瓦萊羅能源 (VLO) 2011 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Welcome to the Valero Energy Corporation second quarter 2011 earnings release conference call.

  • My name is John and I will be your Operator for today's call.

  • At this time, all participants are in a listen-only mode.

  • Later, we will conduct a question-and-answer session.

  • Please note that this conference is being recorded.

  • I will now turn the call over to Mr.

  • Ashley Smith, Vice President, Investor Relations.

  • Mr.

  • Smith, you may begin.

  • - VP, IR

  • Thank you, John.

  • And good morning, and welcome to Valero Energy's second quarter 2011 earnings conference call.

  • With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Gene Edwards, our Chief Development Officer; Joe Gorder, our Chief Commercial Officer; Kim Bowers, EVP and General Counsel; and Jean Bernier, EVP and President of Ultramar.

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

  • Also, attached to the earnings release are tables that provide additional financial information on our business segments.

  • If you have any questions about reviewing these tables, please feel free to contact me after the call.

  • Before we get started, I would 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 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've described in our filings with the SEC.

  • Now I will turn the call over to Mike.

  • - EVP and CFO

  • Thanks, Ashley.

  • And thank you for joining us today.

  • As noted in the release, we reported second quarter 2011 net income attributable to Valero's stockholders from continuing operations of $745 million, or $1.30 per share.

  • Our second quarter 2011 operating income was $1.3 billion, versus operating income of $904 million in the second quarter of 2010.

  • The second quarter refining throughput margin was $11.41 per barrel, which is an increase of $1.84 per barrel over the second quarter of '10, and our highest second quarter margin in nearly 3 years.

  • The increase in throughput margin compared to the second quarter of '10 was due to higher margins for gasoline and diesel, plus wider discounts for heavy sour crude oils on the Gulf Coast and light sweet crude oils in the Mid-Continent.

  • One of the drivers of our year-over-year gain in throughput margin was the increase in gasoline and diesel margins.

  • For example, the Gulf Coast gasoline margin per barrel versus LLS increased to 29%, from $7.97 in the second quarter of '10, to $10.26 in the second quarter of '11.

  • Looking at the Gulf Coast, ULSD versus LLS, margins per barrel increased 16%, from $9.88 in the second quarter of 2010, to $11.49 in the second quarter of 2011.

  • So far, in the third quarter, margins have moved significantly higher, to average around $13 per barrel for gasoline and $16.50 per barrel for ULSD.

  • Another driver for our margin gain over last year was crude oil discounts.

  • The Maya heavy sour crude oil discount versus LLS increased to 21%, from $12 in the second quarter of 2010 to $14.58 per barrel in the second quarter of 2011.

  • The Maya discount has narrowed some in the third quarter, with the July average down to around $12.00 per barrel.

  • An additional benefit for Valero came from WTI type and Eagle Ford crudes pricing at a substantial discount to LLS.

  • The WTI discount to LLS increased more than $13 per barrel, from $2.26 in the second quarter of 2010, to $15.47 in the second quarter of 2011.

  • The discount helped our McKee, Ardmore and Three Rivers refineries, where their crude oil is priced at or below WTI.

  • In the third quarter, the WTI discount to LLS has continued to widen with the July average of just above $16 per barrel.

  • As noted in the release, we are increasing the use of discounted Eagle Ford crude in our system.

  • During the second quarter, we processed an average of 37,000 barrels per day of Eagle Ford, an increase of 12,000 barrels per day over the first quarter.

  • This crude replaced expensive water-borne sweet crude, saving around $16 per barrel in the second quarter.

  • We are continuing to look for additional ways to use more of this discounted crude.

  • We plan to process 25,000 barrels per day of Eagle Ford crude at our Corpus Christi refinery during the third quarter.

  • And our Three Rivers refinery should have the ability to process nearly 60,000 barrels per day of Eagle Ford crude by the end of this year.

  • Continuing with other items, our second quarter 2011 refinery throughput volume averaged 2.3 million barrels per day.

  • That was up 136,000 barrels per day from the second quarter of '10.

  • The increase in throughput volumes was primarily due to the restart of operations at the Aruba refinery.

  • Refining cash operating expenses in the second quarter of 2011 were $3.86 per barrel, which was higher than guidance, due to the higher-than-expected maintenance, catalyst and chemical costs.

  • Our retail segment reported a record high for a second quarter, with $135 million of operating income, mainly attributable to stronger retail fuel margin.

  • US retail had $87 million of operating income in the second quarter.

  • And the Canadian retail operation earned $48 million of operating income in the second quarter, which was its highest quarter on record.

  • Our S&L segment earned $64 million of operating income in the second quarter.

  • Which was up $20 million from the first quarter of 2011, and up $29 million from the second quarter of last year, on higher gross margin.

  • Also in the second quarter, we achieved our highest-ever quarterly production rate at 3.4 million gallons per day.

  • In the second quarter, general and administrative expenses, excluding corporate depreciation were $151 million.

  • Depreciation and amortization expense was $386 million.

  • Net interest expense was $107 million.

  • And the effective tax rate on our continuing operations in the second quarter was 37.6%.

  • Regarding cash flows in the second quarter, capital spending, was $664 million, which includes $133 million of turnaround and catalyst expenditures.

  • And we paid $29 million in dividends.

  • Also in the second quarter, we repaid $208 million in maturing debt, and spent $37 million to acquire a terminal and pipeline in eastern Kentucky.

  • With respect to our balance sheet at the end of June, total debt was $7.6 billion.

  • Cash was $4.1 billion.

  • And our debt to capitalization ratio net of cash was 18%.

  • At the end of the second quarter, we had $4.1 billion of additional liquidity available.

  • We remain focused on our strategic priorities.

  • In addition to making progress on our cost-savings goals, we progressed on key investments at our St.

  • Charles and Memphis refinery.

  • And our hydrocracker and hydrogen projects remain on track to complete in 2012.

  • We also look forward to the closing on our acquisition of the Pembroke refinery, and the marketing and logistics assets in the UK and Ireland, on August 1.

  • In conclusion, Valero is in great financial position, with plenty of liquidity, and an investment grade credit rating.

  • Going forward, we have substantial potential for earnings growth, with improved refining margins, the Pembroke acquisition, and the expectation of significant contributions from our economic growth projects.

  • Now, I will turn it over to Ashley to cover the earnings model.

  • - VP, IR

  • Thanks, Mike.

  • For modeling our third quarter operations, you should expect refinery throughput volume to fall within the following ranges.

  • The Gulf Coast at 1.42 million to 1.46 million barrels per day.

  • Mid-Continent at 420,000 to 430,000 barrels per day.

  • West Coast at 270,000 to 280,000 barrels per day.

  • And Northeast with Quebec only at 200,000 to 210,000 barrels per day.

  • After we close on the Pembroke acquisition, our Northeast region will be changed to North Atlantic region.

  • And the Pembroke refinery will be combined into that region with the Quebec refinery.

  • And we would expect throughput for the third quarter to average between 370,000 and 380,000 barrels per day.

  • Refining cash operating expenses are expected to be around $3.80 per barrel across our system in the third quarter.

  • Regarding our ethanol operations in the third quarter, we expect total throughput volumes of 3.3 million gallons per day, and operating expenses should average approximately $0.37 per gallon.

  • Which includes $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 $175 million.

  • Net interest expense should be around $95 million.

  • Total depreciation and amortization expense should be around $390 million.

  • And our effective tax rate should be approximately 37%.

  • We will now open the call for questions.

  • Operator

  • (Operator Instructions.).

  • Ed Westlake from Credit Suisse.

  • - Analyst

  • Good morning, everyone.

  • Just a quick question.

  • In Q1, there were some one-offs and there was also the hedge and you add that back.

  • And our calculation was up to just under $1 of earnings.

  • And then in Q2, you get to $1.30 in a stronger macro environment.

  • So I'm just wondering, were you disappointed with the level of Q2 earnings or is Q2, do you think, a good expectation as a base to go forward, given some of the volatility we've had in Q1 and Q2 in terms of EPS estimates?

  • - VP, IR

  • I think we were pleased with the results.

  • We would always like to have higher results, but if you look at our capture rate, given the market environment, we captured right in line with historical averages, or we beat those averages, in most regions.

  • Costs were a little higher than expected.

  • But not too much.

  • So all in all, I think it is a fair representation of what we can achieve in this market environment.

  • - Analyst

  • And then my second question is more of a question around, as we get closer to the EBITDA increases that should come with the investments that you're making, particularly in some of the hydrocrackers, can you talk about whether you are going to give some of that cash back to shareholders in terms of as the debt comes down and as the cash flow increases?

  • - Chairman of the Board, CEO and President

  • This is Klesse, Ed.

  • We will look at all of that.

  • Right now, we want to have adequate cash to go ahead and finish these projects.

  • We told you in the past, this year's capital spending will be, as Mike said, in the $3 billion to $3.2 billion, we believe.

  • And next year is probably going to be in the same range as we finish our projects.

  • So for guidance, I'd tell you we are at $3.1 billion, for 2012.

  • That will let us finish our projects.

  • And then we will see how our cash position is affected.

  • Obviously, we're going to close on Pembroke in the UK and Ireland, with cash.

  • Crude oil price is up some.

  • So our intent is to buy all of that inventory.

  • So clearly, we will pull our cash down here in the next week.

  • But then we expect to build it back up because we see a very good third quarter, just as you see.

  • Where we missed consensus, which I think is your question, and looking, when you actually look at what happened, we had a lightning strike at Port Arthur, we had a couple of other things that in a way were acts of God.

  • Our mechanical reliability is improving every day.

  • So we had these acts of God.

  • But as you go through the third quarter, July is just about done, it is going to be an excellent month for us.

  • So we missed consensus here in the second quarter, but right now, we're going to beat consensus in the third quarter.

  • - Analyst

  • And just to be clear in terms of the thought process around returning cash, you just want to make more progress in terms of the hydrocrackers before making such a decision?

  • - Chairman of the Board, CEO and President

  • That is absolutely correct.

  • Operator

  • Doug Terreson from ISI Group.

  • - Analyst

  • Good morning, guys.

  • Bill, industry-wide, we have obviously had some demand destruction over the past couple of months.

  • And on this point I wanted to see whether or not you guys were seeing any improvement in demand for gasoline and diesel in your major markets.

  • Is there any bound anywhere out there?

  • - Chairman of the Board, CEO and President

  • We have not seen that.

  • Joe Gorder is going to answer that for you.

  • - Chief Commercial Officer

  • Doug, how are you?

  • It has been fairly flat.

  • We're off a little bit on gasoline and diesel year to date.

  • We keep looking for those glimmers of hope.

  • But I think on the gasoline side, as long as you've got unemployment where it is, it is going to be very tough here, in the States anyway, for gasoline demand to pick up.

  • Distillate demand, we're getting mixed signals.

  • You got some of the trucking indicators looking positive, and some of them looking negative.

  • The same is true with the rail and the marine cargoes.

  • The Port of Los Angeles data was a little different than the Port of Long Beach data.

  • So we're not seeing any significant improvement.

  • But we're not seeing things crater, either.

  • - Chairman of the Board, CEO and President

  • Doug, let us tell you a little more though.

  • We will give you a little more here on retail.

  • Jean Bernier is going to tell you something about retail for us which will give you a good indication.

  • - EVP, President of Ultramar

  • So on retail, our overall demand in the second quarter is down.

  • It is down about 2% in the US, and on a same store basis, it is down about 3.5%.

  • However, July is looking a bit better than that.

  • So that is an encouraging sign.

  • And in Canada, on the retail side, actually, our volumes have been very strong.

  • Overall, growing about 3%, on a same store basis, between 4% and 5%.

  • So we see different trends in different regions and different areas.

  • - Analyst

  • Okay, good.

  • And also, on the same topic somewhat, we're starting to see prices approach record levels for end users in some of your important export markets in Latin America.

  • Just wanted to see if Joe or somebody could give us an update on trends in export trends that you guys have exposure to.

  • Are they still looking pretty strong there as well?

  • - Chief Commercial Officer

  • Yes, Doug, things look good there.

  • Our gasoline exports in the quarter were 69,000 barrels per day.

  • And our diesel exports were 143,000 barrels per day.

  • The gasoline is primarily being drawn into Mexico, but we moved some to Ecuador and Chile also.

  • On the distillate side, 70% went to Europe in the quarter and 30% to South America.

  • And if we look out to the third quarter, those numbers are generally in that same range.

  • Distillates might be a little higher than the second quarter, but generally in that same range.

  • And Doug, the key for me, is that we continue to see an open ark to Europe for the EN590 grade distillates.

  • So when I look at our distillates for the second quarter, they were down a little bit from historical numbers, but it was more related to availability of supply for us to move out than it was demand abroad.

  • And if you look out to the third quarter and going forward, we still have Mexico demand exceeding their supply as imports grow.

  • Mexico is now importing 425,000 barrels a day of gasoline, and 130,000 barrels a day of diesel.

  • And both of those are up from last year.

  • We still have supply problems with Venezuela.

  • Petrobras is purchasing gasoline.

  • So looking out, things look like they're going to continue that way.

  • So we should see continued strong demand out at the Gulf Coast.

  • Operator

  • Doug Leggate from Bank of America.

  • - Analyst

  • Hi, thanks.

  • Good morning, fellows.

  • The projects obviously kicking in next year, if I could just ask you to give us a quick update.

  • This year, we were looking at the 2 FCC revamps.

  • Did they get completed on time?

  • In which case, should we expect some improvement on the cost line for the balance of this year?

  • And related, can you just clarify whether or not you will benefit from any tax credits related to the accelerated depreciation of your capital, some fairly substantial numbers?

  • In which case would you incur lower taxes in 2012.

  • And I will follow-up, please.

  • - Chairman of the Board, CEO and President

  • Lane Riggs is going to tell you about the stats and Clay Killinger will tell you about the taxes.

  • - SVP Refining Operations

  • Hi, this is Lane.

  • Our FCC grade job was completed pretty much on time and on budget.

  • It is performing quite well.

  • We're still trying to optimize it.

  • But we've already seen a significant improvement in operations, which is on the St.

  • Charles.

  • In the Memphis FCC, we have the oxygen supply.

  • Those 2 projects are complete, so we should, on a go forward basis, we should certainly see an improvement for our earnings ability with both those 2 projects.

  • - Chairman of the Board, CEO and President

  • I would add that the St.

  • Charles, which was a conversion from the millisecond to a conventional cut, we've seen at least an 8 percentage point increase in our conversion or yield and we're going to get the 4 to 5-year run.

  • At Memphis, hanging the cad cooler, because there is no vacuum tower there, allows us to go ahead and heavy up our crude slate.

  • And we will also get a 4 to 5-year run.

  • So these are tremendous projects for us when you look at our reliability or mechanical availability going forward, as well as our just general yield.

  • Because when you get these conversions, yields, when you have $100 oil, you can see that it is worth a lot of money to us.

  • Taking that slurry to a clean product.

  • Now on the taxes --

  • - Corporate Controller

  • Doug, this is Clay Killinger, the Corporate Controller.

  • And most of these, if not significantly all of these projects, will qualify for the bonus depreciation under the tax law.

  • And we've computed at a 6.5% interest rate that for each $100 million of qualified capital expenditures, will relate to about $5 million of net present value benefits to the Company.

  • - Analyst

  • So your guidance for 2012 then, you will start accruing that on January 1, in which case can you give us an idea what you expect the impact to be in terms of percentage on the typical tight cadence that you guys have?

  • - Corporate Controller

  • We haven't calculated what the number will be, but it will come into effect when those projects get completed.

  • But when they get done, we will update you on that.

  • - Chairman of the Board, CEO and President

  • I just want to finish then.

  • On the hydrocrackers, we're still looking for Port Arthur to be completed in the third quarter of '12.

  • And St.

  • Charles to be completed in the fourth quarter of '12.

  • So they are big.

  • This is overall, this is over a $3 billion capital project between both plants.

  • And in this environment we have today will be significant profit contributors as the numbers we've given you in the slides that we've shown.

  • - Analyst

  • Thanks, Bill.

  • My follow-up is really a broader kind of strategic question.

  • You guys have got a fairly good track record of when you buy one asset, you tend to sell another to high grade the portfolio.

  • With Pembroke kicking up here, and with your exit, more or less, from the East Coast, at least the lower 48, how are you feeling about the broader portfolio?

  • And specifically, I would ask how you're feeling about the West Coast, as a core part of the portfolio on a go-forward basis?

  • And I will leave it at that.

  • Thanks.

  • - Chairman of the Board, CEO and President

  • Doug, it is a very good question.

  • And if you think about us strategically, we continue to work on geographic diversification, execution, every single day, keeping our investment grade rating.

  • These things are important.

  • But then you get to our portfolio, and when we look at the demand in the United States -- the world is growing, the United States is much more sluggish in its growth -- that we will continue to work on our portfolio.

  • And so we are looking at it again.

  • Obviously, the West Coast has depressed cracks.

  • I think you noticed in our earnings tables that we actually lost money at the refinery in Quebec, in the second quarter.

  • And so we tend to look at all of these with our whole portfolio.

  • These are long-term decisions.

  • We analyze it in a long-term approach.

  • But we are continuing to work on our portfolio so that we are in fact more competitive.

  • Operator

  • Blake Fernandez from Howard Weil.

  • - Analyst

  • Good morning, guys.

  • Thanks for taking my question.

  • Question for you on Pembroke, I know there was an issue recently, I believe there was a fire of some sort.

  • And I just wanted to make sure, as of the August 1 close date, will that facility be up and running, fully operational, the way you had projected in your slide pack when you announced the acquisition?

  • - EVP, Corporate Development and Strategic Planning

  • This is Gene, Edwards.

  • The refinery is running fine today.

  • There really hasn't been a big impact on operations because of this.

  • There is just going to be some costs built in the tank.

  • But this occurred on the seller's watch and they are taking care of these expenses.

  • - Analyst

  • Okay, great.

  • Thanks, Gene.

  • And then secondly, Joe, I know you went through the export environment, looking fairly robust, through the balance of the year.

  • I was just curious if you have any thoughts on next year?

  • Per the IEA, it looks like we've got quite a bit of capacity coming online globally, about 2.5 million barrels a day.

  • Are you expecting any impact on the Gulf Coast's ability to export or how that might factor into what you're seeing?

  • - Chief Commercial Officer

  • Blake, I really think it is going to be this way for a long time.

  • It is almost getting to be a chorus here instead of a verse that we have strong experts out on the Gulf Coast.

  • I read an article this morning that Reliance is moving their barrels now to Asia.

  • Asian demand is still strong.

  • And we expected them to come to the States at some point in time.

  • We just haven't seen it.

  • So you've got growth in other parts of the world, which are pulling those barrels.

  • The Gulf Coast refiners, as we've said before, are very cost competitive.

  • And you have natural markets for those barrels, and those barrels are into Mexico, Central America, South America.

  • And then over to Europe.

  • And I just expect that it is going to be with us for some time.

  • Operator

  • Mark Gilman from Benchmark.

  • - Analyst

  • Good morning.

  • Had a couple of things, if I could.

  • Just by way of a clarification on the tax issue mentioned previously, I assumed that that bonus DD&A is not going to affect the effective rate, but rather cash tax and that you will be providing deferred taxes?

  • Am I correct in that regard or wrong?

  • - Corporate Controller

  • Yes, you are.

  • You are correct.

  • - Analyst

  • Okay.

  • Thanks.

  • A couple of other things, if I could.

  • I noticed pretty significant increase in high asset crude runs in the quarter.

  • And I was wondering, is that a permanent shift?

  • And what's giving rise to it?

  • - Chief Commercial Officer

  • This is Joe, Mark.

  • It is the economics that are giving rise to it.

  • And you're right, we ran much higher volumes of [Marlem] and Friday in the second quarter.

  • We also ran more volumes of M-100 but it was all economically driven.

  • - Analyst

  • Okay.

  • With respect to the intent to increase the Eagle Ford volumes, Joe, Gene, or Bill, anything entailed in doing so other than logistics of getting it there from hardware, catalyst, or any other type modification that would have to be made?

  • - Chief Commercial Officer

  • Mark, we're running now 40,000 a day down there.

  • And we've got a turnaround scheduled in September.

  • And Lane can speak more to this, if he'd like.

  • But there is no major changes in the turnaround, as a result of the turnaround, that are going to allow us to take those volumes up to 60 a day.

  • So in addition to the volume we're going to run there, we're going to try to run the 25 that Mike mentioned in Corpus Christi.

  • The great thing about running more of this Eagle Ford crude is we've got it priced in there at a WCI type price and we're backing out CCA and Sahara and more of the expensive foreign sweets.

  • Lane, anything on the plant?

  • - SVP Refining Operations

  • During the turnaround, we are going to hang some valves on the top circulating reflux the pump round to be able to handle it.

  • It is a lighter crude and it will allow us, once we get up around 60, which we're still trying to determine, we think we'll be able to run even than that.

  • But essentially we are hanging the valve and have the exchangers allowed to do that after the turnaround.

  • - Chairman of the Board, CEO and President

  • So Mark, we will spend somewhere in the neighborhood around $10 million around Three Rivers to do some of this that the fellas are talking about.

  • To go above that would cost more money, and of course we would probably need a permit.

  • So these are longer conversations then.

  • And at Corpus, it has all been, to this point, really trucking, pipeline construction, getting the oil to the plants.

  • Some of you may remember, I've mentioned to you, we have a project at our McKee refinery, which is the same kind of thing, just not Eagle Ford.

  • But the issue we have at McKee is we need a permit, we would spend about $100 million to have a modest expansion there, which has good economics, but the permit is probably an 18 to 24-month conversation.

  • - Analyst

  • Okay.

  • Guys, I listened very carefully to what Mike said about the crude discounts in the Mid-Continent.

  • But from that standpoint, my thought was the capture rate in that region really doesn't seem to reflect that.

  • Am I missing something?

  • - VP, IR

  • I think you are, Mark.

  • But we will be glad to walk you through it.

  • - Chairman of the Board, CEO and President

  • Why don't you call Mark, because I don't mind telling you guys, our most profitable refineries are McKee, Three Rivers and Ardmore.

  • So we're capturing it, but I'm not sure.

  • What I would like you to do maybe is to call Ashley after the call and he will walk you through it.

  • - VP, IR

  • Yes, and I think there is one more item that the broad public should understand.

  • Our Mid-Continent system includes Memphis, so roughly 40% of our Mid-Continent region doesn't participate in WTI.

  • Memphis is an LLS-based refinery.

  • So if you assume that all of that throughput is capturing WTI base margin, you made a very bad assumption.

  • - Analyst

  • Last one for me.

  • Where were you in the quarter and where might you expect to be in terms of being a buyer of RINs?

  • - Chief Commercial Officer

  • Mark, we're definitely a buyer of RINs And we're now to the point where we're blending probably over 80% of our gasoline volume with ethanol, so that is not the issue.

  • But it is really the biodiesel RINs that has become the challenge for us.

  • There is just not enough biodiesel out there to blend for us to meet it with blending this year.

  • We have plans underway to put in blending facilities for biodiesel at a handful of our racks.

  • And we expect that by the end of 2012, we will be blending at volume to satisfy that obligation, but it will be a build-up until that time.

  • So we are short RINs.

  • - Chairman of the Board, CEO and President

  • It's an expense item well over $100 million.

  • And maybe I can just leave it at that.

  • This is a big program.

  • And Joe is telling you things we're doing to mitigate that.

  • But for Valero, it is well over $100 million.

  • - Analyst

  • Bill, is that annual or quarterly?

  • - Chairman of the Board, CEO and President

  • Annual.

  • It is over $100 million.

  • - Analyst

  • And does it go up from here until you get in position to be able to achieve that blending?

  • - Chief Commercial Officer

  • No, no, unless the market for the RIN -- and frankly, Mark, it is all related to these biodiesel RINs.

  • Those are very expensive.

  • The market for them is about $1.34.

  • And you look at that compared to an ethanol RIN and it's $0.035.

  • So the market for biodiesel RINs are just very high because they're just not available out there.

  • We are going to be blending more, though, as I said, and as a result that expense should go down as we proceed forward.

  • - Chairman of the Board, CEO and President

  • Relative then to the price of wherever they are going.

  • - Chief Commercial Officer

  • Right, as more biodiesel blends, the price of the RINs should come down, too.

  • Operator

  • Jeff Dietert from Simmons.

  • - Analyst

  • Good morning.

  • Thanks for the update on the Eagle Ford volumes.

  • As you think about some of the light sweet crudes coming out of the Eagle Ford, Permian, Bakken, Cushing area, there are major pipelines coming from the Eagle Ford into Houston, a long horn reversal into Houston, the keystone XL enterprise Enbridge lines going into Houston.

  • If production grows as fast as many of the producers believe it will, are you looking for incremental volumes?

  • Could you use incremental light sweet volumes in your Houston area refineries over and above what you have already talked about?

  • - Chairman of the Board, CEO and President

  • Some are going to Houston.

  • Some go to Port Arthur.

  • But Joe is going to answer you.

  • - Chief Commercial Officer

  • Jeff, clearly, the Mid-Continent refineries are benefiting now, right?

  • We all see that.

  • But to the extent that we do move sweet crude down into the Gulf, you're going to see pressure on LLS prices.

  • And so would we like to see some of this crude end up in the Houston market where we can run it or over at Memphis?

  • Absolutely.

  • I don't think that we're going to see this get resolved though any time soon.

  • And I don't know what your view is, but you've got so much production coming onstream up there, as you've described, that I think we're going to see significant volume continue to pour into the market, both from the regions you mentioned, the Bakken area, from the Panhandle area, and then Canadian barrels coming in.

  • And it is going to be 18 months or better for the pipelines to be put in place to carry it out.

  • So you think you're going to see continued pressure on those discounts in the Mid-Continent.

  • One thing that is interesting, Jeff, that we saw, is that Cushing tank capacity is coming onstream big time.

  • We used to use 40 million barrels as a number of tank capacity.

  • It's up to 62 million now and in the next 6 months they're going to add another 13 million barrels which is going to take it up to 75 million barrels of storage.

  • So clearly the market is getting ready for a lot more of this Mid-Continent crude to be available and to be stored.

  • - Analyst

  • Joe, are you starting to see some attractive Saudi barrels coming into the US Gulf Coast?

  • They raised production in June.

  • They're talking about further increases in July.

  • Are you guys seeing some of those barrels?

  • Are they getting priced attractive enough to find their way to the Gulf Coast?

  • - Chief Commercial Officer

  • We are.

  • We're running now some Arab extra light in the Gulf.

  • We're also going to be bringing in more Kuwaiti barrels.

  • The Kuwaitis have lifted their imposed reduction of contract volume.

  • We were operating for a period there where we had a 10% reduction in our contract volume.

  • They notified us that they were taking that off and that we were able to take more barrels.

  • So I do think we're going to see a lot more medium sour barrels coming into the market.

  • - Analyst

  • How significant are those volumes?

  • - Chief Commercial Officer

  • I understand the Saudis are going up to 10 million barrels a day of production.

  • So that would be, what?

  • -- another --.

  • No, not entirely in the Gulf but they're going to put that in the market.

  • Jeff, I don't know how much you will see.

  • - Analyst

  • Okay.

  • On Pembroke, you've provided some guidance on $0.25 a share of accretion on 2010 outlook.

  • Do you happen to have an updated number based on where the forward curve is today?

  • - EVP, Corporate Development and Strategic Planning

  • I think the forward curve, Jeff -- this is Gene, again -- the forward curve looks pretty similar to our forecast.

  • Although RINs prices, obviously, are very high right now, so there is some concern on that.

  • But if you look at the 211 to Brent today, it is around $13 a barrel.

  • It is really not all that bad.

  • We haven't really redone our economics since we did the acquisition but I think it looks more or less in line.

  • - Analyst

  • And do you have any comments on the status or the impact of the ethanol tax credit repeal and how that might influence Valero or the industry as a whole?

  • - EVP, Corporate Development and Strategic Planning

  • Gene again.

  • I'm not sure when it is going to get repealed.

  • The Senate was talking about July 31.

  • But it doesn't look like that is going to happen.

  • Maybe it will happen at the end of the year.

  • We're watching it but in reality it doesn't really have much impact on us right now.

  • The blenders credit is really being captured by the blender, not the ethanol producer.

  • Just to use an example, ethanol today is right around $3 a gallon.

  • CBOB and RBOB in New York are both $3.05, $3.10 a gallon.

  • So there is margin to blend even if you don't have the $0.45 credit.

  • So, in effect, the blenders are capturing it.

  • We capture a little of it at our retail.

  • Our wholesale it's passed on to the wholesale customers.

  • At retail, from our analysis, it's more or less competed away.

  • When we have good ethanol blending margins, our overall margin at retail doesn't seem to be affected much by that blender's credit.

  • I think it is competed away in the business whether it is wholesale or retail.

  • So the net effect to Valero, it really is pretty much nothing.

  • Operator

  • Paul Cheng from Barclay's Capital.

  • - Analyst

  • Good morning.

  • A number of questions.

  • In Corpus Christi, Bill, how much that you can run Eagle Ford?

  • Right now you're saying that in the third quarter it's about 25,000 barrels a day.

  • Assume that there is no major restriction in the logistics side, how much more that you can run it up to?

  • - SVP Refining Operations

  • Hello, Paul, this is Lane Riggs.

  • We have 2 crew units.

  • We have our West line crew unit which can run about 40,000 barrels a day.

  • So that would be pretty much, you're able to run about 40 a day of Eagle Ford if all is economic.

  • And then our other plant is our East plant.

  • And it is predominantly a medium sour, heavy sour but at the end of the day it is all about economics.

  • We can run Eagle Ford in that crude unit.

  • It is just a matter of it being available and the economics are right.

  • And that is about a 100,000 barrel a day unit.

  • So we can run quite a bit.

  • - Chairman of the Board, CEO and President

  • The reason Lane is answering you this way is the East plant has a coker, so you tend to run the coker.

  • But if you get enough discount, you don't run the coker.

  • - Analyst

  • This plant is your original plant, right?

  • With the cracker?

  • - Chairman of the Board, CEO and President

  • The West plant has the resid crack.

  • - SVP Refining Operations

  • That's the original.

  • - Chairman of the Board, CEO and President

  • That's the original Valero plant, it's the West plant.

  • The East plant is an old coastal plant.

  • - Analyst

  • Okay, I see.

  • Very good.

  • Can you give me some bunch of data in terms of working capital, long term debt, marking off the inventory in excess of the (inaudible)?

  • - Chairman of the Board, CEO and President

  • Yes.

  • On the current assets, it is $14.7 billion.

  • Current liabilities $10.2 billion.

  • Total long term debt $7.6 billion.

  • And then our market value in excess of the LIFO on the inventory is $7.9 billion.

  • - Analyst

  • Okay.

  • And I suppose that this may be for Ashley.

  • On the Quebec, is there any particular reason why margin realization seems like, sequentially at least, from the first quarter has dropped so much compared to the benchmark indicator.

  • - VP, IR

  • Quebec?

  • Typically, and if you go back and look at our aperture rates versus a typical indicator like a Brent 211, it falls from first quarter to second quarter.

  • Mostly on the light end, the butanes, LPGs is up there.

  • The market always gets weak because you can't blend them into the gasoline pool.

  • And so you will see it fall.

  • 4Q and 1Q, are typically a higher capture rate.

  • It falls in the second quarter.

  • And then holds and builds back up as you can start blending back into gasoline.

  • - Analyst

  • That seems like pretty substantial, because the benchmark indicator seems to be flat to slightly down on it.

  • - VP, IR

  • It does look substantial and it has been substantial in the past.

  • - Analyst

  • So you think that this is still normal on the seasonal pattern?

  • - VP, IR

  • Absolutely.

  • Go back, we have been posting our Quebec-only performance for that region.

  • We posted that to the Web site a few months ago, right after the first quarter.

  • And you can see, historically, how Quebec has done over the past 5 years.

  • And in the first quarter to the second quarter it falls anywhere from 20 to 30 percentage points on capture rates.

  • And this is the key driver.

  • - Analyst

  • I see.

  • And Aruba, did you guys make money in the second quarter?

  • - Chairman of the Board, CEO and President

  • No, we did not.

  • We had margin, but we had many operating issues.

  • - Analyst

  • Bill, is it primarily an operating issue or that the configuration, even in today's market, the light, heavy, you still won't be able to make money?

  • - Chairman of the Board, CEO and President

  • I will take the second part first.

  • The configuration is an issue when you have $100 oil running a coking refinery.

  • You just have to have a big discount.

  • It's as simple as that.

  • - Analyst

  • Right.

  • So the current discount is not big enough?

  • - Chairman of the Board, CEO and President

  • The discount would have been big enough in the second quarter, then if we had run better.

  • And we had a lot of problems.

  • This startup, which basically we started a year ago, getting ready to start up, has been very tough.

  • Our people have worked very hard.

  • We've gotten a lot of issues getting back to a good rate.

  • Today, we're running very near 200,000 barrels a day.

  • But we have had issues getting there.

  • - Analyst

  • Okay.

  • So do you think that now, the bulk of the issue is behind you?

  • - Chairman of the Board, CEO and President

  • I think we have clearly made progress on being able to run reliably, but I would tell you that the second half on the P&L, not necessarily cash flow totally, but P&L will be challenging unless we get a change in the discounts.

  • - Analyst

  • I see.

  • And this is for Mike.

  • For the remaining spending for the hydrocracker in St.

  • Charles and Port Arthur, how much is the remaining that you have to spend?

  • - EVP and CFO

  • It's about $1.3 billion?

  • - Analyst

  • Together?

  • - EVP and CFO

  • Combined.

  • $600 million, $700 million.

  • And then we have a couple of other projects around it.

  • So I would basically tell you that it is about a $1.5 billion to finish the 2 hydrocrackers, some of the crude work that is going on around them.

  • - Analyst

  • Do you have a rough number what's the CapEx look like next year?

  • - EVP and CFO

  • The capital spending next year?

  • I am going to say it is the same as this year.

  • $3 billion to $3.2 billion.

  • And I think I said a little while ago $3.1 billion, is where we're sitting at this point.

  • Now, having said that, that's like a ball park number.

  • Because like most companies you guys will talk to, we're in the middle of starting our budgets for next year, and our planning.

  • - Analyst

  • 2 final questions.

  • One, Bill, historically, Valero, the strategy is that you love the large coastal refinery, with a high conversion capability to win a lot of discount crude, (inaudible).

  • With the last 6 or 7 month drastic change in the Mid-Continent WTI spread, does that in any shape or form change your view about the criteria?

  • Or that you think this is just too short-term of a phenomenon for you to really change your strategic thinking?

  • - Chairman of the Board, CEO and President

  • It is a very fair question, Paul.

  • Obviously, in today's market, it is all about location.

  • It is a given.

  • And Valero is benefiting by it.

  • We have already told you that at McKee, Ardmore and Three Rivers.

  • So for the industry then to cause the LLS, WTI type to narrow, it is really probably an 18-month to 2-year conversation.

  • Because some of the things that I think Doug mentioned earlier, or maybe it was Jeff, they're not all happening yet.

  • So this is 18 months to 2 years away for pipelines to move this volume out of the Mid-Continent.

  • So location, it is all about location today.

  • However, I would still say to you that at the end of the day, it is just like we've talked about in the past, it is location, it is complexity, but it is also being able to operate.

  • And executing, executing, executing, all the time.

  • And that's the piece that you will notice over the next -- as these projects are getting done, you're going to see our executing is dramatically improving.

  • on our mechanical availability now, we are borderline first quartile, and a couple of years ago, we were third and fourth quartile.

  • So you will see that as this data keeps coming out.

  • But today, it is all about location.

  • - Analyst

  • But you do not believe that if longer -- if we need (inaudible) long term, so you're not changing the way how, in terms of M&A, and consideration, and other criteria?

  • - Chairman of the Board, CEO and President

  • I'm not going to say not changing.

  • I'm going to say what few minutes ago I said, complexity matters.

  • Where Valero's expertise is, is running high complexity refineries.

  • And that is our institutional knowledge here.

  • However, we are looking at an expansion at the McKee refinery.

  • We've already talked about what we're doing in South Texas.

  • Those are projects that we would not have considered 2 years ago for sure.

  • Would not have considered 1 year ago for sure.

  • So there is obviously some change in our approach.

  • On the other hand, to give you the whole story, you can see our Quebec numbers, as Ashley said.

  • We have a currency.

  • Currency is going up in Canada.

  • That makes their conversion to dollars.

  • You can see when you look at their operating costs, it has moved up dramatically.

  • Obviously, they're buying light sweet crude.

  • So where we have an emphasis on in Quebec, is going to be much more on the cost side, and the product realization side, because they have lost that currency buffer that they had previously.

  • And the advantage crude oil being foreign.

  • So clearly, this market that we're in with these differentials or spreads that we've not seen before, are certainly biasing our strategy.

  • But it is still about executing and complexity, and being able to take these barrels and make very clean products out of them reliably every day.

  • - Analyst

  • Finally, can you tell us that, is there any major turnaround from you guys then in the second half and the first half of next year?

  • - Chairman of the Board, CEO and President

  • I think Bill Day just released our turnarounds.

  • But we have them at Corpus Christi in October and Three Rivers in September.

  • The Three Rivers refinery, the entire plant is down.

  • And it is down for 3 or 4 weeks.

  • And the Corpus Christi one is --

  • - SVP Refining Operations

  • The East plant crude coker for 3 weeks.

  • - Chairman of the Board, CEO and President

  • The larger crude unit, the East plant we talked about, down for 3 weeks.

  • The crude coker.

  • But these are turnarounds that are just scheduled turnarounds.

  • The heaviest turnarounds we had were in the first quarter.

  • Operator

  • Evan Calio from Morgan Stanley.

  • - Analyst

  • Good morning, guys.

  • Thanks for taking my call.

  • Depth of question is amazing versus only 5 quarters ago.

  • Clearly a better time for refinery, if that is any indication.

  • A question for you on the macro.

  • It really feeds into the prior response that you had on Arab light volumes.

  • And frankly it actually may highlight complexity versus location.

  • If we look at the year end, excess PR, you could see over 1.2 million barrels of incremental crude demand.

  • With low sulfur Libyan barrels out, it looks as though ex the SPR, that would be met with primarily sour Arab light barrels.

  • And what are your views in terms of the global market setting up for heavy sour imbalances in the back half of the year?

  • It clearly benefits to your system.

  • Any comments?

  • And then I have a couple of other questions.

  • - Chief Commercial Officer

  • Evan, this is Joe.

  • If you think about heavy sour in general, we've got a discount right, Maya related, to LLS.

  • It is around this $14 a barrel which is a decent discount.

  • The SPR release certainly depressed LLS briefly which compressed that Maya discount but now it has moved back out.

  • But if you look more broader than just Maya, you've got a market right now that sees Pemex production stabilizing 1.4 million of exports a day, somewhere in that range.

  • You've got Columbia increasing their heavy sour production by 140,000 barrels per day.

  • They're up to 870 now, which is a significant increase year-over-year.

  • You've got Brazil increasing their production by about 150,000 barrels per day.

  • We're seeing a lot more Basra in the market today.

  • As we mentioned earlier, we've got the Saudis putting more barrels into the market.

  • As are the Kuwaitis.

  • And ultimately we are going to have Keystone come on and it is going to allow us to move more of these Canadian barrels into the market.

  • On the medium sour side, you've had somewhat reduced production in the US Gulf Coast, because there's been some maintenance that has been taking place on the Mars platform.

  • And then of course we had the spill which delayed subsequent drilling but that will pick back up here at some point in time.

  • So when we look at the market for sour crude, both heavy and medium sours, we're pretty optimistic about these discounts.

  • - Analyst

  • Right.

  • It looks that way, in my opinion.

  • And this question on Maya, how should we think about the K factors?

  • Do you see that being moved to offset some of the WCS impact in that pricing formula that's being impacted by Cushing inventory levels or pressure at Cushing?

  • - Chief Commercial Officer

  • Clearly the biggest part of the formula is that.

  • The K factor is what the Mexicans use to try to keep the market, the oil price, at what would be a market.

  • And certainly, when you get heavy sour Canadian crude coming into the Gulf, it is going to put -- any time you get more supply, you are going to have pressure on these discounts.

  • So we expect that that is probably going to happen.

  • They have been very good.

  • They are very capable.

  • They have been very good at trying to keep the Maya price somewhat similar to a medium sour crude alternative.

  • And we expect they're going to try to continue to do that in the future.

  • But again, as you have more crude supply into the market, it should affect those discounts.

  • - Analyst

  • A question on Quebec.

  • I know you mentioned focusing on cost, but is there any potential solution to move Canadian discounted lights that are really getting backed out from the US Mid-Continent and sands growth that may be able to move to the east and give you a TI-like discount into that market?

  • How do you guys think about that?

  • - Chairman of the Board, CEO and President

  • Evan, no, there is really not any logistics in place.

  • You can always rail it.

  • You can put it on a barge or a ship.

  • But it is really the logistics don't sell that way.

  • - Analyst

  • Rail economics don't work then?

  • - Chairman of the Board, CEO and President

  • You have to get the cars.

  • I don't know what people are telling you.

  • Cars now are probably almost a year lead time.

  • Certainly you would have to build the facility.

  • We have a rail facility, but it works for products.

  • And our pipeline won't be finished until the end of next year.

  • So we are looking at all of these items, including what Ashley mentioned on the butanes, as well, and on the general operating costs.

  • But your specific question, it is harder than just putting it on a ship and shipping it in.

  • - Analyst

  • Okay.

  • No, I appreciate that entirely.

  • On Three Rivers, I know you're working with Harvest Pipeline to bring a line from Eagle Ford into the asset, but is there anything magic about 60, in terms of 95 CD capacity?

  • Is there a potential to increase compression and take that number higher?

  • Or is that, as you think about the asset, the right maximum amount for you?

  • - SVP Refining Operations

  • This is Lane.

  • We will see.

  • Ultimately we may think we can run up to 80,000 barrels a day of it, it is just a matter of whether it is fills out parts of the refinery properly.

  • But you're right, the Harvest pipeline will be there.

  • We put in a big truck rack.

  • We will not be logistically limited on Eagle Ford availed in the refinery.

  • It will all be about the economics of Eagle Ford in the refinery, which today we would run as much of it as we could.

  • - Analyst

  • Got you.

  • Just lastly, briefly on the SPR, and the US SPR release, I know you're the single largest purchaser, close to 7 million barrels.

  • How did it benefit you guys?

  • Can you explain maybe the process?

  • - Chief Commercial Officer

  • We certainly can run the crude.

  • And we were able to pick it up at a $5.11 discount on average to LLS.

  • And so it is simple math.

  • You do 7 million barrels times $5.

  • And we had a huge benefit from bringing it in.

  • - Chairman of the Board, CEO and President

  • We will have some costs moving it around, but what we did is the oil fits us, in many of our locations.

  • So we just decided to bid, and it was a bid process.

  • And so as Joe said, we got it for a little bit of a discount, against the metric.

  • Joe is supposed to get that discount though every day.

  • [Laughter]

  • - Analyst

  • That's great.

  • And maybe 1 other question.

  • I know you guys are running a lot more crudes through your program.

  • But it hasn't yet impacted inventory levels.

  • Is there some correlation with running more crudes and having higher inventory levels since you want to blend out so you don't beat up your units as much?

  • - Chairman of the Board, CEO and President

  • I would say no.

  • Because we typically -- and one of you guys correct me -- our crude inventory number runs about 20 days, 22 days.

  • So we're turning our inventory over 20, 22 days here, in that range.

  • So it just goes through our system and our supply people are always balancing our system.

  • So it moves a couple million barrels, we have over 100 million barrels of total inventory.

  • And moves a couple million barrels.

  • But the system is always trying to get off the bus.

  • Operator

  • Chi Chow from Macquarie Capital.

  • - Analyst

  • Thank you.

  • We've beaten this topic to death today but I'm going to ask one more question on running these inland crudes through your system.

  • Just one more here.

  • So assuming a couple years down the road, this is hypothetical, if all of these pipelines and trends come in, assuming you can get all of the volumes of inland crudes you want down to the Gulf Coast, is there an upper limit of how much of these light sweet inland crudes you can run through your entire Gulf Coast system?

  • - Chairman of the Board, CEO and President

  • I'm going to answer you and say, because we got into this conversation the other day, it all depends on the price.

  • So today, we run different crude oils at our Houston refinery.

  • We could put a lot of lighter crude in there.

  • You could put lighter crude into all of our refineries.

  • You will under-utilize your coker.

  • And then, as Lane was explaining earlier, because it is lighter, you will overload your vapor handling capabilities.

  • So that is where you will have to stop.

  • But it all depends on price.

  • - Analyst

  • So you've got 1.6 million, 1.7 million barrels a day, something like that of capacity.

  • Theoretically you can run a full dose of that, without any sort of impacts on operations?

  • - Chairman of the Board, CEO and President

  • No, I would say we would not be able to run that much.

  • We would get limited out on being able to handle the vapors.

  • But you might make more money.

  • So the way we do it is just like all our competitors do it.

  • We run the LP.

  • - Analyst

  • Do you ever see the US as being an exporter of LLS or WTI down the road?

  • - Chief Commercial Officer

  • I doubt it.

  • We're still bringing foreign sweets in.

  • - Chairman of the Board, CEO and President

  • I think we would answer this to say our opinion is going to be no better than yours.

  • I think is the best way to say that.

  • The US is still a big importer.

  • The US imports over 9 million barrels a day of crude oil.

  • And so it would have to be some issue with the refining capacity which you were just asking us for that to happen.

  • But our knowledge would not be any better than yours here.

  • - Analyst

  • Okay, great.

  • One other quick question, Bill.

  • I think last quarter, you mentioned that you thought Valero could beat the $3 EPS for the year.

  • Do you still feel pretty good about that?

  • - Chairman of the Board, CEO and President

  • Yes, I do.

  • Operator

  • Cory Garcia from Raymond James.

  • - Analyst

  • Thanks for taking my call, fellas.

  • Try to sneak one quick one in here.

  • In regards to your stay-in-business maintenance capital, seeing that has been running about [1.7] and I believe several quarters back you guys were talking maybe [1.3 to 1.4].

  • Bearing in mind that, obviously, the regulatory environment can change on a dime, I'm looking at how your portfolio has changed.

  • Are you still thinking maintenance cap could get back down toward [1.3, 1.4] in the years ahead?

  • Or are we looking at more of a [1.7, 1.6] type of level?

  • - Chairman of the Board, CEO and President

  • I think that eventually, we can get to that number.

  • And what it is, it is basically, we spend DD&A.

  • And then you always have to consider these environmental regs or other type of regulations.

  • But yes, we can get there.

  • But what we're doing today is we're spending at a little higher rate in that area just because we had many things going on to improve our reliability through our system.

  • And as we're replacing bad actor pumps, as we're addressing problem exchangers and that system, they are causing us to have a little higher capital spending.

  • But our target would clearly be that we ought to be able to do it around DD&A.

  • With some subject to inflation there.

  • But basically, a DD&A.

  • And for Valero, total DD&A is about [1.5].

  • So for the refining group, it must be about [1.3].

  • Operator

  • We have no further questions at this time.

  • - VP, IR

  • Okay, thanks, John.

  • And just want to thank shareholders for listening to today's call.

  • If you have questions, please contact our Investor Relations department.

  • Thank you.

  • Operator

  • Thank you, ladies and gentlemen.

  • This concludes today's conference.

  • Thank you for participating.

  • You may now disconnect.