The paragraph is an introduction to Valero Energy Corp's Third Quarter 2024 Earnings Conference Call. The operator provides instructions and reminds participants that the call is being recorded. Homer Bhullar, Vice President of Investor Relations and Finance, introduces key members of Valero's senior management team who are present, including the CEO, CFO, and COO. He mentions that the earnings release, along with additional financial information and disclosures, is available on their website. Bhullar highlights the forward-looking statement disclaimer, noting that actual results may differ from expectations due to various factors. Lane Riggs, CEO and President, begins the opening remarks by stating that the third-quarter results were impacted by heavy maintenance in the refining segment during a weak margin environment.

In the quarter, the refineries operated at 90% capacity, aligning with guidance, while U.S. wholesale volumes exceeded 1 million barrels per day for the second consecutive quarter, indicating strong product demand. The Diamond Green Diesel Sustainable Aviation Fuel project was completed on time and under budget. Financially, the company maintained a high shareholder payout ratio of 84% for the quarter. Looking forward, refining margins are expected to benefit from increasing diesel demand and wider sour crude differentials. Net income for the third quarter of 2024 was $364 million, significantly lower than the $2.6 billion recorded in the same quarter of the previous year.

In the third quarter of 2024, refining throughput averaged 2.9 million barrels per day at a 90% capacity utilization, with cash operating expenses of $4.73 per barrel. The Renewable Diesel segment saw a decrease in operating income to $35 million, despite increased sales volumes. Ethanol segment operating income was $153 million, with production volumes up compared to the previous year. Total G&A expenses were $234 million, net interest expense $141 million, and depreciation and amortization $685 million, with an income tax expense of $96 million at a 20% effective tax rate. Net cash from operating activities was $1.3 billion, with adjustments leading to an adjusted net cash flow of $1.1 billion. Capital investments amounted to $429 million, primarily for sustaining the business, with Valero's attributable share at $394 million after excluding joint venture contributions.

In the third quarter of 2024, the company returned $907 million to stockholders via dividends and share buybacks, resulting in an 84% payout ratio. Year-to-date, $3.7 billion has been returned, surpassing their long-term commitment. Since 2021, cash flows have exceeded costs, with significant debt reduction and stockholder returns. The company ended the quarter with $8.4 billion in debt, $5.2 billion in cash, and a 17% debt-to-capitalization ratio. It maintains $5.3 billion in liquidity. For 2024, capital investments are projected at $2 billion, split between sustaining and growth, particularly in low carbon fuels and refining. Expected refining throughput volumes for the fourth quarter were provided for different regions.

The paragraph discusses the company's financial projections and current market environment. It outlines expected operating expenses for the refining, renewable diesel, and ethanol segments in the fourth quarter and 2024. Refining cash operating expenses are estimated at $4.60 per barrel. Renewable diesel sales are expected to reach 1.2 billion gallons in 2024, with operating costs projected at $0.45 per gallon. Ethanol production is expected to be 4.7 million gallons per day, with $0.37 per gallon in operating expenses. Fourth-quarter net interest expense is estimated at $140 million, while total depreciation and amortization should be around $690 million. G&A expenses for 2024 are projected to be $975 million. In the Q&A, Manav Gupta from UBS inquires about the demand for key products. Gary Simmons explains that although the refining margin environment is weaker than previous years, market fundamentals have improved, with sentiment and crack spreads not reflecting these improvements. In their observed markets, conditions remain consistent with past years.

In the third quarter, Lane highlighted that their wholesale sales exceeded 1 million barrels a day, averaging 1.8 million, marking a year-over-year increase. While gasoline sales remained steady, diesel sales rose. The fourth quarter saw a 40,000-barrel daily increase in wholesale sales, aligning with a 1% rise in vehicle miles traveled. DOE data indicated flat to slightly rising gasoline demand overall. Despite softness in diesel demand, jet fuel demand compensated for some of the gap. Consequently, total U.S. light product demand was flat to slightly down year-over-year. In international markets like Canada, the UK, and Mexico, there was growth in gasoline and jet fuel demand but a decline in diesel demand. Export demand remained robust, with gasoline exports reaching about 100,000 barrels a day, primarily to Latin America and Canada.

In the paragraph, the discussion revolves around third-quarter diesel exports, which were strong in South America and Europe. Despite steady demand, crack spreads are below mid-cycle levels, attributed to typical third-quarter negative market sentiment, including post-Labor Day effects and the end of the driving season. This time of year usually sees stronger distillate cracks in the fourth and first quarters. There are signs of global economic weakness affecting diesel demand, causing pessimism in the market. However, fundamentals remain strong with low inventory levels and backward market structure indicating potential resilience.

The paragraph discusses the dynamics of gasoline and distillate markets. There's no motivation to produce summer-grade gasoline currently, and transatlantic shipping from Europe to New York is not profitable. However, export demand for gasoline, especially to Latin America, remains strong, making the gasoline market look promising with no expected significant changes in gas crack spreads soon. For distillates, demand has been lower than expected, but inventories are decreasing, partly due to reduced global supply from economic run cuts and maintenance activities. This positions the market well for winter, where increased heating oil demand could boost distillate crack spreads. The paragraph then shifts to a Q&A segment, where John Royall from JPMorgan asks about the company's capital allocation strategy in light of lower margin environments, focusing on the consistency of their capital return approach.

The paragraph discusses a company's financial strategy and operations. The speaker highlights their strong balance sheet and commitment to returning a minimum of 40% to 50% of free cash flow to shareholders, primarily through buybacks, despite challenges like reduced margins. The company has been funding its needs, reducing debt, and returning significant cash to shareholders since 2021. The conversation then shifts to California, where a recent closure could benefit remaining operations, but new legislative pressures pose challenges. The company is exploring strategic alternatives, awaiting clarity on potential policies. Lane Riggs and Richard Walsh are involved in discussing policy and strategic aspects.

The paragraph discusses the challenges of implementing California's politically driven policies in the energy sector, particularly concerning refinery operations. The policies, while sounding beneficial politically, may lead to higher consumer costs when applied to market realities. As a result, California has lost several refineries. The California Energy Commission (CEC) faces the challenge of implementing regulations that are meant to lower consumer costs. Lane Riggs highlights the company's long-standing strategy on the West Coast, influenced by California's policies, emphasizing operational reliability amid increasing regulatory pressures. In the discussion, Theresa Chen inquires about global product supply changes and trade flow implications, to which Gary Simmons responds, noting the addition of new refining capacity by 2025.

The paragraph discusses the current state of refinery closures and capacity additions, which result in a net addition of about 300,000 barrels per day amidst uncertain demand forecasts. The timing of these changes contributes to unpredictability in refining margins next year, with tighter balances expected over an extended period due to a gap between net capacity additions and demand growth. On the renewables front, Eric Fisher updates on the successful early and under-budget startup of the SaaS unit, demonstrating Valero's strong project execution. The unit is performing well, meeting its design capabilities, and attracting commercial interest, particularly for SBK and blended SaaS products.

The paragraph discusses Gary Simmons' brief mention of contracts with airlines like Southwest and JetBlue and freight carriers such as DHL, highlighting that despite not going into commercial detail, the project remains on track to exceed a 25% after-tax return threshold. When Doug Leggate from Wolfe Research questions Gary about refinery utilization amid potential oversupply, Gary explains that they base their assumptions on historical utilization rates and recognize that some refining capacities may be struggling, often requiring significant capital investment.

The paragraph discusses the potential for additional refinery closures, particularly in Europe and the Far East, due to operational pressures. It also touches on the impact of regulatory measures, like California's ABX, on refinery operations. Specifically, Douglas Leggate and Lane Riggs discuss Phillips 66's Rodeo closure and how import adjustments balanced West Coast supply. Riggs highlights the challenges in operating refineries in California, such as high costs, regulatory pressures, and a complex supply chain, noting that these factors make it difficult for their West Coast operations to be profitable. The company is considering these challenges as it evaluates future portfolio adjustments.

In the paragraph, Roger Read of Wells Fargo questions whether recent developments, such as Philips closing a unit in California, would pressure the company to make difficult decisions about its California refining unit, potentially inviting political interference. Richard Walsh responds that their decision-making doesn't necessarily depend on what others do but rather on California's regulatory programs. He notes that while California's market is efficient, interference tends to worsen the situation. The company is waiting to see how California's policies evolve and plans to react accordingly, while maintaining confidence in its assets and personnel. Roger Read expresses skepticism about California's understanding of policy impacts compared to Walsh's optimism.

In the paragraph, Gary Simmons discusses recent trends in diesel and gasoline demand in the U.S., noting a recent 5% year-over-year increase in diesel demand, which aligns with similar patterns in Europe as supply tightens with the onset of winter. The operator then introduces a question from Paul Cheng of Scotiabank, who inquires about the capital expenditure timeline for the Benicia refinery in California, suggesting that major financial decisions are typically prompted by substantial capital needs or required major upgrades. Lane Riggs acknowledges the correctness of Paul's premise but notes that they don't usually provide specific outlooks on turnaround activities.

The paragraph discusses the financial and operational challenges and strategies related to asset turnarounds and market conditions in the refining industry, focusing on the West Coast and Europe. It highlights the high costs associated with turnarounds and how they influence future asset investments. The conversation touches on the strong margin capture in the European market despite difficult conditions, with notable contributions from the commercial team and favorable crude costs in regions like Quebec and Pembrook. Additionally, it addresses the impact of market-based reference cracks in evaluating performance. Finally, the paragraph ends with an introduction to a question from Jean Salisbury of Bank of America Merrill Lynch regarding the anticipated increase in OPEC supply next year.

The paragraph discusses the potential impacts of increased OPEC supply on heavy sour crude markets and mentions various factors that could contribute to increased supply, such as OPEC's additional 180,000 barrels per day starting in December, expected Canadian production increases, and ongoing Venezuelan production growth. The improved supply situation should lead to more favorable quality discounts. Additionally, there is a discussion on the renewable diesel (RD) side, with anticipated challenges due to tougher margins but positive outlooks for 2025. Factors such as California's LCFS modifications, Europe's Fit for 55 initiative, and Canadian regulatory developments are expected to create tailwinds and potentially improve profitability in the RD sector.

The paragraph discusses how changes in tax credits from the Inflation Reduction Act (IRA) are expected to benefit DGD by favoring domestic production over imports. It mentions that policy clarifications are needed, but changes to the legislation are unlikely, suggesting initial policies will likely remain. In the renewables sector, there is a demand for guidance to proceed with plans. It also notes that feedstock prices have stabilized, and waste oils have become advantageous. The partnership with Darling offers strategic access to both domestic and international feedstocks, while vegetable oil and biodiesel will influence pricing in the future. With the end of the blenders tax credit, adjustments to the Renewable Identification Numbers (RINs) may be necessary for biodiesel.

The paragraph discusses the expectations and current market dynamics for RINs (Renewable Identification Numbers) and naphtha. It starts with the expectation that RIN prices will need to rise to compensate for the loss faced by biodiesel (BD) and renewable diesel (RD) as they shift to the Production Tax Credit (PTC), which would be beneficial for DGD and RD. Joe Laetsch asks about the strong recent exports of naphtha from the Gulf Coast and its impact on margins. Gary Simmons attributes the strength to reduced naphtha supply due to economic run cuts at hydroskimmers and increased petrochemical demand, which creates export opportunities. The conversation shifts to Ryan Todd from Piper Sandler, who asks about the sector’s declining capture rate over the past 18 months and potential improvements. Lane Riggs briefly responds before delegating the question to Greg.

In this discussion, Greg Bram addressed factors affecting the crude market, noting a transition from contango in early 2023 to backwardation expected in late 2024, indicating potential market improvements. He highlighted the impact of heavy maintenance in different regions and its effect on operations. Bram also mentioned improvements in secondary products, especially those related to petrochemicals like propylene and naphtha, which are expected to enhance capture values. Ryan Todd inquired about the sustainable aviation fuel (SAF) market, considering its potential undersupply in the next 12 to 24 months, which could be beneficial for producers. He also asked about the optionality of selling into Europe versus domestic markets, to which Eric Fisher responded.

The paragraph discusses the current state of the market, which is experiencing undersupply due to increasing mandates over the next few years. Europe is highlighted as an attractive market for supply despite needing clarity on policies regarding import codes and duties. In the U.S., clarity is also needed on the IRA's credit preferences, affecting contract finalization. The speaker expresses confidence in resolving these policy and contractual issues by year's end. Additionally, it addresses Valero's efforts to maintain low operating expenses, particularly benefitting from low energy costs, suggesting these costs might increase to a mid-cycle range according to general expectations.

The paragraph discusses the impact of inflation on maintenance costs and catalyst chemicals, with hopes for improvement as inflation moderates. Neil Mehta and Greg Bram also discuss the Port Arthur coker project, which is expected to deliver returns consistent with initial forecasts, despite current market differences. The project's success relies on processing heavy sour crude into light products, with potential additional value from fluctuating sour differentials. Matthew Blair of TPH notes a potential all-time record in ethanol volume guidance for Q4, despite low margins, and Eric Fisher attributes this to increased ethanol production capability.

The paragraph discusses the positive developments in the ethanol market, with expanded export markets and increased global interest in U.S. ethanol, particularly ISCC qualified ethanol in Europe. U.S. corn is highlighted as an attractive feedstock, contributing to opportunities for ethanol exports. There's growing demand for E10 globally, including Brazil increasing its ethanol mandate. In response, capacity has been increased to meet global interest. Despite concerns about increasing tariffs, Rich Walsh suggests that energy tariffs are less likely since countries typically avoid raising energy costs, implying limited impact on energy exports. Jason Gabelman inquires about financial strategy in downturns, noting a $4 billion cash target for potential market weakening. Jason Fraser confirms this target for the balance sheet.

The paragraph discusses the company's cash strategy, indicating they aim to maintain a cash balance between $4 billion and $5 billion in normal conditions. Despite fluctuations due to factors like working capital, they don't intend to hoard cash. Notably, without a positive working capital impact, cash would have decreased by over $200 million this quarter. The company completed strong buybacks worth $565 million without impacting the balance sheet, and the $4 billion target provides flexibility for continued buybacks during downturns. On the market side, strong gasoline and diesel exports from the U.S. are noted, which seem to be driven more by an export premium rather than domestic inventory pressures, as gasoline inventories are currently low.

The paragraph features a Q&A exchange where Gary Simmons confirms that they are selling products to international markets at a higher price than on the U.S. Gulf Coast. Following this, the operator hands the floor over to Homer Bhullar for closing comments, who expresses gratitude for the participants' attendance and encourages them to contact the investor relations team with any further questions. The operator then concludes the event, inviting participants to disconnect or log off.

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