瓦萊羅能源 (VLO) 2004 Q1 法說會逐字稿

We would like to thank all parties for holding and to advice you replace your lines on listen-only until the question and answer segment of today's conference.

This call is being recorded, should you have any objection, please disconnect at this time.

I would now like to turn the call over to today's' speaker Bill Hantke.

Thank you operator, good morning everyone and thank you for joining us.

I am joined on this call by Tom O'Malley, our Chairman and CEO and Hen Kuchta, our President and COO.

As required I'd like to remind you that in addition to our comments concerning our first quarter results.

We may make certain comments regarding forward-looking statements in response to your questions, that you would have expectations.

Actual results may differ from those we currently expect, and the factors that could cause actual results to be different are described in our earnings release and our filings with the SEC.

Before I get started on quarterly results I'd like to mention that on March 30 '04 we executed the definitive agreement in Motiva for the purchase of the Delaware City Refinery.

In addition in the past month we have completed three major financing transactions.

We've completed our $1b senior secured revolving credit facility maturing at April 09.

The new facility replaces PRG's existing $785m facility, extends the maturity date, reduces the cost of issuing letters of credit, contains less restrictive covenants and expands the cash borrowing capabilities of the company.

Also on April 23, in connection with the Delaware City acquisition, we completed both our senior notes and common stock offerings.

We have issued $14.9m in common shares, $200m seniors notes to 2011 at 6-1/8%, and $200m senior notes due 2014 at 6-3/4%.

Also in connection with this call we have posted slides on our Investor Relations section of our website.

Tom will be referring to those slides during his comments this morning.

Moving on to the first quarter results.

As always I assume everyone has read this mornings press release and I will comment mostly on items of particular interest to those trying to analyze or model the company financial results.

As I give guidance on future cost structure components please keep in mind that the numbers I give will include the effect of the Delaware Refinery acquisition, and our April '04 financing transactions.

I'd like to focus some of Premcor net income from continuing operations excluding special items.

As that gets to the core of how we think the company should operate on a normal basis going forward, On that basis Premcore earned $53m or $0.70 a share on the first quarter of '04 as compared with $55m or $0.80 in the first quarter of '03.

You should note that these figures include stock option expense of $4.9m pre-tax or $0.04 a share in the first quarter of '04 and $4.3m pre-tax or $0.04 after tax for the prior period.

We point this out because this is an expense Premcor records that most of our peers do not.

We believe that as relevant when comparing results.

Our stock options expense estimate for '04 is $19m to $20m, which will drop off $8m to $10m starting in '05, due to the full vesting of significant options issued in '03.

Let me also point out that in this mornings press release as well as on this conference call we will make references to Premcor's SEC filing and we will encourage you as always to review those filings thoroughly to get a better understanding of the company and our industry.

Our first quarter gross margin was $317m as compared to $267m in the prior period.

The first quarter results reflect strong refining module in Gulf Coast and Mid West market.

Strong light/heavy crude differentials and lower through puts due to maintenance activities at Port Arthur and Lima.

Hen Kuchta, will describe our operations in more detail in a minute.

First quarter gross margin includes a cost of $6m related to price risk results.

Gross margin for the prior period includes the cost $15m related to this issue, This mornings press release singles out this impact and excludes it from our analysis of our individual refinery operations, in order to reflect a through comparison of we realize margins in the market indicate -- realize margins for the markets indicated margins.

As we mentioned in our SEC filings keep in mind it hard to price environment and particularly its volatility that have an significant impact on Premcor's short-term results that cannot seen simply from looking at daily market indicator.

Turning to operating expenses, natural gas of course, remain above the start levels.

The average natural gas for the quarter $5.65 per mmbtu, and $6.34 per mmbtu in the first quarter of '03.

As you analyze the company's expenses going forward you should keep in mind that we will now be purchasing and consuming around $33m to $34m mmbtu per year.

We have taken steps to reduce our natural gas consumption, but the financial, impact of our higher natural gas prices is and will remain significant for Premcor.

Our natural gas cost for April '04 to date is approximately $5.60.

First quarter G&A excluding stock options was $17m up $6m from the first quarter of '03.

G&A expense excludes the bonus, increase in prior periods primarily due to higher employee related force and only one month of Memphis operations in the first quarter of the prior period.

We would expect second quarter '04 G&A excluding bonuses and stock option expenses to do roughly $15m to $16m.

For the bonus accruals, obviously you'll find on the company's financial results.

Bonus compensation is based solely on our achieving net earnings in excess of $2 a share on an annual basis.

Our board of directors typically excluded special items, bonus expense, and stock option expenses when they turn into threshold EPS number.

First quarter of '04 and '03 depreciation and amortization was $34m and $24m respectively.

In the future D&A should be approximately $34m to $36m for the quarter adjusted for increases in capital expenditures.

Average useful life of CAPEX is approximately 25 years, and turnarounds average approximately four years.

Net interest expense was $29m compared to $25m in the first quarter of '03.

For '04, gross annual interest expense should run around at $150m plus amortization of deferred financing cost of approximately $10m.

Capitalized interest and interest income of approximately $30m are deducted from this to produce the reported net interest figure.

The effective tax rate for the first quarter of '04 was 37.1% as compared to 33.4% in the first quarter of '03.

Tax expansion continues to be booked at an effective rate of approximately 37%.

The rate will vary since the overall rate is so blended depends some part on where our profitability is generated.

continuously utilized extensive net operating loss carry forwards, the remaining balance is approximately $410m.

Therefore we do not pay federal income taxes to any material degree.

For federal income tax purposes, we incurred as a result of the recent equity offerings, a stock ownership change of more than 50% over the preceding 3-year testing period as defined in section 382 of the internal revenue growth.

This has the effect of limiting the annual utilization.

The company does not expect this change in control of in effect its overall ability to realize its net operating loss carrying forwards, and other losses and tax credits in the future.

In regards to the presentation on the income statement for operating revenues and gross of sales, I want to point out again that we've reclassified certain amounts of the first quarter of '03 to confirm to our fourth quarter '03 application as ERTF 3011.

Please note there is no effect on gross margin or net income as a result of this change.

And according to the ERTF 3011, cost of sales of all periods presented includes a net effect of buying and selling crude oils

the company's refinery.

Therefore the

represented growth.

Again I want to point out this re-class have no effect on gross margin or net income for the period represented.

According to special items, we've incurred one-time cost associated with the shut down of St. Louis back office.

In accordance with current accounting rules, we're recognizing those costs as they're incurred.

Our first quarter charge was $4m.

In discontinued operations later our expenses associated

retail enterprise bankruptcy.

We may continuously liable on the assigned releases, and the few remaining unassigned releases that ultimately we rejected.

Our scores in this regard cannot currently be estimated.

As the bankruptcy resolved, we'll review our retail environmental and

reserves of roughly $21m for a possible adjustment downwards.

We've completed all of our restructuring

do not anticipate any significant leaving that restructuring charges going forward.

Concerning capital expenditures and turnarounds, our total tier 2 but low-sulfured fuels expenditures remain approximately $645m.

As of March 31st '04, we've sent $228m of this total.

We expect '04 CAPEX and turnaround expenditures including Delaware City to total around $640m including spending for tier 2, the Port Arthur expansion and

.

Our March 31st '04 balance sheet is strong, and is giving effect to our recent financings.

Our debt to capitalization ratio was below 53% as compared to 55.9% on December 31st.

We'll continue to work it down through a combination of retained earnings, debt retirement, and balance financings of any future acquisition activity.

Cash and short term investments at March 31st '04 were $383m plus restricted cash of $55m for packed debt service to a total of $438m.

Backed by a strong cash position, and expanded bank credit facility, we've confident we can find our CAPEX plans for '06, including our $200m Port Arthur expansion with our earnings capability and existing liquidity.

Our current CAPEX planning goes as we are planning to tap out next year at approximately $675m, and declined through '06 before we turn into more normalized levels in '07.

Finally for modeling purposes, our share account is 89m common shares outstanding with our diluted share base roughly 2m more than basic.

I'll now turn it over to Hen Kuchta for a brief review of our operations.

Hen?

Thanks Bill.

At this point, I would like to first comment on the marketplace that existed during the quarter.

And then second, report on how our refineries operated within the respective markets.

The overall market was obviously good in all regions of the world.

As both the Asian and the US economies continues their strong GDP growth.

As a result of this overall economic growth, transportation fuel demand has shown strong growth worldwide.

For example here in the US, a four week growing average for gasoline demand shows a 5% increase over last year at this time.

The current average is 9.2m barrels per day.

Last year at this time Gasoline inventories were building.

This year the combination of strong demand, a heavy turnaround season, and specification changes has apparently kept the build from occurring.

Certainly the crack spreads throughout the country reflect these bullish fundamental factors.

In the Gulf Coast the 211 averaged 540 a barrel for the quarter, well above the prior five-year average for first quarter cracks, which was 340, a barrel.

It's also well above the five-year annual average of $4 a barrel.

WTI at

spread average 935 for the quarter, which reflects the strong demand for sweet crude to meet low sulfur gasoline specs and the directional increase in production of sour crudes relative to sweet.

Chicago 321 crack averaged 690 a barrel in January and 835 a barrel in February.

These are the two months that we actually operated in Lima, of course in March we were down for turnaround.

Natural gas averaged 565 a million BTUs in the first quarter, which was $0.95 over our budget and had a negative effect of about $7m.

At this point we have raised our budget for the balance of 2004 for natural gas from 470 to 550 per mm BTU.

Before I comments specifically on a quarterly refinery operations, I would like to reiterate a few general points about our operating philosophy that I think are worth reviewing from time to time.

We plan and direct our operations by continuously examining flat price, individual product cracks, market structure and petroleum inventories.

In general we want to produce enough transportation fuel to meet our customer demand, but we have little interest in forcing barrels into markets that neither have the demand nor provide an incentive to store the product.

Furthermore we aggressively look to replace crude with the feedstocks wherever and whenever possible.

Our intent is to maximize the bottom line while at the same time minimizing unwanted products.

Directionally we believe this allows us to put less stress on the equipment, which hopefully shows up in our overall reliability.

Maximizing crude runs is simply not a principle objective.

Having said that, I'll now comment on each refinery.

Overall the first quarter was a heavy turnaround period for us.

We had planned activity at both Port Arthur and Lima but unfortunately we also had unplanned downtime as well.

At Port Arthur we had an unsatisfactory performance for the quarter.

The quarter opened with the plant maintenance turnaround on the Reformer, which overran by a few days, but overall we were not unhappy with the execution.

However within two week of the startup we had to bring the unit back down to make unplanned repairs.

This cost us an additional 10 days and approximately $10m.

I should also mention that in a high sulfur coking refinery the loss of your principle hydrogen producer which the reformer is significantly effects the quality of the intermediate feedstocks and lowers the value of some of the finished as well as unfinished products.

We purchased as much Hydrogen that was available from third party suppliers, that was available but there is not sufficient capacity to meet total demand during the turnaround.

Over three million barrels of intermediates were optimized during the turnaround to maximize the available margin.

Throughput rates at Port Arthur averaged 222,000 barrels per day during the quarter.

A gasoline and low sulfur

production were down considerably as a result of the low hydrogen supply.

As we entered the second quarter, we had to repair a small leak in the crude furnace, which required a shutdown of the crude stilt for 10 days.

At current cracks spread this cost us about $15m in lost revenue.

We believe that our problems are behind us though, and look forward to smooth operations for the balance of the quarter.

Refineries currently processing 255,000 barrels per day, including 230,000 barrels a day of crude and 25,000 barrels a day of intermediate feedstocks.

Including the 10-day shutdown, we expect to average 240,000 barrels a day of throughput for the second quarter.

At Lima the refinery started the quarter at full crude rates.

The refinery averaged 148,000 barrels per day, which kept the gasoline production near maximum, which was consistent with the strong gasoline cracks in Chicago.

On March 6th, the refinery was completely brought down for it's full-year plant turnaround, which is obviously a massive undertaking.

Unlike our other facilities which can take down sections of the refinery for maintenance, the fact that the refinery is a single train operation as in a land locked location requires that everything be brought down at once.

The turnaround was completed on April 9, which overran about three days.

Processing rates were gradually increased and by the 15th full rates were reestablished.

Refinery is now at 158,000 barrels per day.

At Memphis total throughput averaged a 155,000 barrels per day, which included approximately 12,000 barrels per day of feedstocks, which went into the Reformer and the FCC units.

These feeds were economically attractive versus crude and effectively backed out approximately 20,000 barrels per day crude.

During the quarter, the FCC averaged 63,000 barrels per day, which was 4,000 less than maximum, and was due to planned maintenance related to Tier II gasoline.

The Tier II project is now up and running with gasoline below 30 ppm and was less than a one octane number loss.

Suffices to say we are pleased with this performance.

We expect Memphis to average approximately 165,000 barrels per day of total throughput in the second quarter which will consist of 138,000 barrels per day of crude and 27 of feedstocks.

The only planned maintenance in Memphis is a catalyst change on the distillate hydrotreater, which should take approximately 15 days in May.

Finally, we expect to take control of the Delaware refinery this Saturday, and certainly we have been very happy with the whole process which has led up to this closing.

This facility is certainly a powerful machine from a fuel refiner's perspective.

It has all the tools to perform extremely well in it's marketplace and we feel the people who have signed on to work with us will represent as good a team as we currently have in our refining system.

The workforce is motivated and welcomes the challenge of operating the business.

We have assured the employees, the Governor and the Department of Natural Resources that in order to operate a successful profitable business in the state of Delaware, we must first and foremost be safe and environmentally sensitive in all aspects of our operations.

We planned to work very hard to ensure that these objectives are met, and that they are firmly entrenched in the refinery's culture as we roll the Delaware business into our system.

Operationally we planned to process approximately 180,000 barrels a day of total throughput in May and June.

We expect the operation to be profitable from day one, but do not expect to reach optimal operations until the end of the second quarter.

I'd now like to pass the mike over to Tom.

Thanks Frank and thank all.

I'll limit my comments to the future.

Premcor's management, I believe as the worldwide refining industry entered an extended period of enhanced refining margins at the end of 2002.

The industry's capability to produce transportation fuels and worldwide demand for these fuels are in very close balance.

Looking forward, all the statistical information we have available shows that scheduled growth and worldwide capacity to produce these fuels is about half of the 2% growth rate that is forecast for worldwide consumption.

This is a very long lead time industry, but we believe that the world's refining companies and particularly the US sector will enjoy a reasonable return on assets over the next few years.

With this in mind, and in view of the substantial changes for the company's operation poised by the Delaware acquisition Premcor's 2004 budget provided to investors via our Web site in January of this year appears to be overly conservative.

Premcor has redone its estimates for the period April 1, 2004 through year-end, and is revising its full year guidance to over $4 a share in after-tax earnings.

This new 2004 guidance includes our first quarter actual results.

As Bill mentioned earlier, we have provided slides on our website that I will now make reference to.

Slide A market indicators and B throughput provides the basis for Slide C revised estimates.

Slide E shows that absent any other acquisition Premcor will experience significant volumetric growth in both 2005 and 2006 over our number for 2004.

Thus at the same crack in differentials shown in the market indicator Slide A, profit would grow from the 2004 estimated base of $4.11 per share shown in Slide C by 15% in 2005 and 25% in 2006.

Current market cracks light heavy differentials would result in after-tax much higher than our revised guidance.

We would not use the current market as a guide for the future.

But we do believe that's the 15-month averages the covering the period Jan 1, '03 through March 31, '04 shown on Slide A could prove to be conservative.

There are many variables in our business and that's the perfect model they are being impossible to come by.

The information we are providing on our website should allow investors to come up with a reasonably accurate earnings estimates using the crack light heavy differentials and crude oil and natural gas prices that each investor deems appropriate.

We have included sensitivity information on Slide D, which will help you in this regard.

Great care must be taken to adjust estimates, if there is a substantial adjustment on throughput.

Such a change would generally be caused by unscheduled maintenance at a major processing unit.

If at the time of such occurrence Premcor expected it to exceed 2% of our annual productive capacity, we would public announce it and attempt to quantify it.

We may at some degree claim to be filing new ground in openness by providing the public with these modeling details.

But we believe that a well-informed investor is of great importance to our company and indeed to most companies.

We are and we intend to remain.

A growing pure plays oil refinining company.

On that note we will be pleased to take your questions.

Operator, can you open up for questions now, please?

And at this time, if you would like to ask a question, please press star one on your touchtone phone, you will be announced prior to your question.

Once again it is star one your touchtone phone to ask a question.

The first question will come from Chi

.

Hello.

Hello.

Go ahead.

Sorry.

This -- I have couple of questions regarding Delaware?

This is not -- is this is Chi Chau?

Yes.

Okay, go ahead.

Sorry, about that.

I have seen reports that the plant continues to have operational issues with over 70 environmental incidences already in '04.

How do you feel is plant is operating right now?

Chi, this Tom O'Malley replying.

I don't think its appropriate for us to comment on the way the current owners are running the plant, we are confident that we will be able to run the plant, as we run our other plants in an environmentally sensitive manner and in a safe manner.

That's our goal and objective, we put the staff in condition to do that or take it over May 01 and will be responsible from that moment forward

Are you planning to replace the existing management team at the plant?

We have put in place a top management team that can to some degree out of our current organization out of new hirers and out of existing people who are already working at the plant.

Okay, and on a prior call you mentioned that there are over 600 contractors on sight just a couple of months ago, working on I think primarily optimizing the operations in gasification unit.

What is the status of that work and will that unit be operating to your satisfaction when you takeover?

The gasification unit is certainly a new unit within our universe; we don't currently operate one in our system.

We plan to have a fewer contractors on the site down the road and we plan to run the unit somewhat differently than the current ownership group has run it.

We will probably run it at a lower capacity to put somewhat less strain on the overall operation of the refinery, but we're really going to need as Hantke stated a couple of months inside the plant to figure out how we will maximize it.

Okay, and any further thoughts on selling the unit.

We've no thoughts on disposing of the unit.

At this time we want to get inside the operation, our best guess today is that it will remain an integral part of the Delaware City operations.

Okay great, thanks I appreciate it.

Thank you.

The next question comes from Jay

.

Thanks.

I got three questions.

The crude at Port Arthur given the way the

.

Is that I'd have thought it would have been a little bit wider, if you didn't have the down time, is it all due to the down time I guess that 682?

This is Will Hentke speaking, it is really a combination of the down time in my idea and we don't want a 100% Maya all time, so we're working of a different

like a WTS so that average it down to a lower number but certainly the downtime had a major effect.

How much Maya did you run in the first quarter?

I am sorry didn't hear that question.

Well the volumes of the Maya through the plant in the first quarter?

I believe there was about 190,000 barrels per day.

But I just wanted to add something what Bill said, during the turn around, we also bought significant amounts of lighter material, some sweet crude and some of the intermediate effectively increase the cost of the average throughput at the refinery and that was because we had a low hydrogen supply and we knew that the intermediates would have to be improved in order to make gas plant

.

Okay and bigger picture, bigger picture question I guess for Tom, acquisitions next one when would that happen I guess, as specifically if you can get it out and where, I guess would you look at Europe for instance?

First of all, we don't have any set time schedule.

We want to continue to grow as a company; we've looked at all assets that are available here in the United States by absolute preference that is our preferential expansion area.

I've indicated recently in previous conference calls and on the road show that we would consider opportunities in Western Europe.

That's it.

Thanks.

The next question comes from Aubrie Fine.

Hi.

Are you still considering project

for crude site at Memphis or Lima?

We're constantly looking at the opportunity of Sarah in one or the other of those refineries.

There is nothing firmly in place at this time.

For us its really and issue of pure economics and we see an environment where we can make a very significant addition to our earnings per share and have great certainty that such earnings per share will come to the bottom line.

Before we would go forward and make the necessary investments.

These are potentially very large investments and they would have to be backed up, with a very long-term contract for heavy crude oil.

Most likely such crude oil would come from Canada and most likely it would involve an arrangement with a large Canadian producer and it is more probable that such an arrangement would be made at Lima rather than Memphis.

Okay.

Thanks a lot.

Thank you.

Our next question comes from John

.

I have noticed that you've changed the cost per unit numbers that you are issuing from cost per crude through put to cost per total through put per barrels.

What is the rationale for this change is it permanent?

If it is do you have any back data available for us to have to -- in order to sort of track cost trends and any major variances has been going forward?

The rational for the change is that we find ourselves increasingly reducing crude runs in certain of our refineries and adding in feedstock.

As we looked at that, it became a substantial item overall and particularly when we added the Delaware City refinery to the combination we realized it's a permanent condition.

Delaware City has back end capability, which exceeds its crude oil capability.

We are trying to reflect as best we can what is actually happening within our organization and we think the market structure now really requires us to take in feedstocks in some cases rather than crude oil.

It is always done with an eye to the bottom line.

And it seems that we drive better bottom line numbers by running feedstocks.

We will provide a historical base in just a moment from Bill, but I should also point out to you that when you look at Premcor, we've probably added 40% of our capacity in the form of Memphis and since we acquired Delaware in a 12 month time period and to some degree it's always a learning curve.

What is the best way to run a refinery?

We didn't appreciate the importance of running feed stock at Memphis when we first acquired Memphis.

We thought we'd run more crude there.

Feedstocks are a better play for us at this time.

Bill, would you please provide historical data?

Not to read all numbers.

The historical data on crude plus blend stock is included incur 10-K and it goes from '01 to '03.

So if you wanted some history, also we have included the quarterly data with feedstock's in our 10-Q's.

So if you wanted to go back, calculate, see what the numbers were, they are all there.

Okay

Thank you

Another question if you please.

Given the downtime you had at Port Arthur this quarter or last quarter and I guess there will be some downtime this quarter as well.

What happened to your natural gas usage at that facility relative to what you had termed normalized levels?

Hentke

Well we attempted to consume -- the only thing as much as we would normally have so the imports or third party purchases would be no different.

The only thing that would be different there is we actually got cut back about 10%.

And it happened during the turnaround, because one of the major suppliers had to bring down one of its units.

But purchased hydrogen was about the same as usual.

I think the question referred to natural gas.

Natural gas, yes.

Okay.

I am sorry.

The natural side of the equation, I'll have to take quick look, but -- in the third quarter we -- I am sorry, in the first quarter, what we did was our natural gas consumption was down at the equivalent of about $5.5m.

Does that answer your question?

I think I can back off the numbers and presume we can extrapolate from that to April?

Yes, I -- by the way we are not trying to follow the American political dictum of let the person ask a question, we will give a different answer.

We won't answer the question that you're asking.

Certainly, we had lower natural gas consumption because we produced less products, we ran somewhat less crude, but on an average over the year, we still expect to meet the numbers that we have given you in the standalone throughput totals, and if you take a look at our sensitivity chart and the average volume of natural gas that we show there, it really won't be too much different by the end of the year.

Okay, thank you.

The next question comes from Chris Miller.

Yes.

I was hoping to get, now that the Delaware's in the mix, a quarterly breakout of the Capex for this year if possible?

Quarterly.

I don't candidly -- I don't think we are going to do a good job on that.

We try and spend as needed and we very often have a rollover from quarter-to-quarter.

I don't remember a time, either in my past history or at this company when we have actually met the quarterly target.

We have usually under spent quarter-to-quarter-to-quarter.

I will tell you that the annual number look good to us for this year.

We should make it, but whether we spend $30m or $40m more or less in a particular quarter is not something that we drive the company on.

We have a very generous cash position in the company.

We put it in place to some degree because we didn't want to worry from month-to-month or quarter-to-quarter on that issue.

So, I just wouldn't be comfortable, giving you numbers that we have to revise every 15 days.

Maybe I can help a little bit without being too specific on the quarters.

Our budget as reported is about $640m for the year.

That includes capitalized interest.

To-date, till March, we spent about $115m of that and my feel for the actual spending is it'll probably be heavy in second and third quarter and a little light in the fourth quarter.

Like early in the fourth quarter.

That gives you a general direction.

Yes, that's right.

Thank you.

The next question comes from Nicky Decker.

Hi, Tom and all.

My question is regarding Delaware.

You talked about optimal operation by the end of 2Q, what needs to be done between now and then for optimal operations?

I think we couldn't answer that question in a really straightforward way.

We are going into the plant with all of our people on May 1.

It has been our experience when going into a new facility that there are many small issues we have to deal with, but the big issue from our perspective is training.

And the training relates to the environment, safety, and to reliability.

We have to some degree already put in place a program for that.

We'll get underway right away.

Hentke mentioned that it is not our absolute goal and objective during these first two months of operation to search for each and every barrel of throughput so that we can maximize profitability in this extraordinary market.

It really is first and foremost our goal and objective to run the refinery reliably and that leads to a very good safety record and a good environmental record.

We want to get off the ground in the state of Delaware in a very good manner.

I am sure that we will come up with half a dozen projects that will involve the investments of $0.5m or $1m over a short period of time that will give us a better reliability factor in the refinery.

Every thing in safety and the environment really traces back to training and reliability and that's what we are going to be concentrating on.

Okay.

Thanks I appreciate that and Tom just speaking of political dictum.

I am interested to hear your view on the

comment earlier this week that they would like to built two new refineries in the US.

We are already communicating with them.

Our desire to be involved in such an operation, but again as I mentioned in my remarks this is an extremely long lead-time industry.

I am absolutely of the opinion that we need ultimately more refining capacity in the United States.

We import today over a million barrels a day of gasoline.

We are seeing relatively strong growth in that sector.

We have very strong growth going on in the middle distillate pool.

Indeed I suspect that the United States is going to become a supplier of diesel to Europe rather than an importer of diesel from Europe because their diesel pool is going rapidly.

I would love to see some advance on this front.

Like you are talking about five years out if you managed to start the permit processing instantaneously and get a permit within six months.

I don't know where that would be possible in the United States.

I do think that Mr.

comment one of the problems with high oil prices is a shortage of refining capacity in the United States.

But I would also say to you that we have high oil prices, because we have $37 crude rather than $27 crude.

The biggest factor in high oil prices is high crude oil prices.

Not high refining margins.

Yes good.

I appreciate it.

Thanks a lot.

Once again if you would like to ask a question please press star one.

I am seeing no further questions.

Thank you for attending Premcor's first quarter 2004 earnings call.

We look forward to producing very good results for our shareholders and hope that you will attend our next earnings call, which will be in the month last July.

That's it operator.

Thank you for joining the conference.

You may disconnect at this time.