Welcome to the Valero Energy Corporation Reports 2015 4th Quarter Earnings Conference Call. My name is Yolanda, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
It's now my pleasure to turn the call over to Mr. John Locke. You may begin.
Good morning, and welcome to Valero Energy Corporation's Q4 2015 earnings conference call. With me today are Joe Gorder, our Chairman, President and Chief Executive Officer Mike Cyszkowski, our Executive Vice President and CFO Lane Riggs, our Executive Vice President of Refining Operations and Engineering Jay Browning, our Executive Vice President and General Counsel and several other members of Valero's senior management team. If you have 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 statement 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 The Q4 and full year 2015 were really great for Valero.
The Q4 and full year 2015 were really great for Valero. We operated safely and reliably, achieving our lowest ever employee injury rate in refining and reaching an annual average refinery utilization rate of 95%. The markets were favorable during the quarter. Domestic product demand grew supported by lower pump prices and sour crude discounts relative to Brent were attractive to our highly complex refining system. While distillate margins were pressured during unseasonably warm weather in North America and Europe, distillate demand in Latin America remained robust.
In fact, we exported record volumes of distillate and gasoline in the Q4. We continue to execute well on our projects. In the quarter, we successfully commissioned the new Corpus Christi Crude Unit, the Port Arthur Gas Oil Hydrocracker Expansion and the McKee Crude Unit Expansion. Our Quebec City Refinery also began receiving crude via Enbridge's Line 9B. We exercised our option with Plains All American to acquire a 50% interest in the Diamond Crude Oil Pipeline project.
Once completed, this project will connect Cushing with Memphis and provide us with crude optionality and long term cost savings versus sourcing crude oil St. James. Additionally, Valero Energy Partners continues to execute its growth strategy and Valero GP's interest in VLP reached the high splits with the distribution increase we announced earlier this week. We also continue to advance our refining growth strategy. Construction of the of Directors approved the Houston alkylation project.
This project is estimated to cost $300,000,000 and is expected to be completed in the first half of 2019. And finally, regarding cash returns to stockholders, we paid out 80% of our 2015 adjusted net income, exceeding the 70 5% annual payout target. Further demonstrating our belief to Valero's earnings potential, last week, our Board of Directors approved a 20% increase in the regular quarterly dividend to $0.60 per share or $2.40 annually. With that, John, I'll hand it back over to you.
Okay. Thank you, Joe. Moving on to the results. We reported 4th quarter net income from continuing operations of $862,000,000 or $1.79 per share versus 952,000,000 dollars or $1.83 per share for the Q4 of 2014. Actual net income from continuing operations was 298,000,000 dollars or $0.62 per share, which compares to $1,200,000,000 or $2.22 per share in the Q4 of 20 14.
Please refer to the reconciliations of actual to adjusted amounts as shown in the financial tables that accompany our release. For 2015, we reported adjusted net income from continuing operations of $4,600,000,000 or 9 point $2.4 per share compared to $3,500,000,000 or $6.68 per share for 2014. Actual net income from continuing operations was $4,000,000,000 or $7.99 per share in 2015 versus $3,700,000,000 or $6.97 per share in 2014. 4th quarter 2015 refining segment adjusted operating income of $1,500,000,000 was in line with the Q4 of 2014. Stronger gasoline and other product margins combined with higher refined throughput volumes were offset by lower distillate and petrochemical margins and lower discounts for sweet crude oils relative to Brent crude oil.
Refining throughput volumes averaged 2,900,000 barrels per day, which was 34,000 barrels per day higher than the Q4 of 2014. Our refineries operated at 97% throughput capacity utilization in the Q4 of 2015. Refining cash operating expenses of $3.47 per barrel or $0.29 per barrel lower than the Q4 of 2014, largely driven by favorable property tax settlements and reserve adjustments and lower energy costs. The ethanol segment generated $37,000,000 of adjusted operating income in the Q4 of 2015 versus $154,000,000 in the Q4 of 2014 due primarily to lower gross margin per gallon driven by a decline in ethanol prices versus relatively stable corn prices. For the Q4 of 2015, general and administrative expenses excluding corporate depreciation were $206,000,000 and net interest expense was 107 $1,000,000 and the effective tax rate was 28% in the Q4 of 2015.
The effective tax rate was lower than expected due primarily to a reduction in the statutory tax rate in the United Kingdom and the settlement of income tax audits in the United States. With respect to our balance sheet at quarter end, total debt was $7,400,000,000 and cash and temporary cash investments were $4,100,000,000 of which $81,000,000 was held by VLP. Valero's debt to capitalization ratio net of 2,000,000,000 dollars in cash was 20%. We had $5,600,000,000 of available liquidity excluding cash. Cash flows in the 4th quarter included $732,000,000 of capital investments, of which $164,000,000 was turnarounds in catalysts and $136,000,000 was for our investment in the Diamond Pipeline.
For 2015, capital 2015, capital investment included $1,400,000,000 for stay in business and $1,000,000,000 for growth. We returned $1,000,000,000 in cash to our stockholders in the Q4, which included $240,000,000 in dividend payments and $767,000,000 for the purchase of 11 point 1,000,000 shares of Valero common stock. For 2015, we purchased 44,900,000 shares for $2,800,000,000 For 2016, we maintain our guidance of $2,600,000,000 for capital investments including turnaround catalysts, joint venture and strategic investments. This consists of approximately 1,600,000,000 for stay in business and $1,000,000,000 for growth. For modeling our Q1 operations, we expect throughput volumes to fall within the following U.
S. Gulf Coast at 1,610,000 to 1,660,000 barrels per day U. S. Mid Continent at 430,000 to 450,000 barrels per day, U. S.
West Coast at 245,000 to 265,000 barrels per day and North Atlantic at 465,000 to 485,000 barrels per day. We expect refining cash operating expenses in the Q1 to be approximately 3 point $8.5 per barrel. Our ethanol segment is expected to produce a total of 3,800,000 gallons per day in the first quarter. Operating expenses should average $0.37 per gallon, which includes $0.05 per gallon for non cash costs such as depreciation and amortization. We expect G and A expenses excluding corporate depreciation for the Q1 to be around 175,000,000 dollars and net interest expense should be about $110,000,000 Total depreciation and amortization expense should be approximately 4 $70,000,000 and our effective tax rate is expected to be around 32%.
That concludes our opening remarks. Now before we open the call to questions, we again respectfully request that callers adhere to our protocol of limiting each turn in the Q and A to 2 questions. This will help us ensure that other callers have time to ask their questions, which are also important. If you have more than 2 questions, please rejoin the queue as time
permits. Thank
you. We will now begin the question and answer session. And our first question comes from Blake Fernandez from Howard Weil. Your line is open.
Hi, good morning. Just a quick question on the alkylation unit. First, can you provide any kind of return expectations that you have for the project? And then secondly, on the spending profile, it looks like your CapEx guidance in the $16,000,000 is about the same as it was before. So I'm just kind of confirming that most of the spending probably is weighted towards 2017 2018?
Well, hey, Blake, this is Lane. So, the Board approved the escalation unit, it was normally about 3 $100,000,000 The Fund B Decision EBITDA is about $105,000,000 If you use 20.15 prices, it would be about $240,000,000 EBITDA. With respect to the budget, we when you look at our original we gave out the 2016 guidance on our budget for this 2 years ago, it's up about $100,000,000 and it's normally the Port Arthur turnaround. We have a little more turnaround than our outlook was 2 years ago. But certainly and then all the rest of it, the alky is clearly fitting inside our sort of $100,000,000,000 a year strategic capital.
It's not it's normally about $100,000,000 a year. And it is back weighted, like you said, towards 2017 2018.
Okay. Thanks, Lane. Secondly, just maybe if you don't mind sharing some thoughts around light heavy spreads into 2016. And I guess what I'm thinking, especially in light of Iranian barrels coming to market, that could potentially displace some other barrels globally. It seems like maybe that would have an indirect benefit to Valero given your leverage to Gulf Coast and heavy processing?
Yes. Blake, this is Gary Simmons. Overall, yes, we've seen very good spreads between the medium sours and light and heavy sours as well. And certainly the uranium production coming online will put further pressure on those differentials. I think we see several things in the market.
The increase in OPEC production is putting medium sour barrels into the Gulf. You see Gulf of Mexico, deepwater, medium sour production rising. At the same time, we're seeing some of the light sweet production falling off here in the United States. So it's leading to very good differentials. I think the other thing that a fundamental shift is where fuel oil had been trading around 80% of Brent, it's now trading around 60% of Brent, which should mean that we would expect to see good medium sour and heavy sour differentials throughout the year.
I think the other thing for us, the uranium production, of course, we won't be running any of those barrels, but we do think the market rebalances and make some additional heavy and medium grades available from us to us from Latin America.
Great. Thanks for the color, Gary. Appreciate it, guys.
And our next question comes from Neil Mehta from Goldman Sachs. Your line is open.
Hey, good morning. Good morning,
Neil. So Joe, Lane and Gary, you guys have a unique window into what's happening from a product demand perspective. It's one of the big debates in the home markets right now. Can you talk about what the export markets look like from your perspective for diesel and gasoline? And these
gasoline
builds in the DOE. Is that these gasoline builds in the DOEs. Is that consistent with what you're seeing on the ground?
Neal, this is Gary. I think we continue to see very good export demand for our product. As Joe mentioned, we had record volumes in the 4th quarter. Continue to see good demand for both distillate and gasoline abroad. Our rack volumes remain very strong.
We're moving a lot of product over the racks. We're seeing good domestic demand for our product as well. Certainly, I think when you get this early in the year, it's kind of hard to dissect the BOE data. We've seen the large builds as well. Some of the data to us looks a little suspect.
I think we've seen a lot of weather issues in the Gulf that our belief may have been that it hindered some of the waterborne barrels from being able to leave due to fog and weather that we've had in the Gulf. The Mississippi River flooding also has hindered some of the refiners along the river, their ability to clear those barrels as well. I think we're just too early to really get a good view of what demand is going to look like. But everything from us, our perspective looks good.
Yes. The fundamentals, I think, for strong demand are still there. There's no question about that. I mean, we continue to have prices that are very attractive at the street. And then there's a lot of data that's coming out recently on vehicle miles traveled being up and also on auto sales being skewed towards larger SUVs and light heavy trucks.
So, again, as Gary said, it seems like every January, Neil, we find ourselves in a situation where we're looking at the year and everybody's trying to figure out, oh, gee, is this over and is demand going to be totally eroded? And as he said, I think it's just a little early to tell. But fundamentally, it looks like things should bode well for us going forward.
I appreciate that. The second question, Joe, just for you is just the outlook for M and A. I think in the past, you've said that you want to see that relative multiple between Valera and the group move a little bit higher before you'd be more aggressive around M and A. So, just your latest thoughts there and then also at the parent level and then also at the midstream level?
Okay. And Neil, we gave Cisco the responsibility for this M and A activity, which he greatly appreciated the added responsibility. So, yes, I'll give him a crack at this to start.
Yes. Thanks, Joe. I appreciate
it. For Valero, our appetite for midstream M and A and M and A in general hasn't changed. We continue to look at opportunities, particularly those that support the earnings growth that we can achieve in our core business. The good news is we have a great portfolio earnings capability as we demonstrated in 2015. More specific to VLP, VLP hasn't reached the size where it can execute most of the M and A transactions on its own.
But we do continue to evaluate interested in a step out transaction that would change VLP's risk profile or its growth story.
Appreciate that, Joe. Cisco. Thank you.
Thanks, Neil.
Our next question comes from Ed Westlake from Credit Suisse. Your line is open.
Good morning. Congrats. I think this time last year, I said I was going to drive down in an F350 to Disney World. And would there be enough gasoline yields from Valero and the other refiners in the summer to make it possible for me to do so. So I'm going to ask the same question after a year of looking at gasoline markets and some very strong cracks and strong demand.
What are you guys doing to be able to make more summer grade gasoline?
In the short run, I don't think we really have anything that we have on the horizon that is going to be able to increase our gasoline yield. The big thing the Alky project that Lane mentioned that will give us additional ability in terms of making additional gasoline when that project comes online.
We are in maximum gasoline mode now though within the system, aren't we? That's right. Yes, we are.
Okay. And then switching to the self help, obviously, the toppers coming on stream, so we started to see that maybe in 4Q and into this year. You used to have sort of a $500,000,000 number. I think that's gone down to $430,000,000 I mean, just a reminder of what you think the key drivers will be in terms of the spreads driving that 430?
Well, Ed, this is Blayne. So the funding decision on both those units we had, we had Brent and LLS at parity for your relative pretty much in those in that environment. If you want to and we like to reference this historical price set. So if you looked at those projects in 2015, the Corpus unit would give us about 200 dollars 1,000,000 of EBITDA and the Houston Credit Union would be about $230,000,000 So those are and those are slightly exceeding obviously our funding decision, but in the current market, pretty much at our funding decision. Again, as Joe alluded to, the Houston crude unit will start up in the Q2, and we start up the crude unit in Corpus Christi without any incident and start up fine.
Okay. And it's mainly crude against VGO spreads we should look at?
That's right.
The driver here is crude versus really resid, so low sulfur resist.
Okay, helpful. Thank you.
And we have a question from Evan Caleo from Morgan Stanley. Your line is open.
Hey, good morning guys. Maybe a follow on to the product demand question. Given the macro uncertainty, pacing your cash returns to the net income makes sense on a quarterly basis. How do you think about using the balance sheet to fund cash returns, buyback? And has that changed at all given macro uncertainty or share price volatility?
Well, our balance sheet is Devin, this is Mike. Our balance sheet is very, very strong and we intend to keep it that way. Our guidance is to pay out 75% of net income for 2016. So as far as levering up to meet that target, I'm not sure it will be required to do that. It's early in the year.
So, we'll just have to see how the year plays out.
Got it. And then maybe a different follow-up on you shared the EBITDA on all these new projects that will be contributing in 20 16 in Corpus, Port Arthur, McKee and Houston in 1Q? I mean, any color in aggregate how they affect your crude slate flexibility? Or just related, given the right economic indicators, where do you think you could max out your heavy sour and then medium sour runs?
Yes. So, the topper really just gave us more capability to run domestic light sweet barrels or foreign light sweet barrels. It really added to that. We haven't done anything that really materially changes our ability to process medium or heavy sour grades in our system. It was mainly those 2 units are adding 160,000 barrels a day in light sweet capacity.
Yes.
Right. And then but the uptick quarter to quarter on overall heavy and medium sour runs, I mean, where could that be? And I'm sure that's an average number. So I'm just trying to get a sense of if you're kind of max flexed at this point or where we take that?
Yes, a little color on that, Evan. I'll take the topper out, so you can kind of have an apples to apples comparison.
We can
take the toppers out between last quarter and where we are today. We backed out about 400,000 barrels a day of lower 40 8 domestic light sweet crude and we've replaced that with medium sour grades and foreign light sweet imports. That's the big change in our system. Heavy sours are about the same.
Got it. Appreciate it.
Paul Cheng from Barclays. Your line is now open.
Hi guys. Good morning. Good morning, Paul. My actually, this is for you. I'm going to ask from the other angle on the balance sheet.
The last several years that you guys have done phenomenally well, both operationally and financially and also the return to shareholder. I'm just curious that as the cash flow remains strong at this point, does it make sense even though you already have a very, very strong balance sheet to maybe you tonight a part of the free cash flow maybe 20% or so to further strengthen the balance sheet. I think that we all live through the up and down. While I'm bullish on the market, I could be wrong. And that we have seen what happened, everyone was bullish in 2007 and then the bottom fell off because of the economy.
So should we actually take a maybe a slightly different view at this point just as a safe dock to ensure that we build up some additional cushion even though your balance sheet is already remarkably strong. But if cash flow cut by half, then maybe that, that will allow you even have better opportunity to strike and take the opportunity everyone is weak?
Okay. That's quite a question, Paul. And I remember those days very well. Our balance sheet is very strong and we intend to keep it that way. If you're suggesting that we build cash here, our current focus is to continue to look for opportunities to grow our business and increase our earnings per share.
But if you're suggesting that we prepay some debt, the majority of our remaining debt contains make whole provisions that make those prepayments less than controlling.
I see. So that you won't be able to pay and you won't say add on some additional cushion into your balance sheet by adding cash?
No, I don't think at this time that is what we'll be doing. I think we can execute on our payout strategy and all that type of stuff as I said earlier without levering up the balance sheet.
And Joe, just curious that with I think that some of the other company in this and look like some retail asset maybe become cheaper. If you're looking at your portfolio, does it make sense that if the entry point is right for you to re enter into retail by doing so that can maybe that cushion your gains or the hedge gains, any win cost increase or that you provide even a more outlet direct outlet to your Wi Fi product? Or that business you're winning on interest that going back into that business?
No, Paul, that's a good question. We look at it periodically. The retail business is materially different from the refining business. And you know that. I mean, refining is capital intensive and fewer people and the retail business is people intensive.
And when we look at it, I think our view would generally be that we don't need to control the retail outlet
to be able to be
a very good supplier into that market. And so frankly, what we're focused on is further extending our wholesale business where we could have contractual relationships and support the Valero brand at The Street from the wholesale side rather than from a direct retail operation. If you reflect back on our retail volumes when we owned CST in the 1,000 or so sites and the sites in Canada, the volume we moved through them was about 125,000 barrels a day. And when you look at that as it's order of magnitude relative to the total motor fuels that Valero is producing, it's a very small percentage. So, it would take a real huge step for us to have any kind of material presence to really allow us to hedge the benefits associated with owning retail directly.
So, I don't know that unless there was really something that was just incredibly good or allowed us to sustain our contractual relationships with customers. I don't see us reentering that market in the retail business.
Thank you.
And our next question comes from Jeff Diethert from Simmons and Company. Your line is open.
It's Jeff Dietherd with Simmons. Good morning.
Good morning, Jeff.
I appreciate the update on all the projects. I think the St. Charles hydrocracker, I didn't see an update on that. I apologize if I missed it. But could you talk about St.
Charles?
Hey, this
is Lane. So yes, we're currently changing the catalyst out and doing the capital. It's a small capital project, dollars 40,000,000 And so it's just really a catalyst change out, which is based on the cycle that we when we change out the catalyst and the capital implementation, we're doing it right now. So it'll be ready to go here in the Q2.
Okay. And could you talk about your EBITDA expectations on Port Arthur and St. Charles hydrocrackers, what those are expected to contribute?
Well, again, we spend normally about $80,000,000 on the 2 and sort of our funding decision EBITDA is somewhere between a total of $60,000,000 to $80,000,000 So these are an example that's sort of quick hitting, self help. These were sort of the low hanging fruit to sort of arbitrage out that we're there's some maybe some after we started running these units to figure out where we could put a little capital in and get a pretty good hit on it. So I don't know if that will show up as a revenue stream or something like that to you guys, certainly show up in our margin capture going forward.
Okay. And could you talk
a little bit about Line 9 now that it started up? And what your flexibility is to take Canadian heavy versus Syncrude versus Bakken? What's the flexibility there in an environment where you're encouraged to take those grades?
Yes, Jeff. This is Gary. So Line 9, we began taking crude in December. It's fully up and operational and at capacity. In terms of flexibility of grades, all of our crude through Line 9 goes through Montreal and we really don't have logistics to be taking heavy or medium sours.
It's pretty much just for light sweet crude for the Quebec refinery.
Great. Thanks for your comments.
Our next question comes from Roger Read from Wells Fargo. Your line is open.
Yes, thank you. Good morning.
Hi, Roger.
Just maybe coming back to the gasoline question for this summer. Octane availability, as you look around, what do you think the biggest roadblock will be again? Is it going to be the octane alkaloid side? Is it going to be blending stocks? And what is your assumption for gasoline demand growth this year as you set up your expectations and budget?
Hey, Roger, this is Gary. I think we see that as long as we have a strong gasoline market and we have length in suboctane blend component like naphtha, the gasoline pool is going to try to draw naphtha in and it's going to mean octane is fairly expensive. And so we
end
anytime soon. And where will the industry look? I mean, if you thought about it as a low hanging fruit thing, where would you be looking to pick up octane? I mean one of the thoughts is if U. S.
Light sweet is declining and we're importing a light barrel, maybe we create a little bit more that way since the U. S. Barrels tend to be on the low end for octane. But where else should we consider?
Well, I think for us, we've tried to look everywhere we can and this Alky project was the best thing that we really felt was out there. We've studied reforming, expanding reforming, building new reformers and the Alky project has the best return in our system.
But I mean more near term, is there are we just going to struggle 2016 2017? I mean I understand we are 2019, but
Yes, I think we will. I don't see anything in the near term that's going to have a significant impact on the octane balance.
Okay, great. Thank you.
Sam Margolin from Cowen and Company. Your line is now open.
Hey, good morning. Hi, Sam. I wanted to ask one more about the Aphi project here. There's a couple of others out there in the system. A lot of times, these units as newly built units are paired with, like a midstream acquisition or some other project to produce the feed by the operator.
But is it fair to say that there's no real necessity to commit capital to source incremental NGLs here. There's plenty available. And so this Alky unit can be built as a standalone? Or actually, is it does it is it paired with maybe something coming off the toppers or another attribute of your yield right now?
Hey, Sam, this is Lance. Ours is a little different, I would say, than other people in the industry. And what we're doing is we're taking existing alkylation unit at Houston and we're converting it to alkylate B5 Olefins. Normally, alkylation units alkylate C4 Olefins and sometimes C3 Olefins. So we're taking the existing one to retrofit it such that it could calculate C5 opens and we're building a new C4 opens.
What we're really doing, if you draw drew a boundary around the Houston refineries, we're shifting C5 olefins that are going out in Cat Gasoline, bringing in IC4 from Mont Belvieu, which is readily available and inexpensive. And that's really what's happening in making an alkali and also blending some additional butane for the blue RBP, that's really what this project is. So it is different than I would say other people that are looking at this and we're clearly ahead of everybody else in the industry with this project.
Okay. Yes, that makes sense. I think it's been evaluated for quite a while. So it's clear that there's a lot of, I guess, thought into the process. This next one is sort of a moonshot.
I think, as you know, it's been reported Aramco is maybe looking to monetize some assets. You might also know that Shell has a fairly aggressive divestment target too. I don't know, is it fair to say that Motiva today is at least as attractive or as sensible of a consolidation candidate as maybe Sitco was 2 years ago in terms of sort of what's out there to bring into the fold to the extent that I think Mike kind of alluded to the appetite hasn't changed, but I don't know maybe availability of assets has?
Well, Sam, that is a moonshot. I mean, Motiva has a good business and they've got good assets. And if they were for sale, I suspect that we'd take a really good hard look at it. But we're not hearing anything. I haven't heard anything is there in the market.
All right. Appreciate it. Have a good one.
You bet. Take care.
Phil Gresh from JPMorgan. Your line is now open.
Hey, good morning. Hi, Phil. First question just on VLP.
How are
you thinking about the dropdown potential to VLP this year? Last year, I think you had committed to $1,000,000,000 in drops, but you didn't give any specific commentary on the release. So just curious how you're thinking about the MLP market more broadly, valuation impacts, etcetera?
Okay. Yes, Phil, right now, our $1,000,000,000 is our current plan for the dropdown. But
the capital markets are pretty
challenging right now. So we'll just have to continue to
year.
Okay.
Second question is just there's been some talk about the uplift we could see from greater utilization rates from these Chinese teapot refineries and the impact they could have on product exports out of China. I'm just wondering how you're thinking about this risk. And you think China's product quality can compete on the global market, especially on the gasoline side?
I can't Phil, this is Gary. I don't know that I can really comment on the quality of their products. Overall, to me, that capacity is capacity that's going to be very challenged globally because of the weak fuel oil markets. It's going to be very difficult to run low complexity capacity with a very low fuel
environment.
Okay. Thank you.
Ryan Todd from Deutsche Bank. Your line is now open.
Thanks. Good morning, gentlemen. Maybe you said all you wanted to say on it, but maybe a quick follow-up on the prior question on potential drops to VLP. I mean, any thoughts as to what the mix might look like between cash proceeds and equity to Valero or any thoughts on evolution of multiples of those drops or too much uncertainty in the market at this point?
Well, there's quite a bit of uncertainty in the market. So at this point in time, I really can't comment on how the cash proceeds would
be
and how the financing of those drops would be structured.
Okay. And then maybe one follow-up on we appreciate the comments that you made earlier in terms of some of your thoughts on medium sour and heavy sour differentials and the sustainability going forward. But maybe, can you give any thoughts in terms of how you see light sweet diffs, whether it's BrenTI or LLSTI, evolving over the next 3 to 6 months? Are we going to need to see a widening of those spreads in order to clear Cushing and disincentivize imports? And in particular, I was kind of curious given the fact that you've backed out 400,000 barrels a day of lower 48 light sweet crude through your system.
Just generally how you've seen what your outlook is for those light sweet differentials going forward over the next over the course of this year?
Yes, this is Gary. I think over time, LLS and Brent traded at pretty close to parity, but I think we're going to have a lot of volatility between the grades as the year goes on. So you can see, LLS got was paying and
we would have to pay
a premium for LLS over Brent. So we started importing foreign light sweets. You have inventory gains here in the U. S, which I think tells you LLS was too expensive. So then LLS will be discounted.
And I think we'll go through that volatility for the next six months, where we swing in and out of domestic light sweet production into our refining system.
Great. Thanks.
I appreciate it, Bill.
You're right.
Doug Leggate from Bank of America Merrill Lynch. Your line is now open.
Hey, thanks. Good morning, everybody. Good morning, Doug. Thanks, Joe. So, Joe, I wanted to go back to your comment about gasoline on I think you said you were in max gasoline mode right now.
What I'm trying to understand is what happens to gasoline yields as the U. S. Kind of swings back to imports and light speed crude declines. So, I know everyone's focused on octane, but I'm just wondering if we start to see a tightening of the balance by Euromax gasoline mode at this point. I'm guessing that's because this looks so weak.
I'm just trying to understand the interplay as you see things going into the summer. So, I guess, I'm really looking to your prognosis on how those things balance out. Okay.
Gary, you want to go ahead?
Yes. So, overall, if you look at a foreign light sweet barrel versus an Eagle Ford or a Bakken type barrel, the naphtha yield from West African Saharan barrel is about the same as Bakken or Eagle Ford. So in terms of refining yields, it's not significantly different whether we're running that West African barrel or we're running a domestic light sweet barrel.
So, as you swing back towards medium heavy, does the yield mix change then?
Yes. So for medium heavy barrel, it would except for most of the refiners we're running those barrels are very high complexity refining assets. And again, we don't see much of a yield difference with the complexity of our refineries when we're running a heavier diet. The only thing that we can get into is as we go heavy at some of our plants, it can lower utilization some. So we get a lever effect by running light sweet at some of our refineries.
So we have a big incentive to run much heavier crude diet. It can mean that we're running slightly lower crude rates at some of those plants.
Kind of back to the old scale, I guess. Thanks for that. My follow-up is really more as it's probably more as a Skalsky question. The tax rate looks like it's been consistently low now for it's becoming a kind of a regular thing. So should we be looking at tax rate guidance moving lower or is that kind of permanent shift?
Well, we had a couple of unique items this past quarter because of the tax law finally was they got final approval in
the UK and then we
had we have some audits that are underway in the U. S. And we happen to get those settled this quarter. And so that was reflected, which pushed the rate down to 28%. So we try to do the best that we can in giving that guidance to you.
But the 31%, 32% is what I would say for the Q1.
Is that good run rate going forward, Mike?
Yes, right now that would be.
Okay, helpful. Thanks everybody.
Take care, Doug.
Our next question comes from Chai Chow from Tudor, Pickering and Holt. Your line is open.
Great. Thank you. Hey, how are you doing, Jeff? Close enough, I guess. Back on the products markets, can you comment on how you're assessing the supply demand balance of the global distillate market heading into this year?
We saw material weakening of the diesel cracks as the year progressed last year. And just wondering on your thoughts on the cause of this?
Yes, Chi, this is Gary Simmons. Overall, I think if you look at what drives distillate demand, it's weather and then it's economic activity. And thus far, both in the U. S. And in Northwest Europe, we've had warmer winters than what we've historically had.
And so it's led to lower distillate demand. So in terms of how do we correct from here, I think a lot of that correction gets back to some of this low complexity refining capacity with discounted fuel pricing. I think we'll see some economic run cuts with some of that low complexity capacity that will bring the distillate markets back into balance.
What about the economic activity side of things? I mean, are you seeing you mentioned your exports are still pretty good, but are you concerned about global slowdown on the economic front?
I don't know that I can really comment on the global economic activity, but I can say we continue to see very robust demand for our products throughout the globe.
What were your exports of gasoline diesel in the quarter?
Yes. So gasoline, we did 157,000 barrels a day of gasoline. We did 264,000 barrels a day of diesel. If you add kerosene in with that, it would be 3 107,000 barrels a day of total distillate.
Okay. Thanks, Gary. One other question. This is just kind of specific to your Gulf Coast system. We just noticed that your realized margin capture rate versus your index is always better in the Q4 in the Gulf Coast than the other 3 quarters of the year.
And that's been pretty consistent in the last, I don't know, 4 years running. Why is that the case? Is there any specific reason for that?
Well, I would say, certainly, you get butane blending would come into play there. And so as butane has been discounted and we're
able to blend it into
the pool, it helps our our capture rates.
I don't know if you have anything else. Hey, Cheet,
this is Elena. I only add normally seasonally what you see is medium heavy star discounts widen out. And so when you're using sort of the standard capture rates versus light sweet, we always outperform on that as well. Okay.
Great. Thanks, Lane. Appreciate it.
Our next question comes from Faisal Khan from Citigroup. Your line is open. Good morning, guys.
Good morning. Just a quick question. On the timing projects that came online in the Q4, so the Corpus Christi crude unit, the hydrocracker and the expansion of a key. And then also Line 9B already sort of highlighted that, that was a December start up. How did those start up in the quarter?
I'm just trying to understand sort of what the contribution was from the commissioning of these assets in the quarter just so we get sort of the uplift right going into 2016?
Hey, Phil. This is Lane. So McKee, we finished that project, which really took us about 2 years to fully implement the entire scope of that, which was 2 things. 1 was it was an energy efficiency project and distillate recovery and the second was sort of plus crude rate and we finished it in October. And I assume that's what you're after.
You're sort of after the timing. And in the St. Arthur, again, the hydrocracker was down in October and there we replaced the catalyst and did the expansion. And then Corpus Christi really started up during sort of early to mid December. So you wouldn't have seen anything with respect to 4th quarter improvement.
That's really going to be entirely a 2016 thing.
Okay, got you. So McKee, we would have seen a full contribution in the quarter, but it sounds like Port Arthur was down in October and then of course nothing from
the Corpus. Yes.
We're St. John from Corpus, right. Nothing from Corpus and obviously St. Charles we're doing right now.
Okay. And then right now given where crude prices are in Canada versus the Atlantic basin, is it make sense to max out Line 9B? Or where are we with the market in terms of how we benefit from that?
Yes. So I would tell you on Line 9b, we're seeing some value in the Bakken that we're running. Most of the Western Canadian light suites, we're not seeing a material difference in being or uplift in running those barrels compared to foreign light suites that could import into Quebec. Got it.
Okay. Great. Thanks for the time guys. Appreciate it.
Our next question comes from Vikas Dwivedi from Macquarie Group. Your line is open.
Hey guys. Quick question
on gasoline and ethanol. Now they've been inverted for a while. Does that change how you guys blend or any of the approach to the overall
This is Martin Parrish. It's really the impact on the blending margin, not on the refiners margin. Ethanol is selling at about its blend value. Everything is kind of explained value and it's high octane.
You have
to remember that the blender still gets the rent if they choose to blend ethanol. So it kind of works out. We don't I don't I would say there's really no impact. We've got it blended.
Got it. And coming back
to the Alky plant, is the C5 technology, is that also a call on kind of an oversupply to ethane or ethylene market down the road?
Don't want to it's not a call. It's just really you look at the whole NGL market, it's been pretty it's been long. We have and it's really a view that we can take and move NGLs into the gasoline pool. And we can do it by alkylating amylines in the refinery, which is little bit different. And it makes a good high octane, low RVP component, which then in turn allows us to blend additional in the summer in particular.
Got it. Yes, we were
thinking if it was a call, it would be
a great call. I think we're going to
be drowning in the lighter end of the NGL barrel for a long time. That's the story.
And so I mean, I wouldn't tie it to ethane. It's the whole NGL space, right, which we believe is actually long going forward too.
Yes. All right. Thank you, guys.
We have a question from Brad Heffern from RBC Capital Markets. Your line is open.
Good morning, everyone. Good morning. Circling back to the VLP, I'm just curious, we all know the uncertainty and the turmoil in the capital markets, but it seems like the strategy is basically unchanged and you have 55% of the growth in 2016 in terms of budget going into VLP. At what point do you think about that and maybe reexamine the pace of growth given that the market doesn't necessarily seem to be rewarding growth as much as it once was?
Do you want to? Yes.
I mean, we'll continue to right now our plan is to do the $1,000,000,000 but we'll continue to examine and monitor the markets as we move through the year. I mean, it is very challenging right now. We do have our revolver that we could use that as a financing source for some of the drops. So the bank market seems to be a little bit more attractive than the capital markets at this point in time.
Brad, let me just add to what Mike said though. The capital that we're investing build the droppable EBITDA base. But the motivation behind it and we've shared this before, the motivation behind Valero investing in logistics assets are projects that benefit Valero's core business, its core refining business. They're projects that help us optimize our operations. And we're not taking flyers on projects that we wouldn't be willing to commit contractually long term to.
And so, again, the things that we're investing in today, for example, the Diamond Pipeline,
I mean, that is going to be a
direct benefit to the Memphis refinery and provide crude optionality there that they don't currently have today. So, this is a it's a long game. And even though markets are challenged right now, I don't think we should sit here and throw the baby out with the bathwater and totally redirect strategies to try to accommodate it. The other thing that Mike hasn't mentioned is that BLP is in a great position. They got very high coverage ratios to maintain distribution growth and the targets we've talked about is not going to be an issue.
And here again, we're running the business to continue to improve the business and drive EPS growth at VLO and VLP is going to go along for the ride. So anyway, that's just a little more color.
Yes. Thanks for that, Joe. I think that's clear. And then thinking about logistics opportunities as well, I'm curious, obviously, the lifting in the crude export ban is seen as a negative for refiners in general. But I would think there might be some opportunities to present themselves to Valero given the amount of dock space and general opportunity.
We're
that opportunity. We're in conversations with a lot of different parties on projects that they have that they're willing to share now that they might not have been in the past. And so we do see quite a bit of opportunity out there
given not just the decline in
crude prices, but also the export opportunity.
Okay. Thank you. And
our last And our last question is a follow-up question from Paul Cheng from Barclays. Your line is open.
Hey guys, real quick. Maybe this is for Gary. Gary, just curious, the crew inventory build over the last several weeks, quite substantial. Do you have any rough idea that what's the split between is the financial buyer buying it to take advantage on the contango curve? And or what percentage is the operator actually the refiner that who are building inventory here?
Yes. I don't suspect it's a lot of refiners building inventory. Most of our tankage and most refiners' tankage is more operational Cushing. But I don't know that I really could comment in terms of Cushing, but I don't know that I really could comment in terms of the build. I think what we had happened is LLS got at a premium to a foreign light sweet alternative and Valero along with many other refiners started buying light sweet and caused the inventory to build and certainly the market structures incentivize people to store as well.
Okay. Thank you.
Okay. Rhonda, I think that is the last of the questions. So we want to thank everyone for calling in today. And please feel free to call me and Karen if you guys have further follow-up questions. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.