Valero Energy Corporation

Ladies and gentlemen, greetings and welcome to the Valero Energy fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Homer Buhler, Vice President of Investor Relations. Thank you, sir. You may begin.

Good morning, everyone, and welcome to Valero Energy Corporation's fourth quarter 2020 earnings conference call. With me today are Joe Gorder, our chairman and CEO, Lane Riggs, our president and COO, Jason Frazier, our executive vice president and CFO, Gary Simmons, our executive vice president and chief commercial officer, 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 one on our website at InvestorValero.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 now 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 in our filings of the SEC. Now I'll turn the call over to Joe for opening remarks.

Thanks, Homer, and good morning, everyone. The COVID-19 pandemic has had an extraordinary impact on families, communities, and businesses across the globe. The energy business was among those confronted by unprecedented demand contraction, which began in the first quarter of 2020 as COVID-19 cases accelerated globally, resulting in an increase in crude oil and product inventories to record high levels. In response, we lowered our refinery utilization rates to more closely match product supply with demand. And as the pandemic-related restrictions were eased in some regions and mobility increased, product demand increased substantially, steadily reducing crude oil and product inventories. We ended the year with U.S. crude oil and product inventories within the normal five-year inventory bands. Throughout the pandemic, our team has been thorough and decisive in its operational and financial response, while maintaining focus on safety and reliability. In fact, we set several operational records in 2020, recording our best-ever year on employee safety performance, achieving the milestone two years in a row, and the best-ever year for process safety and environmental performance. In applying our refining expertise to optimize our renewable diesel segment, we set records for sales volumes and margin in 2020. We also made significant progress on our international strategy to expand our product supply chain into higher growth markets with the start of waterborne product shipments to our new Veracruz terminal, making Galera one of the largest fuel importers in New Mexico. On the financial side, we improved our liquidity by raising $4 billion of debt at attractive rates and we reduced our capital budget by over $500 million, while keeping our high return projects moving forward. And in spite of all the challenges this past year, we continue to honor our commitment to our shareholders by maintaining the dividend and ending the year with $3.3 billion of cash and $9.2 billion of total available liquidity. Despite the pandemic-imposed challenges and several hurricanes, We completed and continue to make progress on several strategic growth projects, including the St. Charles Alkalation Unit, which was brought online in the fourth quarter, on schedule and under budget. The project further increases the competitiveness of the St. Charles Refinery and is a testament to the talent and efforts of the refining organization. The Pembroke Cogen project and the Diamond Pipeline expansion are on track to be completed in the third and fourth quarters of 2021, and the Port Arthur Coker project is expected to be completed in 2023. The Diamond Green Diesel Expansion Project at St. Charles, which we refer to as DGD2, is designed to increase renewable diesel production capacity by 400 million gallons per year, and is expected to be completed in the fourth quarter of 2021. As a result of continuous process improvement and optimization, the capacity of the existing St. Charles Renewable Diesel Plant, DGD-1, has increased from 275 million gallons per year to 290 million gallons per year. With the completion of DGD-2, the total capacity at St. Charles is expected to be 690 million gallons per year. In 2020, we laid out our comprehensive roadmap to reduce greenhouse gas emissions by 63% by 2025. As part of this goal, we continue to reinvest capital into higher growth, higher return, low-carbon renewable fuels projects. To that end, we are pleased to announce that the Board has approved DGD3, a new 470 million gallons per year renewable diesel plant at our Port Arthur, Texas refinery. We're moving forward with the project immediately, and we now expect the new plant to be operational in the second half of 2023. Once DGD-3 is completed, DGD's combined annual capacity is expected to be 1.2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha. Looking ahead, we expect to see continued improvement in refining margins as COVID-19 vaccines are widely distributed in the coming months, allowing people and businesses to get back to normalcy. We're already seeing encouraging signs with strong diesel demand and with U.S. total light product inventories now in the normal range. In addition, many uncompetitive refineries around the world announced shutdowns or conversions in 2020. and we expect further capacity rationalizations to be announced this year. In closing, we remain steadfast in the execution of our strategy, pursuing excellence in operations, investing for earnings growth with lower volatility, and honoring our commitment to stockholder returns. We expect low-carbon fuel policies to continue to expand globally and drive demand for renewable fuels, and with that view, We're leveraging our global liquid fuels platform and expertise that comes with being the largest renewable diesel producer in North America to steadily expand our competitive advantage in economic low-carbon projects for a higher return on invested capital. So with that, Homer, I'll hand the call back to you.

Thanks, Joe. For the fourth quarter of 2020, we incurred a net loss attributable to Valero stockholders of $359 million, or 88 cents per share, compared to net income of $1.1 billion, or $2.58 per share, for the fourth quarter of 2019. The fourth quarter 2020 adjusted net loss attributable to Valero stockholders was $429 million, or $1.06 per share, compared to adjusted net income of $873 million or $2.13 per share for the fourth quarter of 2019. For 2020, the net loss attributable to Valero stockholders was $1.4 billion or $3.50 per share, compared to net income of $2.4 billion or $5.84 per share in 2019. The 2020 adjusted net loss attributable to Valero stockholders was $1.3 billion, or $3.12 per share, compared to adjusted net income of $2.4 billion, or $5.70 per share, in 2019. Fourth quarter and full year 2019 and 2020 adjusted results exclude items reflected in the financial tables that accompany the earnings released. For reconciliations of actual to adjusted amounts, please refer to those financial tables. The refining segment reported an operating loss of $377 million in the fourth quarter of 2020, compared to operating income of $1.4 billion in the fourth quarter of 2019. Excluding the LIFO liquidation adjustment and other operating expenses, the fourth quarter 2020 adjusted operating loss for the refining segment was $476 million. Fourth quarter 2020 results were impacted by narrow crude oil differentials, lower product demand, and lower prices as a result of the COVID-19 pandemic. Refining throughput volumes averaged 2.6 million barrels per day, which was lower than the fourth quarter of 2019 due to lower product demand. Throughput capacity utilization was 81% in the fourth quarter of 2020. Refining cash operating expenses of $4.40 per barrel were in line with guidance, but $0.47 per barrel higher than the fourth quarter of 2019 primarily due to the effect of lower throughput rates. Operating income for the renewable diesel segment was $127 million for the fourth quarter of 2020 compared to $541 million in the fourth quarter of 2019. After adjusting for the retroactive blender's tax credit in 2019, adjusted renewable diesel operating income was $187 million in the fourth quarter of 2019. Renewable diesel sales volumes averaged 618,000 gallons per day in the fourth quarter of 2020, a decrease of 226,000 gallons per day versus the fourth quarter of 2019 due to the effect of planned maintenance. The segment set annual records for sales volumes of 787,000 gallons per day and margin of $2.66 per gallon. Operating income for the ethanol segment was 15 million in the fourth quarter of 2020 compared to 36 million in the fourth quarter of 2019. Ethanol production volumes averaged 4.1 million gallons per day in the fourth quarter of 2020, which was 197,000 gallons per day, lower than the fourth quarter of 2019. The decrease in operating income from the fourth quarter of 2019 was primarily due to lower margins, resulting from higher corn prices and lower ethanol prices. For the fourth quarter of 2020, G&A expenses were $224 million and net interest expense was $153 million. G&A expenses in 2020 of $756 million were $112 million lower than 2019. Depreciation and amortization expense was $577 million, and income tax benefit was $289 million in the fourth quarter of 2020. The annual effective tax rate was 45% for 2020, which was primarily the result of the carryback of our U.S. federal tax net operating loss to 2015 when the statutory tax rate was 35%. and we expect to receive a cash tax refund of approximately $1 billion in the second quarter of this year. Net cash provided by operating activities was $96 million in the fourth quarter of 2020. Excluding the unfavorable impact from the changes in working capital of $113 million and our joint venture partners' 50% share of Diamond Green Diesel's net cash provided by operating activities, excluding changes in DGD's working capital, adjusted net cash provided by operating activities was $140 million. And adjusted net cash provided by operating activities was $955 million for the full year. With regard to investing activities, we made $622 million of total capital investments in the fourth quarter of 2020, of which $214 million was for sustaining the business including costs for turnarounds, catalysts, and regulatory compliance, and $408 million was for growing the business. Excluding capital investments attributable to our partner's 50% share of Diamond Green Diesel and those related to other variable interest entities, capital investments attributable to Valero were $458 million in the fourth quarter of 2020 and $2 billion for the full year. Moving to financing activities, we returned $400 million to our stockholders in the fourth quarter of 2020 through our dividend, and $1.8 billion through dividends and buybacks in the year, resulting in a total 2020 payout ratio of 184% of adjusted net cash provided by operating activities. And our board of directors just approved a regular quarterly dividend of 98 cents per share, demonstrating our sound financial position and commitment to return cash to our investors. With regard to our balance sheet at quarter end, total debt and finance lease obligations were $14.7 billion, and cash and cash equivalents were $3.3 billion. The debt-to-capitalization ratio net of cash and cash equivalents was 37%. And at the end of December, we had $5.9 billion of available liquidity, excluding cash. Turning to guidance, we expect capital investments attributable to Valero for 2021 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts, and joint venture investments. About 60% of our capital investments is allocated to sustaining the business and 40% to growth. Almost half of our growth capex in 2021 is allocated to expanding our renewable diesel business. For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges. Gulf Coast at 1.49 to 1.54 million barrels per day. Mid-continent at 410 to 430,000 barrels per day. West Coast at 170,000 to 190,000 barrels per day, and North Atlantic at 245,000 to 265,000 barrels per day. We expect refining cash operating expenses in the first quarter to be approximately $4.75 per barrel, which is impacted by lower throughput volumes due to planned maintenance activities. With respect to the renewable diesel segment, we expect sales volumes to be 790,000 gallons per day in 2021. Operating expenses in 2021 should be 50 cents per gallon, which includes 15 cents per gallon for non-cash costs, such as depreciation and amortization. Our ethanol segment is expected to produce 3.7 million gallons per day in the first quarter. Operating expenses should average $0.39 per gallon, which includes $0.06 per gallon for non-cash costs, such as depreciation and amortization. For the first quarter, net interest expense should be about $155 million, and total depreciation and amortization expense should be approximately $575 million. For 2021, we expect G&A expenses excluding corporate depreciation to be approximately $850 million. And the annual effective tax rate should approximate the U.S. statutory rate. That concludes our opening remarks. Before we open the call to questions, we again respectfully request that callers adhere to our protocol of limiting each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits, and please respect this request to ensure other callers have time to ask their questions.

Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation term will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from the line of Doug Terrison with Evercore ISI. Please proceed with your question.

Good morning, everybody.

Morning, Joe.

Regarding refining fundamentals, Joe, you mentioned a minute ago that inventories are starting to shape up a little bit in close to five-year levels. I think on an absolute basis, but they look like they're going to the same range adjusted for demand for both gasoline and distillate, which is a good thing. Margins are near year-ago levels in most U.S. markets, and we're starting to see feedstock differentials widen, too. So my question is, have you been surprised by the pace of the recovery that we've seen? Do you think there's reason to believe that it's sustainable? And either way, what's your overall view for the recovery in the fine products market for 2021? What's your outlook at this point?

Doug, that's a good question. And we'll let Gary and Lane speak to it in some detail. But, I mean, we've been pleased with the pace of the recovery so far. And frankly, I think you're going to see it accelerate as the vaccine rolls out more aggressively. That's kind of an obvious statement, but I think sometimes we do take it for granted. If we can really get the government functioning appropriately on the distribution, I think we're going to be in much better shape, perhaps quicker than we all realize. And, you know, we've got a member of our board of directors who thinks that, There's such pent-up demand, certainly in the East Coast where he is and other parts of the country, that when we do get the vaccine rolled out and we get a herd immunity in place, you're going to see this look a little bit like the Roaring Twenties. And, you know, that's his point of view, and I would tend to agree with that. So with that, I'll let Gary and Lane provide a little more color specifically regarding the inventories and demands.

This is Gary. Certainly, you know, getting total light product inventory, we built a significant surplus, especially early on in the pandemic. So seeing that surplus essentially gone and getting back into the five-year average range is very encouraging. As you know, as demand starts to pick up, it'll allow margins to recover much quicker. I think, you know, another encouraging sign is the fact, despite the fact that we've had a surge in COVID cases, gasoline demand for the DOEs is still you know, a little bit above 90% year over year where it was last year at this time. Our wholesale volumes are showing to be pretty close to that. And so the combination of reasonable gasoline demand and relatively low gasoline inventories has caused the prompt market to be a little stronger. I think one of the key things there is the stronger prompt market has really flattened the curve on gasoline. And so it's taking away a lot of that incentive to store summer grade gasoline and And that certainly sets up for a stronger driving season in terms of gasoline markets. As Joe said, I think, you know, we view that we'll see gradual recovery. Second quarter, you'll start to see things pick up. And then we expect things to be fairly normal by the third quarter, with the exception that we do see that there could be a lot of pent-up demand. And people that are spending disposable income largely buying things that they're ordering are going to spend that disposable income getting out and on the on experiences, you know, family vacations, which could cause a surge in gasoline demand. On the diesel side, as you kind of mentioned, diesel demand has really hung in there pretty strong. So, you know, DOEs are showing over 98% year-over-year diesel demand. Actually, the seven-day average in our system, we're at 111% year-over-year, so actually showing diesel demand growth in our system. I think some of that heating oil demand has been strong. A little bit colder winter this year. Starting to see some drilling activity pick up, which, of course, helps diesel demand. And then, of course, with people spending disposable income ordering things, you know, freight, on-road freight, trucking, and rail has been strong as well. So we move throughout the year. You know, we expect to see some incremental diesel demand coming from ag as you start to plant crops. And then moving throughout the year, we also see that, you know, as jet demand begins to recover significantly, it'll lower diesel yields and help bring supply and demand into balance, which will set diesel up nicely longer term.

Okay, good point. That kind of covers it for me. It sounds fairly encouraging.

Yeah, Doug, I mean, look, we are encouraged. I mean, I think we're through the worst of this, and we're looking forward to getting back to more normal lifestyles here and certainly a more normal business climate. But, you know, let me just say one thing before you get off. You know, I understand that you're going to be repositioning this spring. And, you know, we've known each other for a very long time. And I'd be remiss if I just didn't say that, you know, without question, your wisdom and insight in this sector is unsurpassed. But, you know, more importantly than that, Doug, you know, you're a very good man. And we're all better people for having had the opportunity to get to know you and to work with you over the years. And I, for one, am going to miss you greatly. So, you know, I know we're going to have a chance to visit here sometime in March. But, look, I just want to, on behalf of the whole Valero team, I think we just want to wish you the best and tell you thanks for everything you've done for the industry over the years.

Well, Joe, thank you, too. I mean, you guys have been capital management leaders, especially in this industry. Your stock reflects it over time, and you all are good guys, too. You know, you've been a really easy management team for me to support over the decades, and I just want to thank you for your leadership and really enjoyed our time together. And so you guys pat yourselves on the back because you deserve the performance that has been demonstrated in the stock market for sure. Thanks again, Jeff.

Yeah, bless you, buddy.

Thank you. Our next question is coming from the line of Phil Gresh with J.P. Morgan. Please proceed with your question.

Hey, good morning. Tough follow-up.

Well, hey, Phil, you're still a young guy. You'll get yours right there. But it probably won't be from me.

I guess I'll follow up on one part of Doug's question there, just on the differential side. You talked a lot about the product margin element. Differential is obviously still pretty tight here, especially like on light heavy. So, How do you guys see that playing out for the rest of the year?

Yeah, Phil, this is Gary. I think, you know, we have seen very narrow crude quality differentials. You know, in order to get those to widen out, we need more OPEC barrels on the market. If you look at most consulting forecasts, They're showing global oil demand growing to the point where you'll need at least 3 million barrels a day of additional OPEC production online by the end of the year. And so I think our view is probably the back half of the year is where you'll see quality differentials begin to widen out. I think that's further supported by if you look at the high sulfur fuel oil forward curve, you know, where high sulfur fuel have been trading around 90% of rent. You look to the back half of the year, and it gets more to 80% of Brent, you know, which is more indicative that we'll see those quality differentials widen out, again, kind of second half of the year. Got it.

Okay. And then the second question, just trying to think through the capital spending cadence over these next few years with Phase 3 of Diamond Green Diesel. Obviously, you talked about a $2 billion gap. spending level for 2021 being able to hold, you know, despite still some spending for Phase 2. So as you look out to 22 and 23, do you think you can do the Phase 3 project within the $2 billion or so capital budget as well? I'm just trying to gauge the free cash flow potential as we see the refining margins recover and DTD even come on.

Hey, Phil, this is Lane. So, you know, we did about $2 billion last year, actually a little bit less than that, to maintain our pace on spending on Diamond II and developing Diamond III. And we believe that we can continue to do that if, you know, for whatever reason, you know, the world's, you know, the cash is, you know, the cash is a little bit lower. Obviously, we want to get back to some other things at some point, but we can certainly maintain our spend on renewable diesel at our capital budget of the $2 billion level.

Yeah, and, you know, Phil, just from a broader strategic perspective, this $2 billion to $2 billion number is our target going forward, okay? I don't think you should expect that we're going to go out and spend $3 billion in a year. So we've said that, you know, timing of capital spend isn't necessarily calendar year spending, and so some years it might be less than $2 billion as it was this year, and some years it's going to be a little bit more than $2 billion. But, you know, the target range for us remains in that 2 to 2.5 billion range, and I think it'll stay in this 2 billion range through 2021. Got it. Okay. Thanks so much.

Thank you. Our next question comes from the line of Prashant Rao with Citi. Please proceed with your question.

Hi. Thanks for taking the question. Good morning, all. I just wanted to follow up on the RD market and its evolution. particularly outside of BTC, outside of B4 RENs, which I expect other people are going to ask about, but I'm curious about the LCSS market in California and some of the other provincial and regional opportunities that we've talked about. I wanted to get your thoughts specifically in California. It seems like there's a lot of competing sources of capital. This pandemic has progressed capital towards emerging energy. While they're small now, there's a possibility for a little bit more electrification, more renewable gas, other competing sources for that credit or for diesel substitutes in California. I was just wondering, given the supply coming online with Port Arthur and your longer-term plants, how do you see that playing out in California? Is it fair to say that by the time DGD3 is up online, there might be a more meaningful opportunity outside of the California LCSS and How do you see the pace of that over the next few years? The other part of that also being, do you expect that California could increase the emissions reduction target, which would just then move the goalposts and create a greater opportunity? So there's a lot of pieces moving there, but the market's changed quite a bit since we were talking about this pre-COVID. So I just wanted to get an update on how you see those moving parts playing out.

Sure. Prashant, this is Martin. On California, obviously, the market's been pretty stable as far as the carbon price the last few years. And then the, you know, renewable diesel is the largest carbon generator. If outside California, I'll answer that part first. You know, what we expect to happen in the next few years is the clean fuel standard to be in place in Canada by the end of 2022. That'll bring incremental demand in 2023. We've also got legislation in New York State and Washington State for LCFS programs. We think those states will implement an LCFS over the next few years. The timing of that is hard or impossible to predict, but, you know, we expect that's going to happen. You know, today we sell to California, but we also sell to Canada and Europe. So, I mean, you're right. There's some, you know, electricity penetration. There's renewable natural gas. But still, renewable diesel is the largest carbon credit generator. We don't expect that to change in the foreseeable future. As far as the trucking, that's going to continue. Renewable diesel obviously is huge in that. California, if you look at their projections, they're heading for 2030. Their internal projections are like a 40% blend rate for renewable diesel. We honestly think it might even be higher than that. So, You know, there's really, there's no blend wall. There's nothing to stop this. We're optimistic about demand in California, and we're optimistic about demand in other parts of the globe.

Thanks, Martin. And just to follow up on that, you know, recently we've been hearing in the headlines, there's been some in the financial community who talk about, I've been saying, advocating for a need for a higher carbon price in order to incentivize, you know, the move to emissions reduction. And obviously California's had a higher per ton price than, you know, other parts of the developed world. But do you think that – is it too early to say that there's maybe – that gives the $200 per ton carbon price in California a little bit more legs to be sustainable if the rest of the world is going to come up? Or do you see sort of a meeting in the middle? How do you see that evolving given, you know, where the narrative and where the discussion is right now?

Yeah, I'd say, well, first thing, you have to be a little careful looking at the absolute price because it depends on whether it's a low carbon fuel standard or a carbon tax. You get to a lot of different carbon prices in those different regimes. But I think what California, you know, they've obviously signaled they're okay with $200 and they're okay with that escalated by the CPI each year. If things happen where that price started going down, I would expect California to to move the goalposts and make it harder. You know, we're looking at a carbon reduction of 20% by 2030 now, but if you start having a carbon price go down a lot of credits, I think they're going to move the goalposts because that's the objective, right?

Yep. Makes sense. Thank you. Appreciate the time.

Thank you. Our next question comes from the line of Manaz Gupta with Credit Suisse. Please proceed with your question.

Hey guys, in the energy industry, what you generally see is projects getting delayed by six months or 12 months. You're doing something unique. A DGD is starting up six months before expectations. Just trying to understand from the perspective of engineering, features of procurement, how are you able to achieve a startup before time in this case?

Hey, my name is Elaine. So, we obviously are very, very focused on this project, and we did accelerate this. If you were to look at our spend, we spent more on it than we actually budgeted to try to keep, to try to, you know, as we are executing that project, to find every step we can to optimize and accelerate its schedule, and not do so by accelerating the cost of the project either. So, as you've mentioned, we are, you know, we have worked it really, really hard because it is such a good project, and it is a a big cash flow generator for us. So it's really, you know, we have expertise in terms of project execution. We understand, you know, and Diamond 3 is essentially a duplicate of Diamond 2, and with a few revisions here and there. But it's largely – but we've been able to accelerate that project as well. And we just, you know, because of our focus, we put our best people on making sure that project moves along as fast as it can.

A quick follow-up here is – Obviously, rent prices have moved up. I'm trying to understand how does startup of BJT2 and then following up BJT3 actually cut your RVO obligations, which would give us some idea what the RVO obligation is right now, and then how much lower does it go once both the BJT phases are online?

All right, so we're looking, Manav, to see if Martin or Gary.

I think what you have to think about there, Manav, is You know, you've got the obligation, but you've got a lot of factors right now. I mean, prices right now are probably more influenced by the SRE and the Supreme Court and what the EPA is going to do. And I don't know that it's really so much about the fundamentals as uncertainty at this point. It doesn't change our renewable oil yet.

Yeah, that's right. Right. Yeah, so it doesn't change our renewable volume obligation at all. And I agree with Martin, you know, the uncertainty around SREs and just what will happen under the Biden administration is really what's causing the rent prices to surge.

Thank you for taking my questions. You bet.

Thank you. Our next question comes from Teresa Chen with Barclays. Please proceed with your question.

Morning. I wanted to follow up on the renewable diesel side. So in terms of feedstocks, in a quarter where feedstock costs seem to have risen sharply and with planned maintenance at the facility, your capture was still very high. Can you talk about how you were able to achieve that? Is that sustainable? If there were any one-time factors that might have benefited the quarter? And going forward, as we think over the long term about feedstock costs, Just given the onslaught of projects that are under development, but to Manav's point now, even if not all of them will meet the timeframe and capacity as originally planned, the absolute supply of renewable diesel will likely increase and thus increase in competition for feedstocks. And as such, do you see a shift in the type of feedstocks versus what you're currently using?

Okay. Sure. Soybean oil was up 17% in fourth quarter versus third quarter. But as you noted, our EBITDA for gallon margins were flat quarter on quarter. If you look back in the past three years on renewable diesel, we've experienced wide swings in feedstock costs, RINs prices, D4 RINs, ULSD prices, obviously a huge swing there. However, our annual margins have been very consistent, ranging from 219 a gallon In 2018, it was a low to a high of 237 a gallon in 2020. So you can see that the earnings power is there and consistent kind of regardless, and that's because the market works to compensate. You know, fat prices go up, the RIN goes up. Anyway, so it all kind of works in concert there. So long-term, in the next foreseeable future, let's say, we're not concerned with sourcing feedstocks. We believe our margin history is a good indicator of what to expect over time. You know, any one quarter can be plus or minus, but over time, we feel good about this margin indicator. Then if you look to, so what happened with the soybean price? Well, soybean price is driven by global supply and demand of veg oils. Palm oil prices were first to move up because production growth slowed in Indonesia and Malaysia. due to a drought and COVID-19, a lack of labor to harvest the palm. Now you've got soybean production is pretty tight this year. There's a worry about a lower crop down in Brazil. Soybean oil production is going to be impacted. You've got kind of the whole ag commodity index moving up, so that's moving up soybean oil too. And then finally, vegetable pricing was low as compared to ULSD in 2018 and 2019. We expected some upward movement relative to ULSD. In response to this, more vegetable oil will be produced in response to higher prices. We don't see a long-term sustainable shift in vegetable oil pricing relative to low-solar diesel.

Thank you. On the broader topic of energy transition, since the Biden administration took office and made a series of very aggressive climate-related policy announcements. Can you talk about how this plays out, how you think this plays out for the industry in general from the perspective of cafe standards, emissions, EV penetration, renewable fuels, et cetera, and particularly what you think the next step will be?

Yeah, sure. And we'll tag-team this. I mean, Rich Walsh can cover kind of the policy side of this. But, I mean, you know, we have seen – And we've seen it for some time now. The headlines are all focused on EVs, right? And everyone takes that into consideration when they're looking at the long-term outlook for oil demand going forward. And, you know, we just need to continue to look at the facts and keep it in perspective. EV sales last year made up slightly less than 2% of domestic car sales and just around 4% globally. And, you know, I think if you look forward to developing countries, their focus is a whole lot less on climate change and EVs than it is in feeding their people and providing safe and affordable housing for them. So there's a lot going on politically, but the reality is that, you know, cleaner fuels are going to be part of the future. EVs will be part of the future. But it's far from – the internal combustion engine is far from being extinct. And so – That's one thing that we have to all keep in mind, I think, as we go forward. We're still selling a tremendous amount of internal combustion engines that are more efficient, and our industry has done a fine job of working projects and adjusting operations to reduce the carbon intensity of the products that we're producing. And, frankly, Valero, as you know, is doing a lot of that with the renewable diesel projects that we've undertaken. We're also doing it with carbon sequestration around our ethanol business. We're looking at hydrogen and so on. So anyway, there's a lot going on here, and I think we'll continue to see overall the carbon intensity of traditional fuels, liquid fuels, go down. And honestly, you can tell from our IR deck that already we're very competitive from a renewable diesel perspective with an EV, and I think you'll see that continue to increase. I'll stop there. Rich, on the policy side?

Yeah, I mean, it goes right. I mean, of course, you see a lot of headlines on it. I mean, look, yesterday they came out with an announcement on moving the federal fleet to EVs. But we point out that's very similar to the order that the executive order Obama issued in 2015, mandating that half the fleet become EVs and You know, we didn't see a lot of movement in the federal fleet to EVs under that order. And, you know, it's a lot more difficult than you think to do that. The other thing that I would really like to emphasize is, you know, our renewable diesel can drop in today and, you know, on a lifecycle basis outperforms an equivalent diesel electric truck capacity. So, you know, we can help the administration, you know, address this climate issue, you know, straight away. His order did call for, you know, clean and zero-emission vehicles, and ours are certainly clean. The other thing I'd point out, even in that order, you have to read the fine print. You know, it requires that it be made in America and meet the federal procurement standards. And, you know, I'm not sure there's a lot of electric vehicles that can meet those requirements but are – Renewable diesel is 100% American-made, and it's ready to go now. So we actually think that, you know, a lot of this will be, in the end, the economics are overwhelming for our products, and, you know, and they're ready to go now. So we think we can work with the administration. We think there is going to be demand and policy drivers for, you know, lower-carbon fuels, but, you know, we think that's a good thing for us.

Thank you.

Thank you. Our next question comes from the line of Doug Leggett with Bank of America. Please proceed with your question.

Thanks. Good morning, everybody. And, Joe, Happy New Year. I think it's the first time you've spoken this year. Yes, it is, Doug.

Thank you.

Happy New Year. Well, when I heard Doug in repositioning earlier, I was looking over my shoulder thinking someone had told me something, but you may be a little nervous.

But, anyway.

Thank you, Doug. Well, we passed our congrats along to Doug. He's left me as the oldest analyst in the sector, so I'm not sure I'm grateful for that, but so will be. Anyway, so, guys, two questions, please. I actually just want to start with a quick housekeeping question. Homer mentioned the billion-dollar cash tax refund. Not immaterial, obviously. I just wanted to double-check. Is that a one-off or are there any other retrospective cash tax losses you can bring forward?

Now, this is Mark Smeltikoff. That is a one-off item. Obviously, it relates to our 2020 tax NOL that's being carried back to 2015, and that's the only significant item.

Okay. I just wanted to double-check. Thank you. My follow-up, Joe, is probably a little bit more, I guess it's a more high level. You've talked a lot about EVs. I love that slide in your writer's deck about, you know, the myth. I'm just curious, though, carbon sequestration on your ethanol business, Where does that sit on the potential carbon capture on the refining business? Is that something you're pursuing, will pursue? Is it part of the discussion? I'm just curious as to how you address what your next steps are in what's already been some fairly significant moves to reduce the carbon footprint of your fuels. What should we expect from the level next in that regard?

Doug, this is Wayne. I'll take a shot at that. The reason we choose some of these projects like the ethanol plants, it has to do with the gas that's coming off that plant is largely carbon dioxide. So, you know, we aren't having to further treat it before we find a way to sequester it. So, you know, we're trying to understand that, you know, how that works and try to understand the technology and certainly all the policy and all the other sort of the regulatory regime that's going to be around carbon sequestration. So, it's a good place for us to really start and develop projects. The other way that we can do this is with our blue and green hydrogen. We're gating projects and that will also affect the carbon intensity of our transportation fuels, some of which we've done, smaller ones, but we are certainly gating some larger ones that will make our transportation fuels, depending on what market we can target them in, will obviously help with the overall competitiveness from a carbon intensity perspective. So those are all Those are the things that we're looking at. But I think, you know, again, we're trying to hit, from a carbon sequestration perspective, we're trying to hit strains that we see that are lower in carbon dioxide on that gas and maybe just something that's been combusted that has a lot of other stuff in it, like basically nitrogen and some other things. All right, guys.

Well, that's my two, so I'll be respectful to everyone else. I'll see you all in March. Thanks again.

Thanks, Doug.

Thank you. Our next question comes from Roger Reed with Wells Fargo. Please proceed with your question.

Yeah, thanks. Good morning.

Hi, Roger.

I guess two questions. One, a follow-up on your introductory comments, Joe, and the second one is a follow-up to some of the questions Teresa was asking about renewable diesel feedstock. So the first one on the global capacity kind of expectation of future shutdowns is curious, you know, how you see that unfolding, maybe where you see that unfolding, any particular trigger points. And then on the renewable diesel feedstock, specific to your phase two and your phase three plans here that'll roll out in 21 and 23 or end at 21 and then at 23. how comfortable you are in terms of your line of sight to the necessary feedstocks, you know, in terms of the geographic Gulf Coast focus you have.

Okay. So which one of you guys wants to talk about the first one, the closures?

I guess that'll be me. Hey, Rogers Lane. You know, we've talked about – hey, so we've talked about this a little bit on some of the prior earnings calls. First, we've seen about 3 million barrels a day of refining closures. I think that, you know, we've been – I don't know, and I want to say pleasantly surprised, but certainly surprised at the acceleration of some of these closures. Interestingly, a lot of it's occurred in the United States. I think that's a little bit of a surprise to us. But we've kind of done, I would say, our share, or at least, you know, it doesn't mean that you won't have further closures potentially in the Atlantic Basin on this side of the pond or maybe on the West Coast. But certainly, for now, the United States has done, I think, about 800,000 or 900,000 barrels a day of announced closures. I think if you look at trade flow, though, where the closures, you could look for the closures going forward is primarily Europe, particularly southern Europe. They don't really have access to an advantage crude. They're more aggressive on, with respect to their transition away from transportation, fossil fuels. So I think that's where you'll see more and more, that'll be where you'll see more closures going forward.

Mark, you want to take the second half?

Sure, on the team stops, Roger. Right now, Well, we're looking at line of sight to 2023. We feel very good about procuring these waste feedstocks that we need. If you look at it now in the United States, as far as used cooking oil production and animal cattle production, they're large. The U.S. is the biggest around that. And that comes with GDP per capita and plus established rendering operations and everything else. So we feel good about that into the future. If you look, you know, the U.S. is the place to be. The installed base of renewable diesel is still pretty small, especially the guys that are running the waste feed stock, the free treatment unit. And there's plenty of waste feed stock to still procure. As you look farther down the road, you get past 2025, out to 2030, you know, we expect to see quite a bit of growth in used cooking oil production and the animal rendering. And a lot of that's going to come from Asia at that point because that's where the population growth is. But historically, these white state stocks' growth has been pretty significant, and we expect that to continue. So minus that, after PGD2 and 3, we don't see a problem.

Okay, great. Thank you.

Hey, Roger, I wanted to compliment you on your recent piece of work on the EV expansion and oil demand. That was well done, very thoughtful and well done. And I would encourage everybody, if you haven't seen it, to take a look at it.

I appreciate that. And sometimes when people have referred to me as a piece of work, it wasn't a compliment.

Thank you.

Our next question is coming from the line of Paul Chang with Scotiabank. Please proceed with your question.

Hey, guys. Good morning. Morning, Paul. Good morning. I have two questions. Maybe this is for Joe. I mean, Ling was earlier talking about Europe maybe more facility is going to get shut. So how we should look at the government policy and everything and put it into plan books and that how we're going to position on the longer term. So that's the first question. And second question that at some point, the pandemic will over and you will generate free cash again. And at that point, when you're looking at your financial strategy, you have had several billion dollar debt through this pandemic. I assume that you're going to first trying to pay it down. But after the pandemic, if we're looking forward, will the company take a more conservative approach and even drive down the debt ratio much below the pandemic level? Thank you.

That's good, Paul. Okay, I'll let Jason take the second part, and you directed the first one to me. Relative to Pembroke, and Lane, you chime in on this too, and Rich Walsh, but when you look at Pembroke, it supplies domestic demands within the UK, and it also supplies Ireland and other countries. So we do export out of Pembroke. We bring fuels to Canada when we need them out of Pembroke and so on. And so, you know, it's one thing for politicians to come out and lay down a hard line and say that they're going to do something. But, you know, there's human beings in that country as there are in our country who have purchased internal combustion engine vehicles and they have an opportunity to weigh in on these issues and these decisions going forward. So You know, Paul, I think we all get very concerned when we hear these things, but if you just go back historically and look at how things play out, they don't always turn out exactly the way that we fear, okay? It's usually never as bad as we think and never as good as we think, and I think that's certainly the case here. But we have a clear focus on Pembroke, and Lane and his team are working on different options and different projects that are going to continue to make that a more efficient operation. So, Rich, anything you guys would add to that?

No, I mean, I think you said it really well. If you look at, like, if you just take a look at, say, California, you saw in their early announcements they were very aspirational about how they were going to, you know, drive down carbon, and we all see directionally, you know, efforts to move in this way, and you're going to see increased electrification in these countries, but As you get closer to these deadlines, what you tend to see is that the practicalities of this start to have an effect, and then they tend to move the target and reset the goals. And so, you know, right now there's a big drive on this, and the costs and the consequences of it will start to play out, and it will influence the policy going forward. I think that's the best way I can describe it.

Hey, Paul, and obviously this is laying outside one thing. When we were talking about the key to that trade flow and what we've always thought of more southern Europe that's going to be more exposed to closures just because of where they're located in Europe and where the trade flow in Peru is. Okay, Jason, do you want to take this?

Yeah, sure. I mean, you're correct. One of our more immediate goals will be paying down some of the extra debt we've taken on during the pandemic. And as far as like our – base assumption on debt to cap is 20%, 30% debt. But we are in a very dynamic time, right? We have the energy transition going. We're growing our renewable diesel business. We're aggressively looking at other technologies. So exactly how we end up participating in it and the capital needs of these new businesses, they dictate a different structure. You know, we're open to looking at things, and we recognize we're in a very dynamic time, which is exciting. So we're not wed to that. We'll keep our minds open and see as things evolve.

Thank you.

Take care, Paul.

Thank you. Our next question comes from the line of Ryan Todd with Simmons Energy. Please proceed with your question.

Thanks. Maybe one quick follow-up on the renewable side. Sustainable aviation fuel is clearly going to play, I think, a large role in in this mix going forward over the longer term. It's very small at this point. Can you talk a little bit about what you see as kind of the necessary steps to ramp up the sustainable aviation fuel market and how your renewable diesel facilities are positioned to be able to produce it?

Sure. This is Martin. I think the necessary step to ramp it up is really some, you're going to have to get some mandates to require the use of it across the globe. Right now, it's out there. Is it going to happen? Yeah, we feel pretty confident it's coming, but it's a big question of when. The modifications required at a plant that's producing renewable diesel to produce sustainable aviation fuel, they're significant, but they aren't huge. So, you know, we could pivot there when we need to pivot there. We'll obviously keep paying close attention to that and and doing engineering on options, but it's really about, you know, getting some mandated volume out there.

Okay. Thanks. And then maybe just one, I mean, you touched on parts of this earlier, but maybe just an overall follow-up on refining capture. I mean, you talked about how, you know, headline margins have, you know, have bounced here recently. It feels like capture has stayed kind of, stubbornly low on the refining side for the entire industry. Can you talk to me about how you see some of those trends playing out over the course of the year? It sounds like maybe you expect wind pricing to soften up some and differentials to widen out a little bit. Any thoughts on how and the timing of that recovery over the course of the year?

This is Gary. I think the key for us is we pride ourselves on our ability to optimize our refining system especially on the feedstock side of the business. And with the very narrow crude quality differentials, it's been challenging to do that. So you get to the second half of the year and more OPEC production on the market, you know, potential easing of Venezuelan sanctions, potential easing of Iranian sanctions. All those things, you know, will allow us to do more optimization on the feedstock side. And as we do that, our capture rates would go up.

Great. Thanks, guys.

Thanks, Ryan.

Thank you. Our next question comes from the line of Benny Wong with Morgan Stanley. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my question, and I hope you're all well. Hey, Joe. In your prepared remarks, you highlighted your international strategy moving forward with the Veracruz terminal now started. Just curious if you can, you know, give us an update on the demand and margins. Outlook you're seeing in LATAM generally and maybe in Mexico specifically. Wanted to get a sense in terms of where they are in demand recovery and if there's any notable differences across regions that you're able to see.

Yeah, so this is Gary. As Joe mentioned, we did put the Veracruz terminal online at the end of the year. We have both gasoline and diesel in tankage in Veracruz today. We're still doing some commissioning activity, so we expect to have the truck rack operational in the next couple of weeks. Overall, our volumes for the quarter in Mexico were a little over 40,000 barrels a day. You know, that's an increase of about year over year 145%. So good growth in the country. However, from the third quarter to the fourth quarter, you know, we were down about 10%. You know, the mobility data we see in Mexico is mobility was down about 20%. So, you know, still indicates we're continuing to gain market share. But we did see a big hit in mobility in Mexico, and we saw that reflected in our volumes. Moving forward, we anticipate that the inland terminals associated with the Veracruz Marine Terminal probably come online early second quarter, one in Pueblo and one in Mexico City. And that's really where you'll start to see our volumes ramp up as those inland terminals come on. Our goal is to get to about 80,000 barrels a day in that central system. The other thing that Syvericruz Terminal does is it takes a lot of costs out of our supply chain. So in addition to the ramp-up in volumes, we would also expect to see wider margins on the volume that we're selling in country.

Great. Thanks, guys. That was all my questions. Appreciate the time.

Thanks, Benny.

Thank you. Our next question is coming from the line of Sam Margolin with Wolf Research. Please proceed with your question.

Hello. Good morning, everyone. My question's on the operating side. Your first quarter throughputs are sort of flat quarter over quarter, at least in the Gulf Coast. And so, I was wondering, you know, as we kind of enter this recovery phase, and like you said, crack spreads are even starting to pick up a little bit here, you know, concurrently with demand, how do you balance, you know, what you see on the commercial side with your operating rates, you know, how much you want to ramp utilization versus what your assessment is of, you know, what the market can tolerate and various sort of commodity scenarios. I'm just curious how you work through that, you know, as you think about utilization.

Hey, Sam, this is Wayne. I'll take a shot and maybe Gary can follow up if anything. You know, we're, you know, We're certainly positioned in the Gulf Coast. If, you know, it's recovery, if, you know, if things recover quicker, then our rates could be higher. But we're trying to be, you know, we're obviously being very careful and trying to, you know, not get our supply line chain very extended. So we're, you know, we have strategies around that, trying to think about, you know, make sure that we don't have a lot of pricing exposure and trying to position our assets sort of in a conservative posture just to make sure that we're well positioned going into this. But we can certainly raise rates if we see things getting better.

Yeah, and I would just tack on to that. I think, you know, the key for us is looking at exports in hand, and especially if we're able to ramp up utilization and it results in higher exports and we have good margin to do that, we feel comfortable raising utilization.

Okay, thanks. And then one follow-up, if I might, just on an energy transition theme, you know, and specifically EVs, there's a certain amount of petroleum products that are in EVs, along with sort of other materials and processes that are associated with the energy transition. So, you know, the question is, you guys can make anything. They might not be things you're focused on today, but you weren't necessarily focused on renewable diesel until you figured out the right way to build and structure that business. So, you know, looking out over the horizon, you know, maybe not necessarily over the immediately investable horizon, how do you think about the potential to kind of remix your product streams into things like specialty chemicals or other materials that are sort of more thematic, you know, if not necessarily today over your investment hurdles? Thank you.

So Sam will take it. This is Lane. And we've looked quite a bit, you know, at diversifying into petrochemicals. We continue to look at it. We have a, you know, we have a, it's just, it hasn't met our gating threshold. So we would, you know, but we're going to continue to look at it because obviously it's something that we could do. It's not too far off our wheelhouse to do. But so far when we do a lot of these things, we haven't found them to be better than some of our other projects. For example, renewable diesel projects, right? I mean, In a world where we're going to put money, that's the day, that's where we put our money instead of sort of petrochemical path. But it doesn't mean that we are not, we're close to the idea, but certainly we like our investments in sort of this lower, this carbon transition in terms of trying to lower the carbon intensity of transportation fuels. Thanks so much. Thanks, Sam.

Thank you. Ladies and gentlemen, we have reached the end of our allotted time for the Q&A session. At this point, I would like to turn the floor back over to Mr. Brewer for any additional concluding comments.

Great. Thank you. I appreciate everyone joining us. And for those that didn't get a chance to ask a question, please feel free to contact me. I'm happy to chat with you. Please, everyone, stay safe and healthy and have a great day. Thank you.

Ladies and gentlemen, this does conclude today's public conference. Once again, we thank you for your participation, and you may disconnect your lines at this time.