Good day, ladies and gentlemen, and welcome to the Valero Energy Corporation's 4th Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, there will be a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Homer Bhullar, Vice President, Investor Relations.
Sir, you may begin.
Good morning, welcome to Valero Energy Corporation's 4th quarter 2018 earnings conference call. With me today are Joe Gorder, our Chairman, President and Chief Executive Officer Donna Tiesman, our Executive Vice President and CFO Lane Riggs, our Executive Vice President and COO Jason Fraser, our Executive Vice President and General Counsel and several other members of Valero's senior management team. If you've not received the earnings release and would like a copy, you can find 1 on our website atvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call.
I would like to direct your attention to the forward looking disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC. Now, I'll turn the call over to Joe for opening remarks.
Thanks, Homer, and good morning, everyone. We're pleased to report that we completed another good quarter where we ran our business well and delivered solid financial results. Throughout the quarter, we maintained our unrelenting focus on operations excellence, which enabled us to operate safely and reliably in an environmentally responsible manner. We also delivered on our commitment to invest in growth projects and acquisitions that increase Valero's earnings capability, while maintaining solid returns to our stockholders. In 2018, we matched our 2017 record for process safety performance and we continue to outperform the industry on our personnel injury rates.
The logistics investments we made over the last several years are contributing significantly to earnings. Our investments in Line 9B, the Diamond Pipeline and the Sunrise Pipeline expansion increased our systems flexibility allowing us to take advantage of the opportunities available in the Q4 of 2018. In fact, we set a record for total light crude runs at 1,500,000 barrels per day and a record for North American light crudes processed at over 1,300,000 barrels per day. We also continue to maximize product exports into higher netback markets in Latin America. Turning to capital allocation, we continue to execute according to our disciplined framework.
Our projects and execution remain on track. Construction is scheduled to finish on the Houston alkylation unit in the Q2 and the Central Texas pipelines and terminals are expected to be completed in mid-twenty 19. In November, the Board of Directors of Valero and Darling Ingredients approved an expansion of the Diamond Green Diesel plant to 675,000,000 gallons per year of renewable diesel production and the construction of a renewable naphtha finishing facility. With respect to cash returns to stockholders in 2018, we paid out 54% of our annual adjusted net cash provided by operating activities, exceeding our target annual payout range of 40 percent to 50%. Our solid financial position and a favorable outlook for our business enabled us to further demonstrate our commitment to our investors.
As last week, our Board approved a 12.5% increase in the regular quarterly dividend to $0.90 per share or $3.60 annually. Lastly, earlier in January, we closed the acquisition of Valero Energy Partners. This transaction was immediately accretive and it's greatly simplified our structure. While Valero will no longer have a publicly traded midstream business, VLP's assets and ongoing logistics investments at
Valero will continue to enhance
our feedstock and product flexibility. Now as we look ahead, we remain committed to our capital allocation framework. There has been no change in our capital discipline strategy, which prioritizes our investment grade ratings, sustaining investments and paying our dividends. We expect our annual CapEx for both 2019 and 2020 to be approximately $2,500,000,000 in line with where it's been over the last several years. And you should expect incremental discretionary cash flow to continue to compete with other discretionary uses including cash returns, growth investments and M and A.
In closing, with a growing economy, a year over year increase in vehicle miles traveled and low fuel prices, we're encouraged for 2019. We expect good demand in domestic and export markets this year. Despite seasonal weakness in the gasoline market, days of supply for distillate inventories remain below the 5 year average. Expected incremental diesel demand and discounts for sour feedstocks associated with the impending global fuel oil also give us reason to remain optimistic. We believe that our system's flexibility to process a wide range of feedstocks and reliably supply quality fuels as evidenced by our Q4 2018 results positions Lira well for whatever opportunity the market presents to us.
So with that, Homer, I'll hand the call back to you.
Thank you, Joe. For the 4th quarter, net income attributable to Valero stockholders was $952,000,000 or $2.24 per share compared to $2,400,000,000 or $5.42 per share in the Q4 of 2017. Q4 2018 adjusted net income attributable to Valero stockholders was 900,000,000 or $2.12 per share compared to $509,000,000 or $1.16 per share for the Q4 of 2017. For 2018, net income attributable to Valero stockholders was 3,100,000,000 dollars or $7.29 per share compared to $4,100,000,000 or $9.16 per share in 2017. 2018 adjusted net income attributable to Valero stockholders was $3,200,000,000 or 7 point $3.7 per share compared to $2,200,000,000 or $4.96 per share in 2017.
The 2018 adjusted results exclude several items reflected in the financial tables that accompany this release, while the 2017 adjusted results exclude an income tax benefit of $1,900,000,000 from the Tax Cuts and Jobs Act. For reconciliations of actual to adjusted amounts, please refer to those financial tables. Operating income for the refining segment in the Q4 of 2018 was $1,500,000,000 compared to $971,000,000 for the Q4 of 2017. The increase from 2017 was mainly attributed to wider Refining throughput volumes averaged 3,000,000 barrels per day, Refining throughput volumes averaged 3,000,000 barrels per day, which was in line with the Q4 of 2017. Throughput capacity utilization was 96% in the Q4 of 2018.
Refining cash operating expenses of $3.92 per barrel were $0.34 per barrel higher than the Q4 of 2017, mostly due to higher natural gas costs in the Q4 of 2018. The ethanol segment generated a 20 $7,000,000 operating loss in the Q4 of 2018 compared to $37,000,000 of operating income in the 4th quarter of 2017. The decrease from 2017 was primarily due to lower margins resulting from lower ethanol prices. Operating income for the VLP segment in the Q4 of 2018 was Arthur Arch Terminal Assets and Parkway Pipeline, which were acquired in November 2017. For the Q4 of 2018, general and administrative expenses were $230,000,000 and net interest expense was $114,000,000 General and administrative expenses for 2018 of $925,000,000 were higher than 2017, mainly due to adjustments to our environmental liabilities.
For the Q4 of 2018, depreciation and amortization expense was $531,000,000 and income tax expense, which includes certain income tax benefits as reflected in the accompanying earnings release tables was $205,000,000 Excluding these benefits, the effective tax rate was 21%. With respect to our balance sheet at quarter end, total debt was $9,100,000,000 and cash and cash equivalents were $3,000,000,000 Valero's debt to capitalization ratio net of $2,000,000,000 in cash was 24%. At the end of December, we had $4,400,000,000 of available liquidity excluding cash. We generated $1,700,000,000 of net cash from operating activities in the 4th quarter. Excluding the unfavorable impact from a working capital decrease of approximately $120,000,000 net cash generated was $1,800,000,000 With regard to investing activities, we made $771,000,000 of growth and sustaining capital investments in the Q4 of 2018, of which $254,000,000 was for turnarounds and catalysts.
For 2018, we invested $2,700,000,000 dollars of which approximately $1,900,000,000 was for sustaining and $800,000,000 was for growth. Moving to financing activities, we returned $965,000,000 to our stockholders in the 4th quarter. $627,000,000 was for the purchase of 7,700,000 shares of Valero common stock and $338,000,000 was paid as dividends. As of December 31, we had approximately 2 authorization remaining. We expect capital investments for 2019 to be approximately $2,500,000,000 with approximately 60% allocated to sustaining the business and approximately 40% to growth.
Included in the total are turnarounds, catalysts and joint venture investments. For modeling our Q1 operations, we expect throughput volumes to fall within the following ranges: U. S. Gulf Coast at 1,670,000 to 1,720,000 barrels per day U. S.
Mid Continent at 440,000 to 460,000 barrels per day U. S. West Coast at 265,000 to 285,000 barrels per day and North Atlantic at 475,000 to 495,000 barrels per day. We expect refining cash operating expenses in the Q1 to be approximately $4.05 per barrel. Our ethanol segment should average $0.42 per gallon, which includes $0.06 per gallon for non cash costs such as depreciation and amortization.
For 2019, we expect G and A expenses excluding corporate depreciation to be approximately $840,000,000 The annual effective tax rate is estimated at 23%. For the Q1, net interest expense should be about $110,000,000 and total depreciation and amortization expense should be approximately $550,000,000 Lastly, we expect RINs expense request that callers adhere to our protocol of limiting each turn in the Q and A to 2 questions. If you have more than 2 questions, please rejoin the queue as time permits. This helps us ensure other callers have time to ask their questions.
Our first question comes from Blake Fernandez with Simmons Energy. Your line is open.
Thanks. Good morning, guys. Congrats on the stellar results.
Thanks, Clay.
Yes, appreciate the outlook for 2 years on CapEx. I think there were some perceptions maybe with the project sanction last year that there would be upward pressure and we're actually seeing a $200,000,000 decrease year over year, and that's sustained into 2020. Can you talk a little bit about where maybe some of that deflation is coming from, whether it's the growth component or sustaining or turnarounds?
So, hey, Blake, this is Lane. I wouldn't call it deflation. I would call it that we had a lot of sustaining capital with respect to Tier 3 and plus a reliability project at our Corpus Christi refinery in 2018. Our run rate is like what we said, it's normally about $1,500,000,000 to sustain our assets. We had a little bit more than that in this past year and there's obviously timing involved in all that.
Whether our turnarounds get a little bit lumpy or again we end up having to do something a little special on some environmental stuff, which currently we don't have anything on our sort of forward view of that.
Okay, great. The second question is on Venezuela, obviously very topical. I guess for 1, could you confirm how much you're currently importing crude there? But then I guess more importantly, I'm just curious, in order to replace those barrels, are you looking to resort to more light sweet domestic crudes? Or is your system largely maxed out on light sweet to where you're actually going to have to resort to the global market for kind of medium and heavy and heavy sour replacement barrels?
Thanks.
Yes, Mike, this is Gary. Of course, with the sanctions, we're currently not taking anything from Venezuela. But it was about 20% of our heavy sour that we run was Venezuelan barrels historically. We're certainly hopeful that they'll see prompt resolution to the crisis, not only for the benefit of the crude markets, but for the welfare of the people of Venezuela. We've seen production decline in Venezuela for years and we've also known there was a threat of sanctions.
So we've put alternatives in place to be prepared for this. Of course, the announcement was just made Monday. We've only had 48 hours to respond. Our top priority really has been to get the next 30 day supply plan covered. And I can tell you we're in a lot better position today than we were on Tuesday, but we still have some holes to fill in our supply plan.
We really run Venezuelan barrels at 2 of our refineries in the Gulf, St. Charles and Port Arthur. The St. Charles refinery did begin a turnaround on their crude and coker unit. So that definitely minimizes the impacts that have on our system.
To your point, current economics are certainly pushing us to maximize light sweet in the system.
Great. Thank you.
Thanks, Mike.
Our next question comes from Doug Terreson with Evercore. Your line is open.
Hi, everybody. Congratulations on your results.
Thanks, Doug.
I wanted to see if we could get some elaboration on Joe's points that you made a few minutes ago about market fundamentals. And specifically, while distillate demand in inventories appear to be positive in both the U. S. And the Atlantic Basin, the converse seems true for gasoline, although seasonality and net exports should be supportive. And then also, could you just spend a minute covering how fuel oil markets are likely to sort out this year given the uncertainty that Blake just highlighted about Canada and Venezuelan heavy feedstocks and how you might adjust?
Yes, this is Gary again. Of course, it seems like early in the year during this call, we always were kind of panicked on the gasoline markets. We feel very good about gasoline demand moving forward, high employment and low gasoline prices should result in good gasoline demand. The wildcard of course becomes refinery utilization. So with the 20 year high refinery utilization we saw last year, we are starting the year with a bit of an overhang.
The overhang in gasoline has primarily been PADD 1, PADD 2 and PADD 3. If I look at those regions individually, I could see that we build a little bit more inventory in PADD 1. The market structure is such that there's an economic incentive to make summer grade gasoline and put it in tankage in New York Harbor and there's still tankage available. So that would tell me you could see some inventory gain in PADD 1. I think you'll see some significant improvements in both PADD 2 and PADD 3 moving forward.
PADD II, I think a lot of the gasoline build was a result of the crude discount. The margins were just very strong. So typically in PADD II, you see refinery utilization drop off in the winter to balance the market, but with the crude discounts where they were, they ran hard. But if I look at the PADD II market now, there looks to be more planned maintenance this year than was last year as we move forward. And then currently with the cold snap hitting pad 2, there seems to be quite a few refinery issues in that region.
In fact, the Explorer pipeline between Group 3 and Chicago is now prorated indicating there's a big fall for products in that region. So I think you'll see gasoline inventories draw on PADD 2. And I also think you'll see some good gasoline draws in PADD 3 as well. In the Gulf early in the year, we typically have fog issues, which hinder our ability to export product and we saw that again this year. We also saw a bottleneck trying to get gasoline into Mexico, which is obviously our largest export destination.
And then we saw a lot of refiner buying interest in the Gulf as well as people built some inventory in preparation for turn around so they could cover their supply during their outages. So I think all those things as you see lower utilization in the Gulf as a result of planned maintenance beginning and you see exports pick up, I'm confident you'll see inventories in PADD 3 draw as well. So I think we feel pretty good about gasoline. We feel very good about gasoline demand. And again, the wild card is what utilization is going to be going forward.
Okay. Any insight on fuel oil too?
Yes. On fuel oil, I think it definitely is the issues you've talked about. There's been a lot of significant hits to fuel on the supply side with OPEC cuts and the Iranian sanctions, at about $1 a month and a lot of that is tied to the IMO 2020 fuel spec change. We do see fuel moving weaker as a result of lower demand for high sulfur fuel oil. And then there's some signs that some of the production can be coming on.
The Alberta government did announce that they're going to go ahead and raise production in February at least 75,000 barrels a day. So some of those things will help as well.
Okay. Thanks a lot
guys. Thanks, Doug.
Our next question comes from Paul Cheng with Barclays. Your line is open.
Hi, good morning guys.
Hi Paul.
Before I ask my question, since I told John Locke, if your Gulf Coast realized margin going to be fine in excess of 6.50, I will publicly lobby that Joe you should give Gary and his crew supply team a big bonus, so I'm lobbying you.
Paul, you're really helpful to me here.
But anyway, so other than that, two questions. First, if we were looking at the current level in the Q4, I mean, I think everyone is already trying to maximize on the distant yield. So in your system, is there any more that you can actually do that to shift from gasoline to distillate? And also you said you are running a record 1,500,000 barrels per day in the light oil. Is there any more that you can can you quantify that?
How much more if there's any that you can actually move from light into from medium and heavy into light?
Yes. So I would tell you on the gasoline to distillate swing, there's very, very little else we can do. We're pretty much maxed out on distillate today. On the light crude, we would tell you that the numbers Joe gave you that was about 90% of our light sweet capacity. And so there is some room there to push some additional light sweet crude into our system.
So Gary, you mean that if 90%, that means that at most you can push is another 100,000, 150,000 barrel per day?
Exactly. So we've been saying we have about 1,600,000 barrels a day of light sweet crude capacity.
Okay. Secondly that do you expect the Mexico export that you're shipping there that do you expect to increase in the coming weeks given the fuel shortage there? And all of that, if we look back in the last 2 months, have you seen any noticeable decline in your gasoline export to Mexico?
No, we really haven't. Historically, we see a lot of buying interest in December from Mexico and we see these bottlenecks then trying to get the barrels into the country. And obviously, the crackdown on fuels theft made that even worse. We're seeing good demand for Mexico, not only waterborne barrels, but we continue to ramp up our business of actually importing barrels into the country and we're seeing very good demand for barrels delivered all the way into country as well.
Thank you.
Thank you. Our next question comes from Manav Gupta with Credit Suisse. Your line is open.
Joe, congrats on a good quarter. And Homer, congrats on joining a great team. We will all miss John Locke and would like to wish him all the best in his new role.
Yes. Thanks, Manav.
So I just have a quick question on Diamond Green Diesel expansion. Like if you look at the current margins, is it fair to assume that this is like a 35 plus percent return for project for you? And the second follow-up on it is, what advantage does Darling Ingredients brings to the table? Are they just a financial partner or they give you some kind of competitive edge on your peers who are also trying similar projects?
So this is Martin. On Diamond Green, we're looking at historically and we think going forward, we're going to be at about $1.25 a gallon. So doing the math, you're probably in the right ballpark with that return on EBITDA margins. Now Darling is not just a financial partner. Darling processes about 10% of the world's meat byproducts.
They also do a significant work on collecting used cooking oil. They've been in these markets for years. As Diamond Green, we've been in this fat market for 5 years now, 5.5 years. They've been in for a long time. They bring a lot to the table around sourcing the fat, pre treating the fat for the unit.
So it's a really good synergy here. We've got a refining expertise. We've got expertise in marketing the product. They've got pretreatment expertise and bringing the fat into the joint venture. So it's a really good partnership.
Thank you, guys. Thanks for taking my question.
Thank you. Our next question comes from Doug Leggate with Bank of America Merrill Lynch. Your line is open.
Thanks. Good morning, everybody. Joe, you guys do a great job of making the sell side look really dumb every quarter. It was a great quarter, obviously. But my question is a $30 correction in oil prices, obviously there's some lag effect in your capture rate.
I'm just curious as to the capture rate move that we saw north of 100% on our numbers is running about 30%, 40% above what you would normally deliver. Was that just lag effect or is there something structural going on such as the shift to the lighter grades that we should pay more attention to going forward?
Doug, that's a good question. You guys
Yes. Hey, Doug, it's Blaine. I'll take a shot at it and Gary can sort of recal retune whatever I'm saying here. But there's really a few couple of reasons. One is, as we alluded to in the opening remarks, we've had these pipeline projects.
We had the Line 9 and we had the Diamond Pipeline and the Sunrise. And all those put us in position in the Mid Continent and our Quebec refineries position us to take advantage of essentially the distressed markets in the Q4. And then the other side of that is on the product side, really the lower end prices allowed us to capture essentially higher netbacks on our product prices. I'm sure there's a contribution on the other things like pet coke, all the other stuff that contribute our capture rate, but really it's the first two things that really drove our capture rate in the Q4.
So should we consider that the capture rate is structurally moving higher?
I would say you should on the product side with the lower RIN prices, yes. On the crude side, it's just a matter of how distressed those markets are. And line you have a view of what Hardisty looks like and a view of what Midland looks like and Cushing.
Thank you for trying to answer that. I know it's a tough one. My follow-up is really it's kind of a follow-up to Doug Terreson's question, I guess. Normally, we would see this the industry pivot obviously between distillate and gasoline to some extent as you move through the summer, but obviously you've got this IMO event going into 2020. So I'm wondering is there a possibility that we see Valero specifically maintain a max distillate bias through the whole of 2019 as one part of the solution to the gasoline overhang?
And I'll leave it there. Thanks.
Hi, this is Lane again. We absolutely believe that will be the case. I mean, we've been in an active mode for a while now and we'll continue to be in that way through the at least the way we see the rest of the year going in 2019. Obviously, it's early, but that's the way the forward market will be pointing us
right now.
Great stuff. Thanks a lot guys. Great quarter.
Thanks, Doug.
Our next question comes from Prashant Rao with Citigroup. Your line is open.
Thanks. Good morning, guys, and thanks for taking the question. Hi, Joe. Hi, Joe. So I guess my question, I wanted to circle back to crude sourcing and drill down a little bit.
Obviously, really strong performance there. And as Paul said, it makes us all look we underestimated you this quarter. On the Maya or other Central American heavy sours, I just want to get a confirmation. I mean, a lot of those grades had priced themselves out of the market, we saw in 4Q. But were you what was your purchasing like in 4Q?
And is it were you not running as much? And should we how should we expect that to look now that we've seen some price normalization as we go forward in 1Q?
Yes. So I think on the heavy side, we've definitely seen that Maya is probably not the best marker for what we're paying for our heavy sour crude. So in the Q4, if you look Maya was priced at 4.50 discount to Brent WCS or Western Canadian Select in the U. S. Gulf Coast was trading at a 10.60 sour into the more representative of our actual delivered heavy sour into the system.
In addition to that, then there were certainly some things with the disconnect in Western Canadian pricing. We had a significant uplift on the crude by rail. We did 43,000 barrels a day of heavy Canadian by rail into Port Arthur and those were very discounted barrels.
Okay, thanks. And I guess that sort of leads nicely into my second question. My follow-up is on the Canadian barrels. Year to date, it seems like the import data and purchasing data, what we've heard in the market is that you've continued to be able to get good access to those Canadian barrels. Just wondering if you could give some color on the sourcing, especially given that we've had production cuts up in Canada, what the dynamics are like?
Are those barrels also coming in by rail? Or are there more available in the market? Just any color on how we should think about the variety of sourcing there?
Yes. So in the Q4, we also set a record on the volume of Canadian heavy that we ran our system. We ran over 180,000 barrels a day of heavy Canadian and it is sourced via pipe delivered into the Gulf and then we do about 40,000 barrels a day crude by rail. Our view is that crude by rail will be necessary until one of the major pipeline projects gets approved out of Western Canada.
Thanks, Gary. Appreciate it, guys. I'll turn it over.
Thank you. Our next question comes from Roger Read with Wells Fargo. Your line is open.
Sorry, I kicked off the mute there. Good morning.
Hi, Roger.
Hi, guys. I guess maybe to dig in a little deeper thinking about the summertime here with gasoline. So you're running max distillate, presumably most, if not all, the industry is doing the same. So if we see, relatively speaking weaker gasoline cracks this summer, does that imply that to get things in balance effectively, the industry has to employ run cuts or should we think about additional toggles that you can do if you ended up with a summertime situation with stronger distillate cracks relative to the gasoline, especially with IMO staring us in the face by the latter part of the summer?
Yes. Roger, it's difficult to answer. I certainly think the gasoline situation is a combination of yield, which certainly we expect to be in an active slip mode. And then the other thing I referred to is just what the utilization rate of the refining capacity is and whether that 20 year high that we saw last year is sustainable.
Yes. I mean, I would think with more light barrels available, there's no reason to think U. S. Refining throughputs have to come off, right? It's strictly a margin decision.
We have heard other companies, other refiners talk about different things you can do in terms of how hard you run your FCC units versus other decisions you can make. I was just curious if there's anything like that that occurs for IMO as you look at your overall system?
So, hey, Roger, it's Lane. I'll take a stab at that. So we do, you know, SVC is obviously a pivotal part of our operation and there's certain inflection points, economic inflection points. And it almost always makes sense to fill our alky. So we'll run up to the point to make sure our alkylation units are full.
And so the marginal capacity we're always looking at is to make sense to run past that point. And to your point, interestingly enough, that the stream that we put in these outages also can go into the fuel market for the halfway percent to meet the IMO rig. So we do think structurally at least one of the things that will happen here is that SEC probably won't run a whole lot past filling their alky, certainly in the context of how IMO 2020 is going to work out.
Okay, thanks. And then, Joe, you've done a great job over the years here in terms of capital allocation, the decision to roll up VLP kind of brings the balance sheet more into like the true issue on cash and debt as opposed to the non recourse side. I was wondering as you think about future capital allocation, is there anything you want to do on the balance sheet? Is there a goal to reduce debt here or do you maybe to increase kind of future flexibility if you were pursue anything on the acquisition front?
No, Raju, that's a good question. I would say generally, there isn't to cap of 20% to 30% range. To cap of 20% to 30% range. Donna's got kind of a minimum cash balance target of $2,000,000,000 things like that. Those are just things that we operate with as fundamental assumptions day in and day out as we go forward.
We get asked periodically about somebody raised the issue about the sustainability of the dividend. And that's a really So that being said, I think when I look at Valero, I realize that we understand our business and we're making decisions for the long term based on our strategic view of the market and not hype. And so we always try to position ourselves financially to be able to deal with whatever the market might be giving us. And so, I mean, if we think in terms of the dividend, for example, I can just say without reservation, that we consider the sustaining CapEx and the dividend to be totally nondiscretionary sustainability was any kind of issue there. And really that's it around that.
Okay. And then, sustainability was any kind of issue there. And really that's it around that. From an acquisition perspective, we'll continue to review them in the context of growth projects. And when you think in terms of the roll up of VLP, it kind of takes you to the question, well, are you going to continue to invest in logistics projects going forward?
And the answer to that would be yes, to the extent that they benefit Valero's business. And if you recall, even with VLP as a publicly traded entity, we always started with a need at Valero. And then said, well, if we did the project to satisfy that need at VLP and paid VLP a 12 rate of return, would it still make sense for Valero to do the project? Okay, that was kind of the calculus that we went through and if it was yes, we proceeded. Now we just look at these projects as an aggregate project.
So the Diamond Pipeline, for example, we get a huge benefit on the crude sourcing in the Memphis as a result of the Diamond Pipeline and VLP was given a 12% rate of return. Now all that's rolled in to one set of economics and we look at it in the context of 25% rates of return on refining projects. So the way we structured the framework, it's flexible enough to allow us to adjust a little bit from time to time, but it hasn't fundamentally changed what we're doing and what we're focused on. So that was a really long answer to a pretty simple question, Roger. So sorry about that.
No, I appreciate that. I just can't believe you accused Wall Street of being fickle though.
Yes. I know it's hard to imagine, isn't it?
Yes, absolutely. All right. Thank you.
Thank you.
Our next question comes from Phil Gresh with JPMorgan. Your line is open.
Yes. Hi, good morning. First question, Joe, would be, you've talked for a couple of years now about the illustrative EBITDA that you can generate from these projects that you have underway. And I think in your slides you talked $175,000,000 incremental for 2018 from completed projects. So I'm wondering how you think about that ramp in 2019 2020 that we should be thinking about from the projects underway?
Well, we haven't been that explicit in giving EBITDA forecast for 'nineteen and 'twenty, right? And I don't think we're going to go there. I think what you've got to rely on really, Phil, is the chart we've got in the slide deck. And if you look at our return threshold for our projects and you say you're going to invest this much strategic capital year in and year out, what kind of EBITDA you expect it to produce? And our numbers are $1,000,000,000 to $1,400,000,000 and that includes the benefit of the coker project, of our ownership interest in DGD, of all the pipelines and terminal projects we've got going on, the out fees and so on.
And we're still very, very comfortable with those numbers. And so in terms of moving the needle from an EBITDA perspective, in light of our capital allocation framework and the clear recognition that capital is a finite resource, we're going to invest in it accordingly and the projects we're targeting are going to produce $1,000,000,000 to $1,500,000,000 of incremental EBITDA.
Okay, fair enough. Second question is just coming back to your comment on the minimum cash balances. If I take your ending 2018, take out $950,000,000 for the VLP buy in in the Q1, I think you're kind of around that $2,000,000,000 level. I realize working capital has also been a pretty big headwind in 2018. So trying to think about that, is there some kind of perhaps reversal that could happen with crude oil prices now going back up?
And just generally wondering how you think about that in the context of the capital return plans and things of that nature?
That's a good question. Donna, you want to?
Sure. So in regards to the working capital, I mean, yes, so to the extent prices would go up, you would see a shift in the more positive direction in 2019. A lot of the negative working capital that you saw in 2018 has to do with some timing on some tax payments that were really due in 2017 that were pushed to 2018. So that has sort of evened itself out. But certainly, there are some other movements in the working capital in 2018 that could reverse themselves.
Okay. And then just in terms of VLP taking that down to $2,000,000,000 cash balance. So I mean you're basically saying that you're kind of at the levels you want to manage at or is there flexibility around that $2,000,000,000 or how do you think about that target?
So clearly, that was a big amount of cash going out exist in January. But we're going to continue to make money, generate cash. And so you should see the cash balance recover. But again, we're at that $2,000,000,000 minimum. We're comfortable carrying it at that level.
Yes. Phil, I mean, and we've said this for years now. We never our plan was not to carry $5,000,000,000 of cash quarter to quarter to quarter to quarter. And we were just finding ourselves in that situation. And so there was an intentional plan here try to tighten this down a little bit.
Now Donna has got her target set. She is the CFO and we're going to try to abide by the target. But there's no reason for us to sit here with $5,000,000,000 of cash on the balance sheet.
Yes. Okay. Thank you.
Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.
Good morning team and congrats here on a good quarter.
Thanks Neil.
So Joe and team, I just want to start talking a little bit here about IMO 2020. It's funny we're 40 minutes since the call and it's gotten a lot less attention than probably 6 months ago, which is a reflection perhaps of what you've seen in the forward curve where you've seen diesel FO while it's still favorable has compressed in 2020, 2021. As you look at this dynamic of IMO 2020, has anything changed in the team's mind about the potential upside from it? And just can you talk about how you see it playing itself out through the markets and the sustainability of that tailwind?
Sure. Neal, this is Gary. I don't think our view of what will transpire as a result of IMO 2020 has really changed at all. We still see that you'll see a significant uptick in diesel demand and you'll see weakness in the high sulfur fuel markets. The shape of the high sulfur fuel curve is pretty much as we assumed it would be.
The starting point is a little higher with high sulfur fuel trading 94% of Brent today, but you still see steep backwardation in the high silver fuel curve. I think the one to us that we keep staring at is the ULSD forward curve really isn't showing any IMO impact at all. And we still believe there'll be significant I appreciate
Appreciate that. And then the other follow-up, and it will be but a goodie is RINs. Just your thoughts on that market. Again, it seems like something we haven't paid as much attention to lately. Prices have been lower for a period of time here.
Is there any risk that you see in the RINs market that could send prices higher and just your thoughts on how it plays out from here?
Yes, this is Jason. Just from a policy side, we don't see any seismic shifts coming. I mean, the EPA has several rule makings they're looking at. The E15 waiver for the upcoming summer for the ethanol guys to get more ability to put more in the market tied with the market reform aspects, some rules that would hopefully improve the functioning of their end market is in RFS reset. But what's happened is those have all gotten stalled out with the government shutdown.
So we don't see any change in course more just a delay right now, but I don't see any big catalyst to change things.
Well, and then the small refinery exemption is another piece of this, right? And the EPA followed the rules last year and credit small refiner exemptions where they were appropriate and that certainly took some of the pressure off the RIN market also. We expect them to continue to follow the rules to comply with the legislation as it's crafted and issue the small refiner where they're appropriate. And so, Neil, I'm with Jason, I don't see a whole lot of change in this market going forward.
Thank you.
Thank you. Our next question comes from Paul Sankey with Mizuho. Your line is open.
Good morning, everyone.
Hi, Paul.
Joe, this is a good result, obviously, in Q4, but it feels like a tremendous number of things have changed into Q1 equally.
Further to
your comments about gasoline, for example, it's not a good time in January to sort of turn bearish. Can you talk a little bit about what the really big earnings impact changes have been? And obviously, I'm thinking about OPEC cuts, Alberta cuts, Venezuela, gasoline markets. It's just a very different environment. How do you expect things to progress in some of those things through 2019?
And how different is the environment even in January compared to this very good result in Q4? Thanks.
No, Paul. I mean, that's a very good question. And you hit on the points. I mean, it is a very interesting market because there are so many moving parts right now. The thing that we always have to keep in mind is that January always stinks, okay?
Gasoline is usually weak at this point in time. If the winter is at your
But the reality is, is that
we're managing our business for the long term And we have been in this for a very long time and we understand the cycles in the business. And so what do you do? You make adjustments day in and day out in your operations to try to changing the way he Gary's changing the way he's sourcing crude on a weekly, daily basis to try to get the best netback that we can in the plants. The things that we don't change, we don't change our commitment to the things that make Valero really good, which is operating safely, reliably, honoring environmental stewardship, managing our capital appropriately. Those are the things we can control and that we pay a lot of attention to.
Day in and day out optimization based on certain market conditions, okay, we're all over that too. But we don't have a crystal ball. And so we just manage the business for the long term and we do our best. Lane, you or Gary want to talk to any specifics around that?
One thing I would add on Venezuela, Venezuela at some point is going to have to put oil in the market even if these sanctions stay in place. And so there's going to be a balancing time through here where whoever is buying the alternatives, they'll buy Venezuelan oil and oil will come to our market. So I mean, it will all settle out. You just sort of in an interim time period here where that's going to play out. And of course, if something changes in Venezuela, then it's just back to status quo.
On OPEC, OPEC is clearly going to be looking at trying to set the amount of oil in the market based on whether the markets and what's the structure of the market. And again, as Joe alluded to, we every day we wake up and we do we optimize our assets around what's available out there and we have a great system better than anyone in the market to get the most value and understand these markets.
Great. Thanks guys. And Joe, I greatly appreciate the shout out for our January refining conference. Shame that you were the only major refinery not there this year, but do you remember that we've got our don't forget, we've got our Napa Valley Energy Summit on the 1st April, and you're most welcome to join us in major company supply. Apologies for the shameless plug.
You know, Paul, I would expect nothing less. And if you're buying, we'll look and see if we can make it work.
Appreciate that, guys. Thanks very much.
Thanks, buddy. Take care.
Our next question comes from Brad Heffern with RBC Capital Markets. Your line is open.
Good morning everyone. Lane, I was just hoping you could sort of expand on the comments that you just made about crude sourcing. I mean, it seems like all the numbers we see on the screen for pretty much anything sour waterborne is just not the math that you would normally expect. So is Mars at minus 2 or Oriente at minus 4? Are those crudes actually pricing their way into the system?
Or is there a chance that in the sort of interim period where the trade routes are sort of getting redrawn that we see a cut and runs just because the mediums and the heavies are not competitive?
So I'll take a shot at it and Gary obviously can tune me. Today where we are is the most profitable crude that we run is our suites. And then it's sort of medium and heavy or sort of at parity with one another. And it depends on what part of your refinery you're trying to fill out. But on the margin like the last barrels we try to run-in the system where it's really sweet.
And they all still have margin, positive margin to an open crude unit. So it's just really trying to navigate and get the right dive into our assets. In terms of just the way trade routes are flowing, I think again, as I said, I mean, OPEC is tested, they aren't always going to be touched. And we got to watch how Venezuela plays out on the sanction side. It's just like what happens when Iran, same thing.
So these all work. They're not permanent trade paths, but the world rebalances when these things happen.
Okay, got it. Thanks. And then I was just wondering if you could give any color on your union contracts. Obviously, the steelworkers union negotiation is going on right now and the contract expires tomorrow. So I know you guys didn't have any impact 4 years ago the last time that we saw this, but just curious if what you expect this time around?
Sure. So, you know, shale is really negotiating on behalf of the industry for the pattern bargaining. In terms of Valero, we have 2 refineries that I think it's actually tonight at 12 midnight. These contracts expire and we have 2 refineries that contracts will expire that is our Memphis refinery in Port Arthur. We have a tentative agreement with our Memphis refinery right now in terms of just sort of a local agreement pending the sort of the shell negotiations, and we're still working on our issues at Port Arthur.
We don't expect a work stoppage during this whole process, but you just never know. So we're prepared for that. We have a completely trained temporary workforce to take over the assets in the event that there's a walkout. I'm not trying to say we're going to have 1, but we're certainly prepared for it as you would expect us to be.
Okay. Appreciate it. Thanks.
Thank you. Our next question comes from Craig Scherer with Tuohy Brothers. Your line is open.
Good morning. Congratulations on a terrific quarter.
Thanks, Craig.
So picking up on Neil's IMO 2020 question, I just wonder if you could speak to the expanding wastewater regulations that appear to be limiting the option of ship based scrubbers?
This is Lane. I think what you're asking about, there are some of these environment there's some certain ports that are saying they're not allowing the discharge. Is that what you're talking about?
Exactly.
Yes. So again, that just makes it a little more difficult for the ship to invest in scrubbers. I mean, again, this technology takes the socks out of the air and puts it into the water. I think some of these local ports are fully aware of that. It's just another headwind in terms of making it more difficult to try to solve this longer range problem out of IMO, which is this really heavy bitumen that historically has been burned these ships, there's only a few other pathways to try to get rid of it.
And as Gary mentioned, that's where you really see the forward market trying to understand exactly how it's going to happen is that particular strength.
So would you agree that that's just another data point suggesting a perhaps deeper and more prolonged benefit to the refineries?
Exactly. That's exactly right.
And also just picking up on Roger's M and A balance sheet question, 2018 was a robust acquisition year. We had the ethanol plants, the Peruvian terminalling and the VLP roll up obviously. Do you think that convergence was just a one off event? Do you see ongoing opportunities that can continue to soak up cash balance?
Craig, I mean, mean, our practice is not to really kind of foretell what we're looking at from an acquisition perspective. But I can tell you there is nothing on the radar screen at this point in time. We'll continue to evaluate opportunities as they arise, but we don't have any pressing last year, right? So it's far from a coincidence. But the facts are we saw some opportunities that we felt satisfied our strategic interest and that really was to extend our supply chain and to market.
And so we took advantage of the opportunity. But I'm going to tell you there I would not model for a repeat act in 2019.
So barring ongoing strong M and A and relatively steady $1,000,000,000 growth CapEx, robust margins like we're seeing and the opportunity for IMO 2020, it seems like if anything is going to flex, it's going to be the share buybacks, which we saw in the Q4?
Yes, sir.
Okay, great. Thank you very much.
You bet.
Thank you. Our next question comes from Matthew Blair with Tudor, Pickering, Holt. Your line is open.
Hey, good morning, everyone.
Hey, Matthew.
Homer, did you say 3.8 percent on ethanol throughput guidance for Q1? And if so, does that reflect any economic run cuts or maybe a big turnaround or something else going
on? Well, this is Martin Parrish. Yes, we have cut back a little bit. We're running all our plants, so we have some cut back a little bit. There's just not much fun in it right now.
But we take a long term view and we expect things to turn around. Ethanol demand in the U. S. Going to grow marginally and export demands way up this year and we expect that to continue. It's more mandates worldwide and even better than that just blending economics worldwide for ethanol where it's priced and we just don't think that can stay that way where ethanol prices is cheap.
So that's the plan.
Okay. Sounds good. And then I was also hoping you could talk about octane and upcoming alky expansion. When we look at Gulf Coast octane spreads coming in around $5 a barrel, a I think, would you expect a widening octane spread going forward?
This is Lane. So our Houston alkyol come on stream in the second quarter. Our FID decision, I think the EBITDA was around $105,000,000 or something like that. So I'd have to go back and look and see where it compares to now. But we're still committed to the idea that, A, going forward, octane is going to be more valuable.
There's a couple of reasons for that. One is the autos want higher octane and, 2, you still haven't seen Tier 3, all this Tier 3 investment get in and sort of potentially pressure the Octane. And finally, just all the slight crude puts a lot of naphtha out there. So all that put together, essentially, we believe that Octane is going to be valuable. Where it goes where it is versus our funding decision, we just have to check.
But we still feel like it's a good project. And the same is true for our St. Charles alkylation project.
Great. Thank you.
Thank you. Our next question comes from Craig Wieland with U. S. Capital Advisors. Your line is open.
Hi, good morning. Thank you for fitting my question and congrats on a great quarter. You have about a quarter of your Gulf Coast refining capacity located in Eastern Louisiana. And it looks like Bayou Bridge is about to start up here and start delivering barrels into St. James at some point, maybe this quarter.
Also a slew of other proposed projects that have been introduced in recent weeks months designed to move crude into that market over the next couple of years. So I'm curious if you could elaborate on how you think Valero's crude procurement options will develop on the back of these projects And what type of impact they could have on your Gulf Coast feedstocks? Appreciate any color you can share.
Yeah, I think the biggest thing for us in the Eastern Gulf is St. Charles is obviously a heavy sour refinery and getting better access to heavy Canadian crude would be a big advantage for us there. And so we're certainly looking at some of the projects that are out there, namely the Capline reversal as a potential to be able to get more cost effective heavy sour crude into St. Charles is a big benefit to our system.
Appreciate the color. Thank you.
Thanks, Craig.
Thank you. Our next question comes from Jason Gabelman with Cowen. Your line is open.
Yes. Hey, guys. Congrats on the quarter. Just a couple of questions. A follow-up on the comments about running the FCCs just to maximize alky production.
The inputs into the FCCs, are those able to be blended into the marine fuel pool? Or is there from a technical standpoint an issue with meeting marine fuel specs if you try to blend that vacuum gas oil into the marine pool?
Hey, Jason, this is Lane. So yes, that the feed, particularly the marginal feed, which is low sulfur VGO into these FCCs will fit into the 0.5% fuel oil market.
Okay, great. And there's not an issue with any of the other specs outside of meeting the sulfur spec?
We've done a lot of work in terms of blends, making sure that there's compatibility. There's not the spec for it is not that rigorous. It really ends up being there's just a sulfur spec. So really what you really got to be careful of is, is there something that you do to the blend that creates compatibility. I'm pretty confident ultimately that this potentially could have.
All right, great. And just looking more near term, obviously, 4Q benefited from some better capture than anticipated and trying to figure out if that could continue into the Q1. One area, I think, where there could be some upside is on the butane blending. It looks like butane prices have fallen pretty hard against where gasoline prices are. Do you expect that to support capture rates in the Q1 relative to its support in prior first quarters?
Yes, we see the spread, but it's not a real meaningful contribution to our overall earnings for the quarter.
All right, great.
Thanks a
lot, guys.
Thanks, Jason.
Thank you. This concludes the question and answer session. I'd like to turn the call back over to Homer Bhullar for closing remarks.
Thanks, Shannon. We appreciate everyone joining us. Please feel free to contact the IR team if you have any additional questions. Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.