瓦萊羅能源 (VLO) 2008 Q3 法說會逐字稿

Good morning, my name is Kristi, and I will be your conference operator today.

At this time I would like to welcome everyone to Valero Energy's Conference to announce its third-quarter 2008 results.

(OPERATOR INSTRUCTIONS)

Thank you.

I will now turn today's conference over to Mr.

Ashley Smith, Executive Director of Investor Relations.

Thank you, Kristi.

Good morning, and welcome to Valero Energy Corporation's third-quarter 2008 earnings conference call.

With me today are Bill Klesse, our Chairman and CEO, Mike Ciskowski, our CFO, Rich Marcogliese, our COO, and other members of our executive management team.

If you have not received the earnings release and would like a copy, you can find one on our web site at Valero.com.

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

If you have any questions after reviewing these tables, please feel free to contact Investor Relations after the call.

Before we get started, I would like to direct your attention to the forward-looking statements disclaimer contained in the press release.

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

Now, I'll turn the call over to Mike.

Thanks, Ashley, and thank you for joining us today.

As noted in the release, we reported third-quarter 2008 earnings of $2.18 per share.

Excluding the $305 million pretax gain on the sale of the Krotz Springs refinery, our third quarter earnings were $1.86 per share.

Due to long-term agreements between Valero and Alon, the results of operations related to the Krotz Springs refinery have not been presented as discontinued operations.

Third-quarter 2008 operating income was $1.8 billion, or $1.5 billion excluding the gain on the sale of the Krotz Springs refinery, which compares favorably to the $1.2 billion reported in the third quarter of 2007.

The increase in operating income was due to the Company's higher throughput margin per barrel of $13.11, which was up $3.17 per barrel, or 32%, versus the third quarter of 2007.

The main driver of the higher throughput margin compared to the third quarter of last year was the increase in margins for distillates such as diesel and jet fuels.

Partially offsetting the higher distillates margins were lower margins for gasoline.

Third-quarter throughput volumes averaged around 2.6 million barrels a day, which was 257,000 barrels per day lower than the third quarter of 2007, and 159,000 barrels per day below the second quarter of 2008.

The decrease in volume compared to both of the prior periods was primarily due to the reduction in capacity from the sale of the Krotz Springs refinery and lower operating rates caused by the hurricane.

Refinery cash operating expenses were $4.96 per barrel, higher than our guidance, primarily due to writing off costs associated with deferred capital projects, expenses associated with the hurricanes, and then lower than anticipated throughput due to the hurricanes.

General and administrative expenses, excluding corporate depreciation, were $169 million.

The $52 million increase from the second quarter was mainly due to increases in legal, environmental, tax and incentive-based compensation costs, approximately half of which was attributable to favorable adjustments in the second quarter that did not recur in the third quarter.

For the third quarter, total depreciation and amortization expense was $370 million, and interest expense net of capitalized interest was $81 million, both in line with our guidance.

The effective tax rate was 36%.

Regarding cash flows for the quarter, capital spending was $749 million, which includes $76 million of turnaround expenditures.

We spent $74 million to purchase two million shares of our stock, and since the end of the quarter, we have purchased an additional 8.3 million shares, which takes our total purchases for the year to nearly 23 million shares.

We currently have approximately $3.5 billion of repurchase authorization, in addition to our ongoing anti-dilution program.

Regarding future uses of cash, we have significantly reduced our estimate for our 2008 and 2009 expenditures on capital and turnaround costs.

We estimate 2008 expenditures will now come in around $3 billion, down $800 million versus our previous guidance of $3.8 billion, and down $1.5 billion from our original estimate of $4.5 billion.

Although we continue to remain flexible with our 2009 numbers, we estimate that next year's spending on capital and turnarounds will total approximately $3.5 billion, lower than our previous update of $4 billion.

Regarding our balance sheet at the end of September, our total debt was $6.5 billion.

We ended the quarter with a cash balance of $2.8 billion, and our debt-to-capitalization ratio net of cash was 15.8%, which was down from the second quarter ratio of 20.5% and one of the lowest in the Company's history.

To further strengthen our financial position during the quarter, we increased the amount of committed credit facilities by 10% to $3.2 billion.

Including uncommitted amounts, our total credit facilities as of September 30 were $4.4 billion.

Although we had no borrowings on these facilities, we did have $1.2 billion in letters of credit, leaving us with approximately $3.2 billion in total availability.

In addition to this amount, we have $900 million of capacity under our accounts receivable sales program.

Our primary revolvers do not mature until 2012, and these revolvers consist of contractual obligations from a large and diversified group of banks with no single bank holding more than 5%.

Regarding our term debt, upcoming maturities are relatively low and consist of $209 million, coming due in the second quarter of 2009, and then only $33 million in 2010.

Also in 2009, per terms of the indenture, we are required next October to offer to purchase $100 million of our bond.

In early October, Moody's recognized our solid financial position by raising our investment-grade credit rating a notch from BAA3 to BAA2 with a stable outlook.

For the rating upgrade, Moody's decided many of the same factors that we believe differentiate Valero from other independent refiners.

Key factors include our large complex operating scale, regional margin diversification, ample liquidity, low leverage with sufficient cash flow coverage.

In summary, our Company continues to be profitable and in a solid financial position, despite the turbulence in the financial markets and the massive sell-off in energy stocks.

We do not have to sell assets or take any desperate actions.

Our financial strength provides us the ability to move through difficult economic and industry conditions, and this is a clear advantage over many other energy companies and independent refineries.

Now I'll turn it over to Ashley to cover the earnings model assumptions.

Okay.

Thanks, Mike.

For modeling our fourth-quarter operations, you should expect Gulf Coast refinery throughput volume of approximately 1.425 to 1.475 million barrels per day.

Mid-Continent throughput volume should average between 410,000 and 420,000 barrels per day.

Our West Coast throughput should average between 270,000 and 280,000 barrels per day.

Northeast throughput volumes should average in the range of 560,000 to 570,000 barrels per day.

Refinery cash operating expenses are expected to be about $4.50 per barrel, which is lower than third quarter due to a combination of higher throughput volumes, lower expected energy costs, and the absence of hurricane-related costs.

With respect to some of our other items for the fourth quarter, we anticipate G&A expense to be around $160 million, net interest expense should be around $80 million, and total depreciation and amortization expense should be around $370 million.

And for the fourth quarter we estimate a 32% tax rate.

That concludes our prepared remarks.

Kristi will now open the call for questions.

(OPERATOR INSTRUCTIONS)p We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Mark Flannery of Credit Suisse.

Yes, good morning.

I'd like to talk about the CapEx reductions, if possible.

Can you give us an idea of what you will not be doing now in 2008 and 2009?

Are we talking about project cancellations, deferrals, or are we talking about an extra hard look at maintenance?

Maybe just a little color on what's not going to happen.

Sure, Mark.

This is Rich Marcogliese.

I can give you a sense for that.

I would say the bulk of what we are doing, our project deferrals, although there have been a couple of project cancellations that we can note, on the cancellations side, we originally included a new delayed coker at our Port Arthur refinery.

We still think that fits with the long-range vision for the plant, but we've actually deleted that project from our capital budget.

In addition, associated with our MSAT2 project, this is the mobile source air toxics, we had anticipated benzene recovery plus the production of paraxylene.

We have deleted that paraxylene portion of the project and will now go with centralized benzene extraction and marketing at our St.

Charles refinery.

So I think those two would be representative of things that we have decided to take out of the capital budget.

Beyond that, we have a number of project deferrals that I would share.

It includes pushing off a planned Cat cracker revamp at our Memphis refinery from 2009 to 2011.

We were going to push back the hydrocracker project in Port Arthur from 2010 to 2011.

There are also plans for plans for upgrades at our Quebec refinery, primarily at the asphalting unit and a sulfur plant.

That will be put off sometime within the next five years, as will be a products pipeline from Quebec to Montreal.

So, what we've got again is a combination of a couple of deletions from our capital budget, but primarily it represents a number of deferrals on discretionary investments.

Right.

Maybe I could just have a related follow-up, which is how close are we getting to minimum necessary CapEx levels now, would you say?

In other words, how much more is there in there to defer if you found that to be necessary?

Sure.

I can give you a couple figures on that.

We would say our sustaining capital level is around $1.4 billion to $1.5 billion.

Now that's exclusive of environmental-related investments, which are going to be of the order of 500 million to 600 million over the next three years, as we complete our EPA-114 program.

So, I would say over the next three years, the minimum is around $2 billion.

Great.

Thank you very much.

Your next question comes from the line of Roger Read of Natixis Bleichroeder.

Good morning, gentlemen.

Following along that line, what do you see in the way of turnarounds, I guess a little more in the near term?

Let's say the first part of '09, but also just how you might be scheduling your turnarounds a little differently, given the environment we're in today?

Actually, turnaround activity is pretty light in the fourth quarter.

We are well into a downtime at our Wilmington refinery on the cat cracker and alkene, and it's not a turnaround on those units per se.

We have an air quality project that we have to install to reduce particulates.

And actually that -- so the unit is down to install a new electrostatic precipitator.

Beyond that, we have a planned crude unit turnaround at Delaware City.

And that wraps things up.

Our turnaround-related expenditures this year should end up at around $400 million.

Now as it turns out, 2009 will be a more significant year for turnaround activity.

It will begin with a turnaround in our heavy low cracker at Corpus Christi in January, followed by crude unit turnaround and coker turnaround in Texas City in February.

Our St.

Charles refinery will have a coker outage for coke drum replacement in June, and then we have a cat cracker turnaround in Delaware City planned out in September.

If you look at our turnaround expenditures on a year-to-year basis, 2008, again, would be kind of a low point at around $400 million.

The next couple of years we'll be in the $600 million to $700 million range.

And it relates to the timing of the individual refineries, of when their major units require maintenance.

Okay.

Have you noticed, or would you make any changes, given the weaker environment we're in today, regarding how long you would do a turnaround, or would you slow down the pace at which you were working in order to --- you'd have no reason to be back on in 30 days, if it takes 35 and you can do it a little cheaper, or is it generally a pretty fixed cost as you go through this?

Well, there may be some examples of maintenance where we would work them on a straight day shift as opposed to around the clock.

But typically, especially on the crude and coker side, you're going to want to get those units back on line as quickly as possible, so you're going to typically work them around the clock like we do.

And I think you would do the same for cat cracker turnaround.

So, I think you would be very, very selective on small units where you would work them on a straight time or daylight basis.

Okay.

And then, since we've seen relatively weak gasoline retail numbers out of the MasterCard guys, certainly the EIA hasn't given us a warm, fuzzy feeling recently.

I was wondering, though, as we come away from the hurricane impacts, especially as they constricted available supply in the southeast US, have you all seen any indication, as gasoline prices have been coming down, of any sort of either directional improvement or you're -- probably not quite year-over-year improvement, but sequential improvement seasonally adjusted over the last couple of weeks?

I don't have the last couple of weeks of data, but like in October, our volumes on a same-store basis were down about 1.5%.

Okay.

Thank you.

Yes.

Your next question comes from the line of Jeff Dietert of Simmons.

Jeff here with Simmons.

Good morning, guys.

Good morning, Jeff.

I was wondering if we could get an update on cost inflation or deflation at this point, in some of the major projects?

And should we expect the capital costs to decline, or are they largely locked in on the St.

Charles and Port Arthur projects?

Yes, Jeff, I'll make a couple comments on that.

The general trends we see in the market that commodity pricing is beginning to come down, looks like steel prices -- I think they have peaked and they are on the way down, I would not say, though, that we've seen any impacts on labor rates at this point, for construction labor to do physical work.

But we are also seeing indications out of the engineering contractor community that their queues are diminishing, and we get reports that they're actually looking to define work into next year.

So my sense is some of the inflationary drives that we have seen have in fact peaked.

And maybe we're going to see a little bit on the downside.

As it relates to our specific projects, we're not in a position at this point to indicate that they're going to be any higher than we've previously identified.

Okay.

One of your recent presentations included a comment that financial flexibility provides options when opportunities become available.

With the revaluation of assets that's happened over the last four months, could you talk about what opportunities are starting to look interesting?

Well, we are a refining and marketing company.

At least as of today, we don't have any indication of anything that is available.

But we would be, as we've said in every call, interested in looking at the right assets.

We invest for the long term.

It's a very capital-intensive business.

So if there's an opportunity, we're interested.

And you would stay -- continue to focus on large, high-complexity refining, similar to what you've done historically, no dilution to the existing complexity in the portfolio?

I don't have the specifics.

I guess I would say, the way you're phrasing the question, yes in a way.

But if the base is solid, if we see a way to capture synergies, evolve from crude purchases to marketing, to eventually upgrading, we'd be interested.

So I wouldn't answer your question with an emphatic yes.

I think it's more evolving.

Thanks for your comments, Bill.

Your next question comes from the line of [Paul Cheng] of Barclays Capital.

Hi, guys.

Can I get some balance sheet items -- working capital, long-term debt, the inventory of market [revenue] in excess of the book value?

Okay.

Our current access, less cash, is $11.9 billion.

Our current liabilities, less our current maturities, is $11.6 billion.

Long-term debt and capital leases is $6.5 billion.

And then our book value of our hydrocarbons inventory, I think you asked, is $4.7 billion.

Excess -- total market value is about $12.2 billion, so the excess market value over book value is $7.5 billion.

And the 11.9 and 11.6, that means that your net working capital right now is a positive $300 million?

That's right.

Okay.

And in the $305 million pretax gain, related to the sale of the Coral Spring, I believe you also have sold forward the earn out for $200 million, or something like that.

Is that gain [you're seeing] including in this $305 million, or it is not?

It is not in the $305 million.

And when are you going to recognize it or --

Let me correct that.

It is in the $305 million.

I'm sorry.

The gain is in the $305 million.

Okay, so the gain related to the earn out is already in that?

Yes.

Okay.

Curious that -- is there any material inventory or hedging gain in the number?

Given the oil price came down so sharply, typically that has some inventory gain for most people.

So do you guys have recognized anything here?

We did not have a LIFO decrement.

We did reduce our inventories throughout the quarter close to our LIFO base.

So there's not a material effect on our P&L.

How about on P plus one, because I think you guys don't P plus one, but still have some crude purchase impact as oil prices come down, I assume?

We do not do P plus one.

Paul, I'm not exactly sure what you're asking, though.

You're looking for did we have a gain on the reduction in our inventory volumes in the quarter?

That's correct.

And also that the way the crude prices come down, did you get some sort of a transition rate, a temporary benefit in the quarter?

Mike mentioned the LIFO effect.

But that -- outside of that, we -- in order for us to get a gain on the reduction of the crude inventories, we'd need to take a decrement.

And we didn't do that.

We did not take a decrement.

I see.

Very good.

Thank you.

Uh-huh.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Paul Sankey of Deutsche Bank.

Hi, good morning, everyone.

Paul.

The language here, though, seems very negative.

And one thing I was just wondering about is the fact that distillate margins are holding up.

You seem to be implying that you think that's just related to winter, and it's only a matter of time, say the middle of next year, before they -- they become the last strength to leave us.

Can you just give me your perspective on that, particularly also related to trade in distillate?

I know that's been a big part of the story here.

Thanks.

Paul, I'm not sure where I am negative, so I guess that's in the eye of the beholder.

But we had a terrific quarter, really.

And our operations, we did have a hurricane, so we had plants down, but Rich's group got our plants back.

We continue to improve our operations as we go forward.

We're investing, fixing plants that I talked about in the past.

We're under invested for years.

To the margins, gasoline crack, when you look at crude, is very weak.

The industry must cut back.

We have cut back on reformers.

Unless we need the hydrogen, reformers in a refinery have your weakest economics.

Distillates, sure, we're going into winter, inventories are good from our perspective.

It gets cold every winter.

We expect to see good demand.

By the time you get to next Spring, I'd like to think, maybe this is where you're getting me being a little pessimistic, I'd like to think that we're having some economic recovery in the world.

It is always about demand in our business.

And if your assumption is that we're going to have very, very poor economic activity in the world, then eventually margins will weaken.

But I don't see it that way.

I think by then we're surely going to have some recovery going on.

And that will affect distillates.

Distillates are still tight.

And also, don't forget, Europe continues to be short distillate, South America is short distillate, Chile is going to buy distillates for their winter, our summer.

But the industry needs to watch its utilization rates.

There's no question.

The distillates are strong because demand is still there?

Not in the United States, but it's been strong in places in the world, and now we're entering Europe -- entering Winter.

But distillates were strong because demand was there this summer from Europe and South America.

And don't forget, for Valero, there's two other components.

One is the heavy sour, medium sour differentials.

And they'll widen here as we go into the fourth quarter and first quarter as the asphalt season's ended.

And the other thing that's really important to remember is all these other products that we make.

Asphalts, propylenes, lubes, and all of that, with the falling oil price or raw material price, those product prices have not fallen as much, and the number swing for us is huge.

Even in the third to the second was $500 million?

$560 million.

$560 million of improved gross margin just on those other products from the third quarter to the second as the oil price has fallen.

So, it's obviously continued here in the fourth quarter.

So there's a lot of positive things going on.

The only weakness really is, when you look at it, is gasoline.

Yeah.

I guess what I was saying about you being negative is that you're cutting CapEx and building cash on your balance sheet.

It's not exactly the actions of a bullish outlook.

Can you just talk a little bit more about how much cash you would want to -- or how high you will take the cash on your balance sheet?

I can understand it's a defensive move, but can you talk a little bit more about the balancing that you're doing between the CapEx and the buy back, and I'll leave it there.

Thanks.

Well, okay.

So if you're asking me about cutting capital relative to cash, I think we're looking at the world we're in, and having cash is very, very prudent for everybody on the line that's an investor or an employee, our Company is financially solid.

And we're going to weather this storm that is going around the world.

You asked specifically how much cash?

I don't think I ever have enough cash.

So we're going to build cash here, and we're going to maintain, as we said in our release, the balanced approach that this management team has used for last three years where we've increased our dividend, which I'll add is yielding now just about 4%.

Our dividend, we're buying back stock, we're invested in our assets, and we're trying to find good, long-term shareholder value projects that we can do at our key refineries.

So I think -- I'm not going to answer you specifically to a number, but I am going to say to you that the management team is going to continue the strategies that we've done the last three years.

But with uncertain times, we're clearly holding more cash.

Okay, Bill.

I'll leave it there, thank you.

Your next question comes from the line of Chi Chow of Tristone Capital.

Thank you.

Back on the distillate issue, could you give us some idea of the level of exports, distillates exports in the third quarter, and what you've seen here for the fourth quarter for the Company.

Yes, Chi, this is Joe.

We had extensive exports, really through the early part of the quarter.

They slowed down toward the end, as the arb closed a bit.

We were exporting over 20 cargoes a month during that period.

If you look at what our maximum capacity for exports of distillates is, it's somewhere around between 175,000 and 200,000 barrels a day.

The arb recently has opened back up to Europe, so we're taking a good, hard look at it again.

Okay.

Are you sending much to South America here lately?

It's less, of late, to South America, more over to western Europe.

But of course it's summer there now.

Right.

Okay.

I'm sure you're aware of the Bolivian natural gas that's gone to Brazil and Argentina, and Argentina's shipping gas over to Chile, which isn't happening.

And so it's been a -- an electric generation heating situation.

LNG is very expensive.

So when you look at all these numbers, we see part of our future, and I know some people question this, even among my management team, but we see part of the future as we're going to be an exporter of distillates on the US Gulf Coast.

Okay.

Well if that's the case, then why do you defer the hydrocracker project at Port Arthur?

Deferred the one at Port Arthur only a year, partly to manage a lot of things.

Also just watching our cash flow.

And to, as you know, there is a big project next door to us that's taking a lot of the crafts.

We also have an extremely large turnaround at Port Arthur next year in the first quarter, right?

Second quarter?

End of '09 and then early '10.

So we have a very large turnaround there.

And so when we -- as we look at the situation, we decided to slow that project and put our resources on the St.

Charles projects.

Okay.

These are big projects, you know, St.

Charles is $1.4 billion.

Yeah.

I understand.

Okay.

One other question.

And this is kind of a longer term question, somewhat related to the elections.

Both candidates seem very supportive of the renewable fuels mandate.

And then from Obama longer term.

How do you see the rollout of renewables impacting the refining industry over the next, I don't know, five years or so?

Well, I'm not sure I'm going to add anything that you haven't already thought of.

But it's -- ethanol clearly affects the gasoline balance.

And so this year it's going to average 590,000 barrels a day.

It is basically taking market share from oil refiners.

Next year, it goes up some more.

But the -- I'm very vocal on this.

The philosophy's been flawed.

The tax incentive is huge.

The consumer's paying for this.

And it doesn't do anything for the environment.

Now, having said all of that, if it is in fact going to be part of the fuel mix, we're going to figure out how to play the game.

When you say you're going to play the game, does that mean you could potentially invest in this renewables industry in the future?

We might.

And also, we think second generation, but it all depends on economics.

We are an economically driven Company here.

All right.

Okay.

I guess one other follow-up.

If McCain gets elected, seems like he's going to --

I don't think this question's relevant, but all right.

Well, you're right.

But --

Go ahead, though, we'll try to -- we'll give you our two cents anyway.

Hypothetically speaking, if he repeals the tariff, the ethanol tariff and subsidies, what sort of impact do you think that would have on the ethanol market?

I say without the subsidy, it has to trade compared to gasoline.

Most of this year it's actually traded under gasoline.

So it doesn't change too much.

Recently, gasoline prices are down to the $1.40 range.

Ethanol is $1.75, $1.70, somewhere in there.

So if there was no mandate, no subsidy -- you didn't ask about mandates though, did you?

There's still the mandate.

So basically the blenders have to pay whatever the market is.

I think it's going to continue to cover the cash costs [over corn].

Probably, if they took away the import duty, you'd see more imported ethanol come in long term.

But, you know, these kind of things, we'll see what happens, and then we will react.

Okay.

Well, thanks for the discussion.

Appreciate it.

Your next question comes from the line of Neil McMahon of Sanford Bernstein.

Hi, good morning.

Got a few questions.

First a clarification.

Bill, I think you just mentioned a few answers back that you were seeing still diesel strength in Europe?

And I was just sort of questioning -- is that -- what's that based on?

I was speaking to the summer, third quarter, on the -- where we've been exporting volumes.

But Joe mentioned that the arb was open.

The arb is open to Europe now.

And so, we're seeing less of it, less of our demand going south and more of it going, I guess, to the east.

Okay.

Maybe just a question with regard to heavy crude.

And with OPEC, supposedly, cutting back on production, can you walk us through what you anticipate happening with the light-heavy differential, and residual pricing and availability over the next six months?

Yes.

This is Gene Edwards.

I think it's been driven more by the residual components than it is the heavy supply.

And resid demand, with the weak economy, is down everywhere, that's the reason why we've seen the resid discount stay in the $20 range, even though crude's dropped from $140 down to $70.

We've seen the percentage basis of the spreads open up quite a bit.

In fact, the Maya discounts have gone from 10% of crude up to about 20% of crude.

So, I don't think the real heavy is really being cut incrementally.

The crude in the Middle East is more medium sour.

So, I think it's going to kind of stay in the range we are in right now, which is very good from -- on a percentage basis from where we were a few months ago.

As Gene mentioned, fuel oil is such a significant component of calculating the Maya discount, that when the discounts came in on that, we had a compressed Maya discount.

But now it's opened back up.

The Mexicans were purchasing and consuming a lot of fuel oil early in the quarter, and they've quit doing that now.

So we've seen it open back up.

Okay.

And just finally, maybe a question for Bill.

Given where the share price is, you could potentially do two things.

The first is increase the buyback rate quite substantially, if you think that the stocks are good value at these levels.

Secondly, since your market cap is just over $8 billion, what's wrong with going private?

Well, let me just answer the first question.

We have demonstrated, and continue to demonstrate, that we think our stock's a good buy.

I think Mike had mentioned we've already bought eight million shares this quarter here in early October.

Then of course we had the blackout.

But we've purchased $22 million, $23 million this year, which is a little over 4% of our outstanding shares.

So, we continue to do the things that you're asking.

The only difference is, the same question that Paul asked, is that there's a lot of uncertainty around here about access to markets, and so we're holding more cash.

The other side of this is it takes us a long time on projects.

We're a very capital-intensive business in refining.

These projects take us anywhere from two to four years.

Let's just say on average three to threeish.

It's just such a long lead time that, as we look out toward the future and try to anticipate the market we see, we're going to continue to invest in our key refineries.

And that's what we're doing.

But it's about balance, it's about doing a little of all this.

But it's all for the long term.

That is the one piece of this I'd really emphasize, that everything we do here is geared to our long-term shareholder value.

I totally agree with everything you said.

But the fact is that you're trading at or about just over half book value, so somewhere in the market it doesn't seem to agree with you for some reason.

And I'm just wondering, if it gets to a situation where, to do all the things you want to do over the longer term, maybe the best course might be to take the Company private so you can get on with doing what you are doing without this excessive view in the market on where the share price is going.

Well, there's a lot of companies that will be in the same situation.

Okay.

I don't think this is an appropriate forum to debate this.

Okay then.

Thanks.

Your next question comes from the line of Eric Mielke of Merrill Lynch.

Good morning.

Following on from that scene earlier from share buybacks, I'm guessing you probably spend somewhere around $150 million and $200 million buying back stock in October.

Is that a good run rate to think about on a quarterly or on a monthly basis going forward, assuming that margins stay where they are currently?

No.

I would not give you a projection.

As we've done this always ad hoc, and we have $3.5 billion of authorization from our board, that the management still has here.

But we have done this ad hoc.

So, we make the decision as we go along here, and look at what's going on.

And the reason for buying in October then?

Because we hit $20.

The number in early October was $21, I think, for the eight million shares we bought.

Very good.

And now we're less than that.

Thank you very much.

Your next question comes from the line of Mark Gilman of Benchmark Company.

Guys, good morning.

Bill, I'm trying to get a little bit better understanding of what kind of planning scenario you have in mind with respect to 2009, and in particular that $3.5 billion capital program.

Are you looking for margins in '09 right now, underlying that plan to be at, equal to, above, below, full year '08?

Give me some color on that.

I would give you color.

We look at the forward curve just like you, but if you had to ask me today, they'll be under this year.

And that's what underlies the $3.5 billion number?

That's what underlies our entire thinking about how we approach cash management, where we're going to spend the money when we looked at our stock, everything that everybody's been asking me up to that.

And it's actually longer term than that.

It's not just an '09 conversation.

It also affects '10 and '11 because of the length of time it takes us to do this stuff.

Okay.

And you won't quantify how much additional cash you want to hold through this period?

No, I will not.

Okay.

If I could try just one more.

It looks, from the third-quarter data, that the combination of resid and heavy feed, at least on a percentage basis, was running quite a bit higher than it had previously.

Would you expect, in a more normal operating environment, for that to remain true?

We had the hurricane hit --

Yeah.

We had trouble supplying Memphis and Ardmore because, remember, the volumes come up from the Gulf Coast, but I will let Joe --

Mark, I'll tell you, I would say that we didn't change the slate intentionally during the third quarter.

As Bill mentioned, we had so many operating disruptions.

Both on the heavy sour runs, because we had Texas City down, we had Port Arthur down, St.

Charles down.

So, then Bill mentioned the sweet crude refineries that were down.

It's really hard to look at the third quarter data and say that we fundamentally changed something that we were doing.

I think if you go back to earlier quarters and just look at our history, the slates going forward would be similar.

However, we are always looking -- remember, we run our LPs, we do all this as you expect us to do, and we're always looking for a way to keep heavying up.

But we do get into asphalt balances, and how much we can black crack and how much we can coke.

But we're always looking to take advantage of these differentials.

And certainly the medium sour differential's opened up for us.

So, I think you know how we do all this, and we try very hard to maximize it.

I just wanted to clarify, if I could.

I think Rich's comments, previously, regarding the sustaining capital of $1.4 billion to $1.5 billion per year, exclusive of environmentally mandated projects, does that include turns?

Yes, it does.

So -- and a good number for turnaround on average would be about $600 million a year.

Okay.

And this was discussed briefly previously, but nonetheless, the crude [roles] should have been positive in the Mid-Continent this period.

Was it?

It was slightly negative, $16 million.

And it was because -- we've got it here.

But go ahead --

Yes, Mark.

It was negative.

It was negative $16 million.

About half of that was from the Mid-Continent, half of it was from the Gulf Coast.

Okay.

And --

We were slightly backward a little period there.

Yes, we were.

Okay.

My -- I'll leave it at that.

Thanks, guys.

Okay.

Your next question comes from the line of Jacques Rousseau of Back Bay Research.

Good morning.

I just wanted to see if you could let us know how much the hurricanes cost you, both in terms of expenses and opportunity costs.

The opportunity costs on the hurricanes was about $350 million.

I don't have a firm number on expenses.

There was very little refinery damage.

Something on the order of about $20 million.

All right.

Thank you.

Your next question comes from the line of Ann Kohler of Caris & Company.

Good morning, gentlemen.

Just a question regarding the startup of Alliance, and what your expectations are regarding the amount and the location of the flow of that product.

Well, the startup's delayed and going to make [270,000] barrels a day of gasoline and 270,000 barrels a day of distillate.

Do you have anything --

They're going to export it to the highest [set-back] market that they [see] for themselves, I guess.

The distillate is probably staying in Asia or Europe, and gasoline they'll take to whatever market is the highest for them.

But don't -- we would never wish them ill, but it's a big refinery.

As we are finding out, they're late from what they said, and it will be a big, complex operation starting up.

Also, things are happening still in the world.

Mexico's volumes continue to increase, South American volumes increase.

We have lots of things going on.

So it will do exactly what Gene says, just like our business always does.

It will move to the best markets, and then those markets will move to other markets.

And I think, Ann, it's hard for us to know any more than you would.

Great.

Thank you.

Appreciate it.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up from the line of Paul Cheng of Barclays Capital.

Two short ones.

On the anti-dilution, how much -- can you give us an estimate on how many shares you have to buy back per quarter over the next, say, three or four quarters?

It's roughly 300,000 shares.

It's a fairly small amount every quarter.

Per quarter, it is only 300?

Yes.

And Bill, just theoretically, let's assume if under the very best situation your cash flow from operations actually would be less than your capital spending.

Under that scenario, should we assume you would still be willing to do share buybacks, or that that's not going to be the case under the current credit market situation and the economy?

It's a very fair question, Paul.

But since I don't have to face it today, I'm not going to answer you.

What we would do if that's the case, we have cash, we'll look at our projects, we'll look at where our stock is, we'll look at our future, and we'll make the decision, we think, in the shareholders' interests.

I see.

Okay.

Fair enough.

Thank you.

Your next question is a follow-up from the line of Mark Gilman of Benchmark Company.

Mike, you referred, I believe, in your introductory comments, to the write-off of some deferred capital costs in the SG&A line.

Right.

Can you tell me what that number was, and why, if the projects are deferred, you are actually writing it off?

I can tell you the second piece.

It's because we got a tax deduction.

The total was roughly $43 million, and it was associated with -- primarily the paraxylene unit at St.

Charles that Rich had discussed earlier.

And I think there was a piece on the delayed coker --

It comes out to about $42 million?

$43 million.

$43 million.

It's in our numbers.

We -- on projects where we're deferring them, we actually just wrote off.

Okay.

The Northeast margin, at first glance, looks to be, in the context of the environment, really quite high in the quarter.

Is that just the lube effect?

Or is there something else there that we should be aware of?

Well, it is the lube effect, but it's also because we ran in Quebec during the entire quarter.

And of course as you know, margins went up.

The second quarter was also impacted by the coker turnaround in Delaware City, so it's the absence of that makes it start to look a little bit better.

So you have three things.

Okay.

Thanks guys.

Thanks, Mark.

There are no further questions at this time.

I would like it turn the conference back over to management for any closing remarks.

That concludes our call.

If you have any further questions, feel free to contact Investor Relations.

Thank you for joining our conference call.

Thank you again for participating in today's conference.

You may now disconnect.