Refiners and the major oil for the firm in New York. Today, the kickoff is from Valero management. We are extremely happy to have the CEO and Chairman, Joe Gorder, and the Executive Vice President in charge of Refining Operations, Lane Riggs, here. The company has done a phenomenal job under Joe's leadership over the last couple of years and changed the direction, become, quite frankly, far more disciplined in their capital spending and far more investor-friendly. I always joke about that, follow the cash. The cash don't lie, and their cash is impressive. With that, without further delay, let me welcome Joe.
Thanks, Paul. Well, good morning to all the early birds out there. I do not know what time you guys had to leave the house to get here for a 7:45 presentation, but I applaud you for it. Thanks, Paul, for the introduction. As Paul mentioned, Lane Riggs is here. He is responsible for our Refining and Engineering Operations, and then he also has process safety under his span of control. Then we also have Eric Fisher, and Eric is a Corporate Vice President with the company. He is responsible for Investor Relations, Corporate Development, and then our market analysis group, which is our think tank group. Standing up in the back, the big guy, the bouncer, that is John Locke, and John's our Vice President of Investor Relations, and I am sure most of you probably have met John.
With that, let me go ahead and get started here. Okay. You know what the safe harbor statement is. It says, "Do not rely too heavily on what you are going to hear because they are forward-looking statements." With that, let us talk a little bit about Valero. This chart is who we are, and I think many of you probably know us. We are the world's largest independent refiner. We have a significant midstream logistics business, which is now, we have part of it in a public entity called Valero Energy Partners. We have a significant wholesale fuels marketing business. We have 7,400 branded outlets, and they are branded under various brands in different geographic areas. Then we have a very large renewable fuels business.
We have 11 corn ethanol plants that produce 85,000 bpd of ethanol, and we have a renewable diesel plant which produces 10,000 bpd of renewable diesel. So we cover the fuel side of the business in its entirety. Okay. This map shows you the location of our assets. As you can see, we have a strong presence in the Gulf Coast in the Midcontinent. We also have two assets on the West Coast, one in the Los Angeles area and one in the San Francisco area. We have our Quebec refinery, and then we have our Pembroke refinery over in Wales. But our portfolio is heavily concentrated in the Midcontinent and in the U.S. Gulf Coast. The reason that we stress that is because obviously the natural resource advantage is most prominent in those two regions.
If you look at the location of our ethanol plants, you can see, again, that they're locationally advantaged. They're in the upper Midwest. They sit right in the middle of the Corn Belt. The expense in the ethanol business is the movement of the feedstock into the plants because that's where you have your biggest bulk. So the fact that you're close to the source of feed is very important, and that's why these plants are so efficient. Anyway, that's our portfolio. Now, if we talk about the macro for just a second, there's really nothing new here. You can see on the left, we've got the supply, and clearly from on a global perspective, there is abundant supply of crude and natural gas. On a cost structure side, we're continuing to see logistics built out that are moving these barrels more efficiently.
In our case, where we see this the most is in all of the pipelines that are being built from the MidCon into the U.S. Gulf Coast. Then the Line 9, for example, that's carrying the Bakken crudes and the syncrudes over into the Quebec region. Then in the MidCon, you've got other pipes that are being built. So you've got a lot of build-out that's taking place, which is just making the supply system for the refining portfolio much more efficient. Then if you look at the demand side, obviously we've got economic growth. Globally, we've got lower product prices, which are stimulating demand, particularly here in the United States. We continue to have structural product shortages in areas like South America and Europe, where they're continually short distillates.
Then we've got demand increase that's coming from the developing countries like China and India and in the Middle East. So you've got an environment that is setting up pretty well for an extended period of good times in the refining business, and we feel very good that these conditions are going to hold through 2016 and bode well for our business. Now, we talked about production growth just a second ago. This chart shows that. You can see the growth in crude production from the chart on the left. Granted, we've seen some tempering of that production. I believe the U.S. Department of Energy stats for this past week showed that we were at about 9.2 MMbpd- 9.3 MMbpd of U.S. crude production, but it's still at levels that are very high on a historical basis.
If you look at the graph on the right, you can see U.S. natural gas production, which continues to be stellar. These natural resource advantages obviously are a benefit to us. Now let me talk more specifically about Valero. We say all the time to our employees and to our owners that safety and reliability are imperative for profitability. Safety is key for our employees because they're the ones that are out there making it happen. We spend a lot of time working through this, and it is our number 1 priority. You can see from the chart here in the upper left and the one in the upper right, how we're doing from a safety perspective. We continue to drive our personnel safety stats down, which is good. Our injury rates are very low.
If you look over at the chart on the right, the tier one process safety events continue to decline, and we are getting to the point where ultimately your goal would be zero. It is very difficult for that to happen. I mean, we would celebrate big time if we ever got there, but we are driving it down to very low levels. This is material because tier one process safety events are where you would lose containment in a refinery, and that can lead to some serious issues. We are very focused on these two points. If you look down below, you can see our performance versus the industry benchmarks. This chart has been updated since the last time that I spoke to you guys. We have got 2014's data in there now, and you can see how we shake out on the different categories.
Now, Lane, how many refineries are reviewed in this?
In the U.S., it is 83 participants in Solomon.
Okay, so 83 refineries are into this. We have 15 of those. So if you see where we are shaking out, a higher second quartile, first quartile performance in these categories, that is out of a population of which, we make up, what? 20% of? Something like that. To be rated that high for the entire portfolio says a lot about your operations. That is why I am very comfortable with us making the claim that we are certainly if not the best, one of the best refiners in the business, and we have got a very good portfolio of refining assets. Now, here is a comparison to the peer group, and this is just a data point for you. You can see where we rate on the Nelson Complexity Index. We are the highest among the peers.
If you look at the graph on the right, you can see what kind of clean product yields we produce. We are also very high here, and it speaks to the quality of our portfolio of assets and our ability to optimize around those assets. Here is another interesting data point that shows based on location, how much advantage CDU capacity you have. You can see that with the two new crude units that we are going to be putting on here later this year, early next year, that we are going to have the highest location advantage capacity. If you look at the chart on the right, just to explain to you, this shows the range of different types of feedstocks that we can have within our U.S. Gulf Coast portfolio. This is based on actual quarterly processing data. This is not a conceptual conversation.
This is what we have actually been able to achieve. You can see the ranges of heavy sour crude that we can move and so on, all the way down to the residuals in the other feedstocks. What this does is gives you tremendous ability to optimize the portfolio, to optimize the feedstock slates, depending on what the economics are giving you. That is something that we have invested in over the years, and it is yielding benefits for us today. This is just a graphic to show you that we are located in parts of the country and the world that allow us to move barrels to the highest net back markets. You can see there is a lot of movements that are taking place out of the Gulf Coast.
From there, they primarily go south into Mexico and into Latin America, but we are also moving barrels primarily distillate over to Western Europe. You can see Quebec has movements. We have got gasoline that goes into Quebec when it is short, and we got diesel fuel that is coming out of Quebec. If you go all the way across the Atlantic to Wales, you can see the movements that are taking place out of Pembroke. There, when we bought that refinery from Chevron some years ago, we were long gasoline big time. During the tenure that Eric Fisher was there, he was able to increase our domestic sales. Now we still have some exports that come out of Pembroke, but to a much lesser extent.
If you look at the chart on the right, you can see Valero's product exports, and you can see that they have been very consistent at a fairly high level. I mean, we show here in the first half of 2015 that we averaged 86 of gasoline and 221 of diesel fuel. I will tell you guys that in August of this year, we actually moved 87,000 bpd of gasoline and 280,000 bpd of diesel fuel and another 43,000 bpd of jet and kero. When we get asked regularly, are the export markets still there and are they still strong? The answer to that is yes. Okay. What does all this sum up to? All these advantages that we have?
Well, you can see from the chart on the right that we have refinery operating expenses that on a per barrel basis are very low among the peer group, and that translates into what you see on the right, and that is that our operating income per barrel of product tend to be very high. Now let me transition a little bit and talk about our capital allocation framework. Here you can see what we've agreed to as a management team on the use of cash, and we've broken it down into two categories, the non-discretionary pieces and the discretionary pieces. Among non-discretionary, we've got sustaining CapEx, which means we're going to continue to take care of our assets.
We've got dividend growth, which means we're going to continue to be attentive and take care of our shareholders. Then we've got debt and cash, which is our commitment to maintaining our investment-grade rating, which means we're going to maintain our balance sheet in a way that we can take advantages of opportunities when the opportunities present themselves, whether it be in the M&A market or in some other way. If you go down to discretionary, you can see there that we've got our growth CapEx. We don't really believe that rewarding shareholders with return of capital is exclusive from the growth CapEx. We will continue to develop projects, but the projects that we're developing today tend to be much more focused on short cash cycle projects with high rates of return rather than the long cash flow cycle, high EBITDA producing projects.
I think what you'll see is we're much more nimble in our ability to get things done quickly and to drive the returns. If you continue to proceed to the right through the discretionary, you can see we have stock buybacks in there. I'll show you how we've done so far this year in just a minute. Then we've got acquisitions. We really believe that there's going to be opportunities here going forward. We've been very active historically in the acquisition market, and we're positioning ourselves to do that again with a very strong balance sheet, low debt levels, and we continue to have significant cash based on the income that we've enjoyed. So where are our investments going to go? Well, this shows you what our CapEx is, and this really isn't a change from what we've shown you in the past.
We're still targeting $2.65 billion for this year. It'll probably be somewhat below that, but it's going to be right in that general neighborhood, and then still looking at $2.4 billion for next year. We're going through our strategic planning process right now, and we'll present that to the board later this year. There may be some movement within this $2.4 billion between categories, but you're not going to see any material change in the amount. I mean, $2.4 billion is the number that we're targeting. You can see the categories here. It tends to shift from investments in refining, which if you look at this year, this is primarily the crude units at Corpus in Houston, and it's transitioning more to the logistics assets, which will allow us to increase the pool that we will then be able to drop to VLP.
Now, I mentioned the feedstock flexibility in the two crude units. This is just a chart that speaks to that. We are adding 160,000 bpd of crude processing capability. 90,000 bpd of it is at the Houston refinery. 70,000 bpd of it is at the Corpus Christi refinery. Lane and his team have done a great job of driving these projects forward. You can see there we have the timeline of first half of 2016. Well, the Corpus unit is going to be done by the end of this year. We will have oil in before the end of the year. The Houston unit is probably going to be done sometime earlier next year. Both projects are on budget and ahead of schedule, and they continue to have good returns in the markets that we are looking at today.
We have more detail on these projects on the associated economics in the back of the deck that you have. I think it is slides 31 and 32. Here is what we got going on now from an investment perspective. We are going to continue to increase our production or focus on increasing our production of high-value products. On the distillate side, the Meraux Hydrocracker is in place, and it is performing very well. We are also doing the hydrocracker expansions for the Port Arthur and St. Charles hydrocrackers, and those will be done in the first quarter of 2016, and Port Arthur's will be done before that. Again, those were very inexpensive expansions of processing capability that allows us to produce more distillate. If you look at the next two, the alkylate and the methanol, both of these projects are in development phases right now.
We have them to gate three of our gated process, which is pretty far along, and both projects continue to look really good. The alkylation unit obviously allows us to produce premium priced alkylate, which is a high octane blend stock, which is in significant demand today. We can talk about that later. On the methanol side, this is your cheapest way to convert natural gas into higher value liquids. We have a structural advantage at our St. Charles refinery in that we have surplus hydrogen supply, and we have infrastructure in place. That project benefits from those two factors. What they do is allow you to put in place a world-scale methanol plant at a fraction of the capital cost that it would be to cost to build a grassroots one anywhere else.
We kind of joke that this project, among the methanol plants, makes you the pretty girl at the dance. Everyone wants to partner with Valero on this project because they know the advantages that we have based on the two things that I mentioned. Anyway, we continue to advance it. We will make a decision here later in the year, and we will let you know. The one thing I will say about this is it wouldn't be our intention to go this alone. The capital that we would probably put out of pocket on it is below that which we have had in the capital budget that we have shown you for 2015, 2016. I don't want anybody to get overly concerned that we are going to ramp that $2.4 billion next year up to $2.7 billion. That is not going to happen.
Now, this is something that the strong margins that we've enjoyed this year have allowed us to do. You can see that earlier this year, for the first time, I think, we announced that we were going to have a targeted payout ratio of 50% of net income. We were driving towards achieving that target. The fact that we've had strong cash flows and had the discipline within our capital program and our expense control has allowed us to increase that target. We've driven it up to 75% of net income for this year. I will tell you, that's 75% for the entire year. That's not 75% for the second half of the year. Obviously, you can do the math here.
If we were at 61% through the first half of the year, we're going to have to accelerate the pace of those buybacks to hit 75% for the entire year. But that is what we're targeting, and in a perfect world, you always beat your target. We continue to drive to try to do that. But that is our commitment. Let's talk a little bit about VLP, Valero Energy Partners. This is our MLP. We own the 2% GP interest today. We've got all the incentive distribution rights, and we own nearly 70% of the outstanding common units. These assets are highly integrated into Valero's system, and right now VLP is a very traditional fee-based logistics type of MLP, and it's our plan certainly to keep it that way. It's something that we focus on growing, and this is our way of unlocking value.
This year we committed to doing $1 billion of drop-down transactions. So far we've got $671 million done, and we've got the second drop on schedule right now. That'll take place before the end of the year, and that'll take us to somewhat over $1 billion for the year. We'll exceed that target. What this does really is takes the EBITDA up to a level. It does two things. Number one, it pushes us into the higher splits for the GP. Number two, it gives us enough mass within VLP that we can go out then and get the investment-grade rating that we want so that it can start doing transactions on its own.
Just so that there not be any question in anybody's mind, we have more than $1 billion of MLP-able eligible EBITDA still in the Valero portfolio that can drive the growth for VLP for an extended period of time. As you know, I think our commitment was that we would have at least 25% distribution growth for the next several years. Our plan is to continue to drop assets to grow that to maximize the value of those assets within Valero Energy, hopefully with the pull-through value, and then to continue to grow VLP for the common unit holder. All right. The renewables business has been very good for us. As I mentioned earlier, we have a significant ethanol business, and we also have our renewable diesel plant. Basically, I will just tell you, these are very strong portfolios. The ethanol portfolio is.
We only have the one renewable diesel plant, but it is a bit unique and it performs very well. We are pleased about our investment in the renewables business. Let me just wrap up here by saying, based on what I have shared with you, we really do believe that Valero is an excellent investment. I will not read you the bullets on the left, but take a look at these two charts on the right. This is extracted from Mr. Cheng's data. What it shows you is that based on the 2016 estimate price to earnings ratio for Valero is at the bar he has got there. You can see where the peer range is from the bar on the right and the median. Well, obviously from that chart, we are at the bottom of the peer range.
Then if you drop down to the chart right below that, and you look at the average return on market capital employed, you can see where Valero is relative to the peer group, and we are at the top of that. That tells me that Valero Energy is highly undervalued today. Our management team is certainly taking actions to try to address that. We have got the business to run, and that is our primary focus.
That is our commitment, is that we are going to run the business to continue to try to be the best, to manage our cost, our expenses, to be disciplined in our use of cash, and to the extent we can, to return it to our shareholders. Again, I think we are a great investment. We are undervalued, and our team is going to do what we can to reward an investment in this stock.
With that, Paul, that is all I have got.
Thank you, Joe. We will open for Q&A. Just as a reminder, due to a schedule conflict, management will not be able to conduct a breakout session. If there is any question, then please ask it here. Yes, there is a gentleman here.
How are you doing?
I'm good.
Good.
Curious, how many barrels of Canadian crude can you bring down right now? We saw some pretty wide Maya WCS spreads recently, and just where is that today? Where can you take that? Thank you.
Well, we can buy spot in the sort of the Beaumont and Nederland area. We buy quite a bit there off other people. We have secured. We don't give our positions on pipeline space, do we?
I am sorry?
We do not give our positions on pipeline space. We are able to bring quite a bit. We run anywhere in the Gulf Coast up to 125,000 bpd-150,000 bpd. We pre-invested at Port Arthur to run a lot just because we were early on in the Keystone XL pipeline project. We put in a 65 a-day rail facility at Port Arthur to rail Canadian down. Today it is one of the more economic barrels for us to run because of how depressed the [inaudible] market is on heavy sour. So yeah, we have quite a bit, and we run about as much as we can up to our equipment limitations, which I said For Port Arthur in Texas City, it is somewhere on the order of about 150,000 bpd.
There is a question here.
Hi, thanks. I was taking a look at gasoline cracks. I was wondering if you could help me think about how much gasoline are you guys producing this year, and then what will that look like next year? Will you guys be able to increase production to take advantage of the shortage? How much? Can you just help me think about that, please?
Yeah, you bet. Lane, you want to?
Well, what I'll say is we've been in max gasoline mode pretty much all summer. I don't know what our public number is on that, but it's on the order of 1.5 million bpd or something like that. We've been in max gasoline mode. The real swing on that really is the reformers. FCCs have had a max signal. The new thing to happen this year really versus for the last three or four years when we've been in max diesel mode is we've seen really positive economics on reforming. I would say the industry, at least the last three months, has been in max gasoline mode. I don't know if the industry has a lot more capacity to deliver more gasoline, outside of unit outages and turnarounds and things like that.
There's been a call on our gasoline capacity all summer.
Lane, you might just give him an idea too, what the flexibility is within the system to produce the swing between gasoline and diesel.
We can swing 5% or so, 5%-8% of our production can go back and forth.
Yes, that's a
[inaudible], just one quick follow-up. Next summer, do you think you will be able to increase gasoline production? Are there debottling neck type things you can do, just given how strong that margin is? I assume you would want to get as much of that as you can.
Again, our capacity was at the max call of our. We do not have projects in place to increase our gasoline production. The crude units are more of a feedstock optimization. We will generate more naphtha, but there is only a certain amount of octane in the U.S. Gulf Coast to soak up that naphtha, hence that is the big wide premium regrade that you are seeing. Therefore, on the increment, the industry is going to have to export naphtha until there is more octane capability in the Gulf Coast. So there is not a lot from the position of Valero to try to make more gasoline than we are making today.
Joe, maybe I can ask a question here first. A lot of people is concerning about or that are debating about the export ban. Wondering, based on your contact in D.C., talking to the politician and the political consultant, do you believe there's a high probability export ban will be lifted within the next, say, six to nine months? And whether it will or not, ultimately that if it does lift, how that impact your business, if any?
Yeah, and that's a good question, Paul, and I think it's on everybody's mind. I'll let Lane speak to the effect on Valero of this. But I would tell you three months ago or less, I was in D.C. and I met with a bunch of people, and the politicians. I mean, people like Mitch and John Locke and so on. And the sense was that this was starting to get momentum. But there was also a sense that it wasn't going to happen. And I can't say whether or not it's going to happen. I truly don't know, Paul. I think anybody's guess is as good as mine. There's got to be a lot of support for it, okay?
Because there's significant political capital that's going to be expended by the politicians if they agree to do this, and we have the slightest uptick in gasoline prices, or all of a sudden, you end up with a national security issue because something happens in the Middle East and now you're pushing your oil out to the water. So I think they've got a lot of things to think about as they noodle this issue. That's the soft side and the political side, which quite honestly, I don't know that any of us fully understand very well. Could it happen in the next six to nine months? Yes. Do I think ultimately it'll happen? Probably so. Now, with that said, Lane, do you want to speak to the implications to us in this scenario?
And we can talk about today and talk about what it would take to be damaging.
Yeah. I would sort of, I do not know how many people here keep up with where the, I would say, Brent [inaudible] as markets are. But all year, they have sort of moved in between what I would say is an import parity and a sort of a balanced market, meaning there has been times during the year we have wanted to maximize domestic crude oil. But about half the time this year, we have been importing. And what that means is that there is length of crude in the world, and so therefore, for example, today, we are tacking our refining system to run more medium seller and less domestic light oil. And so why is that? Well, there is a lot of oil sitting around the world, and there is pressure to bring those barrels in, and they can compete pretty easily with the light domestic oil.
And we have seen that off and on all year. So therefore, our view is, if you think about your valuation for the industry, you have to take a view of, well, what is LLS, which is the proxy for light sweet in the Gulf Coast versus Brent, and that will give you the directional flow of how the oil will go. In a world where you actually have to export, you have to be at export parity for there to be a demand for the domestic oil. I have to put it through a dock onto a ship, whether it is a Suezmax or a VLCC, I have to find a customer. And so you still have this freight advantage that the U.S. is going to have versus anybody else consuming that oil.
And that producer or whoever is marketing it has to find a customer, whether that customer is in Europe or is it in China.
Right? But they still have to load it on a boat, and it has to go somewhere. And therefore, ultimately, if the world wants the oil, which is sort of our view, the world needs to pull the oil from the U.S., and that will be when it works better. You have to have a build-out of Suezmax and VLCCs because all that oil that elsewhere has to go somewhere is competing for that capacity as well. So you will have a period once it occurs, or when and if it occurs, you will have to have a build-out of ships to accommodate that. So there will be a freight impact. So if there is not enough shipping early on, then freight will get really high, and again, that creates a larger differential between where it is going to get exported from and where the country is going to go.
That benefit accrues to the U.S. Gulf Coast. I will leave it at that.
There is a question over here, then after that will be a question here.
You mentioned your outlook for 2016 remaining constructive in the macro sense, also the strength of the balance sheet allowing you the opportunity to make acquisitions, you thought there might be some that emerge. Given the strength of the macro environment, how or where might those acquisition opportunities arise?
Well, I will just tell you, this is an ongoing process, right? Doing M&A is not something you just wake up and decide that you are going to do. It is something that you are looking at all the time. Very clearly, we have got a list of targets that we have defined internally, we know generally what the valuations are for those. What you do is you just need to be patient look for the opportunities. Keep an eye on them look for the opportunities, then you will try to take action when you can on it. There are corporate deals that can be done. I would tell you, there is also a lot of one-off asset deals that could probably be done.
In our view, there have been investments that have been made in supportive assets that may not be critical to the operations of certain businesses out there based on the depressed conditions that they have today. It might provide the opportunity for us to come in and to pick off some of those or to partner on some of those. This is an area where I'd love to be specific and tell you exactly what we're thinking about, but I can't, and I won't. Just suffice it to say, though, that really in my mind, this is something that we'll end up seeing. Valero is going to try to grow the business. We'll continue to incrementally grow the refining business, and you may grow the refining business with a deal, okay?
We would buy more refineries to the extent that they fit into the portfolio and added value. The midstream business, obviously we're going to grow. We said we're going to grow that via drop-downs, and then we would also grow that via acquisitions. That'll probably have a higher growth rate perhaps than refining would. The renewables business, we continue to look for opportunities to grow that business. But because of the margins that were enjoyed last year and the ability of the renewables companies to get their balance sheets in really good order, those opportunities just aren't out there yet. Now, if we have a sustained period of very low margins like we're experiencing in the ethanol business today on a relative basis, we may get some opportunities going forward, and we would take advantage of those. Then you look at the methanol plant.
I'm not even going to call it a step out anymore because it's a process that is very easy for us to run. But it takes us into a new line of business and creates an additional earnings opportunity for the company where we can produce high returns. To the extent that we can continue to do that, we will. I know certain businesses right now are highly valued. I tell you, refining is not one of those in my mind, certainly not Valero's valuation. I think if there's opportunities, we'd take a look.
We've run out of time here. Thank you, everyone. Thank you.