The Valero Energy Corp. is hosting an earnings call for its second quarter of 2023. Homer Bhullar, Vice President of Investor Relations and Finance, welcomes all participants and introduces Lane Riggs, the CEO and President, as well as other members of the senior management team. Homer also directs everyone's attention to the forward-looking statement disclaimer in the press release and turns the call over to Lane for opening remarks.

Joe Gorder was thanked for his leadership in helping Valero build upon its 43-year history. The company reported solid financial results in the second quarter, with high throughput capacity utilization and strong product demand. The Port Arthur Coker project was started up in April and is operating well and at full capacity. The Renewable Diesel segment set records for operating income and sales volumes, and the Diamond Green Diesel sustainable aviation fuel project is progressing on schedule. It is expected to be completed in 2025 with a cost of $315 million, making it one of the largest manufacturers of Sustainable Aviation Fuel in the world.

Valero reported $1.9 billion in net income for the second quarter of 2023, compared to $4.7 billion for the same period in 2022. The Refining segment reported $2.4 billion in operating income for the second quarter of 2023, compared to $6.2 billion for the same period in 2022. Valero's throughput volumes for the second quarter of 2023 averaged 3 million barrels per day, with a capacity utilization of 94%. The company remains committed to its core strategy of operational excellence, capital discipline, and honoring its commitment to shareholder returns.

Refining cash operating expenses in the second quarter of 2023 were lower than guidance due to lower natural gas prices. Renewable Diesel segment operating income was $440 million and Ethanol segment operating income was $127 million. G&A expenses were $209 million, net interest expense was $148 million, depreciation and amortization expense was $669 million, and income tax expense was $595 million with an effective tax rate of 22%. Net cash provided by operating activities was $1.5 billion, and excluding the unfavorable change in working capital, adjusted net cash provided by operating activities was $2.5 billion.

Valero made $458 million of capital investments in the second quarter of 2023, of which $382 million was for sustaining the business and $76 million was for growth. They returned over $1.3 billion to their stockholders, paid a quarterly dividend of $1.02 per share, and ended the quarter with $9 billion of total debt, $2.3 billion of finance lease obligations, and $5.1 billion of cash and cash equivalents. They expect capital investments for 2023 to be approximately $2 billion, and for refining throughput volumes to fall within certain ranges.

Eric Fisher has confirmed that it is possible to upgrade the DGD 1 and 2 units to produce more sustainable aviation fuel in the future, similar to the project currently underway at Port Arthur. The exact details and commitment have yet to be discussed, but the company is looking into it.

The DOE data is understating gasoline demand, but Lane's data is showing record volumes in May and June of over 1 million barrels a day. Gasoline inventory is trending at the low end of the 5-year average range, while diesel inventory is up 6 million barrels but still below the 5-year average range. Heating oil demand was weaker in the second quarter, but the June data is showing an increase in the tonnage index. As the weather gets colder, there will be more agricultural and heating oil demand.

The Coker project was successfully brought online in April and is now running at full capacity. The teams did a great job with the accelerated schedule and the project is running as expected. Market conditions are taken into account when considering the profitability of the project.

Gary Simmons and Richard Walsh provide their analysis on the current environment of sour diffs, OPEC+ cutting, and the second round of the STR release. Gary Simmons believes there is reason for optimism as the third quarter progresses, with decreased demand for heavy sour crude, increased production from Western Canada, and seasonal factors helping the discounts. Richard Walsh provides an update on the Navigator BlackRock CCS project, saying that it is progressing and the permitting and right-of-way procurement process is underway.

Navigator is expecting regulatory approval for their project in the back half of 2024, but they have not given an update on a new start-up schedule. Eric Fisher states that airlines are still in the educational phase of understanding SAF and how to make it a fungible product. There is still a lot of details being worked through on how SAF will move into the market and how it will price.

Gary Simmons explains that the recent increase in distillate cracks is due to rebalancing of trade flows, namely increased demand from Europe filling the gap left by decreased demand from Latin America. This is due to China ramping up production and not having enough domestic demand, resulting in exports to Europe, and Russian sanctions that impacted Latin American demand.

Doug Leggate asked a clarification question about Russian exports and Gary Simmons responded that they had seen a decrease in exports, though it was unclear what was driving it. Greg Bram then added that capture rates were consistent with expectations from 1Q to 2Q, and that the new Coker in the Gulf Coast had a positive impact. However, the lower capture rates in the Mid-Con were due to turnaround activity.

The OPEC+ production cuts, maintenance in Canada, and the wildfire and platform fire in Mexico have had a significant impact on the global oil market, with flat prices trending higher due to the reduced supply of oil. In addition, the SBR went from being a seller to a buyer due to these outages.

Greg Bram and Gary Simmons from the company discussed the impact of the second quarter's quality differentials and how they are starting to reverse in the third quarter. Paul Sankey asked about any outages in the Refining sector due to the heat in Texas, to which Greg replied that their operations were good for the quarter and the weather had a minimal impact. Paul then asked about the 14% increase in wholesale sales, which Gary attributed to rationalization in the industry and renegotiated terminal agreements allowing them to be more competitive and capture additional market share. Lastly, Ryan Todd asked about the company's strong performance in renewable diesel in the quarter.

Eric Fisher discussed the sales in the quarter, which were stronger than expected due to timing of ships and running above design capacity. He also discussed the capture rate, which was improved due to lower prices of waste oils, a flat LCF market, and strong ULSD demand.

Ryan Todd asked Lane Riggs what types of projects might compete for growth capital going forward. Lane Riggs answered that they will continue to look to optimize and develop innovative projects that leverage their operations excellence and project execution capabilities. Greg Bram then added that the West Coast saw strong capture rates due to Benicia's high gasoline yield when gasoline prices were strong relative to distillate products.

Joe Laetsch asked about the drivers of higher OpEx in the third quarter versus the second quarter, and Lane Riggs responded that it was due to a slightly higher outlook for natural gas. Roger Read then asked about the potential missing demand from last winter due to unusually warm weather, and Gary Simmons said they had already modeled it, but he didn't have the exact number and offered to follow up with Homer. Greg Bram then discussed the shift between diesel and gasoline, saying that they had been mostly in max gasoline mode but were watching the movement between the two products and would make the shift when the swing cut drove them back the other way.

Greg Bram answered Paul Cheng's question about the attractiveness of running heavy oil and medium sour barrels. He explained that the advantage for heavy crudes had narrowed, but if the differentials widen again, they would have an incentive to continue processing them.

Greg Bram and Paul Cheng discuss the medium sour grade of crude oil and how it can be minimized. Bram explains that different parts of the country and the Gulf Coast region are more attractive to run medium grade crude. Bram then explains that they can run a combination of heavy and light crude to mirror what a medium grade looks like, but at a lower cost. Bram then shifts the conversation to Syncrude, which is a combination of Canadian crudes and waterborne crudes from the Gulf Coast. He explains that the higher cost of Syncrude in the second quarter was due to maintenance and wildfire-related issues.

Rich Walsh discussed the EPA decision to deny RFS favors for small refiners and how it does not affect their ethanol business. Eric Fisher then discussed the commercial impact, which was minimal. Lane Riggs then discussed the company's history of elective gas recovery and how it is in good shape for regulatory capital, with a sustaining capital budget of $1.5 billion.

Neil Mehta congratulates Lane Riggs for taking on a new role and asks him for his perspective on the strategic vision. Lane Riggs explains that he wants to maintain the successful execution of projects and stay disciplined and predictable. He also wants to keep exploring innovative projects and opportunities around their assets. Neil Mehta then follows up with a question about returning cash in excess of the brackets they have discussed historically.

Lane Riggs discussed their approach to capital, which includes buybacks and dividends. Historically, they have been at the high end or above their target range of 40%-50% return to shareholders. This year, they have trended above 50% payout, and they are open to paying out above the upper end of the range for the year if it is the best use of excess cash. Regarding the dividend, they want it to be competitive versus their peers and growing and sustainable through the cycle. Buybacks will also help them reach their targets.

Eric Fisher and Jason Gabelman discussed the Renewable Fuel Standard and the outlook for RIN prices, with Eric noting that the EPA's ethanol requirement of 15 billion gallons will likely not lead to a large change in RIN prices. Jason noted that there is a lot of new renewable diesel capacity coming online next year, but Eric noted that many projects are taking longer to come up and their projects are being slowed down. They then discussed the outlook on cracks, with Jason asking if the hotter-than-normal weather globally has supported diesel demand.

Gary Simmons does not believe that the warmer weather has impacted diesel demand significantly. He also does not know the path forward to restocking the inventory, as it is 35 million barrels below the five-year average. Simmons does not believe that new refining capacity will have a significant impact on the supply-demand balance going forward. He also has no thoughts on the expected impact on RD margins in 2025 when the BTC converts to a PTC, but believes there may be less competition from foreign RD imports.

Lane Riggs confirms that ethanol can be used as a viable feedstock for jet fuel, but it is too early to discuss the specifics of capital, cost, scale, and airlines distinguishing between the two types of fuel. He states that the first barrel of SAF that airlines will get will be RD based, but the next barrel could be from an ethanol source. He also notes that there is no difference between an ethanol-based and RD-based barrel from a SAF standpoint.

The speaker thanked everyone for joining and asked them to contact the IR team if they had any follow-up questions. He then concluded the event and encouraged everyone to enjoy the rest of their day.

This summary was generated with AI and may contain some inaccuracies.