瓦萊羅能源 (VLO) 2004 Q4 法說會逐字稿

Good morning.

My name is Patrice (ph) and I will be your conference facilitator.

At this time I would like to welcome everyone to the Valero Energy fourth-quarter 2004 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. Fisher, you may begin your conference.

Thank you, Patrice.

Good morning and welcome to Valero Energy Corporation's fourth-quarter 2004 earnings conference call.

With me today's Bill Greehey, our Chairman and Chief Executive Officer, along with other members of our Senior Management Team.

If you have not received the earnings release and would like a copy, you may obtain one from our website at Valero.com.

There are also tables attached to the earnings release which provide additional financial information on our business segments.

If after reviewing these tables you have questions on the information presented there, feel free to contact me after the call.

Before I turn it over to Bill, I would like to direct your attention to the forward-looking statement disclaimer that is contained in the press release.

In summary, it says that statements in the press release and on this conference call stating 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 which could cause our results to differ from our expectations including those that we have described in our filings with the SEC.

With that, I'll turn it over to Bill.

Thank you, Eric.

Well, 2004 was another record year for Valero in every respect.

We reported record earnings in every quarter and in fact our fourth-quarter earnings represented the sixth consecutive record quarter.

In addition to the financial success we achieved in 2004, I also want to take a minute to point out some of the other successes that Valero was honored with.

We were ranked number one by Forbes magazine on their annual list of America's 400 best big companies.

This was primarily due to our 117 percent return for shareholders for the 12 month period ended November 30.

Valero was also selected by Platt's as the 2004 Oil Company of the Year.

We are also proud of the fact that to date, seven of our refineries have been designated OSHA BPP (ph) star sites and our goal is to have all of our sites certified within the next two years.

Of the roughly 150 refineries in the U.S. only 18 sites have this designation, so Valero makes up nearly half of these.

And once again this year we were selected as one of Fortune Magazine's 100 best companies to work for.

We rose from number 32 to 23 on this year's list and we're ranked number 3 among America's largest companies.

We were once again the only energy company to make the list.

Finally for the second time we were awarded the United Way's highest national honor, the Spirit of America Award, that recognizes our commitment to the communities where we live and work.

I think that these awards demonstrate that financial success and a strong commitment to employees are mutually achievable and that philanthropic efforts can and should be part of every company's culture.

Clearly this is a key part of our ongoing success.

At Valero we believe that if you take care of the employees, the employees will take care of the shareholders and the communities.

We are proud of our financial performance and we're also proud of our commitment to our employees and our communities.

Before I move on to the outlook for the future, let me go through the quarterly results.

Net income for the fourth quarter was 488.5 million or $1.76 per share.

That is more than triple the 131.6 million or 50 cents per share we earned last year in the fourth quarter, which was our previous fourth-quarter record.

The results this quarter also included a 57.2 million write-off of our joint venture interest in the methanol plant in Clear Lake, Texas.

Since we have been able to secure a more economic methanol supply going forward, we expect that the plant will be shut down in July and therefore we are required to write off the investment.

If you exclude this one-time non-cash charge from our reported earnings, the clean number for the fourth quarter would have been 524 million of net income or $1.89 per share.

I think the market dynamics that took place in the fourth quarter highlight our tremendous earnings power and in particular the distinct advantage we have from our ability to process the heavy sour crude oils.

In the fourth quarter we processed more than 1.3 million barrels per day of sour crude resid and high asset crudes.

These discounted low quality feedstocks represent approximately 60 percent of our total feedstock slate.

Together these feedstocks were purchased at an average discount to WTI around $10 per barrel for the fourth quarter.

That feedstock advantage alone amounted to more than $800 million in incremental operating income versus the fourth quarter last year and $400 million versus the third quarter of 2004.

In thinking about our fourth-quarter results, keep in mind the gasoline margins declined in every region of our business.

We had $165 million of hedging losses related to forward sales of nearly 50 percent of our 2004 heat cracks and our highly probable profitable Benicia refinery was down for 35 days when West Coast margins were at their peak, reducing our operating income by $42 million.

We wrote off the methanol plant investment.

With all that, we still earned nearly $2.00 per share, which is impressive when you consider that the fourth quarter is often the weakest of the year.

Turning now to the refining operations in the fourth quarter, overall the plants ran well with the only notable downtime being the plant-wide turnaround at Benicia, which went well after having completed a successful 5.5 year run since the last major turnaround.

Our throughput margins were strong throughout the system but were particularly strong in the Gulf Coast and Northeast where we processed the majority of our discounted feedstocks.

On the Gulf Coast, our gross margin per barrel rose from $7.34 per barrel in the third quarter to $8.46 per barrel in the fourth quarter.

This was despite the fact that gasoline margins were down 65 percent quarter-over-quarter.

One of the key reasons the Gulf Coast system dramatically outperformed most benchmarks is the benefit we get from our strategy to process the heavier or sour crudes.

The Texas City coker and the acquisition of the St. Charles and Aruba refineries are great examples of this strategy.

By adding the coker at Texas City we have been able to increase our purchase of deeply discounted heavy sour crudes such as Mia.

In fact, our $350 million investment in the coker generated nearly $200 million of operating income in 2004.

And the St. Charles and Aruba refineries combined processed about 350,000 barrels per day of heavy sour feedstocks.

Our timing for these acquisitions could not have been better.

St. Charles earned 335 million in 2004 and has already paid out on our original investment.

Aruba also had a tremendous year, generating 290 million of operating income and by the end of the first quarter of this year, that acquisition will also have paid out.

So in summary, these assets contributed nearly 830 million to operating income in 2004 on an investment of 1.1 billion.

In the Northeast system even though gasoline margins declined sharply, our margin realizations were higher.

This was due to the fact that nearly all of Paulsborough's feedstocks are sour and because the Quebec refinery had roughly $5.00 per barrel discounted to Brent on the high asset crude they run.

In addition to the benefit from the sour crude discounts, we also had a record contribution in the fourth quarter from our petrochemical business.

We earned an additional 88 million compared to the fourth quarter of 2003 due to the stronger margins.

Year-over-year the incremental contribution to earnings was over 250 million.

So far in the first quarter, petrochemical margins continued to be strong.

Propylene margins will be probably an average of $25 per barrel over WTI and BTX margins will probably average about $39 for the quarter.

Keep in mind that last year in the first quarter propylene margins averaged only $9.25 per barrel.

We process and produce about 40,000 barrels a day of propylene, so that is about an improvement of $58 million in operating income in our first quarter over the first quarter of last year.

Briefly on retail, we had the best fourth quarter ever in our U.S. system with an income contribution of 31.4 million despite owning fewer stores.

Our Canadian system contributed 21 million to operating income for the quarter.

Looking at our G&A, they were up 116 million.

The increase over the third quarter is primarily due to expenses related to legal and regulatory matters, charitable contributions, and incentive compensation.

Going forward we expect that G&A expense run rate to be about 95 million a quarter.

Our effective tax rate this quarter was 30.4 percent and was about 33.5 percent for the year.

The lower rates are primarily due to the favorable tax treatment of our Aruba operations.

For 2005 we expect the run rate to be about 33 percent.

Looking at our balance sheet, it has never been in better shape.

At the end of the fourth quarter, our debt to cap ratio was down to 30.7 percent.

For 2004 we were able to reduce our total debt by more than 450 million.

That takes into account the repurchase of our off-balance sheet leases in the first quarter.

In the first six months of 2005, we have about 400 million in notes coming due that we expect to pay from cash flow.

During 2004 we also purchased some of our outstanding notes.

We purchased about 70 million last year and so far this year we have purchased another 80 million.

With the debt reductions we expect to save about 30 million in interest expense this year versus last year.

On top of the debt purchased in 2004, we also purchased over 9 million shares of our stock for our benefit plans at an average price of about $33 per share or 300 million in total.

The total capital expenditures and turnaround costs for 2004 were 1.6 billion, which was slightly lower than our guidance for the year of 1.7 billion.

Of that amount, approximately 315 million was for Tier 2 spending, 205 million was for regulatory, 725 million was for turnarounds and other stay in business capital and 355 million was for strategic projects.

Turning now to our outlook, as we discussed on our last quarterly call, we expected that sour crude discounts would remain wide going forward and that is exactly what is happening.

Global oil demand is projected to grow about 2 percent in 2005, which equates to roughly another 1.5 million barrels per day of crude that has to come to the market.

As you all know, the incremental barrel being produced to meet this increased demand is typically more heavy and more sour.

Globally excess conversion capacity to process these lower quality crudes is limited, which means more resid will be produced and the sour crude discounts have to be wide enough to justify processing them.

And don't forget at the same time the demand for sweet crudes is growing due to the higher yield of clean products and the global movement to cleaner fuels, which further supports widespreads between low sulfur and high sulfur crudes.

Looking at where discounts are now, the sour crude discounts for January and February are already locked in for our Middle Eastern crude purchases and the forward curve for sour crude such as Mars is showing continued deep discounts throughout 2005.

This is unlike last year when sour crude discounts were low at the beginning of the year and didn't make their move until later in the year.

Just to give you some examples, Arab Medium averaged $4.50 per barrel in the first quarter of 2004 yet the average for January and February this year is more than double that at $9.80 per barrel.

This is also true from Mayan discounts, which averaged $9.38 per barrel in the first quarter of 2004 but have averaged over $16.75 per barrel so far this year.

And it is largely because the strong sour crude fundamentals that we believe our earnings in 2005 will be better than what we earned in the 2004.

On the product side we expect the favorable factors that were in place in 2004 to continue in 2005.

Light product demand worldwide will continue to exceed new production capacity, which will further tighten supply and demand balances.

In addition the continuing tightening of fuel specifications worldwide both this year and next make it harder and harder for less sophisticated countries to export barrels to the U.S.

Europe this year has gone to 50 ppm softer spec for gasoline and diesel and as all you know, next year will be the most challenging year for the U.S. refineries when the gasoline spec drops to 30 ppm and diesel falls from 500 ppm to 15 ppm midyear.

If you look at the forward curve for this year, the market is projecting 2005 to be very strong.

In the near term the forward curve for Gulf Coast gas cracks is about $7.00 per barrel for the first quarter.

With the recent cold weather in the Northeast and continued strength in low sulfur distillate demand, the Gulf Coast heat crack is at $6.00 per barrel for the first quarter.

If you look at the Gulf Coast, 5-3-2 margin on these numbers, it is 60 cents per barrel better than where it was in the first quarter of 2004, which was a record quarter for us.

Then don't forget the big difference this year in the first quarter is that sour crude discounts have nearly doubled from where they were last year.

Given that current first call estimates are barely above the 91 cents we made last year in the first quarter, it is obvious that the estimates are significantly too low.

In looking at the full year, Gulf Coast gas cracks are trading at about $7.25 per barrel for the year and heat cracks are pricing at about $5.25 per barrel.

Compared to 2004, which had a Gulf Coast gas crack of $7.73 per barrel and heat crack of $3.98 per barrel, you can see that the market is expecting gas cracks to be only slightly weaker and heat cracks to be substantially better.

Also keep in mind; our 2005-throughput volume should be 100,000 barrels per day higher than the 2004 levels.

This is because we will have the Aruba operations for the entire first quarter, which should add about 100 million incrementally to our operating income.

And we will also benefit from the strategic projects that were completed late in 2004 and those that are coming on line in 2005.

These strategic projects should generate around 175 million of incremental operating income in the 2005.

When you look at all these factors, it is clear why we believe that first call consensus estimates are also significantly understated for the full year.

You have heard me say over and over again that we have entered a new era in refining where the highs will be higher and the lows won't be as low.

This is not only true for product markets, but it is also true for sour crude discounts.

The tight supplies and high price of sweet crude coupled with growing supplies of sour crudes and resid, mean that discounts are going to be good for a long time to come.

All of you know that I've consistently said that you can't keep looking backward in our business.

In 2004, investors who look forward instead of backward were rewarded with the total shareholder return for the year of 98 percent. 2005 is shaping up to be an even better year than 2004 and in 2006 the product specs get much tighter, which means refining capacity will get even tighter.

And that is why I continue to believe that the best is yet to come and I am convinced that investors who continue to look forward will be rewarded with outstanding returns.

With that, we will open it up for Q&A.

(OPERATOR INSTRUCTIONS) Doug Terreson of Morgan Stanley.

Congratulations.

Bill, just to drill down a little bit deeper on the commentary that you made about the current quarter, when you consider the forward curve for gasoline and distillate, turnarounds, hedging and the impact of new plants, it appears that if spread were to be sustained at near current levels that Q1 profits would easily exceed the record results you just posted in Q4.

I wanted to see whether or not you thought this analysis missed any of the major variables that will eventually affect the outcome, and if so, what are they?

And then second on the same point, partially on the same point, if the fundamental trends that talked about are sustained for the full year, then you'll obviously have another record year in '05 and if so, then a cash position which is approaching $1 billion would nearly double in 2005.

And so my question regards your financial strategy in that scenario, that is if current conditions are sustained in the forward market, what would be the priority for the surplus funds that would materialize in '05, that is as it relates to spending, debt and equity reduction, dividends etc.?

So two questions there.

Boy, those were long questions.

Again, you just reiterated the fourth quarter, how good it was in spite of the hedge losses and the fact that we were down in (technical difficulty).

The first quarter obviously is going to be a great quarter.

We do have a lot of turnarounds in January that will impact the first quarter so again we expect the first quarter to be a record quarter.

With regard to the cash flow for the year, obviously we're going to end up the year with a low debt to cap ratio.

Some of the things that we will be looking at -- we will be looking at increasing the dividend.

We mentioned that we did acquire the $150 million worth of notes and I think Mike, we have 400 million coming due this year?

That will be paid off.

We will continue to acquire stock for our benefit plans.

And again we will be looking at strategic opportunities.

Great.

Good numbers and thanks again.

Jeff Dietert of Simmons.

Good morning.

Congratulations on your accomplishments in '04, more than just profitability.

I wanted to follow up.

You came in stronger than we had expected in the Gulf Coast relative to our indicators and I was curious -- my suspicion is its feedstock related but with Mayan spreads being even steeper in the first quarter than they averaged in the fourth quarter, I wanted to make sure I appreciated any changes you had in feedstock on the Gulf Coast fourth quarter.

I think it's primarily the feedstock.

But then again, we process a lot of Mayan crude.

If you take a look at St. Charles, it is primarily the Mayan crude.

The Aruba refinery which isn't obviously Gulf Coast but it is all Mayan crude; the coker, the Mayan crude and the discounts were just absolutely outstanding.

Incidentally all those investments were evaluated on the basis of $6.00, $7.00 discounts from Mayan to WTI, so those discounts now are triple what our evaluation had.

It looked like resid margins continued to widen or resid discounts are even stronger.

Were you able to increase resid as feedstock in the fourth quarter?

We always optimized between supplemental resid and the sour crudes we run.

So we run quite a bit of sour crudes imported out of Russia primarily.

They are a very big discount.

I guess acidic crudes traded at wide discounts as well.

Have you kind of maxed out what you can do at Quebec or is there a potential to run some incremental acidic crudes there?

No.

We've pretty well maxed that out.

We control to the tan (ph) number of crude acidic.

Thanks for your comments.

Congratulations on the quarter.

Fadel Gheit of Oppenheimer.

A couple of questions; one, lower tax rate for the quarter versus previous quarters?

And two, can you give us an indication of what you are borrowing right now Maya versus Saudi versus Iraq and so forth?

On the tax rate.

September, year-to-date our provision was 34.5 percent for the Company and Aruba contributed about 7 percent of our pretax income.

And as you know the Aruba refinery operation is tax-free.

In the fourth quarter, Aruba contributed about 17 percent on pretax -- had an outstanding quarter.

So that lowered our effective rate for the quarter to 30.4 percent and then for the year, 33.4.

(multiple speakers) For 2005, what would be the tax rate?

We're giving guidance right now of about 33 percent for the Company.

And then on the crude slate?

On Mayan today, you are about 1750.

It averaged about 16.75 for January which was about on par with December.

And you want to know how much Mayan we ran?

Correct, I'm talking about absolute volume.

We run almost 17, 18 percent of our crude slate.

Almost 20 on a Mayan look-alike basis.

So should we lump up all the Saudis and Iraqi are all the same or what?

Fadel, what I usually help people out of with theirs -- of the crudes we run, about 525,000 barrels a day is heavy sour, Mayan light crudes (multiple speakers) there.

We'll give you a couple numbers.

We are running a little over 300,000 barrels a day at Maya, a little over 230,000 of so barrels a day at Saudi.

Kuwait crude is slightly less than 100, 75 to 80,000.

The reason I ask the question because if you give detailed guidance of the crude slate, maybe we analysts would come closer to what you think the right estimates should be.

If that's what it will take, we will give it to you daily.

All right, thanks.

John Meloy of Bleichroeder.

Good afternoon.

Do you have any CapEx guidance for '05 and if so, could you break it into Tier 2 gasoline, diesel, etc.?

The guidance for '05 is 1.8 billion.

On the Tier 2 spending, it's going to be about 450 and split between -- that's what you're wondering, right?

The Tier 2 is about 450.

Can you give the other components of the 120?

Other regulatory capital will be about 325.

Sustaining and other is 420 and of this 420, that includes G&A and interest and overhead of 175; turnarounds around 280; and strategic, 320.

Okay, in '05 other than the 400 million, is there any other debt you could repay?

What are the prepayment penalties and would this take precedence over an increase in dividend or stock repurchase?

We have the 400 million that Bill mentioned that just comes due during the year.

We do have other debt that we could prepay.

The 150 that we bought back this year for December and January, that was our '06 and '07 maturity and they are relatively inexpensive to buy back, so that would be one thing we could consider (multiple speakers).

How much falls under that umbrella?

Right now what is left under those is 220 million of the '06's and 287 of the '07's.

When you say inexpensive, are you talking about 1, 2 percent --?

We spent -- that's about right.

So far we've spent 7.8 million in premiums associated with the 150 buyback.

The 150, that was repaid in '04 at 7.8 million in fees?

Part of that was finished in January.

We did the 80 million in January so the total of the 150 occurred about 7.8 million premium.

Okay.

I will have to follow up with you on that I guess.

It seems like 7.8 far exceeds the 1 to 2 percent call premium.

We got a 5 percent premium.

And then lastly for Gene, are you still seeing strong diesel demand on a worldwide basis and particularly into Latin America are Europe?

Are you seeing exported barrels out of the Gulf Coast and any signs of this slowing or picking up?

Yes.

In fact we're seeing barrels from Europe I guess the Russian gas barrels that don't meet the spec over there.

A lot of that we see going into Latin America.

As far as our Aruba production we had been sending to Europe because they are a warmer weather.

We're seeing a lot of demand in South America there.

We are looking at (indiscernible) and Argentina and Brazil right now.

This is really their summer period down there too, so its economic growth, not cold weather driven.

Okay, thank you.

Mark Gilman of Benchmark.

Gene, can you give us what your hedge positions looked like for the first quarter and full year '05?

I guess at the last call, you remember we said we had about 25 percent of our distillate hedged for '05 and we had a marked-to-market -- I think we were on at about $5.00 per barrel at the time and the market at the time was around $7.00 per barrel.

So we had about a $2.00 loss from 65 million barrels or 130 million at the time.

Since then we've added a few more positions.

We're up to about 27 percent.

We sold when the market was strong.

It's come off a little bit and we're currently -- the marked-to-market is about 100 million.

So we've got about a $30 million improvement since the last call but obviously it's still a loss.

And primarily because selling these things in '05, I think our average price now is about $5.15 per barrel.

So really high margins but the market is stronger.

Distributed pretty evenly over the year, Gene?

It's probably going to be a little more in the first quarter just because a lot of these things when you put them, you put them on a flat price for the year and the first quarter being a stronger number than what the second quarter is going to be -- it's going to be a little skewed toward the first quarter but it is distributed over the year.

And no gasoline hedged?

None at all, right.

Were there any earn out payments in the fourth quarter?

Not in the fourth-quarter.

In January we made the earn out on the Orion acquisition.

What was that, Mike?

We made the earn out payment on the $50 million payment on the Orion acquisition in January.

Okay, can you give me a rough idea of what the expansion will do in terms of the alkylation and FCC capacity at St. Charles?

I can comment on that, Mark.

Volumetrically we're going to take the cat cracker at St. Charles from about 85,000 to 100.

We are also going to increase the alkylation (ph) feed capacity from about 14 to 22,000 barrels a day.

With the timing of these projects, you should increase income in '05 by about 33 million.

One final one if I could.

Historically I know I've been told not to look backwards but forgive me for a moment.

When crude prices come down arithmetically, discounts go down as well.

Would you expect that not to be the case if crude prices were to work their way back towards say the mid 30s or something like that?

Mark, this is Bob Beadle.

I think if you got plat price coming down you are going to experience some of that compression and if the drop is related to a drop in demand, then the bottom of the barrel might continue to remain depressed, so that would mitigate that compression that you are talking about.

Okay, thanks a lot.

Wayne Cooperman of Cobalt Capital.

Are we going to see the CapEx come down in '06 or is it going to stay at that same level as '05?

It's about the same.

So when is it going to come down?

It'll start going down in 2007 when we get through our Tier 2.

Primarily our Tier 2 will be done at the end of 2006.

It could go down but again, we have a lot of strategic projects that we have got a backlog on that have great rates of return and we're going to have our balance sheet in great shape by the end of the year. (multiple speakers) So we are going to start feeding these strategic projects into the capital program.

Even though we talk about a lower capital number based upon what we see right now, we will be putting more strategic projects.

How is the acquisition market looking now and can you make acquisitions at similar or better returns than these strategic projects you are talking about?

I don't think we're going to be able to make the acquisitions like we did at St. Charles and Aruba.

That was just unbelievable, but again it was because Valero had the expertise and the management, and the operational know-how that made those both successful.

We are looking at some acquisitions and I think there is the possibility that you can still buy a refinery or so that is having a lot of problems and -- Citgo there's rumors selling their refineries.

So I think there's going to be opportunities but you're not going to get them for what you have historically.

How would those compare to the strategic stuff that you mentioned?

We bought Aruba and St. Charles for less than 20 cents on the dollar replacement cost.

The most we had ever paid was Benicia which was the most profitable refinery Exxon had and I guess we paid close to 40 percent on that.

So I think you'd be looking at a much higher percent of replacement costs.

My question was the return on that versus the return on the internal stuff that you mentioned that you could do.

Oh, the return on those two acquisitions --

No, on the next acquisition.

I don't know.

It probably wouldn't be as good as some of these projects.

Last question, how far out can you lock in some of these sour discounts?

Well, we have looked for example, Mars, the forward curve on that and you can go to the end of the year and still be above $7.00.

Have you done that?

We have not done at any great extent.

Maya, minus the k-factor, you can lock in over $10.00 here near term up to $9.00 by the end of the year.

Great.

Sounds good to me.

Thanks a lot.

Jay Saunders of Deutsche Bank.

Just a couple questions.

On the operating expense in the Northeast, is that increase there the cost of running higher asset crudes or is something else going on there and what is happening in the Midwest?

I assume that is maybe natural gas?

I can make a couple comments on that.

On the Northeast business, we started up a new CCR reformer and gasoline sulfurization unit.

In addition, natural gas prices have been up and so that has been a factor in the Northeast business as well.

Natural gas on average fourth quarter versus third quarter on a Houston basis, fourth-quarter natural gas about 637 per million BTUs and it was 550 in the third quarter.

Okay and on a segmented basis, where does the 165 million come through, the hedging loss?

Is that on the East Coast margin or where?

Jay.

It's allocated.

We allocated back based on throughput margin.

So it's allocated back to the gross margins of all the proprietary segments.

All of the refineries except for Quebec.

Okay, thanks.

Jennifer Rowland of J.P. Morgan.

A couple of questions.

Were there any impacts of LIFO in the quarter?

There was a small impact in the fourth quarter.

It was not material.

For the year the impact was about 20.

Can you quantify the trading income in the quarter or loss?

It was about 165 million that we mentioned in our remarks on the heat crack positions that we had.

That was in the fourth quarter and as I said, that flows back through the gross margin so it is in the gross margin per barrel or the gross margin numbers we reported.

Seg profit is about 8 million for the quarter; 25 million for the year.

Okay and can you just give us your expected throughputs by region for the first quarter?

Sure, Jen.

For the Gulf Coast, we would expect it to be around 1275, the West Coast probably around 300; the midcontinent probably about 275; and the Northeast like 395 to 400.

Those are all 1000 barrels a day.

Great, thank you.

Paul Cheng of Lehman Brothers.

Good morning.

Eric, you mentioned the first quarter throughput level.

Can you give us the full year throughput estimate?

Yes, the throughput would obviously be more difficult to estimate but I can give you some ballparks here.

We expect full year Gulf Coast at about 1.3 and about 300 for the West Coast.

In midcontinent, about 275 and about 390 to 400 for the Northeast.

As you can see, pretty similar across if you are looking at it for the full year.

Obviously there's going to be variation quarter-to-quarter due to turnarounds and other factors, but it's very loose numbers there.

Bill, seriously from time to time you have said that you started to warm up a little bit for the refinery outside U.S. and you are looking at Europe and think that it could be a possibility.

I'm wondering is there any further progress on that front or are you just still looking and you have any that really feel as sufficient and attractive for you to take the plunge or do you just need more time to do an analysis there?

Well, we are kind of where we were before.

We're continuing to study that market but we have not made any decision as to whether we are going to leap into it or not.

Bill, can you share with us that what may be the most important criteria that makes you take the plunge or that you say okay, that is marked-to-market for us?

Let me tell you that our strategic acquisitions, the criteria really has not changed.

It has got to be a large refinery, over 100,000 barrels a day.

We're looking at refineries that have upgrading and can process the heavy sour crudes and we are also looking at anything that would add value to our existing refining system.

If you look at every acquisition we've made, they are synergism with our existing assets.

So that is the criteria we would follow in looking at that kind of a strategy going forward.

Okay, and I presume that your view about retail also did not change?

It has not changed.

And we should not expect any major investment there then?

That's true.

Very good, thank you.

Andrew Fairbanks of Merrill Lynch.

I would like to commend you on seeing and kind of refining in sour feedstock trends 10 years ago and having the courage to position the Company to take advantage of that.

It has really just been a tremendous value creation run so you should certainly be proud of that.

My question surrounds the longer-term capital spending profile for the strategic projects.

Do you have a sense for when you'll come closer to a conclusion on whether St. Charles is doing some additional work there or Aruba or potentially Citgo would be wonderful if you could get that and start to put some cokers in.

Any sense for is that given the leadtime you have to do to do some of the feedwork on some of these major projects, will we get some conclusion some time this year or do you think that will be yet a few years down the road?

We would expect to get that this year.

We're now in the middle of looking at all of our assets and obviously focusing on the ones you said plus Texas City and Corpus Christi and seeing what we can do there process-wise with the base that we have.

We're in the middle of that.

We have a whole group working on that.

We expect to bring it to Bill Greehey here in the next -- as a more finished project in the next 3 months but a preliminary review pretty soon.

And our goal is to work that into our strategic planning which we do in the third quarter and present to our Board in October.

Fantastic, thanks.

Daniel Burke of Johnson Rice.

You mentioned or noted that your sour discounts and sour throughput added 100 million incrementally ops income on a year-over-year basis.

I'm wondering if you've looked at that on a net basis accounting for the resid and asphalt discounts that the bottom of the barrel carries?

Yes.

We have those too.

Obviously the resid, both the product and the feedstock too.

On the product side obviously, one of the reasons these discounts were so wide is that the resid prices were so low and so that was obviously a negative variance going the other way.

So in a way, 800 million for the gross -- did you look at a net number?

There's numbers going both directions.

Obviously heat cracks were up if you are looking versus the third quarter.

Obviously resid sold as a product.

Those prices were down, so there's things going both directions.

We just highlighted there what the benefit of the sour crude leverage was incrementally but there's things going in both directions.

Okay, fair enough.

And just one other question.

In the past you've been willing to share some intelligence on future turnaround activity planning in the U.S.

I was wondering how you view the U.S. spring turnaround season unfolding.

What level of turnaround activity in aggregate you think we will see?

Well, (indiscernible) puts out a forecast and they basically show it being -- crude turnarounds being similar to last year maybe not quite as heavy but last year was kind of a record, but much more importantly I think converging in turnarounds or in what we're tracking so far we are actually seeing converging in turnarounds higher than what they said which was going to be a record year.

The number of cat crackers, cokers, hydrocrackers, reformers, all being down all through the first quarter.

Okay, thank you.

Doug Leggate of Smith Barney.

A couple of questions.

First on the tax situation in Aruba.

Could you just remind us as to how that works through and talk a little bit about how you see that longer term in terms of impacting your long-term tax outlook?

The second question relates to the comment you made about your Mayan feedstock.

I think you said about 17 or 18 percent if I'm not mistaken.

With (indiscernible oil, the bulk of the Mayan field being in decline, our understanding is that PEMEX is not going to renew any further long-term contracts.

I wondered if you could just comment about that in terms of your long-term stock plans for the Gulf?

Let me ask you on the first question, Aruba, you were asking on the tax holiday?

Zero tax goes through 2010.

And thereafter what impact would you expect that to have?

On your corporate charge, the normalized run rate I guess.

After 2010?

You know, I will tell you in all honesty we will do additional capital at the refinery and they will extend that tax holiday if you spend additional dollars, so I don't think we will be paying any taxes anytime soon on Aruba.

They want you to continue to make investments and that is the trade-off.

As far as the Mayan crude, we have obviously visited with PEMEX and PMI.

Their production over the next couple of years is pretty solid.

They're making investments.

Bill Greehey and I both just met with the new director general just the other night and we believe we are the largest Maya purchaser in the United States and we expect that we will have our volumes there as well as the hours that we run including NAPA (ph), Ariente (ph), Moray (ph), and Venezuela and the rest of them.

Okay, that's great.

Thanks very much indeed.

Fred Leuffer of Bear Stearns.

Bill gave some numbers before on heavy and medium heavy crudes, 300,000 a day from Maya, 230 for Saudi Arabia and 75 to 80 for Kuwait.

When does that apply to?

Was that in the fourth quarter or for the first quarter?

Those tend to be our contract volumes and so they are there all the time.

We have a breakdown.

Eric can give it to you.

But we have contracts and so.

How much do you want to know here?

I guess what I'm thinking about, Bill, with the cutback in OPEC productions particularly by Saudi, if there will be a change in the first quarter versus the fourth quarter in terms of your feedstocks?

NO, we've actually -- we have not been cut back.

Do you think that is just a delay in the timing for transportation and you would expect some change this quarter or for some reason they're cutting everybody else back but not Valero?

Well, I don't know if it is Valero but it's the United States also.

You don't just have to look at the Saudis.

All of the crude coming on from an increased supply standpoint this year and the next couple years are medium sours.

I know about the world supply situation but I'm just wondering about -- I mean every major oil company has told me they've been cut back pretty good by the Saudis here in the first quarter and I'm just wondering if any of that is going to change let's say in the first half your crude slate? (multiple speakers)

I would think -- we have actually increased our volumes since I would say third quarter of last year so it's tough for me to tell you we've been cut significantly.

I think a lot of folks are talking about are FOB discussions?

And they are taking them to the European or Asian refineries.

No question those regions were seriously cut.

So we should use these volumes you just gave us for the first quarter?

I would expect we'd get those volumes in the first quarter, yes.

Even if you don't have the term supply, the spot market is pretty much the same prices for some of the top quality crudes, whether it is from Saudi Arabia or another source.

(multiple speakers) We're buying oil from Iraq, South America, Venezuela as I mentioned, some of the crudes that come up the West Coast.

We don't see a problem here in the first quarter.

Thanks a lot, Bill, and your colleagues.

Thank you.

A follow-up from Mark Gilman of Benchmark.

Was there some kind of adjustment in the Gulf Coast DD&A rate?

Fourth quarter versus third quarter?

Fourth quarter versus almost any quarter of the year.

It looked as if there was an adjustment of some kind.

The fourth quarter does reflect the gain on the sale of the Morgan Point, MTVE facility that we did in fourth quarter.

That's roughly $15 million.

Offsetting that by about half that amount is increase in refinery or DD&A due to the refinery project.

Okay, were there any crude slate changes going third quarter to fourth quarter focusing particularly on the midcontinent and the Northeast?

In the Northeast we've run some Arab Heavy crude so that would be the only change it calls for.

In Quebec, we tend to run the crude slate although we have run some of the West African crude.

So I think on the Northeast that's where we're going to tell you there's nothing of substance.

In the Gulf Coast --?

I said the midcontinent, Bill.

Midcontinent, the usual mix of domestic.

We had brought some imported crude in.

We did run some Saharan in the midcontinent but there is no -- nothing of substance.

Is there anything else in particular other than crude slate changes that you could think of that could explain some very substantial departures in the realized margin versus indicator in those two regions?

Yes, in Denver we adjusted our transfer price and the second half of the year and then in fourth quarter to our wholesale marketing group and that was to get the -- our business units aligned better so that everybody was working in the Company's interest.

So we reduced the transfer price so refining took a hit in Denver and at McKee for the benefit of wholesale but it actually aligned the profit objectives better.

And so that is in the numbers and it does show up especially for the Denver and McKee refineries.

And that would show up as a reduction in the realized margin?

It does in the refinery.

It shows up in the wholesale marketing line.

I thought the realized margins that you reported included wholesale, Bill.

And the asphalt realization. (inaudible)

Okay, we will take it off line.

Thanks.

Bruce Blythe of Bloomberg.

A question on the sour feedstock processing.

You mentioned in the release that 1.3 million barrels per day processed during the fourth quarter, that average discount is $10.00 to WTI.

I wondered if you could compare that processing to previous quarter and maybe look ahead and tell us whether you see that proportion changing this year?

It was about 60 percent of your total processing I believe?

There really weren't any changes to our feedstock slate.

We've always been focused on the sour.

We ran last quarter --

The first-quarter in Mars is seven and Maya it's 17.

The average is probably a little over better.

First quarter is better than fourth quarter and fourth quarter was better than third quarter.

I think the other thing is in that 1.3 are resids.

And we run sweet and sour resids.

And the sour resids are still at 18, $19 under WTI but even the low -- that's delivered into the Gulf, so even the low sulfurs are holding in there at $9.00 under WTI.

But do you see the proportion of the total feedstocks changing at all as we do ahead this year?

It's about like about 60 percent of your total processing I believe?

It will actually go up slightly during the year for strategic projects and we are also putting in two sulfur plants so the percent will actually go up slightly.

Slightly.

Can you specify any more than that?

I'll tell you what.

Could you maybe -- if you could follow-up with our media relations person, Mary Rose Brown after the call.

That would be best.

Mark Kibble (ph) of Barclays.

Just a question on international expansion objectives and with your leverage so low, would you consider still funding any of these acquisitions as you have in the past with asset and (indiscernible) equity?

Again, we've got to make sure that we are investment-grade and we are going to have to be in the 20 percent range before we are able to do anything.

And so if we do anything big it's going to be debt and equity.

Okay and as far as any international plans?

We don't have any international plans.

Again we're studying that market but we have not made a decision whether we're going to enter that market or not and obviously there are refineries for sale.

Thank you.

At this time, there are no further questions.

Are there any closing remarks?

Just thank you all for participating in the call and if anyone has any follow-ups, please feel free to give us a call.

Thank you.

This concludes today's conference call.

You may now disconnect.