VLO
#Thanks, <UNK> and good morning everyone
The fourth quarter and the full year 2016 were good for Valero as we achieved our best performance ever in the areas of personnel and process safety, plant reliability, and environmental stewardship
We are very proud of our team’s exceptional execution, which we believe is imperative in our business and critical during the low margin environment like we saw for most of the year
In the fourth quarter, we continued to see good domestic demand supported by low prices and solid export volumes due primarily to demand strength in Latin America
While we saw seasonal declines in available margin in some regions, margins in the Gulf Coast region remained healthy and distillate margins in all regions were bolstered by a return to more normal weather patterns in North America and Europe
We also saw attractive heavy sour discounts relative to Brent
A persistent headwind again this quarter was the exorbitant price of RINs
We spent $217 million in the fourth quarter to meet our biofuel blending obligations
At this level, this is a significant issue for us so we continue to work it aggressively with regulators
Our efforts are focused on moving the point of obligation because we believe this will level the playing field among refiners and retailers, but more importantly, it will improve the penetration of renewable fuels, lower RIN speculation, and reduce RIN fraud
However, based on current rules, we expect costs in 2017 to be similar to the $750 million amount we incurred last year
Given significance of this cost to our company, this issue continues to have our full attention
Turning to our refining segment, we initiated turnarounds at our Port Arthur and Ardmore refineries in the third quarter
Both events carried over into and were completed in the fourth quarter
Our employees and contractors worked hard to safely complete these events
We believe distinctive operating performance is highly correlated to capturing more of the margin available in the market
In our ethanol business, we also ran very well and saw strong margins in the fourth quarter due to high gasoline demand in the U.S
, strong pull from export markets, and low corn prices
Also in the fourth quarter, we invested over $600 million to sustain and grow our business
Construction continued on our $450 million Diamond Pipeline project, which we believe is on track for completion at the end of this year, and we continue to work on our $300 million Houston alkylation unit, which we expect to be mechanically complete in the first half of 2019. We also have additional growth investment opportunities under development around octane enhancement, cogeneration, and feedstock flexibility
And finally, regarding cash return to stockholders, we delivered a payout ratio of 142% of our 2016 adjusted net income, which was 78% higher than our payout ratio for 2015 and well above our target for 2016. Further demonstrating our belief in Valero’s earnings power, last week our Board of Directors approved a 17% increase in the regular quarterly dividend to $0.70 per share or $2.80 annually
So <UNK>, with that, I will hand the call back over to you
Good morning <UNK>
Yes, you bet
We will give you a point of view
What I would like to do is let <UNK> <UNK> answer that question
<UNK> has recently taken the position as the individual responsible for our public policy and strategic planning group, so we brought him back from London to take on this job
And it’s interesting we put the two functions together, strategic planning and public policy, because in our view you really can’t bifurcate the two anymore
They are going to be very intertwined
So <UNK>, you want to go ahead and share your point of view?
Hi <UNK>
<UNK> and we have talked about this before, we set the 75% target because it’s easy to see and cash flow can move around, obviously
And <UNK> is right, looking at net income in a low-margin environment, we set an expectation and we consider it to be kind of the floor
It’s our commitment to our shareholders to the extent we can do more and it’s the best use for the cash, we will go ahead and continue to buyback shares
I think the move we made with the dividend this quarter clearly reflects our comfort level and our Board’s comfort level with the earnings capability of the company in a down market
And so obviously, if you look at a $2.80 dividend, it’s going to continue to be a more significant component of the 75% payout ratio
We are very comfortable with that
But we will continue to buyback shares and the guys will do it in the way they have done it in the past, to some extent ratably and to some extent opportunistically
Yes
I mean it’s – and I will let <UNK> and <UNK> and <UNK> can – we can all speak to this
But obviously, you are going to optimize your crude slate
The big question around this whole border adjustment is how are the markets going to react to it and frankly, we have read everyone of the sell side reports on this and then consulting reports, as <UNK> mentioned and it’s got a lot of moving parts
Some people look at it on a static basis
Some have looked at it when you take into consideration the markets adjusting and some have taken into consideration the currency adjustment also
So right now, there is a skeleton out there that they are trying to put flesh on and we don’t know exactly what it’s going to look like
But I think it’s fair to say that we are going to continue to optimize our operation
And if you recall, <UNK>, I don’t remember how long ago, but we are running over 1 million barrels a day of light sweet crude and there has been times when we have run 600,000 or 700,000 barrels a day of light sweet crude
So, <UNK>, we have got the flexibility in the system
<UNK>, you want to talk at all about the markets and
Hi, <UNK>
Yes, it’s a great question, <UNK>
<UNK>, you want to share your thoughts?
The yield obviously is a function of the stock price
And we can’t control the stock price
What we can control is how we reward the shareholders of the company and how confident we feel about our ability to produce cash flows, free cash flows within the company, that we try to manage, right and we do it through a capital allocation framework that <UNK> mentioned earlier
The dividend and our maintenance CapEx is non-discretionary in our minds and it will continue to be
So making commitments to our shareholder returns through the dividend is something that we don’t take lightly and we modeled extensively
The buybacks and the growth projects, organic capital projects and acquisitions are areas that we consider to be competing for the use of free cash flow
And we look at the timing on our project development activities
We look at the return on our projects that <UNK> and his team are developing and that <UNK> and Martin have and we compared it to the value of buying back shares
And so we make the decisions accordingly to provide the highest returns for the shareholder
I would tell you, I wouldn’t – I would be lying to you if I told you that we look at the absolute yield and say that is what determines our decision around the dividend policy
It’s more how do we feel about the cash flows that we can produce within the system
<UNK> thanks
Glad to hear
Okay, fair enough
<UNK>, you want to take the crack in our RIN?
But yes, I guess <UNK>, we started the year like $0.95 per RIN and now it’s like at $0.50.
So we have made the point all along that this is a market that we believe is right for manipulation and the fact that you have had this movement in it, it sure is based on fundamentals
Well, I certainly think Torrance coming back online has impacted the market here in the prompt market
As I mentioned, we saw some weaker demand with RIN on the West Coast
But overall, LA is moving to summer grade expect today, which you pull butane out of the pool, which directionally tightens it [ph], next month, the bay will go to summer grade gasoline
So all of those things should directionally help demand and bring supply and demand back into balance
But <UNK>, you are not suggesting that its Valero, it’s going to make the run cut?
I mean <UNK>, we are the lowest cash operating cost guys in the business and we don’t have any strong interest in balancing the market ourselves
Good morning, <UNK>
<UNK>, you want to speak to this?
No, we don’t want to do that
But <UNK>, you are right, I mean, what <UNK> said is exactly right and it was characterized earlier
The Lyondell refinery is a nice opportunity, but they chose not to sell it
And we are just not seeing a lot of refining assets that are for sale that would add any value to Valero’s portfolio
So from an acquisition perspective, what do you focus on? You focus on the opportunities in logistics and other areas where you could improve the earnings capability of the company by improving your logistics, your feeds in, your products out, and then potentially upgrading your stream
So we are not in a position – we don’t believe we are in a position where we have got to go do a deal to balance on our portfolio
We will look at this a little differently and then we continue to seek ways to try to improve the quality of the portfolio we have got in place
Hi, <UNK>
That was an incredibly clever way to ask three questions
That was good
The need to get it back, I don’t think we have a sense of need to get it back
Would it be nice to have access to it? And <UNK> and the team are looking at the repatriation implications of the border tax adjustment
You always want to have your cash totally accessible to you
So, it will be great to get it back
But I would tell you that this – let’s just assume that we are able to bring it back and bring it back in good shape
The question is that what do you do with it? You reinvest it in the business? I don’t see us changing our approach to capital if we had the cash back, okay
I mean, I don’t think <UNK> is going to say gee whiz, now I can do a whole bunch more, because we are not holding back on things that we are doing today
So it will be wonderful to have access to it without paying any tax on it
That’s not likely
But I don’t think it changes anything we are doing, <UNK>
<UNK>, you want to?
Yes, I mean we have all adjusted to this
Really, the frustrating thing from our perspective is the negative effect it has by shifting the value of doing business from us to the guidance capturing the RIN
And so obviously, it would be beneficial to Valero if the point of obligation moved, which would reduce our burden
And frankly, we believe it would take a lot of the speculation and the manipulation opportunities out of that RIN market and it should lower the price of RINs
Now, the RVOs will have a factor on that and so on
But from a refiner, from an independent refiner’s perspective, it will be positive
Hi, <UNK>
Yes, do you see our ships loading, <UNK>?
<UNK>, you want to?
And then <UNK>, the tail on that was tax rate changes
In interest rates, I mean it just – it provides an investor different option, right
But you still have the benefits of everything that you have today with an MLP ownership position
And you are right, we don’t know enough yet about the infrastructure projects that are being talked about, at the Federal level right now, what the implications of those are
But any time you get projects like this taking place, they tend to drive distillate demand, of course it would drive gasoline demands also
But – then there is the other things, petrochemical feeds, asphalt, things like that
So we are actually encouraged by the outlook and by the focus on the infrastructure within the U.S
So we will just see how it all plays out
<UNK>, you should never ask us that question when you got a guy who is responsible for the MLP in the room
But to answer your question, honestly, no, we haven’t talked about an equity stake in Keystone
That maybe true, but that does not mean that we would be the guy
That’s right
<UNK>, you want to?
We couldn’t answer that question
But – and I think <UNK> answered it properly
It’s – we sure don’t want to signal our timing on our buying, but we look at what we view to be the earnings capability of this company
And if the returns on the buybacks are better than the returns on the growth CapEx project, then we are going to buyback shares
We said for years that we are not going to hoard cash, to the extent that we produce free cash flow
We will continue to look at the buybacks
<UNK>, where have you been?
Okay
<UNK> did talk to that earlier
Just want to give him the likelihood and then we can talk, <UNK> or we can talk about the other components of that question
And then <UNK> as far as well – <UNK>, it comes down to how are the markets going to react to this, right
And we have read all of the reports and we have read the consultants reports
Something is going to be good for refining, something that may not be as good for refining
And we talked earlier about the fact that we can adjust for the crude slate
But <UNK>, the markets are going to react
The interesting thing was, I guess at Port Arthur, you were able to increase overall run rates, throughput rates, because we were running the lighter slate
So <UNK>, we will be able to flex the system to deal with it
I guess the question is how to – how do the global crude markets respond to the duty, do they price to continue to push their barrels into the market or do they find a different home
And I think <UNK> has made the comment in several of the meetings that we have had that the natural home for a lot of the heavy sour crudes tends to be in the U.S
Gulf Coast refining system
So I don’t know if that changes in any material way
Look that is certainly what we have read also, okay
And I think your friends at Goldman did a report here recently that I have gotten to study, but I thought okay, maybe they moved up and then they move back down, something rise, the market suggest to it
So <UNK>, the interesting thing is because this is kind of a topic du jour, right
But none of us – they got the skeleton out there and the House seems very committed to this today
But they don’t have the flesh on the bones
There is lots of conversations that are taking place around do you have carve-outs, don’t you have carve-outs and so on
I think what I have encouraged our investor base to do is just let’s be patient, not over-reactive and let’s just see how it shakes out
We will adjust to maximize the value to the company, but I don’t think anybody knows enough yet to really understand what the full implications are
And then when we have seen changes like this, the markets tend to respond
So here again, we don’t have a great deal of concern and consternation around us right now
We are just trying to understand it better
