VLO
#Thanks, <UNK>, and good morning, everyone
Our team again delivered solid operating results and distinctive financial performance during a quarter where we saw heavy maintenance activity and soft margins
Our continued focus on safety and reliability in our plants has been key to our ability to capture the available margin
In the first quarter, we saw healthy domestic and export demand for refined products driven by low prices, seasonal weather conditions in North America and Europe, and a resurgence of domestic oil patch activity
Latin America also continued to be a strong source of demand for gasoline and diesel
On the crude supply side, we continued to see rig count increases in the U.S
, particularly in the Permian Basin
As production ramps up and more domestic sweet crude makes its way to the Gulf Coast our refineries in the Mid-Continent and the Gulf Coast are prepared to capture the feedstock opportunities
While RIN prices have declined relative to 2016 there's still a significant headwind for the quarter
At this level, RIN's expense remains an issue for us, so we continue to work with regulators
Turning to our refining segment, in the first quarter we completed a heavy turnaround schedule at our Benicia, Texas City, St
Charles, and Meraux refineries
Our employees and contractors safely executed these projects
With the majority of our planned maintenance for the year behind us, we should be ready to capture available market opportunities
In our ethanol business, we had record production volumes for the quarter as higher ethanol prices and strong demand for ethanol exports supported production rates
Also in the first quarter, we invested $641 million of sustaining and growth capital, construction is progressing on the Diamond Pipeline with completion expected at the end of this year
Work on the Diamond Green Diesel plant expansion, the Houston alkylation unit and the Wilmington cogeneration plant is continuing as planned
Turning to our MLP, as we disclosed in our 10-K for 2016, we created a new VLP segment to align how we manage and allocate resources
Growth in our VLP segment is critical to Valero's strategy to optimize the supply chain
The third party acquisition of the Red River pipeline in January is a good example of VLP executing this strategy, which is focused on assets that are key to Valero's operations or that will supply third party volumes without taking on commodity risk
Lastly, regarding cash returns to stockholders, we paid $629 million in cash through dividends and stock buybacks
So, we believe we're in good shape to exceed our payout target for the year
This payout demonstrates the company's free cash flow generating capability even in a soft margin environment
So, with that, <UNK>, I'll hand it back over to you
And Benny, I think, and <UNK> can talk a little bit too, he and Mike, we went through this process of trying to decide, did we want to go ahead and create the segment
We felt we needed to create the segment so that there was more line of sight to what it is, and then the question becomes, what do you put in the segment? We decided to keep it as clean as possible and just be sure that everybody had a line of sight to the fact that this is the way we manage the business, and we wanted it to be very clear and clean
So the portfolio of assets that we have at Valero that are still droppable, all of that EBITDA that's droppable into VLP is there, but we didn't want to cloud it by including that
So anyway, it's a pretty straight up segment
Good morning, Phil
Phil, that's a good question, and I'll let <UNK> talk a little bit about the RIN market, and then <UNK> can just give you an update on the regulatory front, if that's okay
Good morning, <UNK>
<UNK>, I think it's in the refining side of the business, in the midstream side of the business
I'll let <UNK> talk a little bit about the projects that we've got going on in refining and then maybe Rich wants to share a little bit about anything we got going on on the logistics side, but Rich don't tell them anything secret
I know you would, <UNK>
<UNK>, just more broadly on this
We've talked about the fact that we're interested from a strategic perspective in integrating more assets that go into the refinery and moving product out of the refinery
And that's not a short-term strategy that's a long-term strategy
Along with the other things that we're doing
Safety, reliability and environmental focus and then shareholder returns is the third component
So I think, the strategy that we've got in place today, certainly we have line of sight to the next couple of years, but it's a strategy that I believe works long-term
It allows us to continue to increase the value of the business
So we're very comfortable with it
And again, Rich and <UNK> are both developing projects, we scrub them hard and then we'll just see which ones we want to proceed with going forward
But the focus is clearly around the core business of refining and marketing and around ethanol
Good morning
Unknown Speaker Earlier you mentioned – good morning
Earlier you mentioned still strong export into Latin America and I'm guessing that's probably due to still load utilization in the region
I'm just wondering if that's a sustainable trend or if you see that improving at any point this year?
Yeah, hang on a second, Ed
Good morning, <UNK>
Hi, <UNK>
Thanks, <UNK>
So, <UNK>, on the strategy and I mentioned it earlier
I think the things that we're doing today and they're very much focused on making us the best refining and marketing operation out there, and I believe that, based on the independent surveys that we really are the best, but we continue to raise the bar for ourselves and try to drive it forward
Again, that's not a short-term activity
That is a long-term activity that we'll continue to do going forward
Now, if you think long-term about the markets, okay, and the demand for our products more specifically, you say, well is U.S
demand going to continue to grow going forward? I think our forecast would be that in the next five to ten years you might see a slight decline in gasoline demand in the U.S
Diesel will be determined by economic activity, and so we'll just see how that goes
But as <UNK> mentioned earlier, we are seeing decent diesel demand, and a lot of that is being driven by the increase in activity that we've got in the E&P side of the business
If you think longer term and you think about where demand is going to grow, everything we read is that, globally, you're going to have increased demand for all of our products
And so our focus will go beyond the U.S
borders and we'll take a look at opportunities to increase our market presence in different international markets, and one of the things that Rich and his team are focused on are establishing a footprint in some of those markets so that we have better access to them on a rateable basis
So, I don't think you should expect us to shift the strategy materially going forward
Clearly, midstream growth is something we're focused on
Continuing to improve our refining and our renewables operation is something we're focused on
And then we've talked in the past about the possibility to take some of the streams that we're producing today and high grade them by legging into the petrochemical business
That's something that's probably a little bit longer term, but it is something that we're actively looking at these days and trying to figure out what is a way for us to enter that type of business, boiling the frog rather than diving in head first and see if we can create another earnings stream for the company
Yeah, <UNK>, I'll let <UNK> talk about that a little bit
Thanks, <UNK>
<UNK>, let me just try to be sure we're clear
So, there's two things we're looking at, right? One, are the organic growth projects that we're doing
I would say that we're not reducing our return thresholds on our organic growth projects in the midstream part of the business, and we kind of target, whether it be a drop or whether it be an organic growth project, we want to be like a 12% pre-tax IRR regardless, okay? Now if you're thinking in terms of M&A and the valuations that we're seeing on midstream assets, I'd say that they're pretty doggone aggressive, okay? Rich, you want to -
Yeah, I mean, you saw ---+ <UNK>, you saw the recent deal that was done around Navigator
And I don't know what the rate of return might be on that, but it was a very aggressive bid, it seemed
No, I wouldn't say that
We're going to continue to do what we've done and Mike runs the M&A group here
I mean, we're going to look at everything that's out there and try to make a determination
In a perfect world, we'd find a bunch of assets where we can earn the types of returns who want to do the deal in VLP and it would provide some kind of strategic synergy for Valero Energy also
And we evaluate it looking at it both ways
We have probably liberalized our strategy around VLP a little bit
Historically, I've said that we look at the projects from Valero Energy's perspective first and then decide if we can or can't do it at VLP
And I would tell you that still is the primary motivation, but we are looking at transactions now that would be somewhat more third-party that the user of the asset would be a third-party, but it would bring value to Valero in some way
So, we're adjusting our perspective as we go
Good morning
Yes
Well, okay
I told Rich I didn't want him revealing secrets, right? But, no, obviously we're looking at it
I mean, we sell – <UNK>, you sell a lot of barrels into Mexico today, okay? And I think everybody out there is going to be looking at Mexico as a growth opportunity
And it's certainly one that is very logical for us to pursue
And so, I think you should assume that it's something that we plan to be involved in
And not only Mexico, but other Latin American countries also
You bet
<UNK>, I'll let Mike speak to the levels of leverage, okay? But I mean very clearly what we're trying to do is create higher lows and higher highs in our EPS
And we really like to distinguish ourselves as a company that is able to produce earnings in challenging margin environments
And I think we've demonstrated that over the last several quarters
So, the kind of the self-help focus is something that we're just going to maintain as part of what we do going forward
Whether it allows us to achieve higher levels of leverage
I mean, Mike?
Loss profit and expense?
