The operator introduces the Valero Energy Corp. Fourth Quarter 2023 Earnings Conference Call and reminds participants that the call is being recorded. Homer Bhullar, Vice President of Investor Relations and Finance, welcomes listeners and introduces the Valero management team. He directs attention to the forward-looking statement disclaimer and turns the call over to CEO and President Lane Riggs for opening remarks.

Valero reported strong financial results for the fourth quarter and full year of 2023, with record adjusted earnings and high mechanical availability. They also achieved a record for environmental performance and sales volume. The company is pursuing strategic projects to enhance their earnings and competitive advantage, including the DGD Sustainable Aviation Fuel project. Valero continues to prioritize shareholder returns, with a 5% increase in their quarterly cash dividend. They anticipate continued support for refining margins due to tight product supply and demand.

Valero's product inventories are expected to be constrained in the near term due to industry-wide turnaround activity, providing support to refining margins. However, long-term demand growth is expected to exceed products applied despite new refinery startups. The company's simple strategy of pursuing operational excellence, disciplined growth, and shareholder returns has driven its success and positioned it well for the future. In the fourth quarter of 2023, Valero's net income and adjusted net income attributable to stockholders decreased compared to the same period in 2022. The refining segment reported lower operating income, while the Renewable Diesel segment's operating income also decreased. Refining throughput volumes and capacity utilization remained strong, but refining cash operating expenses were higher than expected due to an environmental regulatory reserve adjustment.

In the fourth quarter of 2023, Renewable Diesel sales volumes increased due to the start-up of a new plant, but operating income was lower due to lower margins. The Ethanol segment reported higher operating income, primarily due to increased production and lower corn prices. G&A expenses were $295 million, net interest expense was $149 million, and depreciation and amortization expense was $690 million. The effective tax rate was 22%, and net cash provided by operating activities was $1.2 billion. Adjusted net cash provided by operating activities, excluding certain items, was $1.8 billion. Net cash provided by operating activities for the full year 2023 was $9.2 billion.

In 2023, Valero had a total of $11 billion in adjusted net cash provided by operating activities, with $540 million used for capital investments. They returned $1.3 billion to stockholders, with a payout ratio of 73% for the quarter and 60% for the year. They reduced their share count by 11% in 2023 and 19% since 2021 through share repurchases. Valero ended the quarter with $9.2 billion in total debt, $2.3 billion in finance lease obligations, and $5.4 billion in cash and cash equivalents. Their debt-to-capitalization ratio, net of cash, was 18%. They have $5.3 billion in available liquidity, excluding cash. For 2024, Valero expects capital investments of approximately $2 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance, and joint venture investments.

In the first quarter, the company plans to allocate $1.6 billion towards sustaining and growing the business, with half going towards low carbon fuel projects and half towards refining projects. These projects meet a minimum return threshold of 25% after-tax IRR. Refining throughput volumes are expected to fall within specific ranges, and cash operating expenses are projected to be $5.10 per barrel. The renewable diesel segment is expected to have sales volumes of 1.2 billion gallons in 2024, with operating expenses of $0.45 per gallon. The ethanol segment is expected to produce 4.5 million gallons per day in the first quarter, with operating expenses of $0.37 per gallon. Net interest expense is estimated to be $150 million in the first quarter, and G&A expenses are expected to be approximately $975 million in 2024.

The speaker explains that there are several factors contributing to the widening of coastal heavy differentials, including increased production in Western Canada and more Venezuelan barrels in the market. However, the main factor is decreased demand due to turnarounds and seasonality. The speaker predicts that heavy sour discounts will continue to widen during refinery maintenance season, but will eventually decrease once more OPEC production is on the market.

The speaker asks about the company's return of capital and how it will be affected by potential changes in the market. The response is given by two company representatives, one of whom has a cold and defers to the other. The company's approach to shareholder returns is explained, with a target of 40-50% of adjusted net cash from operations, including dividends and buybacks. The company has consistently paid above this target in recent years. The speaker then asks for an update on the company's clean products supply and demand outlook, taking into account recent inventory moves and new refining capacity. The response is given by the company's CEO, who discusses the current state of the market and demand across the company's footprint.

The author discusses the challenges of assessing the market during the holiday season and weather conditions. However, domestic gasoline demand is following typical seasonal patterns and is in line with last year's levels. European gasoline markets are strong, leading to steady exports to Mexico and Latin America. The author is optimistic about gasoline cracks improving in the spring with increased demand during driving season. On the diesel side, demand is up 7% compared to last year and inventory remains low, supporting diesel cracks. However, diesel exports were down in the fourth quarter due to changes in trade flow caused by Russian barrels. European demand for diesel is expected to increase in the first quarter due to colder weather. The author also believes that increased jet demand will support diesel cracks as kerosene is pulled out of the diesel pool in the recovery from COVID.

Last year, jet demand was down 10.5% from pre-COVID levels, but it is expected to close half of that gap this year. Diesel demand is also expected to improve due to colder weather and increased freight activity. Around 1.5 million barrels a day of new capacity is expected to come online this year, slightly higher than the projected year-over-year growth in demand. The timing of when this new capacity comes online will impact supply and demand balances. The U.S. is currently experiencing a divergence in product margins across regions, with the Mid-Con seeing weakness in benchmark cracks due to an oversupply of product, but this is expected to improve during driving season.

The speaker discusses how weather has affected demand on the West Coast and resulted in a softer market. They also mention their commercial team's strong performance and how everyone in the company understands their role and is incentivized with the same goals, leading to successful execution.

The analyst asks about the strong performance in the North Atlantic region and if there were any specific factors driving it. The executives explain that accrued costs improved in Cannes and commercial margins were strong in the region. They also mention that Syncrude trading at a discount to Brent is beneficial to their system. The next question is about the impact of shipping disruptions on the movement of product and implications for a system dependent on imports. The executives clarify that they are not running crude from that region and the main impact has been on freight rates.

Manav Gupta asks about Phillips 66's renewable diesel business, specifically the drop in capture on the DJD (Diesel Hydrotreating Unit) to 49%. Homer Bhullar explains the lag effect and how the actual capture would be 64%. Gupta notes that the margin is up significantly when the lag is factored in and asks about future projections.

The speaker, Eric Fisher, agrees with the analyst's analysis that an 80-90% capture rate for renewable diesel would result in a stronger first quarter for Valero. This is due to the longer lag time for foreign feedstocks and the potential for colder weather to increase heating oil demand. The company also expects a draw in February and March due to turnaround activity and the possibility of cold weather hitting the Gulf Coast.

Sam Margolin asks Gary Simmons about the gasoline market and if the current high inventories may be overstated due to the storage of winter grade gasoline instead of summer grade. Simmons confirms this and explains that there is no economic incentive to store summer grade gasoline. Margolin also asks about the development of SAF (sustainable aviation fuel) and Simmons states that they are in talks with airlines and cargo carriers, with the potential for long-term contracts due to the ability to pass on costs to consumers.

The speaker discusses the impact of a recent drone attack on a Russian refinery, highlighting the tightening of the naphtha market and potential issues with distillate supply. They also mention the difficulty in obtaining support from the West for the refinery's operations.

In this paragraph, the speaker discusses potential changes in the distillate market due to various factors such as issues with production and the lifting of sanctions on Venezuela. They also mention potential impacts on supply from Mexico and Nigeria, but state that they have not seen any changes yet. In response to a question about potential changes to the company's asset base, the speaker states that they do not anticipate significant changes, but they continue to evaluate opportunities that come onto the market. They also briefly mention weak results in California and express concern about policies in the state.

The speaker discusses the company's view on policies to move away from fossil fuels and their approach to evaluating assets, including refineries. They mention that California is a challenging place to operate and that they continue to look at refineries. In response to a question about summer grade gasoline, the speaker says that there is currently no economic incentive to store gasoline due to the cost of production and the market conditions.

The inventory build in December was influenced by several factors, including allocations for shipping, dry dock limitations, and volatility in the freight markets. This led to a draw in Gulf Coast inventories and weaker basis, causing refiners to hold onto inventory rather than selling. The company expects this inventory to decrease in the next few months. In terms of renewable diesel, there are feedstock issues and new capacity coming in, making it difficult to predict margins.

The outlook for renewable diesel is difficult to predict due to the increasing capacity and availability of credits, which could lead to lower margins. However, feedstock prices are also decreasing, giving waste oils an advantage over vegetable oils. The company remains competitively advantaged due to their low-cost production of waste oils and access to markets outside of California. They expect credit prices to continue narrowing and are diversifying sales away from California and into sustainable aviation fuel. There is more clarity on the supply side of renewable diesel, but less on the feedstock side, making feedstock prices a potential area for opportunity. The company's CI advantage in waste oils remains a key factor in their competitiveness.

The speaker discusses the expected level of maintenance activity for the company in 2024 and mentions that the industry as a whole is experiencing a heavy season for turnarounds. They also mention that the company's capital spend and growth capital will likely be focused on smaller, netback-driven projects rather than larger environmental or regulatory-driven projects in the near future.

The speaker discusses the company's approach to sustainable and strategic capital spending, stating that they aim for around $1.5 billion for regulatory capital and $1 billion for strategic capital. They also mention their experience with managing higher levels of strategic capital in the past. The speaker also touches on the current state of octane and gasoline demand.

The speaker, Gary Simmons, discusses the impact of structural changes on octane lending and how it may affect the company's financial results. He explains that the increase in light sweet crude oil production has led to more naphtha being produced, which in turn affects the octane market. However, he does not anticipate any major changes in the octane market this year, unless there is a prolonged outage in Russia. The company's marketing operations in Mexico and the Caribbean have seen a 16% increase in volumes.

The company has 250 branded sites in Mexico, which is the largest growing brand in the country. The company expects to see continued growth with the start-up of a new terminal in Northern Mexico. The gasoline market in Mexico is expected to continue to grow. There were some small operational issues due to cold weather, but it is not expected to impact the quarter's throughput guidance. The renewable diesel volumes performed above nameplate capacity and the company expects a similar level of outperformance in 2024.

The company is unsure of the capacity of the project until it is on the ground and running. They will have a better idea of their capacity guidance in a year. The next question is about refining OpEx, which has been higher this year due to increased electricity prices and cost inflation pressure. The company is working to address these issues.

The speaker emphasizes the company's commitment to being the lowest cost guide and mentions their efforts to improve expenses. They discuss the possibility of getting back to a lower cost range and mention the best time to assess expenses is in the third quarter. They also mention several projects that could potentially improve capture in a stable margin environment.

The speaker discusses the company's disciplined approach to projects and the success of their process in generating returns. They also mention their ability to optimize between different sources of crude oil and do not anticipate a significant impact from the upcoming TMX pipeline. The speaker also addresses the company's strong capital returns and the increase in cash balance over the year. They do not mention any mechanical limits or being locked out of the market for buybacks.

During a recent earnings call, a financial analyst asked about the company's plans for its $3 billion in excess cash. The company's CFO stated that they are comfortable with their current cash balance and aim to stay above $4 billion. They have a strong payout and do not have any immediate plans to pay down debt, but they regularly evaluate their portfolio and consider liability management. The minimum cash balance has been increased to $4 billion, as the company found that their previous minimum of $2 billion was too low during the COVID-19 pandemic. The CFO also mentioned that the company now earns a return on their cash, unlike before. The call concluded with the CFO inviting any further questions and thanking the participants for joining.

The operator thanks the participants and expresses appreciation for their interest in Valero. They are now free to disconnect or log off and continue with their day.

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