Hey, everybody. It's a pleasure to be with you. As always, we get to start with a very enlightening slide. We ready to go here?
No, that's okay. It doesn't matter.
I don't think so. Yes?
Yeah.
Okay, there we go. We got our safe harbor statement, and you guys know what this is. It basically says that you really shouldn't rely on anything that I tell you that would project the future. I would say that's very smart. With that, let's go ahead and talk about the company. You know Valero is the world's largest independent refiner. We have 15 refineries with 3.1 MMbpd of high complexity capacity. 70% of that's located in the Gulf Coast and the MidCon, and we'll talk about why that's relevant here in a few minutes. We also have an MLP that we're the general partner of, and we own 100% of the incentive distribution rights to that. Then we've got a renewable diesel plant that we are a 50% partner in, and that's located down in Louisiana at our St. Charles refinery.
We have 10,000 employees, and we got a market cap that is above $30 billion. We also have a renewable fuels business. We are the third largest corn ethanol producer in the U.S. We produce 85,000 barrel per day. Those assets are highly profitable because we certainly bought them right. We bought them out of bankruptcy many years ago. This chart just shows you our geographic footprint. As we point out, we do have a strong presence in the U.S. Gulf Coast and the MidCon. The states here on this map that are in the teal color are those where we have a wholesale marketing presence. Where you see the logo, that is where we have our branded operations. Then you can see the refinery icons.
We have refineries all the way from California around through the U.S. Gulf Coast, the Mid-Continent. Then we have a refinery in Quebec City, and then finally one in Wales. We have the U.S. and the Atlantic Basin very well covered from a refining capacity perspective. Then you can see the location of our ethanol plants. They are all located in the upper Midwest, right in the middle of the Corn Belt, and that provides certainly a feedstock advantage. The current macro environment is one that seems to be still fairly favorable to the refining industry. On the supply side, you have plenty of crude, and you have plenty of natural gas. We are adequately supplied there. We are seeing production increase again in areas like the Permian and the Wattenberg and so on.
Domestic production of crude is increasing, and then the associated gas with that is going to increase the supply there also. Even though we have seen some of the market rebalancing as a result of the OPEC discipline, it has not been in a material way affecting our business to date. Then on the demand side, what we got is a situation where you have more consumption due to economic growth that is being supported by a low price environment. Then we have structural shorts that are going to be with us for a long time. Latin America, Mexico, they continue to be short products and the U.S. Gulf Coast is a logical place to supply those from. From a demand perspective, we think things look pretty good.
This is a very simple view of our strategy, and there are three things that we think about every day. The first is that we have to operate safely and reliably and be good stewards of the environment. We do that very well. I will show you some data points on that here in just a minute. We have to maintain our manufacturing excellence and grow our commercial and operations flexibility. We focus on that every day. Then remaining disciplined in our use of capital. That is something that I think has changed in our strategy over the last couple of years, and I will show you how that has panned out here in just a minute. Very simple strategy. This is something that we are very proud of, and we work very hard every day to achieve these results.
If you take a look at the chart on the upper left, it shows you our personnel safety stats. You can see the trend line here. We have continued to improve every year. You can see from the chart on the right, the upper right, Tier 1 process safety events. We have beaten those down over the years, and now we are getting to the point where that is fairly steady. Then if you take a look at the bottom, this is how we shake out relative to the peer group in the Solomon Indexes. You can see this is for our entire portfolio. We have 15 refineries out of a sample size of 84 or so. You can see where our entire portfolio shakes out. We have continued to improve our performance on these Solomon results over the years.
We believe, and I think this would support the claim, that we are the best operator in the business. The other point I will make on this chart is that 2016 was the best year in Valero's history ever from a personal safety, a process safety, and a reliability perspective. If you strip out turnarounds, we ran at 99.1% utilization last year, so it is pretty darn good performance. The geographic location of our assets that I talked about before does provide a competitive advantage, and here is a little bit more detail on that. In the Gulf Coast, we have low cost natural gas, we have an abundance of feedstock choices, and we have great access to the domestic and the foreign product markets. We have tremendous options about what we are running and where we move it, and we move it to those highest net back markets.
It is a very good place to find yourself in. We also have a very highly trained and skilled workforce on the U.S. Gulf Coast. We have all of the things that you would want to create an efficient operation located where the bulk of our portfolio is located. Then just to give you some context on how we shake out relative to the peer group, you can see the CDU capacity graphs on the right. I mentioned that the complexity of our refineries is an advantage, and the location is an advantage. If you take a look at the chart on the left, this shows that with a very complex refining portfolio, you have tremendous flexibility in the feedstocks that you are going to run. When you have flexibility in that feedstock slate, you are able to optimize on almost a continuous basis.
We are able to do that. You can see the swings in heavy sour and medium sour crudes that we can run. Depending on where the discounts happen to be, we will adjust the feedstock slate. If you look at the chart on the right, this tells you that we are very efficient. We have the lowest operating cost in the peer group, and that is because we tend to focus on the business in continuous improvement every day. Not that the others are not doing that, but our physical location, our ability to optimize, and the things that I mentioned earlier are all driving this lowest cash operating cost result. It is something, again, that we are very proud of. Our portfolio also facilitates optimization around exports, and this is illustrative of the way we look at the market.
You can see that the asset location enables efficient exporting to those highest net back markets. Out of the Gulf, we are moving barrel over into Europe, we are moving barrel into South America, and we are moving barrel over into West Africa. We have the ability to look at the markets and adjust where we are delivering products accordingly. If you look on the right, this just gives you an idea of our historical export volumes. We often are asked, do you have the ability to export more depending on market conditions? This shows you that very clearly we do have the ability to do that. This is our capital allocation framework, and we put this in place two years ago. We have significant discipline in our implementation of this framework.
If you take a look at the overriding principle for all this, it is to maintain a strong balance sheet because we believe we need to have access to the capital markets. Having a strong balance sheet does that. Maintaining a debt-to-cap in a reasonable range also provides flexibility and options. Being in a business where margins can be volatile, it is always good to have your leverage under control. That is the overriding constraint on the way we look at our capital allocation. If you look within that, we have got the things that we deem to be nondiscretionary and the things that are discretionary. The nondiscretionary components of our use of cash are sustaining CapEx. That is how you become the best operator in the business. You maintain your assets, you turn around your assets, you keep them functioning properly, and that is how you deliver 99.1% reliability.
We are not going to compromise on maintaining the safety and the reliability of our refining portfolio. The other thing that we will defend vigorously is the dividend. You all probably know, and I will show you a chart here in a minute that shows what we have done, but we have continued to increase the dividend over the last several years, and we are committed to this. We are often asked, is that dividend sustainable or not? We model it extensively. As you know, last year was a year where margins were not what they were in 2015. In fact, we were all longing for 2015's margins. Around this capital allocation framework, we have been able to produce free cash flow that makes us very comfortable with our ability to increase the dividend, and that is why you saw us do it again in January of this year.
If you look at the discretionary components of our capital allocation framework, you see we have growth CapEx, acquisitions, and cash returns. Effectively what we have done is created a competition within the company for the use of those resources. Growth CapEx has got its place in the business. Acquisitions, which generally have to be opportunistic, have their place in the business, and then cash returns have their place. What we are doing when we look at it like this is we are really balancing growth with the return of cash via the dividends and the repurchases. This is something that we have been committed to for the last couple of years, and we will continue to be committed to going forward.
Now, using this capital allocation framework, you can see on this page the kind of results that we've been able to deliver and where the money's gone. If you look at the bar graphs on the left, 2015 was a great year. We made over $9 a share. We had lots of cash. We executed our capital budget within this $2.5 billion range. What we didn't use for capital, we of course, returned it to shareholders. Our commitment to our shareholder base is that we're not going to hoard cash. To the extent that we can fund our maintenance and turnarounds, and we have cash and we can fund our dividend, and then we have cash left over, we're going to, again, revert back to that capital allocation framework.
There will be growth projects in there, but there will also continue to be repurchases. You can see in a much tougher margin environment in 2016 what we did. We've committed to a payout ratio of 75% of net income. We also look at free cash flow when we're making those decisions. You can see in 2015, we had significant buybacks to balance out that payout ratio. In 2016, we had lower buybacks, but our payout ratio in 2016 was 142% of net income, and we still built cash during the year. That shows how this particular framework is working very well from our perspective. If you look at the chart on the right, this is our CapEx budget for 2017. It's $2.7 billion.
You can see that we got $1.6 billion allocated to the sustainability and then $1.1 billion for growth. We always talk about the fact that we're going to spend about $2.5 billion a year. It's a little higher this year because we had that Diamond Pipeline project that we had expected to spend a couple of hundred million bucks on last year. We didn't get it spent, and so it carried forward into this year. Generally speaking, I think if you looked at Valero and you said, "What are they going to spend year in and year out going forward?" I would use the $2.5 billion number. We're also investing to grow the business. The goal is to increase the earnings per share capability of the company, and you do that in a number of ways.
From our perspective, we do it by further optimizing the supply chain and the refinery operations. In this case, this just gives you an idea of some of the projects that we're looking at. We've got the Diamond Pipeline project, which is going to deliver crude from Cushing into Memphis directly, rather than the way we get it today, which is mid-continent barrel moved down to the U.S. Gulf Coast and moved back up the Capline pipeline into the Memphis refinery. We believe we're going to get better segregations of crude, and we're going to get more efficient transportation costs into the plant. The Diamond Pipeline is a project that Valero Energy is doing, and we also have Valero Energy Partners, the MLP, which will likely be the recipient of this as a drop going forward.
We've got projects like that, which will improve our crude supply capability. Then we've got the Houston Alkylation Unit project, and there's a lot of reasons that alkylate is going to be a higher value product going forward. It's got high octane. You've got Tier 3, which is going to strip octane out of the market, and then you've got Corporate Average Fuel Economy, which is going to require higher octane fuels to allow the automakers to sell cars that people actually want to buy. And so you end up with these projects looking like they're going to produce higher value products. We've got an expansion of our Diamond Green Diesel plant. That's a renewable diesel plant, and renewable diesel is like liquid gold. Currently, we produce about 12,000 bbl per day. We're going to take it up to 18,000 bbl per day.
Most of this product goes to the West Coast, where they've got the LCFS and up into the Canadian market, where they've got LCFS-like requirements. So very high net back product that we produce here. Then projects that we say are under development, we've got a cogen project that we're doing at the Wilmington refinery, which is going to lower the electrical power cost there. We've got another one we're looking at at our Pembroke refinery, and then we've got other octane enhancement projects, additional alkylation projects we're looking at, and then we'll continue to invest to try to create feedstock flexibility and optimize the placement of our products. So we're investing to grow earnings, and we're doing it in what we consider to be a very appropriate way.
Now, this says that we've outperformed the peers in total shareholder return over the last two years, and I really don't need to say a lot about this. You all can take a look at this and see how the results have shaken out. I would say the gray band is the peer trading range, and then you can see the minimums and the average. So anyway, we've done pretty well from a TSR perspective. Then we're going to also continue to grow VLP, and we're going to do it through drop-down transactions. We're going to do it through organic growth, and then we're going to do it through midstream deals. On the Diamond Pipeline, for example, we partnered with Plains to do that project, and so they're going to be the operator. We'll each own 50%.
There are many other opportunities like that that we're looking at which fit into this strategy that we have around VLP, which is to provide the investor an assurance and line of sight to growth via a drop-down scenario, but also to continue to drive new projects, hopefully, that have third-party revenue for us, many that are targeted that have third-party revenues, so that we can make VLP not totally dependent on Valero Energy for its earnings stream. So on the bottom chart on the left here, you can see what the distribution growth has been within VLP, and if you look at some of the things that we got done over the last year, we've increased, again, distributable cash flow.
We are now over $300 million a year of EBITDA on an annualized basis. We had a lot of success in getting the company positioned in the capital markets last year. We were able to secure our investment-grade rating. We have got an ATM program in place. We did public offerings. VLP is now coming forward to the point where it will ultimately be able to do a little bit more on its own. It is still a couple of years old, and it is a fairly small entity yet, but we are going to continue to try to drive the growth there. Just to give you comfort that there is line of sight to the 25% growth we say this year, then the 20% we have committed to in 2018, we have got a significant portfolio upstream that we can drop to VLP.
We are committed to delivering to the VLP unit holder what we told them we were going to do at the time of the IPO, and that is an entity that had good contracts which supported its cash flow, an entity that was not going to take commodity risk, and you were going to have the contracts between Valero and VLP be ones that had minimum volume commitments that supported the valuations of the transactions that were taking place between the two. We are continuing to execute on that strategy. Line of sight to growth is very clear. We believe we are in a good place there. In our ethanol business, we have a very good portfolio. As I mentioned earlier, we have 11 corn-based ethanol plants that produce 85,000 barrel a day of product. The ethanol market strengthened in the fourth quarter of last year.
It weakened again at the beginning of this year. We do have margin in the business. We think that demand is going to continue to increase. We are seeing a lot more ethanol exports than we have seen before, and as long as we have decent gasoline demand and export capabilities, the margins are going to improve. We have listed here a bunch of the macro factors that are also going to be positive on ethanol prices going forward. We think demand is going to be good and that those margins will continue to improve through the year. This is the last slide that I have for you, and this just provides you some data points on how Valero has performed on a return of invested capital basis. We are the highest. EBITDA per barrel of throughput, we are the highest. Net debt to EBITDA, we are the lowest.
The dividend yield, we are above the median. For those reasons, and for those that are listed below, we think that we are undervalued and that we are an outstanding investment. Doug, that is the end of the prepared comments. Anything that you want to talk about?
Sure. We have about 15 minutes for questions, folks. Joe, so many questions, so little time, but we really appreciate you being here.
You bet.
Since you took over as CEO, there's obviously been a very dramatic shift in your strategy of returning cash, and you've very eloquently laid that out this morning. ExxonMobil had their analyst day yesterday, and they made a comment which struck me as, "We're not trying to compete with other oil companies. We're trying to compete with the S&P 500." So when you think of your investment offering in terms of yield, distribution of cash in a volatile market environment, who are you trying to compete with? Is it the wider market versus the refining sector? If so, what more can you do to stabilize your earnings, which is probably the single barrier to getting that higher rating?
Yeah, that's a great question. Doug, two years ago, I would tell you we started with an internal look. One of the things that we had talked about for years was delivering the highest cash returns among the peers. Many of you heard that for several years, and we didn't do it. So one of the things that we decided we were going to do as a team was go ahead and honor that commitment. So we played catch up. At the beginning of 2015, we were paying a $1.10 a share dividend. Today, we're paying a $2.80 a share dividend. Now, the dividend, as I mentioned, is something we're totally committed to, so we wanted to be sure that it was sustainable.
What we wanted to do is reward our shareholders for their loyalty to the company, and we felt that increasing the base level of return that they were going to get on the equity was a good way to do that. The repurchases is our way to balance out the supply of cash that we have. I think we started by looking at the peer group and saying we're behind, and we should catch up. It is hard for somebody who deals with any type of commodity business to look at the business and say you're going to compete with somebody who can dictate the price of their product in the marketplace. The only question they have is how many units are they going to sell, right?
I would really like to be faced with that challenge. We have issues around volumes and margins. We tend to be a little bit more conservative in that regard. But I would tell you, we're kind of competing against ourselves. We just continue to try to raise the bar. When you find yourself positioned based on independent studies that you are the best in the business, then you're really competing against yourself to continue to try to improve the operations and to continue to try to drive the returns to be at the top of the group. So in this case, we do look at it relative to refiners because it's an energy conference. I guess we could put other people in there, but I don't know how relevant it would be.
Yeah, I guess what's behind my question is the focus on returning cash to shareholders obviously has two elements to it.
Right.
The buybacks reduces the dividend burden.
No question.
How would you see the balance between those two moving forward?
Okay. That is a good question. The point would be every share we buy back, we don't pay out $2.80 of cash. We do take that into consideration. It really is taken into consideration, Doug, though, in that bottom part of that slide, the discretionary part. When we're looking at should we do this capital project or this acquisition or buy back shares, we look at the accretive effects of each of those decisions and weigh them against each other. I'll just give you an example. A few years ago, we know Citgo was on the market. Well, obviously, we didn't do it. At the end of the day, we could buy back Valero for cheaper than we could buy capacity if we bought Citgo.
I can buy this incredibly good operation, or I could roll a dice and try to do this other one. It just didn't make sense to do that.
As much as everybody wants to do deals and grow the business, some of the better deals are the ones that you don't do. The competition for the use of the free cash outside the non-discretionary pieces are what we look at. We do realize very clearly that reducing our share count. John, I think we went from 570 million shares to 450 million shares.
450.
When we look at the dividend increase, Doug, and we look at what we think we might do from a share repurchase perspective, you look at the incremental additional cost cash flow required to support that dividend, and it really isn't that material in this case.
That's a very good point. It all balances.
I know we have limited time, so let me just check into the floor and see if there are any questions.
Yeah. You talked about opportunities for ethanol exports. Could you talk about that in the context of the renewable fuel standard? Is that export opportunity large enough that the agricultural community could get behind it and say, "Yes, we can limit ethanol to 10% of the gasoline pool instead of an unreachable mandate?
Yeah. Okay. The corn growers are for anything that increases ethanol production, right? As we would be too. I mean, we're an ethanol producer, and we like it. What being able to export ethanol does for you, it allows you to clear the market in a market that would otherwise be long with ethanol today. So it alleviates some of that pressure. Now, will it lead them to say, "As a result, we're good with only 10% ethanol being blended?" If I was a betting guy, I would probably take the under on that. Because the-
Where are these opportunities at, those export opportunities? Where are they? Any kind of indication of size?
Yeah. No, the bulk of it's moving into South America, and as we understand it's over 100,000 bbl a day now.
Yeah.
This is in a market that produces a million?
Right.
I think there's 1 MMbpd of ethanol production, and 100,000 goes out. We're a player in that. We're exporting ethanol. It all goes to anytime you're in an efficient business where you're producing, let's just call it fuels, in this case, you're going to want to run your plants because you got the fixed cost in it. You'll drive the cost per unit down by running hard, and if you can find a place to move it, you move it. Question over here.
Couple questions on M&A. With respect to how you're thinking about things right now, one, you go over your M&A strategy as you see it. Two, are you kind of on the sideline, given all the uncertainty in Washington? Does that put you on the sidelines for assets either acquiring or divesting? Then lastly, you mentioned the Citgo example. When you look at an acquisition like that and compare it to dividend buyback, do you incorporate all your operational success and say, "If we were able to operate it would look like this on a creative basis.
Yeah.
You compare it like that.
Yeah. Okay. I'll start with the last one. You feel free to help me with any of these that you want, okay?
Okay.
John, you too, okay?
Okay.
Otherwise I'll run out of words. On a Citgo type deal, the value that you get in an acquisition is largely driven by the synergy you can create.
Yeah.
Okay? When we look at any refining asset, we're looking at what it's worth to us, not necessarily somebody else, but to us. We believe that we can operate them better than anybody, but we also have done enough transactions because you know one of our core competencies historically has been acquisition and integration. We know how long it takes to take a plant that probably isn't performing very well and to turn it into one that would fit into that graph I showed you with top-level Solomon performance. It takes one turnaround cycle, two turnaround cycles.
It takes a lot of capital. All that goes into the equation when you're looking at something. If it's a Gulf Coast asset, probably nobody can bring more to that than we could from a synergy perspective, because you've got a tremendous portfolio of assets. If you've got an issue at a plant, and you've got a crude ship coming to it, and you can move it somewhere else, you have a real advantage over somebody who's bringing it into a sole plant. They're going to sell that cargo distressed, and their economics will just never be as good. All of that goes into consideration when we're looking at the acquisitions. Public policy has everybody rattled today because everybody's trying to figure out where it's going to go.
We got the BAT, we got the point of obligation, we've got all of these things going on. It really doesn't affect our decision making around M&A because you can't necessarily dictate the M&A market. You can try to target people and have conversations and try to identify transactions. There's nothing that I see taking place today out there that would affect our view of we are or aren't going to buy this asset based on some kind of policy. If you were looking at a refinery that was going to be product exports and have to import all their crude, then you're going to have to figure out what the BAT does. I trust all these guys that say it's going to be good for us, right? It's all going to balance out and not be a problem.
That works really well in an academic setting. I don't know how it works in reality. That's why we're reserving judgment on these things until we see a little more flesh on the bones and make a decision. I would tell you, generally, our strategy's not being affected in a direct way by anything that's happening on the macro scale.
Question here.
Sure. I've got two quick ones for you.
One second. We'll move to the mic. Thanks.
Can you comment on the RFS announcements, point of obligation? You just touched upon it. A lot of news flow last week. If you could comment on that because you're actively involved.
Sure.
One. Two, can you comment on, you're seeing a lot of crude imports, even when refining utilization is really weak.
Okay. I'll take that one.
If you could just say it's because of that or it's because of the barrel are not available because of OPEC reduction in supply. And the third one, can you comment on gasoline demand? Because EIA is obviously putting out really weak numbers when December was really good.
Right.
Those are the questions.
Okay, great. And I'll take the first one and let Gary handle the second two. On the RFS, you know we've been very active at trying to move the point of obligation. We sued the EPA. We have our petition out there. Last year, they denied our petition. The feedback was there was enough substance to it that they opened it for a comment period. The comment period ended, I think, on February 22nd, and there continues to be a lot of work being done around this. Generally, I think we all have to be encouraged by the fact that we've got an administration in place which is much more pro-business. And the regulations, and you know this because it affects your businesses too, the regulations have gotten a little bit out of control.
It is one thing for them to be reasonable and for us to maintain the public health and be good stewards of the resources and so on. It is another thing to just make it punitive because you do not like a particular business. I think that is kind of where we got before November. Anyway, we are going to continue to work the point of obligation thing. I would tell you, I would not believe anything you read until you hear somebody out of the White House make a comment that something was going to happen, or the head of the EPA said something was going to happen because I see we are being mentioned, other people are being mentioned.
I try not to read all that stuff, but I will tell you that we are working, moving the point of obligation hard, and I think we have got a compelling argument that that should happen.
Can I ask a follow-up on that?
Sure.
I do not know where AFPM stands on it, but API obviously is against it and they seem to sorrow and they participated in public comments and they said they are also against removing point of obligation.
Right.
If any comment on that there seems to be different views between different refiners.
There's no question. It depends if you're short or long. The thing is, within our trade association, within the AFPM, I think the organization was able to look at the greater good for the industry. If you look at merchant refiners, they're going to be short. If you're in the marketing business or you've got significant blending operations, you're going to be long, and you've enjoyed a windfall at the expense of somebody else. We've got basic issue, though, is we've got a totally illogical process in place. You personally would never set it up so that one guy had the obligation and another guy was the point of compliance, and this guy could hold this guy hostage, right? We've seen RINs go from $1.05 at the election to $0.37 yesterday.
Well, do you think that's a supply and demand issue? Anyway, I'll stop there, but we're going to continue to push this.
Gary, we've only got a couple of minutes, I'm afraid, to the supply and demand question, but if you could take that. I'm really sorry, folks, but we're going to run out of time.
Oh, doggone it.
No, let's go to Gary, please go ahead.
Yeah, on crude or-
On the question as it relates to reports on gasoline demand.
Yeah. First, I guess starting on the crude question, I think what we saw is domestic crude production ramped up over the last several years, and a lot of the OPEC nations were the one yielding their market share to give way to the domestic producer. Last year, we saw the OPEC countries fight to regain that market share, and they did it by discounting their barrel into the U.S. Gulf, and we've seen that continue. As long as that happens, as long as those medium and heavy sour barrel are being priced competitively, we'll continue to see those barrel flow into the U.S. On the gasoline demand, I don't think when you look at the stats, certainly you've seen what looks to be a shift down in gasoline demand. There's no reason why we believe that will continue.
I think when you actually get to where they break apart the DOE data into pads, you'll see a lot of that decline in demand has actually been in Pad 5 on the West Coast, and it's really attributable to the heavy rains that we've seen out there. I think you get back to more typical weather patterns, and you have the low price, and we'll see gasoline demand very similar to what we saw last year.
Folks, I am sorry. We are pretty much out of time. We can ask so many more questions of you guys, but I guess I would say finish off by saying congratulations on that relative outperformance that you showed us out there on the chart.
Well, thank you.
Thanks very much, guys, for being here.