瓦萊羅能源 (VLO) 2010 Q2 法說會逐字稿

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  • Operator

  • Good morning and welcome to the Valero Energy Corporation's second quarter 2010 earnings conference call. I would now like to introduce your host, Mr. Ashley Smith. Sir, please go ahead.

  • - VP, IR

  • Thank you, Brandy, good morning and welcome to Valero Energy Corporation's second quarter 2010 earnings conference call. With me today are Bill Klesse, our Chairman and CEO, Mike Ciskowski, our CFO, Rich Marcogliese, our COO, Gene Edwards, our Executive Vice President of Corporate Development and Strategic Planning, Joe Gorder our Executive Vice President of Marketing and Supply, and Kim Bowers, our Executive Vice President and General Counsel.

  • If you have not received the earnings release and would like a copy, you can find one on our website at Valero.com. Also attached to the earnings release are tables that provide additional financial information on our business segment. If you have any questions after reviewing these tables, please feel free to contact me after the call. Before we get started, I'd like to direct your attention to the forward-looking statement 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's or management's expectations or predictions of the future are forward-looking statements and tended 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.

  • - EVP, CFO

  • Thanks, Ashley and thank you for joining us today. As noted in the release, we reported second quarter 2010 income from continuing operations of $530 million or $0.93 per share. I should note that the $53 million after-tax gain from discontinued operations shown in the financial tables relates to the Delaware city assets that were shut down in 2009 and sold in June of this year. Second quarter 2010 operating income was $921 million versus an operating loss of $192 million in the second quarter of 2009. The $1.1 billion increase in operating income was mainly due to higher margins for distillate and secondary products such as Petrochemicals, asphalt and lube oils as well as improved sour crude discounts.

  • The improvement we saw in diesel margins was most significant. If you look at the benchmark ULSD margins on the Gulf Coast they nearly doubled from $6.16 per barrel in the second quarter of 2009 to $12.14 per barrel in the second quarter of 2010. Secondary margins also made strong contributions, for example, propylene margins improved 156% and lube oil margins increased 104% versus the second quarter of 2009. Sour crude oil discounts also improved during the second quarter. The Maya heavy sour crude heavy discount to WTI expanded from $4.57 in the second quarter of 2009 to $9.75 in the second quarter of 2010. Another way to look at this is as a percentage of the WTI price, so the Maya discount increased from 7.7% of WTI in the second quarter of 2009 to 12.5% of WTI in the second quarter of 2010, which is a 62% improvement year over year.

  • Our second quarter 2010 refinery throughput volume averaged 2.3 million barrels per day which is slightly higher than the top end of our guidance as the strong margins incentivized higher run rates. However, compared to the second quarter of last year, volumes were down 55,000 barrels per day mainly due to the continued idle status of our Aruba refinery. Refinery cash operating expenses in the second quarter of 2010 were $3.55 per barrel, which was well below our guidance. This was primarily due to the higher throughput volumes and lower than expected maintenance, catalyst and chemicals and energy costs. We are pleased to see that our focus on cost reductions is showing results. In fact, we are on pace to exceed our target of $100 million in pretax cost savings in 2010. The culmination of numerous Companywide initiatives and commitment by our employees has yielded nearly $90 million in cost savings through June and there is more to come.

  • Looking at our other business segments, retail had its best ever second quarter with operating income at $109 million, which is 68% higher than the second quarter of 2009 primarily due to higher fuel margins in the US. Our Canadian retail operations also performed well during the quarter. Our ethanol segment had $35 million of operating income in the second quarter of 2010, which is $13 million higher than the second quarter of 2009 but down from the first quarter of this year due mainly to compression in margins between ethanol and corn prices. Despite very competitive industry conditions, our ethanol business has been profitable and we are pleased with the performances of this business.

  • General and administrative expenses excluding corporate depreciation were $131 million in the second quarter and in line with our guidance but were $34 million higher than the first quarter due mainly to the favorable effect of a $40 million insurance settlement during the first quarter. For the second quarter total depreciation and amortization expense was $367 million, which was in line with our guidance. Net interest expense was $116 million which was slightly below our guidance and lower than the first quarter of 2010 due partly to lower interest rates and higher than anticipated capitalized interest. The effective tax rate on continuing operations in the second quarter was 34.2%. Regarding cash flows for the second quarter, capital spending was $517 million, which includes $114 million of turnaround and catalyst expenditures. For the year, our capital spending target has been revised to $2.3 billion to incorporate spending for various strategic projects including hydrocracker project at our St. Charles and Port Arthur refineries and additional turnaround maintenance at our Benicia, Aruba, Memphis and Port Arthur refineries.

  • Also during the second quarter we spent $223 million to pay down debt, paid $28 million in dividends and received $220 million in proceeds from the sale of the Delaware City assets. With respect to our balance sheet at the end of June, total debt was $8 billion. We ended the quarter with a cash balance of $2 billion and we had over $4.4 billion of additional liquidity availability. At the end of the second quarter, our debt to cap ratio net of cash was 28.6%. So far in the third quarter benchmark margins have moderated versus the second quarter of 2010 in most of our regions. For example, the Gulf Coast ULSD margin versus WTI had decreased to 22% to $9.51 per barrel while the Gulf Coast gasoline margins versus WTI has increased 17% to $8.47 per barrel. We are continuing to see good sour crude oil discounts with Maya discounts as a percentage of WTI holding fairly steady with the second quarter.

  • One reason that is up versus the last quarter is the West Coast where gasoline margins versus WTI have increased 23% to $20.36 per barrel partially offset by diesel margins that had decreased 12% to $12.69 per barrel. Unfortunately ongoing maintenance work at our Benicia refinery is limiting our ability to capture this margin but we anticipate being back up to full rates by late August.

  • In summary, we had a really good second quarter that demonstrated the earnings power of our assets following the strategic actions and cost reduction efforts we have taken over the last 12 months. No doubt there is more work to be done to continue to improve our competitiveness but we have made great progress and we are proud of what our employees have accomplished so far. Going forward, we will remain focused on running our assets safe and reliably, maintaining our financial strength and investment grade credit rating, reducing our cost and improving our portfolio of assets. And now I'll turn it over to Ashley to cover the earnings model assumptions.

  • - VP, IR

  • For modeling our third quarter operation you should expect the refinery throughput volumes to fall within the following ranges. Gulf Coast at 1.325 million to 1.375 million barrels per day. Mid-Continent at 410,000 to 420,000 barrels per day. Northeast at 370,000 to 380,000 barrels per day and the West Coast at 250,000 to 260,000 barrels per day.

  • Refineries, cash, operating expenses are expected to be around $3.85 per barrel, which is higher than the second quarter due mainly to refinery maintenance expenses at Benicia and Aruba and higher expected energy prices. Regarding our ethanol operations in the third quarter, we expect total through put volumes of 3.15 million gallons per day and operating expenses should average approximately $0.36 per gallon including $0.03 per gallon for noncash costs such as depreciation and amortization. With respect to some of the other items for the third quarter, we expect G&A expense excluding depreciation to be around $135 million, net interest expense should be around $115 million, total depreciation and amortization expense should be around $365 million and our effective tax rate should be approximately 35%. We will now open the call for questions, Brandy.

  • Operator

  • (Operator instructions) Our first question comes from the line of Jeff Dietert with Simmons.

  • - Analyst

  • Good morning.

  • - EVP, CFO

  • Hi, Jeff.

  • - Analyst

  • Nice job on operating expenses this quarter. I was hoping you could update us on the strategic review at Paulsboro and Aruba and if there's any update you can give there and include your capital spending expectations on Aruba.

  • - Chairman, President, CEO

  • This is Klesse. For Paulsboro we continue to look at our alternatives there. We have been very open to the fact that we are trying to find an alternative. For Aruba, what we are doing there is doing turnaround work in preparation to being able to operate the refinery. That work should be done sometime here in September and during this period between now and then we will make the actual decision as to whether or not we are going to start up but we are preparing to do that. And then on the M&A side of that, we are clearly still looking for a partner or somebody to come in to that operation with us. We have a much more stable tax environment there for the next 20 years and so I think the value of the asset has been approved and the government of Aruba has worked with us very well for Aruba and to help us with the asset. As to capital spending, the question is for this year or just in Aruba?

  • - Analyst

  • For Aruba, just the capital expenditures or turnaround expenses to get it up to operating condition?

  • - Chairman, President, CEO

  • Yes, Jeff. Our estimate is $50 million.

  • - Analyst

  • Okay. Good. Also could you update us on -- you've been exporting distillate out of the Gulf Coast could you talk about where your July and August volumes are. Are they continuing to hold up nicely?

  • - EVP, Marketing, Supply

  • Yes, Jeff, this is Joe. The second quarter volumes were good, okay, we were over 60,000 a day of gasoline and over 160,000 barrels a day of distillate. They are somewhat tempered in July and August although still at very good levels. If you look at some of the factors in the market that have supported the exports over the last couple of quarters, they are still present. Venezuela still struggles to export both gasoline and diesel and are continuing to get it from the US Gulf Coast, the Isler refinery is still down. Mexico's demand exceeds its supply and it continues to import product, so although we have seen, we are close to Europe for example now, we still do have significant volumes moving out on the water.

  • - Analyst

  • Thanks, guys.

  • - EVP, Marketing, Supply

  • Yes.

  • Operator

  • Our next question comes from the line of Doug Leggate with Bank of America.

  • - Analyst

  • Good morning.

  • - Chairman, President, CEO

  • Good morning, Doug.

  • - Analyst

  • Couple of questions. It looks like -- really just wanted to talk a little bit about the outlook for the third quarter. Inventories have been building pretty aggressively here if you believe the DOE's numbers and you guys are looking to take based on your guidance it looks like utilization has gone up into the mid-90s. Can you just talk a little bit about what your thoughts are in terms of outlook -- you've been out, I guess, Bill in particular, you've been very vocal about needing to take a leap when the market perhaps looks a little tenuous as it relates to sluggish demand and so on, so just some thinking behind what you're doing with utilization would be helpful and I'll have a follow-up.

  • - Chairman, President, CEO

  • Well, I don't think the utilizations are high so Ashley.

  • - VP, IR

  • Roughly like the second quarter.

  • - Chairman, President, CEO

  • Okay. So your numbers are correct then. Well, inventories have been building but we are still in the heart of the gasoline season and as Joe just mentioned we continue to see reasonable exports especially from the US Gulf Coast but there is no question as we said in our press release that we need the economy to get going here. We need people to get back to work, but we still think the third quarter is going to be okay for us.

  • - Analyst

  • So you've kind of nailed the nub of my question, Bill. What is the export dynamic right now? Is it holding up as good as it did in Q2? Maybe a little color would be appreciated.

  • - VP, IR

  • It's not bad. Okay? If I were to look at it on an absolute basis, I would tell you July was slightly down from June but June was at a very good level. We are still seeing it relatively strong, I would say.

  • - Analyst

  • Okay. The only follow-up I have is you obviously had some unfortunate down time towards the back end of the quarter. Are you able to quantify lost opportunity cost?

  • - VP, IR

  • Sure, I can go ahead and address that. The unscheduled down time impact was primarily related to cat unit outage at the McKee refinery, that was in the middle of June and extended through the first part of July. That had about $15 million impact on the second quarter business. And then also we saw down time on the fluid coker in Benicia. That had occurred on June 20. That had about a $15 million impact on the quarter. Now, the Benicia coker outage will extend to the late part of August. It will be about 60 day outage so we will see some carryover into the third quarter numbers. In total for the second quarter unscheduled down time would be around the $50 million level counting everything.

  • - Analyst

  • 50, 5-0?

  • - VP, IR

  • 5-0, yes.

  • - Analyst

  • Great. All right. That's it for me, guys. Thank you.

  • Operator

  • Our next question comes from the line of Douglas Terreson with ISI.

  • - Analyst

  • Good morning, guys, and congratulations on your results.

  • - Chairman, President, CEO

  • Thanks, Doug.

  • - Analyst

  • I just had -- I just want to close on the export question one more time. Joe said something I had a question about. Just to kind of put it in perspective the year on year difference on export for you guys and Joe mentioned Mexico but besides Mexico, are there other Latin American markets that have become relevant to you guys and if so what are they and temporary or permanent?

  • - EVP, Marketing, Supply

  • Yes, I mean Doug I hate to get into this -- into too much detail because we work very hard to establish these relationships where we know we can export the barrels on a consistent basis.

  • - Analyst

  • Sure.

  • - EVP, Marketing, Supply

  • But if I were to -- if you'll allow me to just be broad in my brush here, it is the South American countries and of course obviously the closer, the better the economics but we think in barrels a little bit further also.

  • - Analyst

  • Sure.

  • - EVP, Marketing, Supply

  • And the things that I mentioned, the factors that I mentioned that continue to support the exports are there and it's anybody's guess at what point in time from might be stabilization of some of those activities. I don't know when and if the Venezuelans are going to restart and run in a reliable way and when they will improve their internal operations. In addition to the supply issues that we also have demand increasing on those markets and so the Gulf Coast because of its low cost structure and its complex refineries, it's very competitive and allows us with a decent cost of products to move into those markets and I think we will continue to do that.

  • - Analyst

  • Okay. Okay. Well, thanks a lot, Joe.

  • - EVP, Marketing, Supply

  • Yes.

  • Operator

  • Our next question comes from the line of Evan Calio with Morgan Stanley.

  • - Analyst

  • Good morning, guys, good quarter and thanks for taking my call.

  • - Chairman, President, CEO

  • Sure.

  • - Analyst

  • My first question, this is kind of regulatory, political. I know the EPA recently stated they rejected Texas air quality granted to the TCEQ under the Clean Air Act after 19 years of granting those permits. While I know it's still early this that reconciliation process, do you have any comments on how this process could develop or how these changes may affect your six Texas refineries?

  • - EVP, General Counsel

  • Evan, this is Kim Bowers. I've been working pretty hard on this issue right now as you can imagine. It is a very complicated regulatory issue. We are working with the regulators right now to try to address it as it relates to our successful permits. We have not been approached by EPA directly on this issue just yet but we are working to try to remedy the issue as quickly as we can and to mitigate the fallout for our refineries.

  • - Analyst

  • Do you think there will be some compromise reached promote from a Texas to a federal level or is it too early to tell?

  • - EVP, General Counsel

  • I hope so. I think EPA and PCT have worked together very well for many years and I suspect at the end of the day they will come back together again on this. I think there will be litigation, the HE filed suit yesterday on the flex permit issue and I think the industry will follow suit as well. The litigation is going to be part of it but I think at the end of the day we will have to find some way to resolve the differences between the two agencies.

  • - Analyst

  • Okay. And my second question, is really capital structure and has followed some of the prior comments. I know your cash balance is at $2 billion potential upside for many assets sales that are kind of ongoing in process. I think you reported another strong quarter and cautiously optimistic on demand so kind of revisiting the prior question that's been asked before, I mean do you have any color on how you see deployment of cash, whether it be buyback, strategic acquisitions or just continuing to kind of run with a higher cash balance until we see more macro certainty? Thanks.

  • - Chairman, President, CEO

  • We will continue to run with a higher cash balance. Clearly, we are looking at some of the refineries that are for sale. We have told people that. But whether we are interested at the end of the day remains to be seen. Our capital spending, we have in the release are about $2.3 billion, so we expect to -- and we expect to progress on our Port Arthur hydrocracker project here. So we continue to work on our assets. By the end of this year we will finish the big scrubber at Benicia and also have the MSAT 2 and then next year you'll see us do more strategic projects that really can improve our basic business but basically to your question we are going to run with a higher cash balance.

  • - Analyst

  • Okay. Thanks, guys.

  • Operator

  • Our next question comes from the line of Paul Sankey with Deutsche Bank.

  • - Analyst

  • Hi, everyone.

  • - Chairman, President, CEO

  • Good morning, Paul.

  • - Analyst

  • The cost savings that you've just about achieved for the year, how much more do you think you can do this year assuming that you can do more? And also if I remember back I believe Bill that you used to talk about a back end loaded cost savings target of I think it was $1.5 billion over five years. Could you refresh your views on that too, please, thanks?

  • - Chairman, President, CEO

  • We had the project years ago where we were saying we were going to save $1 billion in operations and a lot of it was going to come from maintenance and other items, and I conceded to all of you that we were having trouble achieving that goal. So we have basically dropped that program and have pulled it much closer in and are working on what we have been giving as guidance more recently and that's been this year we are going to get $100 million savings, last year we got -- I'm looking around the room here. We will give you a number. $215 million and we have a very detailed list of where this is coming from and so it's a -- and we will exceed the $100 million this year, we will probably be much closer to over $200 million again. Some of it comes on the revenue line so it's not at all just cost, but we molecule management, things along those lines but we have a very diligent focused approach here but we pulled that whole goal structure in much closer.

  • When you look at the Solomon benchmarking, though, we have a goal in this Company that we are going to be first quartile and that's going to take us a few more years but we are going to be a first quartile refinery throughout our portfolio.

  • - Analyst

  • I mean, that's a run rate that would get you to the $1 billion if you could keep doing that $200 million?

  • - Chairman, President, CEO

  • Oh, yes, I think at the end of the day we are going to do it but we are having trouble articulating it. It was moving around on us so we decided to abandon that and pull it closer in.

  • - EVP, COO

  • I might add to that, this is Rich Marcogliese, we are working through a number of our structural issues in the refining system. Earlier this year we completed the revamp of our Memphis cat cracker which was a high maintenance cat unit. In the second quarter of next year we will do a revamp on the St. Charles, millisecond cat cracker which is also a high maintenance unit and next year we will also complete a replacement of all six coker on the Port Arthur refinery which has been a high maintenance coker. As we advance along in time we are going to eliminate a lot of the high maintenance-related issues that we have -- that have come along with our acquisition process.

  • - Analyst

  • Yes, I mean it sounds just from the fact that you've easily identified two cost savings projects for next year the cat cracker Port Arthur that you could do another $200 million next year.

  • - EVP, COO

  • I do think there is potential to increase the amount of cost savings in the business in our drive for first quartile.

  • - Analyst

  • Great. Bill, in the past you've said some pretty salty things and I know you've been asked about Washington today but you've had some pretty salty things to say about what's going on in Washington. I notice that in today's comments you didn't mention anything specific. Is that because you're feeling a lot better about the way you believe refiners and Valero particularly are going to be treated perhaps post the BP issues or is it just a function of having a nice profit and not needing to -- not needing to talk about Washington?

  • - Chairman, President, CEO

  • No, I don't think it's the last thing at all. If we still had issues in Washington, we would be talking about it, but I believe at least for this year I'll say the realization of the impact of what was being discussed in [Waxman, Marky or Carey Lieberman] has settled in and so there is not a consensus for this and that we do not see anything that is going to happen this year at least prior to the elections and then we will see what happens at the election. But those bills are bad for the United States, they are bad for jobs, they are bad for Valero, they are bad for energy, they are just not in the interest and it's hard for me to understand how these things get generated. But today it's -- we think it's a bad quarter and will probably be an issue that will come in after the elections.

  • - Analyst

  • Thanks for that. I knew it wouldn't take much to set you off, Bill. Thanks very much.

  • - Chairman, President, CEO

  • I knew you were baiting me anyway.

  • Operator

  • Our next question comes from the line of Edward Westlake with Credit Suisse.

  • - Analyst

  • Maybe a question about dividends. I mean I'm just trying to think about obviously a strong quarter, your controlling costs, controlling CapEx, I know there are some projects you have to do, you talked about high cash balances, but at what point do you think it's prudent to raise the dividend from the current level and is it a debt to equity, discussion or is it really around just economic confidence in terms of the metrics that you're looking at?

  • - Chairman, President, CEO

  • I think it would be both of the two items. It would be our total debt and also our confidence, but this is a Board item and we would, with those two in mind as it progressed, that's when we would look at it. But I will tell you today we management will not recommend to our Board a dividend increase.

  • - Analyst

  • And the rationale being the debt is still too high?

  • - Chairman, President, CEO

  • The debt is high in this environment and also there's still a lot of uncertainty. We need an economic recovery. This business sells fuels. All of you that ride above -- about us, recommend us, invest in us, we sell fuels and we need this economy to get moving.

  • - Analyst

  • Thanks. And maybe a more sort of detailed question. Obviously you're seeing a lot of NGLs come into the mix both obviously in terms of the US ENPs targeting additional NGL growth, the Eagle Ford and you've also got international NGLs. How much of an opportunity, how should we think about the capture of that in terms of your margins going forward?

  • - Chairman, President, CEO

  • I guess you would be then talking about butanes and -- but what's happened is as we have had to drop vapor pressures to basically accommodate ethanol we've actually had to push out of the blending pool butanes, isopentanes and things like that so to be honest, that's not something we are focused on.

  • - Analyst

  • So if you needed to run higher through puts of that you would need to adjust the capital base of the Company and there would have to be wide discounts on the available liquid streams?

  • - Chairman, President, CEO

  • The discounts would have to get much wider, but remember there is a mandate to use ethanol, so you still even with wider discounts probably the olephins, the petrochemical side would see more of a benefit than I'd say the refining side.

  • - Analyst

  • Thanks very much.

  • - Chairman, President, CEO

  • Our next question comes from the line of Paul Cheng with Barclays Capital.

  • - Analyst

  • Hey guys you have been looking at Europe for several years and when you're looking at that market, have you changed in your view whether it is an attractive market for you to make acquisition and also when you are looking at there's a lot of (inaudible) out there, have you sensed that the bid-ask price between the buyer and the seller is starting getting close or is still quite wide apart?

  • - Chairman, President, CEO

  • We are still interested in Europe but only for a quality asset or assets that we think can actually fit into our portfolio and lifts our portfolio. Valero is a refining company and we process oils into fuels. I think you guys all know like 81% of our volume is either gasoline, diesel or turbine fuel. But Europe is a big economy, it's a very large market, it's 15 million-barrel a day market. Diesel demand is still growing, gasoline gives you the North Atlantic arbitrage. Political risk diversification as Paul asked me earlier, I mean, there is a higher level of risk in the United States than it used to be. The market intelligence knowledge that we gain, weaker assets are shutting down. We are starting to see that. We saw one of our competitors make an announcement about one of their facilities over in Europe, and then the bottom line would be a major diversification for us. So we are still interested but as I've told many of you when we met one on one, Valero is going to only do something that we absolutely believe is in our shareholders' interest.

  • - Analyst

  • And not so much about Valero but in general have you seen the bid-ask price in Europe getting closer or that is still quite wide apart?

  • - EVP, Corporate Development Strategic Planning

  • Paul, this is Gene, we've been looking at a lot of the assets over there and so we know what's on the market but as of today, there have been no transactions so it is really kind of hard to tell what the bid offer spreads really are. You don't really know what the bidders may be at. We know what we see values at. I kind of sense that it is more of a buyers' market but there's been no transactions, it's impossible to say what the ask really is.

  • - Analyst

  • Okay. And that next question actually I think for Rich, Rich, I think in the second quarter you guys been able to buy some distress in Latin America. Have the oil in that help your profit in the Gulf Coast. Any kind of estimate that you have in terms of the incremental benefit in the quarter because of that and for Mike, is there any trading or hedging gain or loss in the quarter?

  • - EVP, Marketing, Supply

  • Hey, Paul, this is Joe. And I'll address that -- the crude oil discount question. We were able to secure some cargoes of heavy sour crude at distressed prices and I would tell you probably delivered into the Gulf on a -- and we are starting to move it in today but delivered in margin improvement over may be a Maya price might be $2 to $4 a barrel.

  • - Analyst

  • Joe, what's the volume that you have done in the second quarter for that top benefit?

  • - EVP, Marketing, Supply

  • I'm sorry the--?

  • - Analyst

  • The volume? When you say $2 to $4, I assume that you're just talking about those in excess of Maya, so how many cargoes or what is the minimum barrel that you have done in the second quarter?

  • - EVP, Marketing, Supply

  • We didn't run that in the second quarter.

  • - Analyst

  • Oh, you didn't run it in the second quarter, so it would be a third quarter event?

  • - EVP, Marketing, Supply

  • Correct.

  • - Analyst

  • Okay.

  • - Chairman, President, CEO

  • You asked this other question on -- to the gains.

  • - EVP, CFO

  • Yes, Paul, this is Mike. On our trading we had $39 million of income this quarter so we had a good quarter.

  • - Analyst

  • $39 million. And Mike, do you have a preliminary 2011 CapEx number that you can share?

  • - EVP, CFO

  • We are not -- I've told people it's going to be in the same range of what we are doing but we are actually in the middle of this strategic planning but we do intend to try to advance our hydrocracker projects that we basically have 40% or so invested in already.

  • - Analyst

  • So from that standpoint, should we assume Bill, it is going to be somewhat higher than this year?

  • - Chairman, President, CEO

  • No. I would say it's going to in this range.

  • - Analyst

  • I see. A final question, if I could. Aruba, Bill, can you share with us the pulses behind the decision to undergo the full Aruba turnaround now? You've been holding off until recently. Is that -- what may have changed that for you to trigger that action?

  • - Chairman, President, CEO

  • Okay. I missed part of that. I'm sorry--?

  • - EVP, CFO

  • Why are we doing the Aruba turnaround now?

  • - Chairman, President, CEO

  • Oh, in Aruba because we have -- we will have a contribution margin and we are also able to, as I said, reach this agreement with the government going forward here.

  • - Analyst

  • I see. Thank you.

  • - Chairman, President, CEO

  • People -- these are negotiations and people are acting in good faith.

  • - Analyst

  • Okay. Very good. Thank you.

  • Operator

  • Our next question comes from the line of Jacques Rousseau with RBC.

  • - Chairman, President, CEO

  • Hello.

  • - Analyst

  • What would be the same store sales at your stations in the second quarter?

  • - Chairman, President, CEO

  • Yes, in the second quarter on an overall basis it was up 0.7% in the second quarter of '10 versus the second quarter of '9.

  • - Analyst

  • Great and just--?

  • - Chairman, President, CEO

  • That's in the US. In Canada is actually up about 4.9%.

  • - Analyst

  • Great. Just one other one. For the new capital budget of $2.3 billion, could you break that down by the four categories you normally do, strategic, sustaining, turnaround and regulatory?

  • - Chairman, President, CEO

  • Yes. The regulatory is pretty much about the same. The sustaining is down, oh, about $100 million. Turnaround is up about $100 million and strategic is up about $200 million.

  • - Analyst

  • Thank you.

  • Operator

  • Our next question comes from the line of Blake Fernandez with Howard Weil.

  • - Analyst

  • Good morning, guys, thanks for taking my question. Bill, you alluded to the closures we have begun to see in Europe and the potential for maybe some more to happen with so many assets on the market. Does that cause you to kind of reconsider Paulsboro in your kind of maybe get a little more constructive on the East Coast?

  • - Chairman, President, CEO

  • It's a very fair question, but we are still committed to looking at strategic alternatives for that plant.

  • - Analyst

  • Okay. And then my follow-up was on -- I know you kind of addressed cap and trade earlier. I'm curious about the new financial regulations. There's been some press reports suggesting that refiners would be kind of negatively impacted with having to post additional collateral for trading. Are you anticipating any real material impact from the new regulations?

  • - Chairman, President, CEO

  • Not right now. We are still evaluating the financial reform but most of our trading activities is already cleared through an exchange and so we don't see a big incremental increase in our margin requirements.

  • - Analyst

  • Okay. Great. Well, that will take care of me. Thank you.

  • Operator

  • Our next question comes from the line of Mark Gilman with the Benchmark.

  • - Analyst

  • All right, guys, good morning. Couple of things if I could. Joe or anyone else, give me an idea how much Maya and Arabian crude you ran systemwide in the quarter and how that compared to prior periods.

  • - EVP, Marketing, Supply

  • Okay. Maya was about 225,000 barrels a day in the quarter and that's fairly consistent. Maybe up a little bit from where we were in the first quarter. The Arabian crude was about 165,000 barrels a day and that was fairly consistent with where we were. Now that's the Saudi crude. We got quite Kuwaity barrels and so forth. It was all fairly consistent with where we were at the first quarter.

  • - Analyst

  • How about Latin America, Joe.

  • - EVP, Marketing, Supply

  • I don't lump it together that way, Mark, but if I told you barrels from Columbia had increased, we are over 60 a day there, barrels from Venezuela continue to be right in that 100,000 barrels a day on the heavy sour, those are really the two big ones that we have, Colombia and Venezuela.

  • - Analyst

  • Okay. So there were no real significant changes to the crude slate second quarter say versus first?

  • - EVP, Marketing, Supply

  • There were not.

  • - Analyst

  • With that in mind, the margin capture rates in particularly Gulf Coast Mid-Continent in this period, at least based on our tracking mechanisms are just off the charts. And I guess in that regard I'm wondering are there any inventory effects that might be built into those numbers? I know, Mike, you talk about secondary products in your discussion of the performance in the quarter, but frankly those products tend to do better in a significantly declining crude oil price environment and the second quarter looked more like a U, in that regard with not a whole heck of a lot of change across the period. Any clarification on that subject, I'd appreciate.

  • - EVP, COO

  • Mark, this is Rich Marcogliese. There is an operational component comparing second quarter versus first quarter. First quarter was a very heavy turnaround period for us. We had St. Charles refinery down entirely in the first quarter and we had the cat cracker report authored down in the first quarter for what was a 55 day turnaround, so you actually saw a big rebound in capacity utilization in the Gulf Coast that two of our more profitable refineries in the second quarter that impacted the results.

  • - EVP, Marketing, Supply

  • Was Mark focused on the margin?

  • - EVP, COO

  • Capture.

  • - Analyst

  • Yes, I was.

  • - Chairman, President, CEO

  • And that's--. Go ahead.

  • - EVP, COO

  • And then you asked about the inventory. There's no material inventory adjustment in our second quarter numbers. I think the discounts, the heavy sour crude discounts have been pretty good or strong and the second quarter really contributed to our capture.

  • - Analyst

  • Okay. One more general question, if I could. Maybe Gene Edwards could pick this one up. There's been a lot of talk with respect to repealing the ethanol tax credit and Gene or I guess anyone else, I wonder what your thoughts are in terms of what the implications of that would be in terms of ethanol pricing and margins. It's a little bit of a complex thing to think about.

  • - EVP, Corporate Development Strategic Planning

  • Right. Mark, this is Gene. The way we look at it, right now ethanol is trading for about $0.30 under gasoline and on top of that there's the $0.45 lenders credit so the ethanol plants really are not even capturing the credit. The credit is being captured by the people that blend the ethanol so from an ethanol manufacturing standpoint it's almost irrelevant today. It could be relevant in the future if things change and ethanol tightens up and captures the full blending margin plus captures the credit. That would be a great scenario from ethanol producers' standpoint but in fact today it's not being captured there so it doesn't factor into our ethanol planned economics at all.

  • - Analyst

  • But Gene you don't think there's any price implications at all of the potential repeal of that credit? You think the ethanol price ex credit would remain unchanged in that scenario?

  • - EVP, Corporate Development Strategic Planning

  • Yes, I do, because you'd still have a blending margin of $0.30 a gallon to blend the ethanol even with current prices whether the credit was there or not. So you would not see blending back down 1 barrel because the credit being gone.

  • - Analyst

  • Okay. Thanks a a lot.

  • Operator

  • Our next question comes from the line of Faisel Khan with Citigroup.

  • - Analyst

  • Good morning.

  • - Chairman, President, CEO

  • Good morning, Faisal.

  • - Analyst

  • Could you quantify what the impact was of the secondary products such as pet cam asphalt and lube oils in terms of the margin uplift or the EBITDA uplift in the quarter in.

  • - Chairman, President, CEO

  • Yes, we have--.

  • - EVP, CFO

  • Quarter to quarter?

  • - Analyst

  • Yes, that would be great.

  • - EVP, CFO

  • I guess the price range there, it's roughly $110 million, $115 million improvement quarter to quarter.

  • - Analyst

  • I got you. Then the last question is on the OpEx, OpEx per barrel at 355, the sequential sort of improvement in that OpEx number, how much of it was that was natural gas related versus kind of (inaudible) self-help?

  • - EVP, COO

  • Natural gas?

  • - Chairman, President, CEO

  • Yes. I mean, total costs were -- of all of those components that I lifted in the speaker notes energy was the smallest amount improvement.

  • - Analyst

  • Okay.

  • - EVP, COO

  • It was about $0.20 cents a barrel.

  • - Chairman, President, CEO

  • Yes, going from first quarter to second quarter, the fall in energy costs was about $0.20 a barrel.

  • - Analyst

  • Okay. Got you. Great. Thanks, guys.

  • Operator

  • (Operator Instructions) Our next question comes from the line of Chi Chow with Macquarie Capital.

  • - Analyst

  • Thanks, good morning, everyone. Got a couple of questions on the Gulf Coast system. What's the timing on the hydrocracker project at this point?

  • - EVP, COO

  • On the hydrocracker projects we are looking at late 2012 completion from Port Arthur and we are envisioning a late 2013 completion on St. Charles.

  • - Analyst

  • Okay. Thanks. And then a more general question. How are you feeling about your long-term market position in the Gulf Coast, particularly with the new capacity that's come online this year and looks like there is more to come in the years ahead from competitors?

  • - Chairman, President, CEO

  • We think our position is very good.

  • - Analyst

  • What about some of the smaller plants down there in Houston and Three Rivers? You still feeling okay with those plants longer term?

  • - Chairman, President, CEO

  • Yes. We are comfortable with our portfolio here except for the items that we had talked about previously. If you look at our Houston refinery, it really is tied with our Texas City refinery and it's actually been running very well and our people there have done an excellent job. At our Three Rivers refinery, we are somewhat tied to Corpus Christi but that's also where we make DTX and so if you look at the structure there we've actually made some decent money selling benzene here, so these plants have been doing a good job for us and we have a major effort underway at Three Rivers where all our people are involved where we are actually looking at how we operate the entire facility, which will get our costs even down more.

  • - Analyst

  • That's great, Bill. Thanks. And then one final question--?

  • - Chairman, President, CEO

  • Oh, and the guys just reminded me here, all this oil production is going on in the Eagle Ford actually it has the potential to help Three Rivers also.

  • - Analyst

  • That's good point. Thanks. One final question on the 2010 strategic projects, you talked about, Bill. I guess in some of the other comments you mentioned the MSCC revamp at St. Charles and co-drum replacement at Port Arthur. Are there additional projects beyond that that you could elaborate on?

  • - Chairman, President, CEO

  • Sure. We are looking at -- and I've mentioned this in previous calls but we are looking at a couple small hydrogen plants at our facilities, both McKee and Memphis. There the only hydrogen we have available is from reforming and the world we live in here today and we got into quite a discussion, a year or so ago on this but in the world we live today you really should be generating your hydrogen from natural gas not from oil and if you don't need the octane because of ethanol doing it so we have those projects in the mill. Rich, you want to--?

  • - EVP, COO

  • Yes, I would add a couple more. Also associated with the St. Charles MSCC revamp we are going to install a large power recovery turbine that will contribute about $10 million a year in operating income. That is a plan we have -- we have there so it's also another important project.

  • - Analyst

  • Okay. Great. Thanks.

  • - Chairman, President, CEO

  • And we have some little things that are in there too, but these tend to be -- you'll see us next year doing more what I'll call -- they're economic -- we call them strategic but they are economic driven.

  • - Analyst

  • Anything on the West Coast in particular?

  • - Chairman, President, CEO

  • Well, what I would say on the West Coast, what we are looking to get behind this us is the completion of this large scrubber project at Benicia that will complete construction in the fourth quarter of this year which actually positions the refinery fairly well from an air emissions compliance point of view and will allow us to increase capacity utilization. And then we have the turnaround in the refinery there in first quarter next year. So between -- and this is a huge project, this is a $650 million project counting the computer and so we get that done this year, we have our turnaround at the refinery in the first quarter so there is a lot of expense capital going into Benicia.

  • - Analyst

  • Great thanks for your thoughts. Appreciate it.

  • Operator

  • Our next question is a follow-up from the line of Mark Gilman with The Benchmark.

  • - Analyst

  • Hey, Rich, were there any cokers that were voluntarily idled for any part of the second quarter?

  • - EVP, COO

  • No. We did not have any coker shutdowns in the second quarter. Now, we always evaluate asphalt economics versus coker runs and we may moderate coker throughput based on that particularly our Corpus Christi refinery but generally we had good utilization of the cokers across the quarter in line with the Maya differentials.

  • - Analyst

  • Okay. So it was basically as high a utilization rate in coking this quarter as you would expect to achieve?

  • - EVP, COO

  • I would say with the exception of where asphalt economics were superior to resid conversion. I wouldn't say it's the highest that we have ever seen for coker throughput but certainly it's been improved over the last 12 months.

  • - Analyst

  • Okay. What -- are there any significant second half turnarounds other than the work at Benicia?

  • - EVP, COO

  • That is really it. And it's really it for the balance of the year. We will get Benicia wrapped up in the latter part of August. Now, a lot of planning is underway for a very large workload in the first quarter of '11. As I mentioned before we will have the millisecond cat cracker turnaround in St. Charles, we will have a crude unit in coke drum replacement turnaround at the Port Arthur refinery. We have got a plantwide turnaround in Ardmore that will hit the first quarter of next year so we have got a good opportunity now to get all of our planning done anticipating that activity later.

  • - Analyst

  • Okay. Thanks, Rich.

  • Operator

  • And ladies and gentlemen we have reached the end of our allotted time for questions and answers. Mr. Smith, do you have any closing remarks?

  • - VP, IR

  • Thanks, Brandy, I just want to thank everyone for listening to our call and if you have any questions feel free to contact the investor relations department. Thank you.

  • Operator

  • Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.