Good morning. Thank you for joining us today. Our next presentation is Valero. With great delight, we have the largest independent refiner, actually, the largest refiner in the country, their CEO and Chairman, Bill Klesse, with us. Bill is going to share with us his insight about the industry as well as the company. Without any further delay, let me welcome Bill.
Well, thank you, Paul, and good morning to all of you that came out early today. With me is Gene Edwards, our Executive Vice President and Chief Development Officer, Ashley Smith, our Vice President of Investor Relations, and Matt Jackson in Investor Relations also. So we have our safe harbor statement. Just an overview of Valero here. Many of you follow our company. We are the largest independent. We have 15 refineries, 2.9 MMbpd and 6,800 branded outlets, including 1,000 in the U.K. We also are the third largest renewable or ethanol producer, and we have a very good position in that business. Just to head off a question, yes, we believe that the Biodiesel Mixture Credit is probably going to go away, but not the mandate. So we believe that ethanol is a key part of the fuel mix in the United States.
We've recently announced an acquisition of Murphy's Meraux Refinery. Here's a good overview, and we have these, if you don't have one of these, I'm going to go quickly, but we have this presentation available for you. $325 million, we allocate about $270 million to the refinery. Many people have asked us, "Why would you do this size refinery when we are known and do have our high complexity, 190,000 bpd of average, counting Murphy into our mix?" So we're a coking kind of operation. But this refinery has lots of hydroprocessing. We know what hydrocrackers cost. Remember, for those of you who follow us, we're building two of them. It's got a distillate gas oil hydrotreaters. There's a DAGO, which is deasphalted oil hydrotreating. So there's a lot of hydroprocessing in this plant, and it fits very nicely with us.
However, we did not count any synergies in our acquisition, although we know that there'll be quite a few between our St. Charles refinery, where we're making significant investments, and this Meraux Refinery, which on the river is about 40 miles apart. Television went off, but Pembroke, we closed on Pembroke, and so we've completed our first month with this business. We think it's a great addition to us. It is a very good refinery. Chevron ran it very well. As Murphy has run their refinery, I know there's a reputation in the business that the Meraux Refinery has not operated that well, but it has operated very well and has been profitable here. Well, Pembroke is a great addition. Lots of capacity for us.
We exited the East Coast of the U.S. in refining, but we are still in the Atlantic Basin, and we still market on the East Coast. We have lots of opportunity when you look at the Atlantic Basin, as this map will show you. We got it color-coded here. Diesel fuel is red, diesel and jet. Gasoline is green, and intermediates are blue on here. We have the Aruba Refinery, the Quebec Refinery, Pembroke. About 50% of Pembroke's gasoline is exported, and we know the cost structure of this refinery versus East Coast refineries. We think that we have good opportunity to put the gasoline as shown. We also import gasoline in the summertime in Canada.
We have been exporting some diesel from Canada, and of course, those that follow us and follow our industry closely know that exports from the U.S. Gulf Coast have been a big factor in our business this year. We moved distillate to many markets out of the U.S. Gulf Coast, and we've been moving gasoline, which isn't necessarily shown here, from the U.S. Gulf Coast, actually into Mexico and Latin America. You get to see our footprint. We are large. We're in most markets. I mentioned we exited the East Coast in refining, but we still have access to that market from Pembroke. You can see us. Our ethanol plants are located very well in the upper Midwest among the corn. We find that we're very competitive.
Many people say to us, "Well, you're so concentrated in the U.S. Gulf Coast because it's the most competitive area." That is true, but I will tell you, it is also the most efficient when it comes to maintenance, construction, frankly, utilities, and a lot of other things. It's a very efficient area to operate. Going to just look at the global picture here, and refining is a global business. Every market, in a way, indirectly impacts refining. Why? Because the arbitrage is always freight cost. You can move freight all over. You can move product all over by incurring the freight cost. You can see here, though, the golden age of refining when demand was very high back in 2003, 2004, 2005, 2006. The world was growing rapidly. But out here in 2010, 2011, and 2012, we've had good growth.
In 2011, the world growth has come down significantly from the estimates for the year. We have here about 1.2 or 1.3. Obviously, earlier in the year, it was expected to be much higher. In 2012, we still have the world growing over 1 MMbpd . That growth is in the Far East, Latin America. Middle East is where you're seeing the growth. But now we would look for 2012 with the recovery to actually be a little better than shown on here. 2011 might weaken a little more, but the world is still growing in oil consumption. In Valero, in looking at just the markets, we have discounted crude.
If you change our benchmark, most of us are used to WTI as being the benchmark. If we switch it to an LLS benchmark, looking here at these discounts you're incurring in the market, the next slide will show you a refinery configuration. You see, obviously, WTI is just a very advanced crude oil today. The other important factor to note on here is Maya or heavy sour. We're using Maya as a clone here, but heavy sour crude oil, thus coking, is much better this year. When you look at our company, we have 70% or so of our feed is discounted to LLS in one form or another. In our particular case, about 11% or 325,000 bbl is basically a WTI-priced crude oil.
Even though we're not heavily concentrated in the Midwest as some of our peer group is, we are benefiting from that as well. The other thing I will tell you is that coking refineries we have at St. Charles, Port Arthur, Texas City, and then, of course, Corpus Christi is not coking, but a big HOC operation, heavy oil cracker, are making us excellent money this year. Going back and looking now at refinery configurations, this is the gross margins. It's like a good indicator modeling of what this type of refinery look like. They're defined here with Midcontinent WTI cracking. Then you have an ANS medium sour. You can see those here. Gulf Coast heavy sour, which is really coking. You can see in the golden age of refining where these configurations were. Now, there's other factors going on in here.
Remember, operating costs have increased as we've had to desulfurize more oil. You think about all the things that are the rules we've incurred, flare gas recovery. Your cost structures have come up. However, if you look over there to the right, quite frankly, and location is key or access to certain crude oils, Midcontinent cracking, refining is absolutely just tremendous. We know that by watching all the peer groups in the Midcontinent. You can see this WTI operation is better than the golden age of refining. The other interesting point is heavy coking is actually almost as good as it was. Then you can see that, well, it is true ANS is not as good.
We know West Coast has high unemployment, very poor economy, and you can actually see some of this reflected here in that you don't have the margins on the West Coast. Fundamentally, just to look at the business a second closer in the United States, the business is actually in very good shape on inventories. What do we have going on? Demand for gasoline has been down or flat because really reflecting the economy, unemployment, all the issues we have, high prices with gasoline. However, the inventories are in excellent shape, and that's shown on the chart on your right. You can see here last year is the blue, the red is this year, and this is number of days. The black line is the five-year average. If you look over on distillates on your left, you can see a similar trend.
The distillate inventory in the U.S. is very good. Distillate demand is up a little bit this year. U.S. demand is very low-growth, slow recovering here, reflecting the economy. You can see exports, activities that are going on around the world have really made our inventory situation very attractive here. When you look at Valero and you say, "Well, what are our key" This is like a key slide, our key strategic kind of priorities. You can see here, it's always about safety in our business. We've been managing our overhead. We're investment grade. We're going to maintain that. We work on margin capture. We have been reducing operating costs. Reliability, Valero has improved reliability tremendously, and we continue to improve it. For us, we have to complete our major projects. You'll see that on another page.
Quite frankly, Valero is unique, and I view us as unique. We are spending a lot of money on economic projects. Projects that are going to generate a huge earnings for us in 2013. We continue to optimize our portfolio. We've taken a lot of action, both in the acquisition side, but also in the divestiture side. We continue to add select investments in retail. We look at the ethanol business. We are very convinced it's going to continue as part of the fuel in the U.S., as I had mentioned, and also in biodiesel. Remember, we are a very capital-intensive business, and there's always a long lead time, but the actions we are taking are improving our company's competitiveness greatly. Now, just a couple of improving operations. When you just look at it here, the top chart is energy efficiency. It's been improving.
The one I really want to focus on, because some people question how our reliability or mechanical availability has been over the years, and a lot of the refineries that Valero purchased, quite frankly, were under-invested. We have invested a lot. There's no denying that. We are seeing the benefits of that. We fixed our coke drums at Port Arthur this year. Next year, we will fix the coke drums at St. Charles. We fixed our cat crackers at Memphis and St. Charles. These were huge negatives in this area of mechanical availability. We have major inspection programs underway. We are actually incurring expense today with contractors as we do positive material identification and a couple of other things as we go through our assets very thoroughly.
We are improving, as the chart on the bottom shows you, and this is the Solomon data, and you can see here how much Valero has shown, and this is the 2010 information. You could see where we are using those benchmarks for 2011. We also continue to work aggressively on our expenses. This is what we've saved over the last few years. Many people say, "Well, how come it doesn't show up exactly on your bottom line?" There's always offsets. I can tell you, if we hadn't gotten these savings, then we would be that much higher in our cost structure. These are very real. We have a very detailed list. If anybody's curious, we can give you that list. It's interesting where you find savings when you really get your organization focused on it.
On the chart on the right shows how we've attacked our G&A number of people that are in basically the corporate headquarters, and you can see how that's come down quite dramatically. We continue to find ways to save money in our company. Yield is very important when you have $100 oil. Remember, when you have a coking refinery, you get your liquid volume yield, but you generate sulfur, you generate coke, so solids, so you don't get the same value for those that you get for your liquids. Your liquid volume yield is very important when you have $100 oil. You can see on this chart how we are very focused on this, how it is improving. A 0.4% change in our liquid volume yield was $242 million of improvement. This is a very important item for all refiners, quite frankly, in this market.
You can't lose your liquid volume throughout the refinery. When you process heavy sour crude, you're going to use it, so you got to make it up some other way. How do you make it up? In your conversion units, cat cracking, and of course, hydrocracking. As the point at the bottom mentions, the last point, once we have the two big hydrocrackers completed, you'll see Valero's liquid volume yield jump 1.4%. Now it's magic, right? No. We take natural gas to hydrogen. It's really gas to hydrogen. That hydrogen's priced way below oil because it came from natural gas. Hydrogen goes into the hydrocracker. You put 1 bbl into a hydrocracker, you get about 1.3 bbl back. It came from the natural gas. That's where you get your economics, but this is just another way to look at it in liquid volume yield.
Many of you invest on the other side, of course, upstream. The whole Eagle Ford is a huge play. Every time you talk to somebody, we're going to get more oil from the Eagle Ford in South Texas. The other Granite Wash, the play in Eastern Ohio. Obviously, the Bakken, this whole shale is tremendous impact. Valero at McKee and Ardmore obviously runs a WTI-priced oil, so we have this benefit there. We've been growing rapidly our consumption of Eagle Ford crude. The chart on your lower right shows our Three Rivers refinery, and you can see there we used to run foreign sweet, and we've shown you here that beginning next year, we'll be running 60,000 bpd You can't really get higher. We get into a lot of how do you handle the vapors. It's a light oil.
We run into a constraint without capital investment, which requires permits. You can see here, this has had a huge impact on the profitability of a relatively small but very well-run complex refinery. We also at Corpus Christi in the fourth quarter will start running some Eagle Ford crude as the pipelines are completed. Next year, we'll be up about 45,000 bpd . You saw the announcement yesterday. A lot of that has to do with getting crude oil to the refinery centers. All of these shale plays, the infrastructure's not there to move the oil to the market. It's either being moved by rail, truck, and eventually pipelines are being built. Valero is very strong financially. We're unique here. Look at our financial strength. We've also returning cash to the shareholder. In this, we bought 11 million shares of our stock.
It is about 2%, $220 million. We bought it for less than $20 here over the last month. We are also going to look at our dividend in October. That is a dividend meeting with our board, and we will review our dividend. We are investment grade, as I mentioned. We paid off $718 million of debt this year. Our debt to cap is excellent. We bought these other assets. We still ended August with over $3 billion of cash. Very strong, and we are very unique in the sense that the capability to add real long-term shareholder value. Capital spending, I mentioned earlier, we are unique. If you think about the refining industry, I do not believe anybody is spending the money we are on economic projects. The reddish orange is $1.4 billion. That is primarily driven by our hydrocracker. Got another slide or two on that.
Our capital spending next year will be about in the same range. In 2013, our capital spending drops significantly as we complete these projects that we are working on right now. Very unique in the sense that Valero has income-producing assets coming into our mix during 2012. Here is just a chart we have used in many presentations. It lists the key economic projects going on. Obviously, the two revamps on the cats I mentioned have been completed, and you can see the hydrogen plants, the hydrocrackers are huge contributors. Go over to the far right column. You see the numbers using the 2011 margins, so you could see the impact we are having here. It is over $2 a share of financial impact coming to the company. We threw this in there just so all you engineers in the room could marvel at the pictures.
The one is the moving, it is a millisecond cat cracker before at St. Charles, and then the after, it is now a conventional riser, a unit that is run throughout our industry. We improve yield and run length. We could not run more than a year on this unit nor the Memphis unit. Now we will be able to run four to five years on these cat crackers, and we are fixing our other things. That is why you are going to see going forward a significant improvement in our reliability. The hydrocrackers are on schedule. They are very large projects, and they are on schedule.
We will be able to run 60,000 bpd in this economic environment. What does that mean? The good diesel cracks. It is very attractive to make diesel fuel, and we will run at a much higher rate. They are on budget. They are on time.
We should have the Port Arthur done starting up in the third quarter and the St. Charles starting up in the fourth quarter next year, so that 2013 will see all of these things coming to us. Why are we a good buy? We are just an excellent buy. Our stock price is just not representative of all this earnings power. We have very strong margin environment. We expect to make, and it is different than the consensus that is out there, we expect to make over $2 a share here in the third quarter. For the year, we expect to make well over $4 a share for the whole year. 2012 looks very good. Then 2013, we have all these economic projects coming to us.
We don't see this Brent WTI. I don't think it's going to stay at $28 or whatever it is today, but it's going to stay wide, and there is an advantage to being in the Midcontinent here and getting access to that type of oil. So improved performance. Our competitiveness of our refining portfolio is so much better today than it was a few years ago. We're adding quality assets, lots of what I'll call optionality, synergy, but a lot of optionality on where we make stuff, how we move stuff between refineries, feedstocks here, where we go ahead and hydrotreat, and where we actually upgrade our products. That's how Aruba fits into our mix as being a real feedstock channel for us as to bring in gas oil or hydrocracker feed to our operation.
Those projects will be completed, and we just think by any metric, our stock is just not being appreciated. We understand there's lots of turmoil and volatility in the market, but just look at the performance that we're generating. We gave you a lot of detail in our appendix. Ashley and Matt put together a lot of info so you could see how some of the things that we've represented here to you, how we're getting those numbers. So there's a huge amount of disclosure here to help each of you evaluate our company. And with that, thank you very much.
Thank you, Bill. We will have time for several questions before move to the breakout. There's question here. Can you wait until the microphone? It's in the middle over.
Sure, go ahead.
Should we assume, given that you have exited the East Coast with Paulsboro and Delaware City and your asset base, you prefer complex crudes, that there is absolutely no interest in the Sunoco assets, they really do not fit in Valero's portfolio? Could you talk about your view of those assets?
You are asking about the Sun assets?
Yes.
Yes. Okay, I got it. We made a decision to exit the East Coast of the U.S. in refining. We bought the Pembroke refinery, and we think we are in a much stronger competitive situation. On acquisitions that are out there, potentially out there, who knows? We made that strategic decision.
If you look at low-cost crude, that has obviously helped out your margins. From a supply-demand standpoint, I wonder if you could provide some color or even quantify the U.S.A. next one to two years versus Europe next one to two years in terms of supply side capacity, refining capacity additions at an industry level. Is that going to outpace demand, or what does the supply-demand situation look like?
I am going to take the second part of that, but I will let Gene talk about the first. On the second part, sure, there is refinery capacity coming into the market, but the market is growing. And refining capacity comes in in steps. The market tends to grow at some rate. So you always have these step changes coming in. So obviously, there is a capacity coming in next year. This year, when we look at it actually, the demand has fallen off. If you had asked me three months ago, I would have told you we will consume some of that refining capacity this year. Now, with demand falling, it is more in balance. Next year, there will be a little more capacity added than it looks like demand. However, I think world demand is going to come up some. So it always comes in in steps.
For the next several years, I think demand is going to track nicely with refining. There is also a chart, and we can get it for you, that shows that world refinery operating rate is actually down this year from last year, even though there is more capacity in. And if you think about what is going on in the world, several of the Latin American countries have had trouble running their capacity. You have seen in the Caribbean, some of our competitors have taken action on their capacity and actually have downgraded their plants. Clearly, the refinery in Curaçao is not a factor in the business that it used to be. It needs a huge amount of investment. So a lot of refineries around the world need a lot of investment. Many of them can only process light sweet crude oil as well.
I think the dynamic is not as nearly as your first impression might imply that capacity is outreaching. But capacity comes in steps, and so you see that come in. So over the next several years, I think refining is going to be just fine. That is why I am hanging around. But on your first part of your question, Gene, I would like him to talk to you about the U.S. and Europe and how we see that.
Yeah, I think you are seeing a situation right now where you have there is too much capacity. So what you are finding is there is the haves and the have-nots. The haves are the guys that have low-cost structures, can get advantage crudes. The have-nots are the ones that have the higher cost crudes related to Brent, really Brent related plus transportation. You think on the East Coast, high cost structure, high capital structure, and refineries that just cannot make it in this type of environment. So we have tried to position ourselves where we have more of the have type refineries and have divested the ones that we do not think can compete in a low margin environment because there is going to be surplus capacity and represented by these lower utilization rates.
But these low utilization rates, a lot of them either in the East Coast or over in Europe where they have high cost structures, high natural gas prices. The U.S., I think is entering a position where we got sustainable competitive advantage because we got more and more crudes being produced in the United States, which gives you the advantage there, and also the cheap natural gas. $4 over here versus $10+ in other parts of the world for natural gas. I think we're just ending up with a better cost structure on the refineries that really can make it.
Just to add to that last comment that Gene made, the natural gas price in the United States is a huge competitive advantage. Just to give you a sense, in Valero's cost structure, when we went from $12 natural gas to $4 natural gas, is about $1 billion of lower cost. Now match that up with guys around the world that we're competing with that are having to process or use LNG or fuel oil, and compare that to the natural gas situation we have here. So that's why we at Valero firmly believe that we can compete in this industry in the world. It's one of the few manufacturing businesses that can still compete in the world from the United States. So that's why we're so optimistic about that.
Bill, a Barclays competitor has sort of postulated that ultimately in the sort of the 2016 time period, with all the growth in the North American onshore oil plays, that even the Gulf Coast sort of refining complex might get overrun with crude, and there's just not enough light refining capacity to handle all the crude that we're going to get. What's your feeling towards that, and how would you guys benefit in that type of environment?
Well, I think on just the plain crude question, the U.S., at least into the Gulf Coast, will quit importing any foreign suites. Gene, go ahead.
Yeah, I think it's going to be location dependent again. You could see a lot of these crudes as they push down to the Gulf Coast. You could see the Gulf Coast being long crude, which I think is good for having Gulf Coast refineries. On the other hand, the West Coast, the East Coast will continue to import crude. The Midcontinent is going to be a net exporter of crude. I think they have long-term sustainable advantage. Like Bill said, probably not $28, but at least whatever Gulf Coast is minus pipeline freight is going to be a floor margin for Midcontinent refineries going forward. I think the strongest areas are going to be Midcontinent first, Gulf Coast second, and the East Coast, West Coast are going to be more disadvantaged on crude.
With that, we're going to move to the breakout session for additional Q&A. The breakout session is going to be Liberty 3. Thank you very much.
Thank you, everybody.