And with that, our keynote this year is Chairman, President, and CEO of Valero Corporation. Joe and I have been friends for a long time. I think he's presided over, I think, one of the biggest changes in behavior in this industry when he took over as CEO. Please join me in welcoming Joe to the podium. We are webcasting today, so we're going to try and stay on schedule. Joe, thanks for being here.
Thanks, Doug. All right. Well, good morning, everybody. Good to see you. Great to see friends, people that are dealing with the same issues we are out there. Let me go ahead and get into this, since Doug did say we've got a timeline. I'll start with the safe harbor statement. Basically, what this says is that this presentation contains forward-looking statements that are not guarantees of future performance and are subject to risks. With that out of the way, we'll talk about the company. Valero is a premier liquids fuel manufacturer and marketer. What we have on this page is really a description of our three reporting segments. We've got a refining segment, which includes our 15 refineries, it includes our logistics business, and then it includes our fuels marketing business.
Our logistics business, you guys may know, we used to have a publicly traded MLP that traded under the symbol VLP. We bought it in. We announced last year that we were buying it in. We ended up buying it in this year, so it doesn't show up as a segment anymore. The reason for that was that the market obviously had changed. But the logistics assets that are in VLP, that were in VLP, were all there to support Valero's core refining business. They weren't assets that we felt we could lose control over. Some of the structures that were available to us to have a sustainable MLP just weren't viable for us. So we went ahead and bought it back in. But as I mentioned, they are dedicated to supporting our core business and optimizing our supply chain.
Next, we've got our ethanol business, and this is a corn-based ethanol business. We produce 113,000 bbl a day of corn-based ethanol, and I'll talk more about this business here in just a few minutes. Then the new reporting segment that you'll see beginning in the first quarter is our renewable diesel business. This is a material business to us. We currently produce about 18,000 bbl a day of renewable diesel. We're in the process of doing an expansion, which again, I'll talk about in a minute. That will take us up to 44,000 bbl a day of renewable diesel production. This is really a very high-margin product that we're able to produce, and we've got a first-mover advantage on it. It's something that we're pretty enthusiastic about to the point where we created a separate reporting segment for it.
Again, you' ll see that starting in our first quarter reporting. Okay, so this gives you an idea of our geographic footprint. You can see the colored states are those that we have a wholesale marketing presence in. Then we'v e the Valero logo where we have a branded presence. You can see the refinery icons, and that would show you that we have refining assets that go from the West Coast of the United States through the midcontinent, significant presence in the U.S. Gulf Coast. Then we supply the Atlantic basin with our refinery in Quebec and our refinery in Wales. So we' ve pretty good coverage from a refining perspective. Then you see the ethanol plant icons.
The key point here is that those ethanol plants are all located up in the Midwest, central Midwest, which is in the middle of the Corn Belt, which makes the efficiencies around transporting feedstocks and then moving the finished product out pretty effective. Then you can see our terminals and our pipeline assets and finally the Diamond Green Diesel plant, which is located near New Orleans at our St. Charles refinery. So that is our geographic footprint. We' ve pretty good coverage here in the U.S. and by water on a broader basis. The way we go about creating value is really pretty simple. We focus on our operations, and our goal is to be the premier operator in the business. We focus on safe, reliable, and environmentally responsible operations.
I'll show you some of our stats on how we've done there here in just a couple of minutes, but our performance has led us to have the lowest cash operating cost in the business, which is critical when you're operating in a margin business. The second component to this strategy is really visibility to earnings growth. We are investing in projects that are providing significant EBITDA contributions to the company, and they're really focused on addressing operating costs and letting us to control that better on market expansion and on margin improvement. There are great projects. I will cover a few of them here in just a minute. Finally, our commitment to our shareholders. We have provided pretty significant total shareholder return over the last year, last several years with consistent increases in the dividend and pretty aggressive share buybacks.
We' ve a targeted payout ratio of 40%-50%, which we have exceeded for most of those years, and we're very committed to it. So very simple approach to creating value for our owners. Now, one of the key components within this is the capital allocation framework that we have here. This has been a constant for us for several years. It guides us in how we're going to allocate capital. We start with the overriding premise that we are going to maintain a very strong balance sheet. This includes maintaining our investment-grade rating and then keeping our debt to cap at very manageable levels. 20%-30% is our target, and we've been well within that for the last several years. Then if you look at our use of cash, it's really broken up into two categories.
We have the non-discretionary category, which includes our sustaining CapEx, that is turnaround and maintenance capital, and then our dividend. We are uncompromising on our commitment to allocating our financial resources to these two categories. If you look at the bottom, you see our discretionary components, and these are where we've created competition within the organization for remaining free cash flow. It's broken up in growth CapEx, acquisitions, and cash returns. The cash returns we're talking about here really is the share repurchases. Again, we look at that in the context of maintaining the payout ratio of 40%-50% of adjusted free cash flow, and we have executed to this capital allocation framework for the last five years. Just to give you an idea as to how we've done, this is what we've achieved from a capital allocation perspective.
You can see the bar charts on the left. At the bottom, we've got the dividends, then we've got our sustaining CapEx, again, the non-discretionary components. Above that, you've got our growth CapEx and our buybacks. This is how Valero has allocated its cash flow over the last five or six years. If you look at the chart on the right, you can see that we are going to spend nominally $2.5 billion a year on both sustaining and growth CapEx for 2019 and 2020. Now, we added the 2020 guidance because late last year, we were receiving a lot of feedback that people thought based on some of the things that we announced, that we were going to significantly increase our capital budget and w e're not doing that.
We're doing what we told you guys we're going to do for several years, and that is maintain capital expenditures in that $2.5 billion range, give or take, based on timing. The result of these activities has been to allow us to have cash available to do these two things. Number one, you can see on the left where our shares outstanding have been and what we've done with the dividend. We' ve materially reduced our share count, and we have significantly increased our dividend. If you look at the chart on the right, this shows you where our dividend yield is relative to other sectors, but also where we are relative to the S&P 500.
One of the things we wanted to do is allow our equity to appeal to a broader market, and having a yield that was attractive and competitive at the S&P level was something we wanted to achieve, so we have moved it that direction. Let's talk a little bit about our operations. This is our safety and reliability results, and it continues to be exceptional. We work very, very hard at this. This isn't something that just happens. This is something that we focus on every day. Lane and his team are totally focused on maintaining safety and reliability within the system. You can see how we're doing on a personnel safety standpoint. I believe that 2018 was our second-best year in company history, second only to 2017, but at levels that are very low.
And then you can see our tier one process safety results. Again, they remain at very low levels and were consistent with 2017. If you take a look at the bar graphs on the bottom, this is how our portfolio, our entire portfolio, shakes out in the Solomon studies. I think there's 83 or 84 refineries that participate in this survey. This would be the aggregation of our 15 refineries put together and the results relative to that population. You can see where we sit with personnel, with maintenance, and non-energy cash OpEx, and energy intensity. We perform very well. What I would direct you to really is the fact that there has been continuous improvement based on the activity that management has undertaken in all these categories.
So it would lead us to conclude that we are the best refiner in the business. I would tell you that we are not satisfied with these results. We believe that we are going to continue to push it, and we're going to continue to drive all of these performance categories into the first quartile. So very good solid operations. Our approach to investing in our sustaining CapEx has led to what you see on this page, which is really very high degrees of mechanical availability. You can see the improvement since 2008, and it is really contributing to what we have in the bar graph on the right, and that is us having the lowest cash operating cost per barrel among the peer group.
We function in a margin business. We aren't able to set the price of our feedstocks, and we cannot set the price of our product, so we operate on the margin. One of the key components in making money in a business like that is that you maintain your cash operating costs at very low levels without sacrificing the reliability of the system or the safety in the system. The processes that we put in place have allowed us to do this. Our system does benefit from great flexibility. What we have here with the bar charts on the left is our CDU capacity. You can see that we have significant CDU capacity in the U.S. Gulf Coast and the midcontinent, which really provides us the opportunity to source feedstocks that are very advantaged, whether it be crude or other feedstocks.
So we see that as a huge advantage going forward. If you take a look at the bar charts on the right, these are the ranges of feedstocks that we can run. You see our range of heavy sours, medium sours, and light, and so on. We have tremendous flexibility within the system to optimize around this. I think one of the surprises that we delivered in the fourth quarter was really the fact that we were able to optimize within the system and provide feedstocks into the system that weren't something that you had clear line of sight to, and it resulted in a very solid quarter.
One of the things I'll say is that we get asked a lot about how much light sweet crude can we run in the system because it's so abundant right now domestically, and we can run 1.6 million barrels a day of light sweet crude. We can talk about this in offline conversations. But Lane and his team are looking every day. They're running the LPs, and they're trying to figure out which crudes make the most sense to run the system based on where the product markets are. We optimize very aggressively. I think the key point here is that our ability to optimize within the system was underestimated in the past, and it should be appreciated. Okay. Now, this shows you the markets that we actually move products into, and you can see the aggressive position we've taken out of the U.S. Gulf Coast.
Now, we move products out of the market to capture the highest netbacks. Really, the products are being pulled into markets that are growth markets or that are supply-constrained in some way. These are our actual transactions that we have that take place. If you take a look at the bar chart that's embedded here, you can see what we did in 2018 from an export perspective. The variation in the volume of exports we have isn't because the market isn't pulling product. It's more because the netbacks are better to keep the product at home than they are to put the product on the water and move it somewhere else.
We want to be sure that we always have capacity to take advantage of whatever the market's giving us, and that's why we've got capacity, current capacity that exceeds our current volume of exports, and we have the ability to increase it going forward. In addition to providing really strong returns and excellent operations, we're very focused on continuing to grow the earnings capability of the company, and that's what this slide speaks to. You can see, and I showed you the capital allocation before, we're spending about $1 billion a year on growth investments. We produced, based on the accomplishments that we had and the projects we brought on last year and late the year before, $340 million of incremental EBITDA. The Diamond and Sunrise Pipelines were great additions to us.
The Wilmington Cogen has reduced our operating costs on the West Coast, and the Diamond Green Diesel expansion is providing a market for us for much higher-margin products. If you look at the projects that we've got underway, we've got the two alkys, we've got the Central Texas Pipeline Project, we've got the Pembroke Cogen. Those are all smaller projects. But if you look at the two larger ones we have, we've got the Diamond Green Diesel expansion. I think the guys are calling that the Super Diamond project. We've got the Port Arthur Coker project. I'll talk about those two specifically here in just a minute. All these projects that we're doing fit within the capital allocation framework and the capital guidance that we've given you.
And you say, "Okay, it's great to invest in these projects, but what are they going to deliver when they're operational?" That is what we illustrate here with this bar chart on the right. You can see that the projects that we have underway with the capital that we're spending over the next five years and the return thresholds that we have are going to produce anywhere from $1.2 billion to $1.5 billion of incremental EBITDA. We' re not caretakers of the business. We're going to operate it safely and reliably, but we also want to grow the earnings capability of the company, and we' ve great projects that are going to allow us to do that. On the Port Arthur Coker project, this was developed pre-IMO, and Lane and his team really worked on this project for several years, and it's a great project.
It allows us to optimize the Port Arthur Refinery, and it is a contributor significantly to our EBITDA going forward, and it has very high returns. It is very unusual when you' ve got bigger projects like this that have a longer cash flow cycle to be able to deliver significant EBITDA and a significant return. This project is really special in that it enables us to do that. We're going to spend $975 million to build a 55,000-barrel-a-day coker that is going to start up in 2022. Based on 2018's average prices, it's going to throw off $420 million of EBITDA, and if you use kind of a mid-cycle price deck, it's going to throw off $325 million of EBITDA. Again, very significant EBITDA contribution and very high rates of return on that project.
Then we have the Diamond Green Diesel expansion, and this project really benefits from the increasing renewable fuels mandate and the carbon pricing that I think we're all going to be dealing with in the future. We' re going to spend here $550 million. That is Valero's part of the 50% contribution to this project, $550 million that will be funded with cash that is generated by the Diamond Green Diesel JV that we have with Darling Ingredients. It is going to increase the production capability of the renewable diesel operation that we have today by 26,000 bbl a day, taking the total output to 44,000 bbl a day. Valero's 50% share of the EBITDA on the $550 million investment is estimated to be $250 million a year at $1.26 a gallon.
The margins on this product are higher than $1.26 a gallon, and we have line of sight, a pretty clear line of sight to those increasing going forward. So, really good project. Frankly, we have a bit of a first-mover advantage on this, and that the relationship with Darling provides us the feedstocks. You say, "Well, these are great margin products. Why isn't everybody doing it? Why aren't you doing more of it?" It really comes down to the limitation on the feedstock side. You run animal fats that are rendered, and you run corn oil and used cooking oil, things like that. That's what gets you the renewable diesel nomenclature versus the just biodiesel. These margins are very low carbon footprint. These products are very low margin, very low carbon footprint, and therefore, they trade at a premium in the marketplace.
Okay, our ethanol business. Here, we've got a great portfolio of assets. It is a very well-run, low-cost operation, and we believe ethanol is going to be part of the fuel mix. That's why we bought three additional plants last year. Margins were weak last year. It was a good time to buy assets, and so we stepped into the market and did that. We produce, again, I mentioned 113,000 bbl a day of ethanol. Margins in this business have been compressed over the last six months or so. They're improving now, so they look better. One of the things that's key, I think, long term to the ethanol business is that we have the ability to export ethanol. The volumes of ethanol being exported are much, much higher.
Quite honestly, I think if we see a resolution to some of the trade agreements that we're working, it allows us to export not only the ethanol but also the distillers grain that goes with this. This business is improving and the outlook for it is pretty positive going forward. Here again, from the bar chart, you can see that the exports of ethanol have continued to grow. So we feel pretty good about this and its place in our portfolio in producing motor fuels. Then the topic that Doug mentioned in his comments is IMO, and we are very well positioned for this. I mean, quite honestly, the tailwinds for IMO are still there. I think we got a little overhyped kind of early middle part of last year.
The bloom came off the rose a little bit in October when there was some commentary around perhaps the president doing something that might affect IMO. Based on everything we're seeing and the analysis that's been done, it's indicating that this isn't going to be as significant a factor for consumers of diesel fuel going forward from a price perspective, and so the rhetoric has toned down quite a lot. We expect that this is going to happen. This is essentially, I think you all know what this is. I mean, it's a reduction of the sulfur content. In bunker fuel, we're going from 3.5% weight to 0.5% weight. What we really think this is going to do is increase the sour crude discounts.
It's going to increase diesel demand and therefore the cracks, and it's going to strengthen gasoline cracks as refineries change what they're doing today and they try to optimize around diesel production. The bar chart on the right shows how Valero is positioned relative to the peers in meeting the requirements from IMO. We are well-positioned, and we do have the highest distillate yield among the peers. So let me conclude with this. Based on what I shared, we believe that we are a compelling investment. You can see where Valero ranks in these bar charts here relative to the S&P 500. We're very high in consensus EBITDA growth. We have a very solid dividend yield. We've had very high TSR relative to this group. Our debt is in very good shape, and our enterprise value to EBITDA is low.
Now, this is very interesting in that we've got a great portfolio of assets. We've got a very disciplined growth strategy. We have a great management team that runs the business quite well. We are focused on rewarding our owners with returns, and we're undervalued. We think it is a great time to be an owner of Valero. So Doug, with that, I'll stop, and we'll go ahead and open it up for questions. Huh?
Great. Well, thanks, Joe, and I should add that we also have Homer and Lane here on the stage with us as well for questions. Please make yourself known if you have any questions. Joe, I'm going to kick off with a couple because I mentioned in my opening remarks that I guess since you took over as CEO four or five years ago, you've really changed the game as it relates to capital discipline and how you designed the investment case. You are now a pure-play refiner. How do you address the volatility of being a pure-play as it positions a company relative to that broader S&P 500 market as well as obviously your peers?
Yeah. No, that's a great question. It's very difficult for a company to go from being a cat to a dog, right? I mean, you just can't do it. I think if somebody wants to own the best refiner, that's what we're positioning ourselves to be. If somebody wants to own the best E&P company or the best petchem company, they have the choice to go do that and build their own portfolio. What we don't want to do, Doug, is throw curve balls into this mix. We are what we are, and we're proud of what we are. One of the things we do try to do constantly is look for opportunities to high-grade the streams that we produce today and to leg into products where we think demand is going to be greater.
We'r e doing it in a very methodical way, not a revolutionary way. Just like our greater investment in the renewable diesel business, that's something that we think is going to be a much more significant part of the fuel mix, is going to be required. It is an LCFS-compliant fuel, and it has high margins. This is one of the things that we do. We run a process business, and we do it and we do it very well. We' ve got the opportunity based on the assets that we have in place today to leverage those assets and to invest in producing different products that will provide us a higher margin.
Then if you say, "Okay, well, what are you going to do with the core motor fuels business that you've got?" We have worked hard to really try to extend the supply chain into our assets and out of our assets. The into projects are things like the Diamond Pipeline and the Sunrise Pipeline, where we have made very beneficial investments. Then out, we have invested in Mexico, and we are investing in Mexico, and Lane and the team are building the business down there. We bought the terminalling assets and the business operation in Peru. So we're looking for the opportunities to create legitimate, sustainable shorts in markets that are short product. We' re there to supply it, and we can supply it very efficiently out of the Gulf Coast.
So, if you said, "What is Valero going to look like in the next 5- 10 years?" I think I would tell you are going to be looking at the company that is the best refiner in the business, that has the lowest cash operating cost, that can capture higher margins than anybody else in the business, and that is growing their earnings capability with products that are going to be there for the long haul.
I know it is not a straightforward question to answer, but I think one of your slides showed the balance between buybacks and dividends. The 4%+ dividend yield you have today is obviously tremendously competitive. I think the issue next is that in a commodity market, how do you sustain the cash flow visibility, let us say on mid-cycle conditions?
Right.
That allow you to sustain that dividend growth. How would you address that balance going forward given the volatility we've seen in the markets between buybacks and dividends?
Yeah. Well, at the core of the whole thing is having a balance sheet that allows you to do this and having really good, reliable operations that allow you to produce free cash flow, and then being disciplined in how you use the resources that you have. Just as a point of reference, before we even recommend to our board of directors that we look at dividend increases, we'll run Monte Carlo simulations based on some of the worst years in refining history that we've ever had and based on what we view a mid-cycle case to be. Then we'll make our decision based on that outcome. I said that we would defend the dividend and our investment in maintenance reliability with the balance sheet, and we will do that.
Before we make that kind of move, it is something that we model extensively and we get ourselves very comfortable with. The flywheel in our shareholder return scenario is really the buybacks. We bought back shares last year at a decent average price below where we sit today. But, I mean, we bought back some shares at over $100 a share, too. I mean, it's where we were. Would I like to have those dollars back? Well, maybe, but it is what it is, and we told people what we' re going to do, and we executed accordingly. I think if you look at the dividend going forward, we will continue to look for opportunities to increase that. It just provides a basis for a broader group of investors to look at the stock versus just energy portfolios.
That's something that we wanted to achieve. As long as we believe as a team that it's sustainable, I think we'll continue to try to drive it that direction. Buybacks, you'll switch on and off periodically, based on the circumstances that you're dealing with. But the dividend is something that I think we want people to be able to rely on, and so we're very careful when we do it.
Yeah. That's certainly been a big part of the reset in the valuation. I want to check in the floor in just a second to see if anybody's got any questions. Again, please raise your hands. Please go ahead.
Can you just comment a little bit around customer conversations and feedbacks on taking the VLSFO blend you mentioned? How easy is that uptake going to be for your customers?
I assume, is that our renewable diesel?
Your blend product, your compliant fuel that's going to be 0.5% sulfur or less.
Oh, okay.
How have those conversations gone? What's like the willingness to take that fuel? What are some of the challenges that you're hearing from customers in taking the fuel? I imagine consistency in fuels might be an issue. If you could comment, what's the mix between willingness to take this compliant fuel and people that are just going to run MGO?
Yeah. Initially, we've sort of been talking about the idea that ultimately you can make a blend of something. We're going to probably some blend of diesel, what we would call VGO, virgin gas oil, potentially sweet ATBs, all of which can ultimately be compliant with this half-a-percent fuel oil. We've been doing blends. We've actually been working with one of our primary shippers, and there are some issues around compatibility that we're trying to work through with them. I think what you'll see is early on, just out of the risk profile and the risk of potentially creating some issues with their engines, you'll see them use marine gas oil, ultra-low sulfur diesel early on as this gets going.
As the industry can figure out how we can, because it'll be a big driver to figure out how to move, like I said, VGO and ATBs and other components into this blend. There'll be a big financial driver to do that. We're working on it now, and I'm sure other people are as well. You'll ultimately find blends. It'll just be a matter of are they 10% VGO or are they 30% VGO or what I'm going to call ATBs, which is essentially the light resid off of a sweet crude unit. I think early on, you're going to see the industry probably be a little distillate rich in what it's going to try to burn.
Is there a generalization you could provide us with to sort of how long that period of running MGO will be. For the first six months, are we going to see mostly MGO? Is it going to take that long to sort of get comfortable with these blend products?
I'm just out throwing a limb on this because I'm not sure I'm any more knowledgeable than any of you in the room are. Other than you can see what'll happen is it'll be regional. Somebody will figure some of these blends out, but they got to be in the right place. The chemistry of all these different constituents, that's where it's technically difficult because not all these streams are the same. They look the same to all of us. We look at it, you look at the clear glass of it here, but it's not. It has to do with some of the other the chemistry of those particular streams.
I think you'll just see regionally, there'll be places where there'll be primarily MGO and there'll be ultra-low sulfur diesel and somewhere else where somebody has that advantage and they've figured out how to blend this. There'll be some of that. Then ultimately, it'll take whether six months or a year, I don't know, or two years. But that'll be the trajectory because there are going to be a lot of economics to try to figure this out.
Sorry, last question from me. In your conversations with customers, when do you expect them to start cleaning out tanks and taking this MGO from you guys? Is this like a fourth quarter of 2019 event? Is it late 3Q? I presume it's whenever they clean their tanks out for their last quarterly voyage, but I'm curious when that might be in general.
I would tell you, our view is it's late third quarter into the fourth quarter, but there's going to be, again, as this happens, you see this going, as January 1st, 2020 comes, there's going to be a disparity between the fuels. There's going to be an economic incentive to try to burn 3.5 weight percent as long as you can. It's just like phasing down RVP, you just have to look at the supply chain and how long it takes. It's not going to be universal. It'll be very regionally specific, on how fast they turn their tanks over. In terms of direct conversations, we aren't in direct bunkering business today. We make bunker and sell them to other people, so we don't really have that relationship other than with a few key tanker companies that we talk to.
It's maybe a good segue, Lane, to talk about some of the IMO stuff because obviously, the whole industry appears, given the gasoline situation, the whole industry appears to be in max diesel mode right now. Does that in some way mitigate some of the potential supply issues, particularly around marine gas oil? If we think about heading into winter, margins gap for gasoline have been pretty poor. If we stay in max diesel mode all the way through the summer in 2019, do we pre-position some of those inventories to address some of those issues through the transition into 2020?
Well, the industry, for the most part, I'd have to go back and look exactly, but we've been in max diesel mode now for at least two years. There's the occasional, and I was talking last night with your peer over there, but there's occasionally where a particular cut on the FCC, if any engineers in the room, heavy cat naphtha, they're fleeing back and forth between gasoline and diesel. It's a really heavy stream that, depending on how discounted butane is, might get you to switch back and forth. But other than that, we have been in max diesel mode for a while. The industry can't make a whole lot more diesel if you have positive economics. To meet this, it's going to take incremental crude runs somewhere in the world. That's how you're going to have to meet the incremental distillate demand.
Maybe a great segue. I could have thrown you that as an easy pitch, I guess. Because it leads right into the issue, we're going to have some European refineries here later today, but European utilization has notoriously been much lower than the U.S. This is probably the best thing to happen to European refining in 20 years. Do you expect that the utilization rates there, and I'm thinking Pembroke specific as your personal experience, do you expect utilization rates there to move meaningfully higher? If so, how do you see the crude slate changing with light sweet exports from the U.S.?
Well, we've been exporting U.S. Gulf Coast crudes to Pembroke really for about three years. That's not unusual for us. I think you'll see an appetite for what's going to happen if you don't have the complexity, which most of the European refineries don't have the complexity to upgrade. They naturally make fuel oil. Like Pembroke, for example, I think makes about a 1% fuel oil, which isn't compliant. What happens? Well, if I can't make 1% fuel oil, now maybe dilution is the solution. I can just sort of hit it with a ton of diesel and really grow it. That's not really how it'll work. I'm going to look at crude as an alternative to try to fix that problem, but so will everyone else.
Ultimately, we'll just see how it works, but you're going to probably drive up the value of light sweet in their effort to meet the demand, which is going to be this distillate crack. The distillate crack is going to drive the European refiners to run more, but they're going to be trying to do it in the most economic way, which means they got to run lighter, sweeter crudes, less medium, heavy, light, even Arab Light. Those things get pushed away from them in their efforts to try to do that. If you're configured to be able to run those other crudes, this is what we've been talking about, you'll see those widen out. European refiners ought to be headed toward they're running lighter and sweeter. Will they make a lot of money?
We'll just see because it all is about what is the relative value of sweet versus your overall basket of the crudes. What does that look like once this happens?
I know we have a couple of minutes left, so let's go to the question at the front.
So continuing on from that point, Lane, lighter sweet crudes. Now, the incremental light sweet crude in the world is a U.S. shale barrel that doesn't have a fantastic distillate cut. Does that mean as the less complex refineries run the lighter sweet crudes, w e are going to exacerbate the light ends overproduction in the world. Is that what you believe will happen?
I don't want to say if I believe. It's obviously if you were to be czar of the world, you'd get as much of the U.S. production offshore into the less complex refineries in the world, and you would be trying to bring medium and heavies into the Gulf Coast. That's how you'd solve it. There'll be a lot of logistical bottlenecks to accomplish that, right? Because there's a fairly wide arbitrage on the medium sour versus a light sweet in the most of those pricing scenarios. So you're going to see people like us try to- t he refineries along the Gulf Coast, they'll take advantage of this for a while. And in the naphtha link, that just goes to the valuation, right?
If it's a big cut of naphtha, say, you compare shale oil versus one of the BFOE grades. Distillate rich crude versus a lighter naphtha, it'll obviously get it a little bit of a discount, but you also got to look at the bottoms, right? So, refining will figure we'll value this, and it'll get arbed out. But in the near term, and I don't know how long it'll take, is a lot of these oil shales, all these North American crudes will get bottled up along the Gulf trying to get out.
Francisco?
Sure. You talked a little bit in your presentation about exports and how you're constantly arbing the domestic market versus international markets. How do you see that evolving, and how do you think about margins regionally? Obviously, a lot of your product stayed in the U.S. last year. How do you think that evolves into the various regions, LATAM, Europe, some of it makes it to Asia personally?
You want to do that one?
I'll take a shot at it. Distillate is a world product, right? There's a value. So we look through the lens of a sort of a Brent distillate crack. It's, in other effects, whether you're on the East Coast, the Gulf Coast, anywhere on the water in the Atlantic basin. We're very Atlantic basin driven. We have some West Coast refineries, but our worldview is really Atlantic basin. Structurally, we have a view that long term, Latin America is a big growing market, and that's the reason we are buying assets there to extend our supply chain. We also have a strategic view that there's aspirational desire to build refineries, but they're hard to get built, they're expensive to get built, and they're difficult to run.
One of the things that U.S. Gulf Coast have in particular versus an advantage we have is we have a very skilled contractor work base, and it's concentrated, and the industry can share this. This helps with our cost structure. Not only do we have the advantages of natural gas, but we have the advantages of this oil shales thing I was talking about with respect to getting balled up. We also have the advantage of this very shared contractor workforce that allows us to probably have one of the lower operating costs effectively in the world. All that together, we believe our natural home for our products, even in light of whatever happens with respect to U.S. demand, will go to Mexico, Central America, and South America.
Well, guys, we've got a couple of minutes left, so I wonder if I could ask you to kind of wrap up. We only get through half our questions, but obviously the Q1 is not looking great for the whole industry for obvious reasons, and your buyback flywheel, I think is how you referred to it, Joe, it would obviously make a lot of sense to expect that you guys are taking advantage of that now. But how do you see today's environment relative to your perspective of mid-cycle, and would it be right to think about the trajectory with IMO and potentially a tighter gasoline market, as we've talked about, as suggesting that this might be quite an opportunistic time to take on a little hard look at Valero and in the sector generally?
You want to address it or-
I'll address the market side of it. You saw the stats. We had pretty good seasonal, I would call them seasonal draws. They're not out of line with history. Maybe gasoline was a little bit better than what you would see seasonally. You sort of see the gasoline inventories right at sort of coming into the five-year band. On days of supply, because demand's been so well, it's freshly on a day of supply basis, gasoline looks pretty good.
Distillate inventories are below the five-year average. If you look through where the distillate inventory is into IMO 2020, if you look at how well we're going to make this fuel in terms of other alternative ways versus marine gas oil or straight ULSD, I think the year looks pretty good on a clean product basis, in particular for diesel. Gasoline, I think we'll have a good driving season. I don't know if it'll be spectacular. That'll be a function of are there outages or things. Absent outages or something like that, it will have a good three months here through, I'm going to say Memorial Weekend, and we'll just see with respect to gasoline.
Just on that point, very quickly, we had the opportunity to have dinner with the guys last night. Lane, you made a point that although the indicators are that maintenance downtime in 2019 looks pretty light, you're seeing something different in the contractor side. Can you speak to that?
Well, a lot of our contractors, of course, they're always talking their own book, right? They feel like it's going to be a pretty busy year. Again, we don't normally talk about other people's turnarounds. I'm not going to tell or even our own for that matter when we get outside of the quarters. There are several people I think that are going to try to take advantage of moving some of their maintenance work into this year and to try to get it so they're in position to be able to run, and try to be as little turnaround maintenance as they can for 2020.
Joe, finally, opportunistic on the buybacks?
Yep.
To the extent you can share.
No, I can't share anything, and you know that.
Okay.
But I think what everyone should rely on is that we say we're going to have 40%-50% targeted payout ratio, and we'll manage it accordingly based on where we are in the business.
Well, gentlemen, congratulations on running the business that you do, and we appreciate you being here.
Well, thank you, Doug. Appreciate it. Thank you, everyone.