Thanks everyone for coming again to Vail. Next up, we have Valero, Joe, Gary, and Lane, the full deck. Thank you very much for all making it up here. Lots of debates in refining this year, and I am sure you will address all of them. Thank you very much, Joe.
All right. Our pleasure. Thank you for coming this morning. There are other things you could be doing, and we are really glad you decided to take the time to spend with us. Thanks for the introduction. Gary Simmons is responsible for our Commercial Operations. Crude supply, product supply, all of our trading activities, wholesale marketing, Gary has got that whole set of responsibilities. Lane is responsible for refining. He has got Refining and Engineering. Then we have John Locke, who runs investor relations for us, who I think probably most of you know. We brought the operating guys out here because when you think about Valero, quite honestly, it is about being the best operator in the business and operations excellence.
These guys know more about what is happening in the market and in the industry than anybody I know, so it is great to have them here. Hopefully we will get a chance to get you guys some questions in, and you can get good answers. Let me begin with the Safe Harbor statement. You all have seen this before, so I will not belabor it, but it talks about forward-looking statements, so essentially, do not rely on anything that we are telling you. Okay. You all know who we are, I believe, but just to go through it very quickly, we are the world’s largest independent refiner. We have 15 refineries with 3 million barrels a day of refining capacity.
70% of that capacity is located on the U.S. Gulf Coast and the Mid-Continent, and the reason that that is relevant is because that is where we typically have significant supplies of crude. We are an operator of a logistics business. We have an MLP. It is Valero Energy Partners. We have a significant ownership position in that, and it is a traditional MLP focused on liquid logistics assets. We will talk more about that here in just a minute. We are a marketer of wholesale fuels. We do that through both the branded and the unbranded channels, and we have 7,500 retail sites located in the U.S., Canada, the U.K., and Ireland. Finally, we have got a renewable fuels business.
We have 11 corn ethanol plants with 85,000 bpd of capacity. Then we have a 50% interest in a renewable diesel plant that is located at our St. Charles refinery. Now, this map is just intended to give you an idea of the reach of our system. The teal-colored states are those that we have a marketing presence in. Then you can see the V logo. That is where we have a branded marketing presence. The refinery icons, I think, speak for themselves, but you can see we have assets all the way from the West Coast of the U.S. down through the Gulf, the Mid-Continent, and we handle the Atlantic Basin via Quebec and Pembroke. You can see the location of the ethanol plants.
They are located in the upper Midwest, which puts them right in the middle of the feedstock supply, which gives them cost advantages at delivering the feeds in. Then our headquarters is in San Antonio, and the renewable diesel plant is near New Orleans. Now, there is a lot of conversation at this conference about the macro environment, and I think from our perspective, it has not changed in a material way. We still have an abundance of crude in the world and natural gas. If anything, we are seeing more medium sour crudes coming into the market with the Iranian production coming on. We still have significant crude length. The logistics build-out that has taken place in the Mid-Continent of the U.S. is continuing to make more crude available to certainly the Gulf Coast refining. That is the supply side.
On the demand side, we are going to have continued GDP growth. Demand response has been very strong when you look at gasoline demand. Distillate demand globally is good. In the U.S., it still tends to be fairly flat, but demand has been good. As long as we have low product prices, I think we are going to have good, solid demand. Then we have structural product shortages, which really are not going to go away anytime soon. That is really South America, Europe, and then the developing countries. Bottom line is we have got ample supply available to continue to produce markets like we saw last year. Okay. Now let me talk about Valero specifically. I mentioned that we are very focused on operational excellence, and safety and reliability are key components for this.
Lane and Gary have done a great job of implementing processes which have driven down our incidents, and you can see that from these charts. 2015 was the best year in Valero's history for personnel safety and for process safety. We had a very good year there, and we continue to focus on it. Then if you look at the graph down below, I could tell you that in my opinion, we are the best operators in the business. This chart speaks for itself, though. It tells you that we are the best operators in the business. This is the results of the Solomon survey. I think there were 84 refineries in the survey. This is the aggregate of our portfolio and where we shook out.
You can see we've had improvement over the years, and we can make the claim that we're the best, but I think this would tell you that we in fact are. Complexity is a major issue, particularly when you've got strong gasoline and distillate yields, and you can see where our complexity index shows up relative to the peer group here. It's down a little bit, and it's down a little bit because we added the two new crude units, or we've got the two crude units in there, I believe. Crude units have very low complexities, and so on average, our complexity came down a little bit, but we still have a significantly complex system. If you look at the chart on the right, you can see there that that's our cash operating costs.
We have the lowest cash operating costs among the peer group, and that really is a major factor when you've got any kind of margin compression. You say, "Okay, who's the guy that's going to be able to run even in a tight market?" It's the guy with the low operating cost. So that's critically important to us. That's our cash operating cost. Okay. Here we show that we have significant crude capacity that is location advantaged, and we are number one in that category. If you look at the graph on the right, this is really important. This goes to optimization activities within the system, and this shows you the flexibility that we have within our system to process whatever might happen to be the most cost-advantaged feedstock at that point in time.
You can see the swing in ranges that we can run of the different types of feedstock. Again, that's very important to us as we try to continue to optimize the system. This just depicts our export capabilities, and you can see that with our Gulf Coast refining presence, we have the ability to move barrels really all over the globe. With the northern refineries, so with the one in Wales and Quebec City, we have the opportunity to handle that Atlantic basin pretty well. We're very efficient at exporting. We've developed significant market relationships which allow us the opportunity to continue to export. If you look at the chart on the right, you can see what our exports have been historically and the capacity that we have.
We get asked a lot, "Are the export markets still there?" Gary can speak to that in a bit. But when we choose not to export, it's typically based on the fact that the markets are stronger here domestically, and so we'll keep the barrels at home. But the system does provide the opportunity to optimize the net back in almost any market condition. Okay. The capital allocation framework that we have here is one that we implemented in January of last year. It's one that we're holding to, and we will, going into the future. The overriding constraint on our use of cash is maintaining a strong balance sheet. The way we look at that is maintaining the investment-grade rating and maintaining a debt to cap that's low. That then would speak to our available liquidity, which we have a significant liquidity available to us.
Maintaining a strong balance sheet is a governing principle here. Then we look at the use of cash from a nondiscretionary and a discretionary basis. Nondiscretionary is our sustaining CapEx because those reliability and safety figures I showed you earlier are not possible if you are under-investing in the portfolio. We are going to continue to invest anywhere from $1.5 billion, $1.4 billion, $1.6 billion a year, whatever it takes to maintain the assets. That will then provide us with safe and reliable operations. Then the dividend is something else that you saw we increased it at the beginning of the year from $2 to $2.40. We did a lot of modeling of that to be sure that it was something that was sustainable, and we absolutely believe it is.
We look at those two components of our use of cash as being absolutely nondiscretionary. Then the discretionary pieces are growth CapEx, acquisitions, and then cash returns. There is competition within Valero for the use of that free cash flow among those three categories. We have said this year that we are going to have a 75% payout ratio that is of net income, and it is our goal certainly to achieve that. But we always weigh additional share repurchases in against the acquisitions and the growth CapEx. In running a business like ours, it is always a blend of growth of EPS and returning of cash. I think we have got a pretty good balance of that, which I believe you can see here. This is our capital budget for 2016.
You can see that we have got about $1.6 billion in there for sustaining CapEx, and then the growth CapEx is split equally between asset optimization and logistics. The logistics investments are really in assets that are MLPable, so we could drop those to Valero Energy Partners. Then the threshold on these projects is really a hurdle rate of about 25%, and that applies to the asset optimization. The logistics projects would have lower return thresholds. Now, here is an example of some of the things that we did invest in. We have got the two crude units, one at Corpus Christi and one at Houston. The Corpus Christi crude unit started up in December. It started up very quietly, and I would tell you the project execution there was perfect, and the startup was perfect, and it is running very well today.
Lane and his team did a fine job of executing that project. The Houston crude unit will be up here in the second quarter, probably middle part of the second quarter. Both of those projects, although they do increase capacity, the real benefit of them is that they allow us to optimize the feedstock slate into those refineries. We are backing out, as it shows there, low sulfur resid, and we are running crudes that then will produce that feed for the cats. You can see then the net throughput increase here of those projects. Then on the other side there, we have got the hydrocracker expansions. Port Arthur is complete, and St. Charles is close to complete here. Those will increase our production capacity by 23,000 bpd of diesel.
We have the Houston crude unit, or Houston Alky project, excuse me, which was approved by the board in January, that will allow us to produce 13,000 bpd of alkylate. We have a host of other projects in the pipeline that Lane and his team are looking at. It is a little early to provide any details on. Anyway, we are continuing to invest in the business with the primary focus of those investments being asset optimization. One of the projects we are doing on the logistics side is the Diamond Pipeline. Here you can see the route for that pipeline. It will connect Cushing into our Memphis refinery. It will allow us to improve both the cost and the quality of the crude supply we are getting into the Memphis refinery. This project is being done in partnership with Plains.
They are 50% partners, we are 50% partners. You can see it is a little over $900 million project, and we would intend then to drop our interest in that pipeline into VLP when it is complete. Now we will talk about VLP. You know that it is Valero Energy Partners. Valero set up this sponsored MLP back in December of 2013. It has performed pretty well in the market. It has held up very well against the assault that has taken place in the MLP market here recently. It is an MLP that has assets that are tightly linked to Valero's core refining business. When we look at assets to put in there, they are those that we are comfortable entering into commercial agreements around with term agreements, with minimum volume commitments, and so on. The cash flow stream to VLP is fairly assured.
You can see down below the distribution growth that we have had in VLP. If you look at the right, and we list our accomplishments, we have had significant increases in distributable cash flow. We did drop, thus far, $1.3 billion of assets from Valero into it. The performance of VLP has been very good. Just to give you a line of sight to the growth that we still have available to us in VLP, we just list the MLPable EBITDA here, and it is in these categories. Again, we continue to look for opportunities to grow that MLPable EBITDA based on the projects that we are looking at to optimize the system. The renewables business, we spoke about it briefly at the beginning, but we have the 11 ethanol plants that have 85,000 bpd of production capacity. These are really good plants.
They are operated well. The technology is good. They have low cost. Even in this incredibly difficult margin environment that we are having in the Ethanol business, our plants continue to operate. We do have a very good portfolio there. The Diamond Green Diesel plant is a good operation. I think most of you know renewable diesel is certainly going for a premium, particularly in light of the LCFS, the demand for that product is very strong. We are looking at projects to potentially increase the capacity, and it would be modest increases, but we are looking at that right now. The outlook for Ethanol is really challenging right now. Lower crude prices, of course, have led to lower product prices, and that has led to lower ethanol prices. Frankly, there is very little margin in the Ethanol business today.
But as crude prices move back up, I think we will see improvement there. Okay. We do believe that Valero is an excellent investment. If you look at the bottom of the chart first, we think we are undervalued. We have got a great management team. We have got a very strong financial position. The macro environment looks good for Refining going into 2016. We have proven that we are excellent operators. On the other side, we are delivering industry-leading returns. If you look at the three bar charts at the top, you can see where our total stockholder return was in 2015. We were the highest in the peer group at 47%. If you look at our return on capital, it was also very high. If you go to the right and you look at our PE ratio, you can see that we are below the peer average.
Quite honestly, that does not make a lot of sense to us. Now, one of the things that I wanted to do last year that we spoke about was trying to drive a multiple improvement. I do not know that that is really possible, but what we are focused on is earnings per share growth. We are investing to try to achieve that growth, and we are committed to being the low cost and best operator in the business. With that, Ed, that is what I have. If you are good, we can open it up for questions.
Yeah, that is great. Let me just run over here. I am not speedy at altitude.
Hey, Joe. How are you?
Good, good. Thank you.
Can you talk about how opportunistic you guys
can be and have been with the recent correction in the stock price as regards buybacks?
I am trying to think of how to answer that. I probably won't answer that. Last year, we bought back quite a lot of stock, and we did it fairly ratably. We've committed to the 75% of net income payout ratio. The dividend, of course, will make up a big chunk of that. But we really haven't disclosed our timing. I wish I was a great stock picker and a great timer of the purchases, but I'm not. I'll just be honest with you. When we look at it, and if we've committed to this as a percentage of net income, I think you can expect as we produce income we'll be purchasing shares. John and his team, of course, try to buy dips wherever possible, but that's just not what we do. Anyway, our commitment to you is that we will deliver that payout ratio.
As far as specifics on the timing, I just can't give you that, partly because I don't know.
Okay.
Yeah. I listened to the Total's and MPC's presentations and had asked them about a recession. Arguably, Brazil and much of Latin America has already been in a recession for several quarters, but exports have remained strong. I was curious if you guys could talk about some of the structural reasons why exports have remained at high levels.
No, that's great. How about we let Gary talk about that?
Yeah, I think what we've seen, especially in Latin America and South America, is a lot of the export demand is driven by unreliability on the Refining side. So you see refineries going down a lot. It leaves that market structurally short, and we're able to fill that short. In addition, you see a lot of good growth in product demand in those countries as well. So I think we see it that it's sustainable into the future.
Hey, guys. What is the level of gasoline and distillate exports from out of PADD 3 at the moment from Valero? What is your view going forward in terms of which markets will continue to demand product exports?
Yeah. So in the fourth quarter, we did 157,000 bpd of gasoline exports. We did 264,000 bpd of diesel exports. If you add jet into that, we were up at 307,000 bpd I would tell you the gasoline number in the first quarter is consistent with what we did in the fourth quarter, right in the same ballpark. Distillate volumes are down a little bit, and the reason for that is the arb to Europe has been closed in January and part of February. As of yesterday, the arb to Europe was open again, so I would expect those to ramp back up. But with the way we see the first quarter, gasoline should be fairly flat with the fourth quarter and distillate down just slightly. The markets for diesel, we have been pretty much sending all of our diesel to South America.
Gasoline is going to Latin South America and also to Eastern Canada.
I have a question for Lane, just to move around.
Thanks.
You've been fairly disciplined on projects, and I know you are very averse to talking about projects until you firm them up.
Right.
But in general, as you look around the refining system, what scope is there to further improve the already good performance that Valero is delivering? In particular areas, gasoline, diesel, et cetera.
Our area of focus, as Joe mentioned, we've approved this Houston Alky, which is really a little unique. We're going to be alkylating C5 olefins instead of C4 olefins. We'll build a new C4 olefin unit, but we'll alkylate the C5 olefins because what we see in the industry is there's an issue around octane, and it's only going to get worse with Tier 3 as you look out into the future. That is an opportunity the industry has to solve, and it really can't be solved with reforming, because reforming that particular component hurts how we make gasoline. It creates more toxins. Really alkylate's the answer. We'll look at some other potential alkylation opportunities, but they're still in the pipeline. The other area we focus in are just these little connectivity around, is Texas City appropriately connected to the right terminals?
Do we have the right level of desalting? These are all smaller projects. Rather than two big hydrocrackers, what we are doing is having a portfolio of smaller projects that we can execute in a more timely fashion that increase our flexibility even more so than we have today to take advantage of the right feedstocks, the right crudes, and those sorts of things. That is really the sort of thing that we are working on.
Yeah, it is a different approach than we have had in the past. Lane has done a great job of managing this with his team. Putting in place and really sticking to the gated process for project evaluation has led to much more discipline in this. It has led to investments in long lead items later in the process than earlier, because so many times in these projects, the economics change materially. For example, like on the methanol project that we talked about. You do not see anything about it in here. We put it on the shelf. Quite honestly, we did not get the deal that we were looking for, and we said we would not do it if we did not get that deal. The second component to that is the economics on methanol do not look so great these days.
Being more deliberate and not getting out over our skis, so to say, on talking about projects has really been the approach we have taken, and I think that is what we will continue to do.
Looking at the global supply and demand picture, could you make some comments on the outlook for global refining capacity additions for 2016 and how you guys sit on the overall cost curve? Related to that, how tightening of WTI Brent spreads impact you guys?
Okay, Gary?
Yeah. I will start with the tightening in WTI Brent. Obviously, I think this is something we saw coming for a while. We have said all along, as you get the logistics built out from the Mid-Continent to the Gulf, you would see WTI and Brent come in, and that is kind of what has happened. Certainly, the lower flat price has caused those differentials to come in even tighter than you might have expected had the production continued to ramp up. In terms of where we are on the cost curve, I think we still feel very good with the natural gas cost advantages that we enjoy. The flexibility in our Gulf Coast system gives us a feedstock cost advantage. All those things really put us in a very good position on the cost curve that I think we can be competitive.
All right, Gary, there is your global petroleum demand growth expected to outpace refinery capacity expansion. How about that one? I read, I guess we all looked at, we were looking at the news before we came in, and it was the IEA.
Yeah.
Yeah.
Talked about this huge glut of refining capacity globally out in the future. I do not know. I do not know if these guys are right.
Yeah.
But they weigh in on multiple things. You can read so many things and get concerned. But the facts are, even with capacity additions, there is going to be winners and losers, and demand is going to continue to grow. If we are operating from a zero-sum game, we are going to win because we have incredibly low operating costs. Every quarter, I ask some of Gary's guys to look at the delivered-in cost of a barrel produced in the Gulf Coast, delivered into New York Harbor via Colonial Pipeline, versus a Reliance-produced barrel moved over on a ship into the New York Harbor. Consistently, it has never been the case where they could deliver it at a lower cost than we could.
I remember years ago, we were all concerned, "Oh my gosh, Reliance is going to kill all U.S. domestic refining." Well, it just has not happened. We have a great labor force, particularly in the Gulf Coast. You have a great labor force. You have low-cost natural gas, you got cheap crude, and you got access to the water, and you are moving a fungible product that you can take anywhere. I think U.S. refining is going to hold up just fine.
You guys mentioned that you see a challenged near-term margin outlook for the Ethanol business. I am just wondering, as you take a longer-term view, do you think there is existential risk to that business line, depending on how the presidential election turns out? Is there a risk that this could go away, or do you believe that this is a sort of longer-term part of the energy infrastructure in the U.S.?
Yeah. Any one of you guys, we can talk about it. Go ahead, Lane.
Yeah. What I would say is we at Valero continuously believe that ethanol has its place in the supply chain. That's the reason we're in it. There's some people that are talking certainly about whether you should get rid of the mandate. You have the RIN program that's still in place. Even without it, we just think it has a place in the fuel mix. The issue really is about the economics is that ethanol has to be tethered to gasoline, which really is tethered to crude oil, and your feedstock to this is corn. The economics of the Ethanol business will improve whenever you have an oil recovery and whenever the oil price. So that's when you'll sort of see the overall economics of the Ethanol business improve.
As long as they keep still having the Iowa caucuses as one of the first things around, I don't think it changes a whole lot really. It's very difficult to get that moving.
If I could ask a follow-up to that. You talked a little bit about the demand side being strong long term in Ethanol. Is there any thoughts on the supply side? I mean, some supply-side response with especially some of the larger ethanol producers. I mean, margins are pretty tight.
They are.
There's not, from what we see, a tremendous oversupply.
Right.
It's surprising that, when you look at the weekly runs, it still seems like most producers are running at 102%, 103% of production.
No, you're absolutely right. I mean, we run our plants above nameplate capacity consistently. From a supply perspective, I guess it's very difficult today to envision a scenario where you're seeing a bunch of new grassroots ethanol plants being built. I mean, the economics simply wouldn't support it today. There is adequate capacity to meet the gasoline blending requirements at 10% today. I think we produce like 980,000 or 990,000.
Of ethanol
Yeah, barrels of ethanol, which is adequate for the gasoline demand where it is today. You could always import more ethanol if you needed to. Right now, I think most ethanol producers are looking at how to export and get into some of these export markets, and we're doing some of that ourselves. Long term, I don't think you'll see a bunch of additional supply coming into the market, and I think people will just continue to try to debottleneck and push that trickle growth.
Joe, because of the actions the team's taken, you've got the best balance sheet in refining. Obviously, there is stress in the midstream. You've got VLP. New assets are more tax efficient to put into these MLPs than older assets. How much appetite is there to perhaps partner with some of these distressed midstream guys and get access to incremental EBITDA?
Well, that's a really good question, and I know there's conversation around who are we going to buy. I'm telling you, we're not doing a major MLP acquisition, okay? We are looking at assets. Frankly, those conversations are starting to happen more now, where people were being proprietary with their projects in the past, they're now wanting to partner up. So there are ownership interest opportunities that we're starting to see today. I'm sure that there will be assets that get spun out of some of these entities, and we'll take a look at them. But we have been very disciplined in our analysis of these. We've said that we realize that VLP is a sponsored MLP. We're using it to own assets, and because of the attractive financing to own assets that support Valero's core business. We haven't changed that.
We've also said we're going to invest in liquids logistics base assets that have fee-based cash flows and take no commodity risk in VLP. We're going to stick to our guns. We are seeing opportunities, though, Ed, it's starting to shake out a little bit. That's why we talk about drops. We'll do another drop in the first half of this year. We'll be looking to the market probably, and maybe put some of the drops on hold and look to the market for acquisition opportunities. It'd be really nice for us to have some third-party income coming into VLP also. Again, not abandoning our strategy of assets that tie into our business, but we're not opposed to doing assets that other people participate in, too.
I'm glad we got that out there. Joe, thank you very much.
You bet.
Gary, Lane. Thank you to Valero.
Thank you, guys.
Thank you.