Welcome to the Valero Energy Corporation reports fourth quarter and annual 2011 earnings conference call. My name is John and I will be your operator for today's call. At this time, all participants are in listen- only mode. Later, we will conduct a question- and- answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Ashley Smith, Vice President of Investor Relations. Mr. Smith, you may begin.
Thank you, John. Good morning. With me today are Bill Klesse, our Chairman and CEO, Mike Ciskowski, our CFO, Gene Edwards, our Chief Development Officer, Joe Gorder, Executive Vice President and President of European Operations, Kim Bowers, Executive Vice President and General Counsel, and Jean Bernier, Executive Vice President. 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 several 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. I will turn the call over to Mike.
Thanks, Ashley, and thank you all for joining us today. As noted in the release, we reported fourth quarter 2011 income from continuing operations of $45 million or $0.08 per share. This number includes an after-tax benefit of approximately $161 million or $0.29 per share from a year-end LIFO inventory decrement. Our fourth quarter 2011 operating income was $167 million versus operating income of $378 million in the fourth quarter of 2010. Our fourth quarter refining throughput margin was $5.46 /bbl , which is a 25% decrease compared to the fourth quarter of 2010. The decrease in throughput margins compared to the fourth quarter of 2010 was due to lower margins for gasoline and petrochemical feedstocks, plus reduced discounts for medium and heavy sour feedstocks such as Mars and Maya crude oils. These declines were partially offset by higher margins for diesel.
In the fourth quarter of 2011, Gulf Coast gasoline margins per barrel versus LLS decreased 185% to a - $2.05 from a + $2.42 in the fourth quarter of 2010. Gulf Coast ULSD margins per barrel versus LLS increased 39% from $9.88 in the fourth quarter of 2010 to $13.71 in the fourth quarter of 2011. So far in the first quarter of 2012, Gulf Coast margins have moved higher, averaging over $5.50 /bbl for gasoline and about $16 /bbl for ULSD. The Maya heavy sour crude oil discounts versus LLS decreased 44%, from $12.75 in the fourth quarter of 2010 to $7.19/bbl in the fourth quarter of 2011. The Maya discount has narrowed some in the first quarter, with the average down to around $4.50 /bbl .
The WTI crude discount versus LLS increased over $13 /bbl , from $3.34 /bbl in the fourth quarter of 2010 to $16.70 /bbl in the fourth quarter of 2011, which helped improve throughput margins in our Mid-Continent region from the fourth quarter of 2010 to the fourth quarter of 2011. Our fourth quarter 2011 refinery throughput volume averaged 2.7 million barrels per day, up 523,000 bbl/day from the fourth quarter of 2010. The increase in throughput volumes was mainly the addition of capacity from the acquisition of Pembroke and Meraux Refineries, plus operating the Aruba Refinery, which was not in operation during the fourth quarter of 2010.
Refining cash operating expenses in the fourth quarter of 2011 were $3.92 /bbl , which was higher than the third quarter of 2011 and our guidance, mainly due to costs of a legal settlement plus higher regulatory and tax expense. Our ethanol segment reported its best quarter on record with $181 million of operating income, which was up $111 million from the fourth quarter of 2010 and up $74 million from the third quarter of 2011, mainly due to much higher gross margins. For the full year 2011, our ethanol segment reported operating income of $396 million, its best year ever. In addition, since we bought the first two plants in 2009 through the end of 2011, we estimate that in less than three years, our ethanol business has generated cumulative pretax cash flow exceeding the purchase price and recovering our $750 million investment.
As good as the fourth quarter was for ethanol, I should point out, though, that ethanol margins declined significantly in December, and have remained low so far in the first quarter. Our retail segment reported fourth quarter operating income of $83 million, consisting of $48 million in the U.S. and $35 million in Canada. For the full year 2011, our retail segment reported their most profitable year ever, with $381 million in operating income, which includes a record high from our Canadian retail with $168 million in operating income. In the fourth quarter, general and administrative expenses, excluding corporate depreciation, were $129 million, which was below third quarter 2011 and our guidance, mainly due to favorable legal settlements. Depreciation and amortization expense was $393 million, and net interest expense was $89 million.
The effective tax rate on continuing operations in the fourth quarter was 52%, which is higher than our guidance rate of 36% due to the combination of year-end tax adjustments and low pretax income. Regarding cash flows in the fourth quarter, capital spending was $899 million, which includes $128 million of turnaround in catalyst expenditures. For the full year 2011, Valero's total capital spending, including turnaround in catalyst expenditures, was $3 billion, or $200 million below the previous guidance of $3.2 billion. Our expected capital spending for 2012 is consistent with previous guidance at around $3.4 billion. Also, in the fourth quarter, we paid $84 million in dividends and $79 million to purchase 3.5 million shares of our common stock. We also spent $547 million to acquire the Meraux Refinery and related logistics assets, which included approximately $219 million for inventory.
With respect to our balance sheet at the end of December, total debt was $7.7 billion, cash was $1 billion, and our debt to capitalization ratio net of cash was 29%. At the end of the fourth quarter, we also had nearly $4.5 billion of additional liquidity available. As to our refining operations in the fourth quarter, we completed the hydrogen plants at Memphis and McKee, which were two of our key economic projects. Startup is underway at Memphis, and we are planning to start up the McKee plant in February. These projects are designed to take advantage of the large spread between natural gas and crude oil prices, which is very valuable given that natural gas is only trading at 15%-20% of the price of oil on an energy equivalent basis.
Our two hydrocracker projects at Port Arthur and St. Charles remain on budget and on time for completion in the second half of 2012. These projects were designed to capitalize on high crude oil and low natural gas prices while producing diesel and gasoline to meet growing global demand. Now I'll turn the call over to Ashley to cover the earnings model assumptions.
Thanks, Mike. For modeling our first quarter operations, you should expect the refinery throughput volumes to fall within the following ranges: the Gulf Coast at 1.38 million barrels per day - 1.42 million barrels per day, the Mid-Continent at 390,000 bbl/day- 400,000 bbl/ day, the West Coast at 220,000bbl/day- 230,000 bbl/ day, and the North Atlantic at 450,000bbl/day - 460,000 bbl/ day. The lower throughput volumes in our Gulf Coast and West Coast regions are due to substantial turnaround activities planned for this quarter, particularly at our St. Charles and Wilmington refineries. A listing of our planned turnaround activities was posted this morning to our website under the newsroom. Refining cash operating expenses in the first quarter are expected to be around $4.50/bbl , which is higher than last quarter due mainly to lower throughput volumes and some higher maintenance costs related to the turnaround activity.
Regarding our ethanol operations in the first quarter, we expect total throughput volumes of 3.5 million gallons per day, and operating expenses should average approximately $0.34 /gal , including $0.03 /gal for non-cash costs such as depreciation and amortization. With respect to some of the other items for the first quarter, we expect G&A expense, excluding depreciation, to be around $160 million. Net interest expense should be around $85 million. Total depreciation and amortization expense should be around $400 million. Our effective tax rate should be approximately 36%. Okay, John, that concludes our opening statements. We will now open the call for questions.
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're 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. Standing by for questions. Our first question comes from Doug Terreson from ISI. Please go ahead.
Good morning, guys.
Morning, Doug.
Mike mentioned in his opening remarks that refining margins have improved versus Q4. On this point, I wanted to see if you could provide your view on product balances in the Atlantic Basin over the intermediate term, meaning while demand has not been great and capacity growth was pretty significant during the second half of 2011, the next couple of quarters appear to be more promising, especially with the closures announced in recent months. I just wanted to see if you'd provide your perspective on the demand and the supply sides of the equation for the basin in coming quarters, and also updates on the status of Aruba, too.
Okay. Well, Doug, this is Joe.
Hey, Joe.
I'll speak for a minute to the gasoline piece, and then somebody else can speak to Aruba. But obviously, with what's happened in the marketplace from a supply perspective, things look encouraging. You've got plant closures in the Northeast U.S. You've got the situation with Petroplus in Europe. We have Hovensa making announcements. Isla still isn't running well. So from a supply perspective, products tend to be a bit tighter than they have been.
Perfect.
If you look at U.S. gasoline demand, of course, it's not particularly strong, but the real story in gasoline continues to be the export markets, where year to date through December, we exported 511,000 bbl a day of gasoline, which is up 175,000bbl from the previous year. So that continues to look good. Will it continue? I think it probably will. You've got Latin America growing, and they continue to import. Venezuela still has issues at their domestic refineries, and then they're involved, of course, with Isla and Hovensa. Mexico gasoline imports were up to 405,000 bbl a day, and Petrobras continues to pull gasoline. So if you look at the gasoline markets in general, I think that we're going to continue to see very strong demand, and our export business should continue to be strong.
On the distillate side, again, you had just average distillate markets here in the U.S., but their exports were also very strong. The industry exported almost 850,000 bbl a day. So that continues, and the same refinery issues that are affecting gasoline are out there for diesel also. The heart of Europe, which was closed a little bit earlier this year, is now open again, and so we're seeing barrels move that way. Our exports for the quarter were 65,000 bbl a day of gasoline and slightly over 180,000 bbl a day of diesel fuel. So that continues to be good for us. So I hope that answers your question.
Yeah, that's a good answer, Joe. Thanks.
Concerning Aruba, Doug, we continue to look at our strategic alternatives. We are in the same boat as was announced by one of our competitors operating in the Caribbean. We intend to have a decision here very shortly here within the first quarter.
Our next question comes from Jeff Dietert from Simmons & Company. Please go ahead.
Good morning.
Morning, Jeff.
My question revolves around heavy sour discounts in Maya. You talked about Maya discounts being soft in the first quarter. Lots of things influencing that. The K- factor is moving around. Resid inventories are low, which is propping up Maya pricing. You got Hovensa coming out of the market, and then eventually Seaway deliveries coming later in June. Could you talk about your expectation for Maya and heavy sours as we look through 2012?
Yeah, Jeff, this is Joe again. I think you cited on so many of the facts that are going to affect this market. Right now the discounts are weak, and as you said, resid is very tight. We also had the compression of the WTI Brent spread, which WTS moves with. As that came in, as did the respective, the relative prices of WTS. So 80% of the Maya formula was affected by those two components. As you mentioned, the K- factor, we saw the Mexicans adjust the K by $1.90 a month the last two months, and we expect them to continue to move that going forward. So although the discounts are weak today, I think our expectation is that we'll see discounts somewhere close to last year's levels or slightly below as the year moves on.
Thank you. Secondly, you guys have been supporters of TransCanada's Keystone Pipeline, and that's experienced some government delays. Are you free to pursue whatever options are best in moving Canadian crude down to the Gulf Coast? Are you considering both TransCanada Keystone and Enbridge, or are you focused on one or the other more intently?
Well, Jeff, we continue to be big supporters of Keystone. We think it's a great project, and we're committed to that pipeline. That being said, we have a strong appetite for heavy sour crudes in the Gulf Coast, and we're watching the other projects as they develop. Obviously, we've got Enbridge and Enterprise that have one project in place. We've got an open season now on another pipeline that would parallel the Seaway project. It runs from Cushing south to Cushing, and then on down to the Gulf Coast. We support all of these projects that would bring additional crudes into the Gulf.
Thanks for your comments, Joe.
You bet.
Our next question comes from Ed Westlake from Credit Suisse. Please go ahead.
Hey. Yes, good morning, everyone. I guess on the call, signaling higher payouts of and rising free cash flow. Maybe just give some color about your thoughts about shareholder distributions, and then I have a follow-up. Thank you.
We increased our dividend last year, and we bought shares in the fourth quarter. There's a few shares that carried over into the first quarter that we purchased because of settlement dates. But clearly, we'll look at increasing our dividend, buying some of our shares as we complete our projects. Now, first we're going to maintain our investment-grade rating. Then we have the Port Arthur hydrocracker should be done at the end of the second quarter, starting up in the third. Then the fourth quarter, we finish the one at St. Charles. So as these projects are getting completed, we'll look at how we manage our cash.
The other thing that we have said when we've spoken to you all, as we look into 2013, we expect our capital spending to fall from our $3.4 billion, where we are today for 2012, down into $2.5 billion to the low $2 billion for next year.
Very helpful. Just a follow-on separate area, but you're actually making money in the North Atlantic, even as everyone else closes around you. Given that you were able to make money from the assets that you've chosen to invest in, are you tempted to add more to the European refining portfolio if you can find a similar advantaged asset as Pembroke?
We have a very good base in the U.K. and Ireland. So with all the noise that's going on with some of the refineries that are available, yes, we would take a look at this. We say that about everything anyhow. But if you actually look at it, we want a very strong strategic fit. It needs to be compatible in the sense of moving streams between refineries. It needs to bring marketing or at least support our trading in the Atlantic Basin and then the exports that Joe spoke about. So it has to have strategic or synergy value to us in fitting into an overall system. But obviously, we read the news, and we see what's going on as well. And we have a good base there that we didn't have prior to our acquisition of Chevron's business.
My interpretation of good base, is this correct, is that you could just stick with your current assets. Therefore, the bar for any further acquisitions would have to be that much higher?
That would be absolutely right.
Okay, thank you.
Our next question comes from Doug Leggate from Bank of America. Please go ahead.
Thank you. Good morning, everybody.
Morning.
Going to try a couple of questions also, if I may. The first one, Bill, when you talk about your strategic options for Aruba, and obviously you've brought in Europe to the discussion as well, can I ask you to bring us up to date with your thoughts on the West Coast? Particularly as it alludes to the free cash flow on the West Coast as opposed to the earnings. Specifically, if you have continued the requirements for regulatory spending, does that remain a core area in the perhaps redesigned portfolio as you move forward? And I have a follow-up, please.
As of today, the West Coast is a very key part of our business. You use the word core. It is a core asset for us. We have a good position there. We have very good operations. We have had to spend a lot of money at our Benicia Refinery here for environmental though, and that is true. The thing that you cannot forget on the West Coast is they're still in a recession or a depression. They have unemployment headline number of 11%, a little over that, which means underemployment is probably twice that. CARB is absolutely out of control. They do not work for the common good, and they're hurting the economy in the West Coast. For us now, we continue to work on our cost structure. We're attacking that. The refinery operations are reducing costs in that business, and we're in a competitive position.
We're well-positioned there. The macro is the problem, and it needs to be solved.
Thanks, Bill. My follow-up is really more of a micro question on gasoline. We see how strong distillate cracks are, gasoline less so. You've announced your turnaround program, which, if I'm not mistaken, looks like it's relatively heavy by historical standards. Could you maybe characterize, how do you see the outlook for cleaning up gasoline inventories, the overhang that we have right now? Perhaps if you have a view as to how industry maintenance could perhaps help that over the next couple of months, that would be great, and I'll leave it there. Thanks.
Well, for us, these turnarounds have been scheduled. The one in St. Charles that Ashley said, we put up our turnaround schedule on the webpage. But these have been scheduled turnarounds. So St. Charles will be down for 66 days. In April, McKee goes down to do work on the cat cracker, which will reduce gasoline production up in the Texas Panhandle. So ours have been scheduled. There's no question that gasoline is sloppy, although, quite frankly, the cracks have improved significantly here just in the last couple of weeks. But part of the issue, again, is in North America and in Europe, we have growing, at least in North America, growing but very slow economy. Europe, Western Europe, I don't know if they're technically in recession today or not, but you combine the uncertainty we have economically. We do have higher prices.
We have in the U.S. this housing overhang. Remember, we sell fuels to everybody. There's a large segment of our customer base who either is unemployed or facing economic uncertainty. So to me, we have to have people getting back to work and economic activity picking up, and we'll see demand recover. I think we'll see higher demand this year than we had last year. The turnarounds, when we're down, obviously reduce production, just as all the shutdowns that have been announced are doing. But I'm optimistic that gasoline's going to be fine this year, but we do need to get people back to work. Distillates is still doing just fine. As Joe said, the arb open again to Europe. Economies around us are growing. From our U.S. Gulf Coast business, we'll continue to export.
Thanks, Bill. I'll leave it there.
Our next question comes from Paul Cheng from Barclays Capital. Please go ahead.
Hey, good morning, guys.
Morning, Paul.
Mike, can I ask some balance sheet data in terms of working capital, the long-term debt out of the total debt component, and the inventory market value in excess of both?
Sure, Paul. Our total current assets at the end of the year was at $16 billion. Total current liabilities was $12.7 billion. Our net working capital was $3.3 billion. Our market value in excess of LIFO is about $6.8 billion. Total debt at the end of the year was $7.7 billion, and our stockholders' equity was $16.4 billion.
Mike, out of the $7.7 billion in total debt, how much is long-term debt?
Pretty much almost all of that is long-term debt. We did have $250 million that was under our AR program. Included in those numbers is about $45 million of capitalized leases.
Okay, perfect. Bill, or maybe both Bill and Mike, you're talking about raising the dividend and maybe doing a bit of the share buyback and returning cash. With next year, your budget is at the $2 billion-$2.5 billion, and that locking on the Wood debt, that's generally a pretty substantial sum of free cash with your DD&A already in the $1.7 billion-$1.8 billion. How are you looking at them? Historically, I think in a rising cash flow environment, you tend to spend more as a percentage in the share buyback than dividend. Going forward with that, how you look at it with a recent Barron's article talking about the 4% yield, which for you guys at current share price is about $1 per share. Do you think the volatility in your business is still way too high there for you trying to shift for that kind of a yield?
Well, I've said that once we get through this spending that we're doing, which we think are very good projects. You're asking me, how do I look at this? We have said that we want to pay one of the highest dividends among our peer group, and that is what we're going to do. When I try to match it up between dividend and stock buyback, if we don't have better projects that add shareholder value, then we're going to have our dividend that's high or one of the highest of our peer group, and then we'll use the rest of our cash to maintain our investment-grade rating. We may buy back some of our debt or redeem it, and at the same time retire some of our shares.
Bill, do you have a target ratio between in terms of the cash return to the shareholders, say 40/60 between dividend and share buyback or 30/70 or any kind of target?
No, I do not. I will go ahead and add, we as a company do not see benefits of special dividends. We would tend to act in a more regular manner in the sense of what I just said, paying a dividend that's one of the highest of our peer group, and at the same time then buying our shares.
That is great. Bill, in the past you have said you have been in discussion with Murphy on the Milford Haven. Can you update us whether you are still in discussion on that? Also, you have laid out some of the criteria when you are looking at assets, wondering whether BP Texas City will fit into your criteria in general?
Okay. There is always confidentiality agreements associated when we look at things, but I have said our Pembroke refinery is right across the Haven from-
Milford.
Milford Haven. I have also said there would be some advantages. However, we are not talking to Murphy.
You are not talking to Murphy now?
That is correct.
Okay.
As far as Texas City, we have said in the past we have looked at that, but there is confidentiality agreements, and nothing seems to be happening.
I see. Thank you.
Thanks, Paul.
Our next question comes from Blake Fernandez from Howard Weil. Please go ahead.
Guys, good morning. Couple questions for you. One, as I understand it, the results in the quarter were negatively impacted from your long-haul crude purchases that were tied to the WTI Brent spread, which compressed. I'm just curious if there's any way to, one, quantify that, and then secondly, is there any discussions of maybe changing the way that you structure the purchasing going forward?
Okay. Yeah, Blake, we have estimated what that impact we believe was in the fourth quarter, and the number is about $200 million.
Okay.
As far as how we have an estimate of the number of barrels that we had WTI exposure on. We have been transitioning away from purchasing some of our crudes and hedging away from WTI and reducing that exposure. Joe, do you want to?
No, you are exactly right. During the quarter, we looked at the market, we saw the spread had blown out to where it was, and we did not think it was sustainable. It was affected by Libyan oil being out of the market and then coming back in. Then the announcement of the Seaway reversal, of course, had a significant effect on it also. We anticipated that it would come back in, so we started shifting, as Mike said, to different bases for our hedging and acquisitions.
Okay, but it is fair to think that is not really going to be prevalent in the first quarter?
Right.
Okay. Then secondly, Joe, I know you already pretty much covered the export dynamics, but if you do not mind, as I understand it, Valero is increasing their export capacity this year. I was just curious if you could give us some timing of when that occurs, and is there really incremental demand as it stands right now to actually increase the amount of exports from your system?
Yeah, that is a good question, Blake. We are working on multiple things that are going to facilitate our ability to export more effectively in the future. Some logistics projects, but the two hydrocracker projects will be a big plus for that. We will be able to produce diesel fuels that are of a high quality that allow us to move them anywhere. The European spec is a more stringent spec than just a generic grade, so we will be able to move more barrels that direction. Then it all goes to demand. So I am telling you, we are going to have the ability to export, then it goes to demand. With what we are seeing in our industry now with refinery closures and shutdowns and reduced run rates, I think we are going to see strong demand. Plus, you have growth in these markets, as Bill said earlier.
You got growth in South America, Latin America. You have growth in Mexico. In addition to supply being constrained, you are going to have higher demand. We are going to be the beneficiaries of that. We always forget how efficient the Gulf Coast refining system is globally, but it is very efficient, and I think we can compete with anybody.
Okay. That is great. I will leave it there. Thank you.
Our next question comes from Sam Margolin from Global Hunter Securities. Please go ahead.
Good morning.
Morning.
I have a question. It is somewhat related to the WTI-linked long-haul barrels. It is regarding the buy-sell contract mechanics in the Gulf Coast, which presumably also had an impact in 4Q. Are there any initiatives underway or talks with producers here domestically in the Gulf about using a different kind of contract in that mechanism during the delivery lag?
Yeah. I guess we would rather not tell you.
Okay.
It is a fair question, but we would rather not tell you specifically what we are doing relative to our crude acquisitions. I think we had a pretty good feel for the market, and we made some good decisions, and I would rather just stop there.
I will add, so you have some feel for it, that what you typically are doing is locking into differentials. You can do that with WTI, you can do that with Brent, you can do it with a lot of things. How we manage that really becomes a company's internal decision. That is why Joe is saying, t o us, it is doing our business every day, and it is a competitive world. It is really locking in the diffs. Obviously, we had some diffs locked in on Brent. Or we would have lost more money.
Okay. Well, here's one that should be less controversial. On the retail numbers, the same store sales were flat year-over-year. That stands in pretty stark contrast to the DOE demand figures. It looks like there's some kind of error in that data set, just based on the massiveness of the drop-off. Your retail numbers, is that reflective of a broader picture of better than expected demand, or is that just your location and exposure and company specific?
This is Jean Bernier here. No, you are right. Our fourth quarter volume, when compared to the same quarter last year, was better in the fourth quarter than our year-to-date trend. Overall, we're up about 1.5% in the fourth quarter versus a drop of 0.5% year- to- date. And on a same store basis, we have a similar trend. So we did better in the fourth quarter compared to last year, and some regions did better, and Texas in particular, was a good market for us.
Okay. Yeah, it's just noteworthy because the weekly DOE numbers have been putting actually a strain on the exchange traded commodity prices for most of the fourth quarter, and this rebound might reflect some changes in the understanding of that demand picture. So I was just curious if it was a national thing.
Yeah, Sam, you just have to remember where our stores are located.
Okay.
They tend to be Southwest, with most of them in Texas. Texas has a good economy.
Then in Canada. Yeah, same thing in our Canadian.
Yeah, the Canadian volumes are this quarter when you look at the overall volumes, but that is mainly from our heating and cardlock segments. If you look at our retail gasoline, we were about flat to last year.
Okay. Thanks very much, guys.
Our next question comes from Paul Sankey from Deutsche Bank. Please go ahead.
Hi. Good morning, everyone. There is quite a significant union issue today, I believe is the deadline. Bill, can you talk a little bit about any potential impacts that we may have, what you expect to happen, what has happened in the past, and also if you could widen that out from not only a Valero impact potentially, but also to a wider industry impact, I would be grateful. Thanks.
Well, Paul, I will first speak to Valero. We have two refineries that have agreements that terminate tonight. We continue to negotiate, and I have the expectation that we will have an agreement. At Port Arthur, we have actually five agreements, and we have tentatively have reached agreement on four, and so really there is just one agreement. Now, we were served with notice that they I guess it is a notice that says they can strike or will strike-
Strike.
if we don't have an agreement here at Port Arthur. At Port Arthur, we intend to operate if that's the case. As to other companies in the industry, some companies were served. We've heard there were two companies that were notified that they could have a strike. Remember, we're part of the pattern. Valero is a member of this group that negotiates. Shell has the lead and is negotiating the pattern. We'll see what happens today, but we expect that we're going to have an agreement. We'll see what happens.
Thanks, Bill. I think Memphis is the other affected refinery for you guys?
Memphis for us is an agreement does expire tonight. At Memphis, we have negotiated with the union an orderly shutdown. If they decided to strike, we will shut down at Memphis.
On balance, you expect an agreement?
Yes, we expect an agreement.
That's great. Thank you. That's very helpful.
We're a great company to work for.
Yeah, I knew that, Bill. I knew that, but worth repeating.
Yeah. But you know, maybe there's a job for you here.
Yeah, I might need one, mate, if Wall Street keeps going the way it's going. The other question I had was on ethanol. There's been a significant change between Q4 and Q1, in Washington. I know that you had a record quarter. I believe things are pretty poor right now. If you could just talk to the way ethanol has shifted and whether we're now in a secular change, actually, because of what happened in Washington on the credits and stuff. Thanks.
Yeah. Paul, this is Gene. Our margins in the fourth quarter averaged about $0.56 a gallon on an EBITDA basis, which is the strongest quarter we ever had, obviously, and the year averaged about $0.35 a gallon. Since then, the margins have come off. Right now in January, we're somewhere between break even to a nickel a gallon. Pretty weak. Remember last year this time, we were pretty weak as well. I think what, if I let you know what's happened, we lost the blender's credit, but I don't think that in itself has had much to do with the margins because ethanol today is about $0.60 a gallon under gasoline in the East Coast. So it's still a big margin for blenders to blend, regardless of whether the credit's there or not. I think more what's going on is just the supply-demand.
Demand in the fall was around 850,000 bbl a day, plus we were exporting 100,000bbl, 120,000 bbl a day. So you add those together, you needed the supply, and supply ramped up from 900,000 bbl a day to about 950,000bbl a day. So it was a very tight market. What's happened in December, January, just a seasonal reduction in gasoline demand has reduced ethanol blending down to around 750,000bbl, 760,000 bbl a day. Everybody was still running this 940,000bbl a day, so we've been building inventories. The exports haven't been enough to consume all that with the seasonal drop-off in demand. Going forward, I think what's going to happen, these poor margins we're seeing, remember these that are even at our plants located in the Corn Belt, plants that are outside the Corn Belt are negative cash flow right now, so we'll see productions fall off.
At the same time, remember, the mandate this year is 860,000 bbl a day. We are blending below the mandate. People are probably using credits right now to soften the difference. At some point in the near term, we are going to actually see ethanol blending move higher to this average of this 860,000 bbl a day for the year. You factor in exports, which have been strong into Brazil, Canada, Europe. I think they are going to stay in this 100,000bbl-120,000 bbl a day range. I think the market is going to tighten back up, but we are just going through a soft period right now.
Understood. That is a great answer. Thanks, guys. I see the time is okay now, so I am going to throw in a third, and it might be a little bit of a question I should know the answer to, but I believe that Gulf margins right now are pretty much an all-time record for January, and we have talked about weak gasoline demand. Obviously, we know the export story. Could you just make any observations you have on just what is driving that strength? It does seem very impressive. Thanks.
Well, this is Gene again. One thing we are seeing on gasoline, the exports have gone up over 600,000 bbl a day. Joe mentioned the numbers earlier, 500,000bbl. That was for the year, but just on a weekly basis, the numbers continue to look quite good. We talked about Hovensa shutting down and the Petroplus issues and some of the East Coast refineries shutting down. I think all of those things just are tightening up the projections for a stronger spring.
Great.
Let me add, we don't see the issue, per se, on supply in the sense that supply is in reasonably good balance for this time of year. It's been a demand conversation, and we're like a lot of people, we see the economy starting to recover. So we think that demand will be better as we get into the summer. Then, as Gene said, when you think about how the supply side has been affected here, that actually we see good margins as we go into summer.
Great. Then just to finalize on that, is there anything strange or unusual about the capture that you're achieving of the current margins? Is there anything we should be aware of as we work through Q1? That'll be it from me. Thank you.
I would say no.
Our answer is no, there should be nothing that's acute or aware.
Thank you.
Our next question comes from Evan Calio from Morgan Stanley. Please go ahead.
Morning, guys.
Morning, Evan.
Hey, to follow up on the Atlantic Basin, I see the clear benefits on supply for Pembroke from Atlantic Basin tightness and closures. Yet, where do you see the volume limitations on Colonial product into the East Coast, and do you see a potential to move more product out of the Gulf Coast into the East Coast? Clearly, you'd think RBOB would be a lot tighter this summer into that market, ex events in the two other assets that shuttered in November.
Right. Well, on Colonial, we'll see it prorated, right? It's going to stay full all the time. A lot of barrels are moving out of the Gulf to Florida. They can also move around to the East Coast. It always becomes, from our perspective, an arbitrage opportunity. Where can you supply the East Coast demand that we have most efficiently? Is it out of the Gulf, or is it out of Quebec, or is it out of Pembroke? That's the way we would view this. But as far as the Atlantic Basin goes, there's just volume coming off from a refining perspective, as we've talked about now, everywhere. It's just making it a much more attractive market for the refiner that can move effectively. When we look at our supply opportunities, they are significant.
The issue in trying to determine the ultimate net back that you are looking at comes down to shipping oftentimes. Foreign flag vessels moving from Quebec and from Pembroke into the New York Harbor are advanced.
Right. What is the barge arb out of the Gulf Coast? Is that the widest of those three? Obviously, Pembroke and Montreal being easier.
I am sorry, I am not sure what you are asking.
Does the arb have to be the widest in order to justify barging product from the Gulf Coast out and around Florida to the East Coast, or is that?
No, not always.
Okay.
It just comes down to then just being sure that you are efficient in the supply. There are factors within the refinery that will affect your decision to move one way or the other in addition to the margin. Generally, we're trying to optimize the margin.
I have a follow-up question. It relates to differentials. I guess, first with Maya, why you guys were constructive on that spread. What is your ability, or what's the spread that incensed Valero to flex away from Maya and into LLS? LLS is trading under Brent, and you have a lot of issues. There's a lot of different differentials there. Curious what that price was or if you were incented in the 4Q to shift away from Maya runs. Conversely, to the West Coast, where crudes are relatively bid into Asian refining startup capacity, the converse of the Atlantic Basin. Are you seeing most crude options pricing in the same direction of ANS, which is a tricky marker to follow?
This is Gene, let me go to the Gulf Coast first. I think what we're seeing with Maya prices, where they are today, we're more advantaged running medium sour crude opposed to Maya. We are shifting some there. Also, the LLS is much cheaper than foreign suites, and some of our refineries like Houston can run those suite. We lighten up our crude slate a little bit there. I think the Maya will widen back out. There is competition. There is more Venezuelan crude coming on. There is still lots of barrels coming out of Colombia. I think you will reach more of an equilibrium. We do not want to just completely go off of Maya and into heavy crudes. From short term, we do have ability to flex a little bit. As far as the West Coast, Joe, do you?
Well, I do not think that ANS is behaving any differently than the other crudes out there.
Okay. So it is reasonably indicative of what you would be realizing.
Yeah. The only crude that is out of step with the rest of the market is WTI. LLS, frankly now, we are starting to see it move away from Brent. You will see that number. I guess LLS is $1.62 below Dated Brent today, which is a change from where it was last year.
Yep.
It is weakening, and it is weakening because you are seeing more sweet barrels push into the Gulf Coast, and it goes to the thesis that I think Bill and Gene have shared with you guys in the past, that ultimately, domestic sweet crude pushing to the Gulf Coast is going to put pressure on LLS margins. It will put pressure on foreign sweet pricing, and ultimately, you could see foreign sweet crudes completely backed out of the market. It is going to be of benefit to the Gulf Coast refiners. We run sweet crude at Meraux. We run sweet crude at Houston, as Gene said. If you back the foreign sweets out of the Gulf, you are going to benefit Pembroke and Quebec also, because those prices come down a bit.
That is probably a four or five-year conversation. We would say in the U.S. Gulf Coast, on what we see on the production and the capability to move the oil to the Gulf Coast, that the industry may push out all the sweet crude imports into the Gulf Coast, not the East Coast.
What you think that would change your diet of Maya, I guess is what I am saying, especially if Maya was supported on resid tightness.
Well, I think Gene told you today, we are better off running on medium sours at our plants than the heavy sours.
Right.
What that tells you is you are not going to build new coking today and into a sunk coker, there is not probably a lot of fun.
If I just slip in one last one, if I could. I know you mentioned you are supporting other various pipelines. Are you seeking nominations on Seaway, to commit to a potentially advantaged crude source?
I think on that one, we will decline to answer, except go back to what Joe said earlier. We want the heavy crude to the Gulf Coast. We're very public on Keystone, but he also said that we're in the way talking to all of these companies.
Got it. Appreciate it, guys.
Our next question comes from Mark Gilman from The Benchmark Company. Please go ahead.
All right, guys. Good morning. A couple quick ones if I could. Are you cash positive in the fourth quarter?
Absolutely no.
Bill, was that a negative? I am sorry, I did not catch it.
Yes. No. We are not cash positive. We are not.
Okay. Could you update us a little bit on the Eagle Ford crude takes at Corpus and Three Rivers in the fourth quarter, and where you expect them to be in the first?
Yeah, Mark, this is Joe. We ran about 60,000bbl in the quarter. We're running 80,000bbl today, and we expect by the end of the second quarter, we'll be running 100,000bbl.
Joe, how does that split out between the two plants?
The bulk of it, certainly in the fourth quarter, I would tell you 55,000bbl of the 60,000bbl went to Three Rivers. I don't have it specifically marked, but I think we're going to be running 30,000bbl of the 80,000bbl in Corpus today, and then about that same range in the first quarter.
Okay. The 100,000bbl that you mentioned, that end of first quarter or second?
It will be during the second quarter.
Okay. Any specific plans in place for diesel yield enhancement at Pembroke?
Lane or Gene?
Hi, Mark. This is Lane. We are currently looking at different ways to re-optimize their FCC catalyst and trying to get to a more selective riser conditions with catalyst. Obviously, we are looking at their distillation just to make sure the right molecule is in the right place. We do not have a project per se right now lined up to increase their diesel production, though.
Okay. I am a little bit confused as to what Mike's $200 million number represented in discussing the long-haul crudes. Is that pre-tax, after tax? Does that encompass what I believe would have been a very negative crude roll impact in the MidCon? If you could identify roughly what that might have been in the fourth quarter, I would appreciate it.
Okay. What that does represent, it is a pre-tax number. The volumes, I do not think I can disclose due to-
It is a pre-tax number, and the question was that we answered on the long-haul crudes, which basically are the crudes that we had exposed to WTI as we set our differentials and locked those crudes in. That is $200 million.
Okay.
The other piece of your asking is, yes, it's negatively impacted our performance when it went from $25 -$ 10 at McKee and Ardmore for sure. We still made money at those refineries, but now we have a $10 diff instead of a $25 diff. With the volumes we run at those plants, the difference between, in a way, $25 down to $10 is about another $200 million. But we were still profitable at those refineries. Obviously, there's a $10 advantage.
Okay, that $200 million, Bill, that you just mentioned, that's also a pre-tax number, I assume.
Yes. We're giving you everything in an operating profit.
Yeah. Okay. Just one more real quick one because I've got to jump. The decision to participate in both cellulosic ethanol as well as biodiesel, it sounds to me as if you're willing to put a reasonable amount of money on the table here.
I can answer you, Mark. We think that in the U.S., we are going to have the continuation of the mandates to use it. We have this Renewable Volume Obligation. When you look at it is a large number for us. Even though we manage these in the sense of profit centers, when you look at the overall company, we want to control some of our destiny. Even if we have a new Congress or whatever, we still think those mandates are going to continue. The answer is, last year for RINS, we spent how much? $100 million and-
$155 million.
$155 million for RINS. Did that include the diesel RINS?
Yes.
That is our total. We spent $155 million buying RINS. Our estimate for this year is nearly twice that for RINS when you count diesel and cellulosic and regular. Yes. Your answer is right. We think it is part of the fuel mix, and we have a good project on biodiesel or renewable diesel. We have a good partner, so we are going to run that like a refining project. The Ken Ross project that has been announced with Wood, we think is a good opportunity to get our toe in.
Thanks, Bill. That helps a lot.
Our next question comes from Chi Chow from Macquarie Capital. Please go ahead.
Great. Thank you. Back on the crude hedging loss in the fourth quarter, I am assuming that you had also a pretty sizable hedging gain in the first quarter through the third quarter of last year. Mike, could you quantify what those gains might have been?
Your question is, I am asking you, because we are buying crude that we set the differentials against WTI, then we benefited just like every other mid-continent refiner on that. Is that your question?
Yes. I am assuming that you used NYMEX WTI contracts to hedge long haul. When the spread blew out from $3 - $28 in the first three quarters, I am assuming there was a hedging gain in the first three quarters then.
All right. So there was. So we're going to answer you for the long-haul barrels. Okay, Mike?
Okay, yeah. That number is estimated to be a little bit over $700 million benefit.
Mike, do you have that broken out by quarter?
I do. It's roughly about $250 million in the first quarter, $210 million second, $250 million third.
Okay, great. On all these contracts, is there a particular region that is hitting? Is it all in the Gulf Coast, or is it spread out between West Coast and Gulf?
Yeah. Our volume is so skewed to the Gulf, that is where you are going to have the biggest effect.
Okay. Great. Thanks. Then Mike, in 2012 here, your debt maturities, do you just have the one, the 6% and 7/8% notes coming due?
Well, that is correct. We have $750 million that comes due in April. Then if you look at our balance sheet when you see it will show $250 million of current maturities associated with our AR program. But that renews annually, and we anticipate renewing that.
Right. Okay. Then in the fourth quarter, what sort of working capital impact did you have on through cash flow?
Actually, we had about a $700 million cash requirement associated with working capital. What makes that up is our receivables, payables, net increase. That was about a little over $300 million. We had an increase in our income tax receivable of about $200 million. Then we also had some prepayments on crude. It is more of a timing deal from January to December, and that was another roughly $200 million.
Okay. Do these items reverse out here in the first quarter?
I am not exactly sure of the timing on the income tax receivable. On the receivables, payables net, that should reverse over time, yeah.
Right. Okay, great. Thank you.
Our next question comes from Cory Garcia from Raymond James. Please go ahead.
Good morning, fellas. One quick question out of me, sort of switching up the export angle a bit. Are you guys sending any gasoline or diesel off the California coast? Maybe quickly, your views on the West Coast export trend.
We are not. My views on the export trend, you got a view out of West Coast?
Well, we think that there eventually could be an opportunity there. We need to have that capability. That's one reason we're working our cost structure so that we can compete. That would be into the West Coast of South America, might have a freight advantage of not going through the Panama Canal. Also, there's action going on in refining capacity in Hawaii, as you know. We haven't done anything as of yet, but we're looking at this type of optionality because we believe a key part for all refiners in the U.S. is having the ability to export.
All right. Makes sense. Thank you.
Our next question comes from Harry Mateer from Barclays Capital. Please go ahead.
Hi, guys. Just a quick one. Given the rate of spending this year, you do have a $750 million maturity coming up in April. Can you just tell us what your plans are with respect to that?
Well, as of right now, we will go ahead and redeem that, but we're actually looking at how our cash flow goes for the next month or two from operations. Our projects look like they're on budget and on time. We'll make a decision here in February, the latter part of February, on how we're going to address that, whether we're just going to redeem it or whether we'll need to issue something.
Okay. Thank you very much.
That's a board item for us, so we'll go back to our board and explain to our board how we're going to do it.
Great. Thank you.
We have no further questions at this time.
Okay. Thank you, John, and thank you for listening to our call. If you have any further questions, please contact the investor relations department.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.