful that the light crudes you're running on the Gulf Coast are discounted to LLS. I was wondering if you could help us understand some of what's been moving around the light heavy spread more or less from the beginning of this year through, I guess early April it compressed, and it's widened a little bit since then. We've heard different stories. Saudis were in and out of the market, Venezuelan crudes. I was just wondering what you all have seen along that line.
Yeah. All right. Well, relative, and you're really looking at Maya pricing when you're talking about the heavy sour, WTS strengthens with the Longhorn startup and essentially WTS realigning itself with WTI. You'll remember last year we had that huge discount of WTS to WTI, and that certainly helped to expand that Maya discount. The other thing we've had is WTI has strengthened relative to Brent, so as that's come in, you've had the whole heavy sour complex come in and draw closer to a WTI priced crude. You got the final factor that the K-factor has lagged, and Pemex uses that to adjust the price of their crude to keep it at a market parity with alternatives, and they've lagged.
They are limited as to how much they can move it in a month without going before the government to get approvals, so it just lagged. Now we know we are going to get an improvement next month, so this discount will improve further. Those are the three primary factors that affected the heavy sours. The medium sours have improved just recently as really a result, I think, of a lot more Middle Eastern crudes being in the Gulf. Our guys estimate anywhere from 8 million to 10 million additional barrels were in the Gulf during the quarter. So that helped that.
Then, you look at it longer term, I think. There are certain refiners in the Gulf that are going to end up running a lot more Arab crude than they would a Mars crude or a domestic medium sour crude, and that is going to put more of it back in the market. Just as a more general statement, anytime you end up with more crude in a particular market, it is going to put pressure on the entire complex because you will look at substituting. To the extent that we move Midland barrels into the Gulf, and they are accessible to Houston refiners and other refiners, you are going to see additional pressure on both the medium and the heavy sours.
Okay. Thank you.
Our next question comes from Paul Cheng from Barclays. Please go ahead.
Hey, guys. Good morning.
Good morning, Paul.
Two quick questions. One is a simple accounting question for Mike. After the 80% spin off for the CST, the remaining 20%, are you going to report them in terms of the P&L on the equity accounting or you are going to report as calls and only report P&L if you receive any dividend?
No, it will be on an equity and earnings basis.
In an equity earning basis. For the next several years, I think previously you guys was talking about somewhere in the $2 billion - $2.5 billion kind of CapEx, and this year is higher. On a going forward basis, with some of the new growth projects, should we assume that you're going to be higher than that range now?
Paul, this is Klesse. We're higher this year because we do have quite a few logistics projects that we discussed a few minutes ago, and they will carry over into next year, some of them. The guidance I've only given is to next year in the $2.5 billion range. Except for some carryover of these type of projects, we'll be in that $2 billion - $2.5 billion range with some carryover of logistics projects. The whole business today is about location. If you don't have the location, you have to have the logistics.
No, totally understand. A final one on, maybe this is for Lane. Butane and Naphtha. There's a lot of concern in the market that the debate is going to become increasingly abundant and as a result, become really cheap. The question is that, do you guys already, at this point, max out in terms of how much you can blend? I presume butane is going to restricted by the RVP and Naphtha. Don't know whether there's anything you can do in terms of increasing your net blending volume if the price is attractive.
The question is the naphtha length that all refiners are seeing, and that is correct. You're seeing more of what I'll call low octane blend stocks coming toward the refiner from the NGL feeds. For us in particular, yes, we are blending the naphthas where we have enough octane. Also, what is happening is as the price of naphtha, which we expect what you said to occur as well, you will go ahead and restart or increase your runs through your reformers.
Even though you want to make hydrogen from natural gas, the facts are because of the naphtha pricing, you may go ahead and run your reformer as well. We're doing that and looking at that, and then it depends on what severity you actually run at your reformer. Then, of course, the last option is that the naphtha could potentially be exported. And we, as everybody else in our industry, we will look at all of those numbers and pick the best course. That is what we are doing, and I am sure everybody else is.
Bill, is there any rule of thumb you can provide, under what circumstances that you will choose what option? Or that that is too many moving parts that cannot really give one rule of thumb?
Well, you really have to run it through your models, to be honest with you. But I suspect first option is to blend. The second option will be to run your reformer, and run it at different severities. Then the third option is, meaning you just cannot get rid of it internally, that the option will be to export it.
Thank you.
And that's how I'd rank them.
Okay.
Our next question comes from Sam Margolin from Cowen. Please go ahead.
Good morning. Thanks for the time. You touched on Maya. I just want to revisit this for a second. It looks like the composition is really outmoded here, given the fact that all the components have dislocated from each other. In the past, you've had a lot of success pricing heavy barrels in the Gulf away from that benchmark, and you touched on it a little bit with the pipeline capacity going into the Gulf, maybe devoted a little more to the heavy side. I was wondering if you could just provide a little bit more color on the opportunity set for heavy crudes underneath what we're seeing on the Maya side.
Well, we are seeing heavy crudes move south, right? We're moving them by barge. We will be moving it by rail into St. Charles. And we're seeing some come down Seaway that gets consumed. Then you go back to the more tradition. So there is going to be more there from the U.S. and actually from North America. Then you look towards South America and the traditional sources, and we continue to be a large purchaser of crude from South American producers. And even though those crudes have a Maya basis, there's a greements that we have in place that vary the price on that. We have been able to continue to get heavy sour crudes priced in, if mild prices are better.
Maybe I will add a little more for you. When you look at the Mississippi River, we are doing what others are doing. We are barging heavy crude down. Also we are looking at rail facilities to bring it into our St. Charles and those refineries. If you start to move west, of course, Keystone Pipeline is being built, the southern leg, and that is when Joe is speaking of seeing more heavy crude come down. We expect to see heavy crude come into Port Arthur, as well as more into Houston through all the other pipelines and of course, Keystone.
Then you jump back, and when there is foreign imports, you have to look to Venezuela and what actually happens in Venezuela as we go forward. When they have had, and this is the truth, when they have operating issues with some of the upgraders, things like that, we get to see more of this type of oil that we can process in our hardware available. You have all of these moving parts, but generally speaking, Valero wants more heavy sour crude oil on the U.S. Gulf Coast because we are a big buyer.
Okay. Thanks so much for the color. Just as a follow-up, Keystone potentially facing another delay here, but as a lot of investment moves into the rail side, and that seems to be taking up a bigger and bigger share of offtake in these disadvantaged basins. I was wondering if you had done any planning or thought about the raw bitumen element as well, moving away from WCS and getting it in as a raw material, particularly if there is any local blending opportunities for you around your Gulf Coast system.
Of course.
I guess we're. Sorry. Go ahead.
I will try to answer part of this. Of course we have. We still believe Keystone, now the deal with the Northern leg, XL, we still believe that will be approved, and it will be built. It's a pipeline. This has nothing to do with the pipeline. It's all about the oil sands. Just a little trivia here, the greenhouse gas emissions from producing California heavy crude are actually higher than it is for the oil sands. One cold power plant produces like 25% of the greenhouse gas emissions from the oil sands.
This is all just a ridiculous conversation that's going on. Part of the rail cars that we have purchased are insulated and coiled so that we can move the raw bitumen just as other companies are trying to balance between WCS and Bakken and those type of crudes, as well as the pure bitumen. We've tried to estimate how we will supply our refineries down the road and have purchased our rail cars accordingly. Those rail cars will be delivered to us really through the end of 2014. They come to us every month.
All right. Thanks so much, everyone. Have a great day.
Thanks, Sam.
Our next question comes from Evan Calio from Morgan Stanley. Please go ahead.
Hi. Morning, guys.
Morning, Evan.
Sorry if I missed some of the opening comments, but can you provide any additional color on the hydrocracker issue at Port Arthur in the quarter and whether it rolled over into the second quarter? Just confirm you remain on track for the St. Charles startup.
Hi, Evan. This is Lane. What we had to do is we had an emergency shutdown valve that it wasn't working properly, so we had to remove it and had it shipped off. We found there was a manufacturing error in the valve, and we actually were able to take the one from St. Charles project, because these are essentially carbon copies of one another, and put it in place. This was all in Ashley's notes. This was really a sort of a March conversation. No, we're running fine and don't expect this to have any implications for the second quarter.
We also lost a seal on a compressor when we had a power failure or something.
Yeah, the initiating event for when this, we had a recycle compressor trip on a lost seal, and that caused this emergency shutdown valve to close, and then it wouldn't open.
Those have been repaired, and that part of the project is going just fine, as Ashley Smith said. At St. Charles, it's going to be late second quarter. We'll get some oil in the unit, but we'll really be starting up in July. We are having, in the sense of difficulties getting this job done, but it's not through lack of effort.
Got it. I know you guys quantified potential RIN exposure year-on-year. I was just curious if there was any strategy to mitigate that number. I noticed the Diamond Green startup is obviously going to give you incremental, more valuable diesel RINs, but building new terminals to blend. Anything else that you're doing that could mitigate that potential cost? Thanks.
Evan, we're looking throughout the system to just find every opportunity that we can to blend more. We continue to look at the economics on every export cargo to decide if the arb is better to keep it here or to go ahead and put it on the water, considering the cost of the RIN. We have adjusted product yields throughout the quarter, and we will continue to do that. For example, we produced more jet when it was economic to do that. But the economics do not favor that today, so we have moved back.
Then we have a very aggressive effort to try to support change to the regulations as they are. You may want to talk more about those activities, but we are working those issues every way we can to try to make this problem less of a problem for us. I think we are still very comfortable with the estimates we have given you for this year in that $500 million-$750 million range. But the squeeze that we have had that has driven the prices up where they are is going to be with us unless we get some kind of relief.
I think what I would add here is, the way Joe is describing this is what RINs have become is part of our cost to manufacture and then in our decision making. If you have a $0.60 RIN or whatever it is, $0.56-$0.70 today, it gets into our cost to manufacture, and then it works through all our modeling so that helps you drive your LP economics. That is really the point here. It gives you more of an incentive, for instance, to make jet fuel than diesel or whatever, and that is how it works through the modeling.
Great. Lastly, if I could. I know you've benefited from some distressed marine cargoes over in the market the last couple of quarters, and maybe you've seen that. Are you still seeing some volume there or have they been pulled back given MA's back up and running? That's it.
Well, yes. I think we continue to see them from time to time. It's certainly not ratable, Evan, so it's really hard to say whether it's more or less than it has been or when that might change, but they're still available.
Got it. Appreciate it, guys.
Our next question comes from Blake Fernandez from Howard Weil. Please go ahead.
Hey, guys. Good morning. I had a balance sheet question for you, I suppose. Ashley Smith mentioned the debt reduction of $300 million in notes later this quarter. Obviously, you have some cash coming in, about $850 million or so from the retail spin. Bill, I know you had talked about maintaining a more flexible balance sheet post the spin-off of retail. Can you give us a sense of, once we get the cash in hand and then pay off the notes that you referenced, how should we think about additional debt reduction from here?
Well, for just the question on debt reduction, this is all the debt that we are maturing this year. So that will leave Valero with about $6.6 billion of long-term debt. Next year, we have about $200 million of maturing debt. I would assume we are going to pay that off. The year after that, we have $500 million. I will give you a number. $500 million in the next year that at least today, I would tell you we would pay it off. So that takes you out quite a few years. And that is the maturing debt. As far as calling debt, we do not have any debt that it is economic for the company to call. So that to your question.
I think you are asking me a little broader question, and that is, I do not know where you came in the call, but so far this year, we have bought over 9 million shares of our stock. We have been out of the market, obviously, the last few weeks as we have to be. We will be out of the market for a while here while this settles out with CST. But we think our stock is still undervalued, and we, as Ashley Smith said in his comments, we are returning cash to our shareholders.
Perfect. Thank you on that. The follow-up question I had for you on the incremental hydrocracking expansions. I am just trying to see if I can get a sense of how that may potentially impact the overall company-wide yield. I know you guys had some charts in your slide pack showing the changes in distillate yield over time. I am just trying to get a sense. Does this have an order of magnitude impact to change the overall yield?
Yeah. The numbers that we've shown you in our presentations after the two hydrocrackers would take us up to about 39% of a total distillate yield. I've mentioned in the past that when we finish these expansions and do our conversion at Meraux, we'll be into the low 40s. I've used this 42%, 43% of our yield. Really, for Valero, we're unique then at that point because we'll have a gas to distillate ratio of about one to one, which is very unusual for a U.S. refining company.
Perfect. Thank you, Bill.
Our next question comes from Chi Chow from Macquarie Capital. Please go ahead.
Great. Thank you. This may relate to Evan's prior question, but in the first quarter, it looks like your realized margin capture rate in the Gulf Coast was strong again, even with the high levels of maintenance. Did you realize the same dynamic in the fourth quarter with the capturing these stranded heavy barrels, or was there something else that drove the capture rate?
Chi, the single biggest driver is probably the addition of the new hydrocracker at Port Arthur. That's just a high-margin unit. After that, we saw some nice discounts on some of the distressed heavies and some of the things we benefited from in the fourth quarter. But the number one by far was adding the hydrocracker.
Okay. How much heavy Canadian crude did you bring down and process versus prior quarters?
It was about the same, Chi. I'm going to say we were in the 45,000bpd-50,000 bpd range on average. Now, there were periods there that we had much higher volumes, and we're expecting those volumes to ramp up going forward, but it wasn't materially different than fourth quarter.
Okay, thanks, Joe. Then on the RIN issue, Bill, can you give us an update on any discussions that Valero or other industry groups have had that you are aware of with the EPA on any relief from the RFS mandate and how any of these lobbying efforts are going?
Well, I can give you some color. I was in Washington last week with a group of other refiners and a couple of the majors. Our industry is united here in trying to get awareness that the RINs issue, when it was $0.05 a RIN was one conversation, and when it rapidly increased to over a dollar and has fallen back here, it is another whole issue. As an industry here, we met with several congressmen, some senators. They all realized that the RFS is broken and needs to be fixed. There is no cellulosic to speak of. I think somebody is going to make a little this year. The advanced is kind of ludicrous that you ought to buy Brazilian sugarcane ethanol and export corn-based ethanol. It is kind of a ludicrous thing here. So people realize that. As far as the White House and the EPA, they both realize as well, we met with them, that there is an issue. But I am not going to say that anything is going to be solved here in the short run.
Okay. Do you believe these discussions are going to When do they gain steam again? Is it dependent on RIN price, cost inflation? Is that when the next battle kind of wages, or is it maybe late this year when the EPA actually takes a look at the obligations for next year? Do you have any sense on timing?
Well, theoretically, you do not hit the blend wall this year anyway.
Right.
This is more of a precursor of things to come. You do hit the blend wall next year. There is a realization that E15 is not the solution. When the EPA tested E15, they really only tested emission systems. The facts are, and the API ran tests, and out of the three major carburetor fuel pumps in cars today, one of them failed 11 out of 12 times. So there is now this awareness. AAA has come out that going to these higher ethanol percentages will not work in the car fleet. I think 95% of the car fleet is not warrantied or so for a higher ethanol content. So I think what you have is an awareness that this has to be addressed. There is going to be or scheduled to be hearings, I think it is in the House Energy Committee here later this summer. But it is like all things in life. Squeaking wheel gets the grease, and when something starts squeaking, whether it is high RIN price, high gasoline prices, high something, there will be a lot more attention.
Okay. Just one question on E15. Does the EPA acknowledge that that is not a solution, or are they still of the mindset that their tests are valid that they conducted on the vehicles? Any sense there?
I would not have an answer. They are aware that the car manufacturers have not changed their warranties, and they are aware of this fuel pump issue. But I do not know if they have said anything else.
Okay. Great. Well, thanks, Bill. Appreciate the comments.
Yeah.
Our next question comes from Paul Sankey from Deutsche Bank. Please go ahead.
Yeah, Bill, I am so sorry. I hate the subject myself, believe me. But it seems like we are going to have to get into 2014 before we get a resolution on this. It has to become a crisis, essentially, before we get a solution.
Well, I suppose that's right.
Okay.
Now, I do say there are going to be hearings, and there is an awareness that there is a problem brewing that is of significance. So you do have awareness. The rest of this is, I'm just an engineer working in an oil company, refining company here. You tell me about politics.
Well, as you know, we look to you as the spokesman of the industry, Bill, regardless what Washington's going to do, and I think you've been quite clear on this. I'm just worried that the EPA broadly, arguably prefers high gasoline prices for efficiency reasons, and the politicians aren't concerned because the gasoline price is relatively low.
Well, I would not disagree with the second part of that. I would not put words in the EPA's mouth that they want high gasoline prices.
Okay, let's totally change the subject. You're pursuing, obviously, the organic projects that you have. Is there anything on M&A asset market transactions? Obviously, you've been busy with the CST thing, but is there anything to say about any other potential changes to your asset base, Bill, at a refining level? I know you've referenced pipelines and trains. Thanks.
Yes. Paul, this is Gene. There's pretty slow activity in M&A right now. I think the issue is, U.S. refineries, almost everybody's making money now or thinks they'll be making money in the future as these cheaper crudes become available. So there's really not a lot on the market. A couple that were on the market got pulled off that you're probably aware of. And then in Europe, there's some things for sale over there, but you got to look at the European situation as they become the marginal player in the world without the cheap crude and without cheap natural gas. You've got to be top tier, basically, to be a survivor in Europe. So there's limited activity, I would say, right now in the whole Western Hemisphere.
Great stuff. And then finally from me on exports. There's some concerns that new capacity in the Middle East and other additional supply globally may threaten the distillate export story. Do you guys have a view on that? Thanks.
Well, I think as the Saudi refinery comes online, part of its products will clearly be directed to the Eastern Mediterranean and into the Med. Clearly, some of the Indian Reliance volumes have moved that way, as well as moving to South East Asia. You also have some Chinese projects that are coming online. But I think you have to come back to at least the U.S. Gulf Coast capability here to be very competitive. And so if you look at our natural gas costs relative to other refiners, if you think about the crude and at least the differentials that Joe spoke to earlier against world markets, there's no doubt in our mind, even though we've had LLS above Brent and other things happening, that eventually LLS is going to go below Brent. We really do believe that this is what's going to happen.
Our crude situation pricing is very strong. Then you look to new refinery construction. The Brazilian refinery that I guess is going to get done sometime here, they are now up to $16 billion-$20 billion for a 230,000-bpd refinery. Those economies are growing, whether it is Mexico, Colombia, or Brazil. Any of these guys that have talked about building a refinery like Ecuador, I just find it personally extremely hard to believe that those countries will spend money to do that. I think that the U.S. Gulf Coast can compete very well into those markets, and I think we will still send distillate to Northern Europe. I think we are competitive. I think the markets are there for us. The U.S. still is a huge market that consumes product as well. I think you have to have the export markets. Otherwise, U.S. refinery operating rate is going to drop significantly.
Yeah, we tend to agree, Bill, and it is worth noting that the market cap of your company is not that far from what that one refinery system is going to cost in Brazil. It is kind of crazy, huh? Anyway, thanks a lot.
You could build one. We are not for sale, but you could buy all of Valero for about one or one and a half refineries. Crazy.
Yep. Thanks, Bill.
Our next question comes from Faisel Khan from Citigroup. Please go ahead.
Thanks. Just a quick question on the McKee turnaround. When the turnaround is complete, is that going to result in any increase in your distillate processing capacity or, sorry, distillation processing capacity, or that is still a second quarter 2014 event, is that right?
Hi, Faisel. This is Lane. Because the unit was not performing as best as we went into the turnaround, we will gain some capacity back on crude distillation. We are putting in this energy efficiency project, which will allow us to improve the yields of diesel off the unit. Yes, the expansion that we have spoken about the last few calls and investor relations is really this event that is in 2014.
Okay.
Because we're waiting on a greenhouse gas permit from the-
Yeah, we do not have the permit is the reason.
Correct.
We have to wait for a permit.
Okay. What is the turnaround time for a permit these days? When did you guys file, and when would you expect to get a permit?
Well, I do not know when we filed, but the way it is going now, because Texas is not issuing the greenhouse gas permit.
Right.
Because we have this dispute going now. This is Texas.
Okay.
I will tell you it is two years.
Okay. Understood.
Just like California and just like the East Coast.
Okay. Got it.
It's not true.
Thanks, guys.
That's not true for some other states.
Okay.
Our next question comes from Ed Westlake from Credit Suisse. Please go ahead.
Hey, two questions. The first one's going to be around turnaround schedules, and the second one's on your self-help. Just on the turnarounds, it feels as if you're still doing quite a heavy amount of turnarounds in the system in the first half of this year. Is 2013 characterized as a sort of a heavy year and then it gets a bit better for 2014 or 2015, or just give us some color, potentially?
Yeah, this is Lane again. It is a little heavier than I would say our average year is. We don't have any really big turnarounds other than finishing this Quebec turnaround up here in June, really for the rest of the year. Next year is a little bit more towards our average turnaround, so to give you a scope, we spend about $600 million a year on, somewhere between $400 million and $600 million a year. We're on the $600 million a year side. We're a little bit lower than that next year.
Okay.
But for the range of turnaround work.
That is helpful. Then just on these crude topping facilities, $250 million, I guess is the average. Any idea of a payback period for those types of things? Are they really looking at splitting off the light ends and then exporting the light ends or moving them around the system?
Well, do you know the payback about? Of course, it depends on your assumption as to the crude pricing.
Yeah. So we, our internal
How much-
Yeah, right. Our-
They have IRRs in the over 30% area.
30%.
It is based on our assumption as to this discount. But then the second piece of your question, no, they are not. The two that we're looking at are Corpus Christi and Houston. Today, those two refineries are short crude fractionation. We buy stuff. So at Houston, we have a very large cat cracker. We buy feed for the cat cracker. What we'll do in Houston is by building this crude topper fractionator, we'll make our own feed for our conversion units downstream.
Historically, in the business, you didn't really make any money on crude fractionation. You made money on conversion units. So we have a couple of refineries, including Wilmington, for instance, that has a lot of conversion, not a lot of crude fractionation, because it was economic to buy feedstocks. If you're in a world where you have depressed crude oil prices relative to the feedstocks, you can see that there's an incentive to make your own feedstocks, and that's what we're really doing at both plants.
Doing some maths, these hydrocracker expansions, that's about another 50,000 bpd , so slightly under the $500 million that you might get from the current hydrocrackers. You get the 30% payback on these crude topping facilities, some crude up in Quebec, then you've got the maybe $90 million, depends on Brent-WTI for McKee . It all adds up to another sort of $ 750 million -$ 1 billion of potential EBITDA improvement in, say, 2015 as the next round kicks off. Is that a fair reading?
It's a fair reading in the sense of you have to make your own assumptions. As to these differentials, making more distillate, what's the distillate crack? These are why we're doing those projects. We think they fit exactly with how the markets are shaping up.
Thanks, guys.
Our next question comes from Arjun Murti from Goldman Sachs. Please go ahead.
Thanks. In your release, you mentioned investing in certain refineries to increase the front-end flexibility to process more light sweet crude. I apologize if I missed it in any of your remarks, but any quantification of capital requirements in incremental light sweet crude runs from those efforts?
Arjun, this is what we were just talking about, these front end, the topping projects.
Yes.
This is at Corpus and at Houston, Bill's explaining where-
Yes.
... we're crude short versus the downstream, and they're $220 million - $280 million a piece. Incremental crude is, I think, at Houston, 90,000 bpd , and Corpus is-
70,000 bpd
... 70,000 bpd . 70,000 bpd .
We have other things going on. I'm going to tell you, just like everybody else, where we're pushing out medium type crude oils throughout our system to be able to handle more of the light crudes. We can run in our system now, I think it's 680,000 bpd . I know we have those.
Yeah. No, you are right.
680,000 bpd of lighter sweet crudes in our system, and we have other projects underway to debottleneck here, change an exchanger there, move some of the light ends over here. We have quite an effort going on in our engineering groups because we believe this all is going to be discounted.
I guess the big thing was to ensure you kind of do not lose on utilization and the op costs do not go crazy. It sounds like that is the purpose of these projects. You can maintain utilization rates and the op costs will still look reasonable.
Well, the purpose is to make money.
Yes.
We'll run our LPs. I would not say to you, in other words, if we're making more money and our operating costs go up per barrel basis, I guess I say, "So what?" We wouldn't-
Yeah.
... be focused on, "Hey, we have to hit ex-op costs." What we would want to do is make more money overall.
That makes sense. Thank you so much.
Our next question comes from Allen Good from Morningstar. Please go ahead.
Good morning. Thanks for taking me here at the end. I know we're running along. Just, I guess, a follow-up question as well on some of the indicated investment for the increase in the export ability as well. Can you remind me of what your current export capability is now and where you see that moving to over the next two or three years?
Yeah. I think if you looked at gasoline today, you'd say we could accommodate 225,000 bpd , and we'll be able to take that up to 250,000 bpd or more going forward. And then diesel is about 280,000 bpd , and that goes up to 400,000bpd-425,000 bpd with some of the projects we've got underway. The projects are really focused on tankage, some piping, some dock work. The tankage would allow for additional segregations, which will enable us to keep higher quality distillate feeds segregated, and then we can capture the premium when we export them.
Okay, great. And then second question. I know a couple of years ago when you did the Pembroke acquisition, you made mention of taking advantage of some Atlantic Basin opportunities and maybe even exporting back across to the U.S. Given all the changes that we've seen here in the crude supply in North America and the potential for some of the lighter discount crudes to move to the East Coast, do some of those export options of the Atlantic Basin still exist for Pembroke? Does the acquisition quite stack up now compared to how it was a few years ago, given all the changes we've seen?
Yeah, I think your comments are fair. But we're making money in Europe, in the U.K., in our business. We've been able to move gasoline into the East Coast. We've moved gasoline to Quebec. We ship some gasoline to Brazil. The distillate's going back still towards Europe. So, yeah, I think we have a very sound Atlantic Basin strategy when you consider Pembroke, our Quebec City refinery, and then our Gulf Coast operations. But yes, the best place in the world to refine today is the U.S. Gulf Coast. So that's got to be true. Otherwise, I think our position is good.
Okay, great. Thanks.
Our next question comes from Robert Kessler from Tudor, Pickering. Please go ahead.
Hi. Thanks for the follow-up. Bill, just a friendly push on the heavy light differential commentary. I get your point about the probable near-term widening in the heavy light spread and the K-factor lag and everything. But just to push you a bit for some color, the spot spread today between, say, LLS and Maya is sub $5. You've mentioned in the past an 8% differential is needed to justify marginal coking economics. So can we make a simple extrapolation and say that some of your cokers are technically underwater for just that unit today? Or can you correct me in that assertion?
Okay, so the numbers you say are fine. And I'd say really $8 would be a floor. You probably need $10-$12 . Part of it gets into what you're comparing it against, whether it's against Brent, LLS, or this. Now, are cokers underwater?
They are at the break-even. If we can make asphalt.
Speak up.
If we can make asphalt, if you have the ability to market asphalt versus an open coker, you would be marketing asphalt today. But versus fuel oil, you would coke fuel oil. But we are right there. We are right at break-even on the cokers.
Your observation is correct.
If the heavy light spread does not widen like you expect, would you consider reduced throughput at the cokers?
Sure.
Sure. I think maybe you could not hear him very well. If we can make asphalt at some of our plants, like Corpus, you would make asphalt. Then if you have a spare coker, now you have a spare coker if you have optionality, then you look at our fuel oil economics, so we would balance those as well.
Sure. Okay, thank you.
Yes, you can spare your coker would be. Yes, you are right.
Thank you very much.
Our last question comes from Paul Cheng from Barclays. Please go ahead.
Hi. A real quick follow-up. Do you have an estimate what is the opportunity cost related to the downtime in the first quarter for Benicia and Wilmington, as well as the Texas City, Corpus Christi, and the Port Arthur into the two different numbers?
Yeah. You want the number for the-
What is the opportunity cost related to the downtime in your Gulf Coast system and in your West Coast system in the first quarter?
Well, hang on. We're going to get-
Hold on one sec. Including turnaround activity. I'm going to have to break this out.
This would be the unplanned downtime. Unplanned downtime. We've got-
Yeah.
Paul, this is Lane. On the West Coast, it was about $31 million of unplanned downtime. On the Gulf Coast, it was about $30 million. Do you have the turnaround numbers?
Those are opportunity costs, right? It is not the actual repair cost. It is opportunity cost?
That is what we would call volume variance.
Yeah, lost margin.
Okay.
And so that is just on the unplanned downtime. Plus, you want the impact of turnarounds?
Yes, please.
Okay. So you are at-
We do not have that one.
Next page, yeah. It is actually a pretty big number. This looks like it is over, for the Gulf Coast, over $200 million.
That old turnaround, yeah.
West Coast is about $25 million.
That means that in the West Coast is $25 million, right? Gulf Coast is $200 million, you say?
That's in that ballpark, yes.
Okay. That means that West Coast, the total downtime you estimate your opportunity cost is around in the $56 million, and in the Gulf Coast, it's actually as high as $230 million.
That is a rough estimate based on market margins and impacts due to the turnarounds and unplanned outages.
Okay. Very good. Thank you.
Okay.
We have no further questions at this time.
Okay. Thanks, John. Thank you for joining our call today. Please visit our website or contact investor relations for additional information.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.