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Operator
Welcome to the Valero Energy Corporation reports 2016 fourth-quarter earnings results conference call.
My name is Vanessa and I will be your operator for today's call.
(Operator Instructions)
Please note that this conference is being recorded.
I will now turn the call over to Mr. John Locke, Vice President, Investor Relations.
Sir, you may begin.
John Locke - VP of IR
Good morning, and welcome to Valero Energy Corporation's fourth-quarter 2016 earnings conference call.
With me today are Joe Gorder, our Chairman, President and Chief Executive Officer; Mike Ciskowski, our Executive Vice President and CFO; Lane Riggs, our Executive Vice President of Refining Operations and Engineering; Jay Browning, our Executive Vice President and General Counsel; and several other members of Valero's Senior Management Team.
If you have not received the earnings release and would like a copy, you can find one at our website 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 after reviewing these tables, please feel free to contact our Investor Relations team after the call.
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 Joe for a few opening remarks.
Joe Gorder - Chairman, President and CEO
Thanks, John, and good morning, everyone.
The fourth quarter and the full year 2016 were good for Valero as we achieved our best performance ever in the areas of personnel and process safety, plant reliability, and environmental stewardship.
We're very proud of our team's exceptional execution, which we believe is imperative in our business and critical during a low-margin environment like we saw for most of the year.
In the fourth quarter, we continued to see good domestic demand, supported by low prices and solid export volumes, due primarily to demand strength in Latin America.
While we saw seasonal declines in available margin in some regions, margins in the Gulf Coast region remained healthy and distillate margins in all regions were bolstered by a return to more normal weather patterns in North America and Europe.
We also saw attractive heavy sour discounts relative to Brent.
A persistent headwind again this quarter was the exorbitant price of RINs.
We spent $217 million in the fourth quarter to meet our biofuel blending obligations.
At this level, this is a significant issue for us, so we continue to work it aggressively with regulators.
Our efforts are focused on moving the point of obligation because we believe this will level the playing field among refiners and retailers but more importantly, it will improve the penetration of renewable fuels, lower RIN speculation and reduce RIN fraud.
However, based on current rules, we expect costs in 2017 to be similar to the $750 million amount we incurred last year.
Given the significance of this cost to our Company, this issue continues to have our full attention.
Turning our refining segment, we initiated turnarounds at our Port Arthur and Ardmore refineries in the third quarter.
Both events carried over into, and were completed in, the fourth quarter.
Our employees and contractors worked hard to safely complete these events.
We believe distinctive operating performance is highly correlated to capturing more of the margin of available in the market.
In our ethanol business, we also ran very well and saw strong margins in the fourth quarter, due to high gasoline demand in the US, strong pull from the export markets, and low corn prices.
Also in the fourth quarter, we invested over $600 million to sustain and grow our business.
Construction continued on our $450 million Diamond pipeline project, which we believe is on track for completion at the end of this year.
And we continued to work on our $300 million Houston alkylation unit, which we expect to be mechanically complete in the first half of 2019.
We also have additional growth investment opportunities under development around octane enhancement, cogeneration and feedstock flexibility.
And finally, regarding cash return to stockholders, we delivered a payout ratio of 142% of our 2016 adjusted net income, which was 78% higher than our payout ratio for 2015 and well above our target for 2016.
Further demonstrating our belief in Valero's earnings power, last week our Board of Directors approved a 17% increase in the regular quarterly dividend to $0.70 per share, or $2.80 annually.
John, with that, I'll hand the call back over to you.
John Locke - VP of IR
Thank you, Joe.
For the fourth quarter, net income attributable to Valero stockholders was $367 million, or $0.81 per share, compared to $298 million, or $0.62 per share, in the fourth quarter of 2015.
Fourth-quarter 2015 adjusted net income attributable to Valero's stockholders was $862 million, or $1.79 per share.
For 2016, net income attributable to Valero's stockholders was $2.3 billion, or $4.94 per share, compared to $4 billion, or $7.99 per share, in 2015.
2015 adjusted net income attributable to Valero's stockholders was $1.7 billion, or $3.72 per share, compared to $4.6 billion, or $9.24 per share, for 2015.
Please refer to the reconciliations of actual to adjusted amounts as shown on page 3 of the financial tables that accompany our release.
Operating income for the refining segment in the fourth quarter of 2016 was $715 million compared to $876 million for the fourth quarter of 2015.
Adjusted operating income for the fourth quarter of 2015 was $1.5 billion.
The decline from the 2015 adjusted amount was primarily due to narrower discounts for most sweet and sour crude oils relative to Brent weaker gasoline margins in some regions and higher RINs prices.
Refining throughput volumes averaged 2.9 million barrels per day, which was in line with the fourth quarter of 2015.
Our refineries operated at 95% throughput capacity utilization in the fourth quarter of 2016, with major turnarounds at the Port Arthur and Ardmore refineries completed early in the quarter.
Refining cash operating expenses of $3.83 per barrel, or $0.36 per barrel higher than the fourth quarter of 2015, primarily due to favorable property tax settlements and adjustments in 2015 and higher energy costs in 2016.
The ethanol segment generated $126 million of operating income in the fourth quarter of 2016 compared to a loss of $13 million in the fourth quarter of 2015.
Adjusted operating income for the fourth quarter of 2015 was $37 million.
The increase from the 2015 adjusted amount was due primarily to lower corn prices and higher ethanol prices.
For the fourth quarter of 2016, general and administrative expenses, excluding corporate depreciation, were $208 million and net interest expense was $112 million.
Net interest expense was lower than guidance due to prepayment penalties associated with the early redemption of the 2017 notes being reflected in other income.
Depreciation and amortization expense was $468 million and the effective tax rate was 21% in the fourth quarter of 2016.
The effective tax rate was lower than expected due primarily to stronger-than-projected relative earnings contribution from our international operations that have lower statutory rates and other items as referenced in the release.
With respect our balance sheet at quarter end, total debt was $8 billion and cash and temporary cash investments were $4.8 billion, of which $71 million was held by VLP.
Valero's debt-to-capitalization ratio, net of $2 billion in cash, was 23%.
We had $5.6 billion of available liquidity, excluding cash, of which $720 million was available for only VLP.
We generated $998 million of cash from operating activities in the fourth quarter.
With regard to investing activities, we made $628 million of capital investments, of which $244 million was for turnarounds and catalysts.
For 2016 we invested $2 billion, which was slightly lower than guidance, due to lower turnaround costs and the timing of some growth spending.
And of this total, $1.4 billion was for sustaining and $600 million was for growth.
Moving to financing activities, we returned $440 million in cash to our stockholders in the fourth quarter, which included $271 million in dividend payments and $169 million for the purchase of 2.7 million shares of Valero common stock.
For 2016, we purchased 23.3 million shares for $1.3 billion and had approximately $2.5 billion of authorization remaining.
For 2017, we maintain our guidance of $2.7 billion for capital investments, including turnarounds, catalysts, and joint venture investments.
This consists of approximately $1.6 billion for sustaining and $1.1 billion for growth.
For modeling our first-quarter operations, we expect throughput volumes to fall within the following ranges: US Gulf Coast at 1.63 million to 1.68 million barrels per day, US Mid-Continent at 415,000 to 435,000 barrels per day, US West Coast at 195,000 to 215,000 barrels per day, which reflects a major turnaround at the Benicia refinery, and North Atlantic at 440,000 to 460,000 barrels per day.
We expect refining cash operating expenses in the first quarter to be approximately $4.15 per barrel, which reflects projected increased natural gas prices.
Our ethanol segment is expected to produce a total of 3.8 million gallons per day in the first quarter.
Operating expenses should average $0.39 per gallon, which includes $0.05 per gallon for non-cash costs such as depreciation and amortization.
We expect G&A expenses, excluding corporate depreciation for the first quarter, to be around $175 million and net interest expense should be about $115 million.
Total depreciation and amortization expense should be approximately $485 million and our effective tax rate is expected to be around 30%.
That concludes our opening remarks.
Before we open the call to questions, we again respectfully request that callers adhere to our protocol of limiting each turn in the Q&A to two questions each.
This will help us ensure other callers have time to ask their questions.
If you have more than two questions, please rejoin the queue as time permits.
Operator
(Operator Instructions)
Brad Heffern, RBC Capital Markets.
Brad Heffern - Analyst
Morning, everyone.
Joe Gorder - Chairman, President and CEO
Morning, Brad.
Brad Heffern - Analyst
Hey, Joe.
I was wondering, obviously a big topic of conversation has been the border adjustment tax in this space, so can you go through your thoughts on how that's going to affect feedstock costs, your ability to pass it on and maybe the likelihood that you see of that actually making it through?
Joe Gorder - Chairman, President and CEO
Yes, you bet.
We will give you a point of view.
What I would like to do is let Jason Fraser answer that question.
Jason is recently taken the position as the individual responsible for our public policy and strategic planning group.
We brought him back from London to take on this job and it's interesting.
We put the two functions together, strategic planning and public policy, because in our view, you really can't bifurcate the two anymore.
They're going to be very intertwined, Jason, you want to go ahead and share your point of view?
Jason Fraser - VP of Public Policy and Strategic Planning
Sure.
Yes, I'll give you a heads up on where we are with the House tax blueprint.
We've read all you all's reports.
As you know, there are greatly differing opinions on the blueprints, including the border adjustment tax aspect, how it affects our industry and Valero.
We are performing our own analysis as well as working through scenarios with AFPM, our trade association.
We're also engaged with the legislative process.
We are at the very early stages.
No legislative text has been released by the Ways and Means committee yet, so we're not sure exactly what's going to be in it, but we're going to continue to work this issue.
Regarding the likelihood of passage, you guys know that any kind of major legislative change like this is difficult to pass.
If there isn't bipartisan support, the Republicans may have to use the budget reconciliation process.
We also have a new administration, which adds another variable, so it's really hard to handicap at this stage how is likely to turn out.
Brad Heffern - Analyst
Okay.
Thanks for that.
Joe, or maybe Gary or Lane, the South Coast AQMD in California has talked about potentially banning the use of hydrochloric acid.
I was curious if you know what the impact will potentially be on Wilmington and maybe the chance of that going through as well.
Lane Riggs - EVP of Refining Operations and Engineering
Brad, it's Lane.
Yes.
We're engaged in the process and there's obviously a conversation around it.
I can't really share much more than that.
It does impact our operation.
We do have a HF unit there as long as the operator there in Torrance.
There are technologies.
Obviously the most straightforward one is the sulfuric acid but there is also one of the other technology providers in this space has another solution and -- but we're certainly working with them in terms of how long it might take to -- if they choose to go down that path and how long -- what the phase-in or at least the reform it would be, but we are very involved.
Brad Heffern - Analyst
Okay.
I leave it there.
Thanks, guys.
Operator
Phil Gresh, JPMorgan.
Phil Gresh - Analyst
Hey.
Good morning.
Joe Gorder - Chairman, President and CEO
Hi, Phil.
Phil Gresh - Analyst
I just wanted to start with the return of capital.
Obviously, the year ended up north of 140%.
You are guiding to 75%, which is consistent with the guidance you've always set but there's obviously a big delta between those two numbers.
I guess I'm wondering how you're thinking about that target relative to what you accomplished in 2016 and just taking note of the fact that 4Q did step down a bit from the rest of the year on the buybacks.
Mike Ciskowski - EVP and CFO
Okay.
Yes.
Phil, this is Mike.
We continue to spend our discretionary cash according to our capital allocation framework.
When we look at how much we're going to buy back in a particular quarter, we do look at the net income, but we also consider cash flow, and so for the quarter, or 2016, we did pay out 142% of net income and that equated to 51% of cash flow.
Phil Gresh - Analyst
Okay.
So you're suggesting we should consider cash flow as a metric as well?
Mike Ciskowski - EVP and CFO
Well, not suggesting that as our overall guidance, but in a lower margin environment, where net income is hit with our depreciation, we do take that into consideration when we are returning to our shareholders.
Joe Gorder - Chairman, President and CEO
You know, Phil, and we've talked about this before, we set the 75% target because it's easy to see and cash flow can move around, obviously.
Mike is right.
Looking at net income in a low-margin environment, we set an expectation and we consider it to be kind of the floor.
It's -- our commitment to our shareholders to the extent we can do more and it's the best use for the cash.
We'll go ahead and continue to buy back shares.
I think the move we made with the dividend this quarter clearly reflects our comfort level and our Board's comfort level with the earnings capability of the Company in a down market.
Obviously, if you look at a $2.80 dividend, it's going to continue to be a more significant component of the 75% payout ratio.
We're very comfortable with that.
We will continue to buy back shares and the guys will do it the way they've done it in the past, to some extent ratably and to some extent opportunistically.
Phil Gresh - Analyst
Sure.
Okay.
That makes sense.
If I could maybe just push a little bit more on Brad's question, more from the angle of if something were to happen, maybe just talk through your system, the amount of crude you import, the about of product you export.
You gave some number on product exports but maybe just what changes you think you would potentially make if this were indeed implemented.
Joe Gorder - Chairman, President and CEO
Yes.
I mean, it's -- and I'll let Gary and Jason can -- and Lane, we can all speak to this, but obviously you are going to optimize your crude slate.
The big question around this whole border adjustment, is how are the markets going to reacted to it?
Frankly, we've read every one of the sell-side reports on this and then consulting reports, as Jason mentioned, and it's got a lot of moving parts.
Some people look at it on a static basis.
Some have looked at it when you take into consideration the markets adjusting and some had taken into consideration the currency adjustment also.
Right now there's a skeleton out there that they're trying to put flesh on and we don't know exactly what is going to look like.
I think it's fair to say that we are going to continue to optimize our operation.
If you recall, Gary, I don't remember how long ago, but we were running over 1 million barrels a day of light sweet crude and there's been times where we've run 600,000 or 700,000 barrels a day of light sweet crude.
Phil, we've got the flexibility in the system.
Gary do you want to talk at all about the markets?
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes.
If you just look really over the last several years, our strategic objectives have been around developing feedstock flexibility and developing export markets and so we believe that puts us in a really good position to be able to handle whatever the border tax may throw our way.
Phil Gresh - Analyst
Okay.
Got it.
Thank you.
Operator
Neil Mehta, Goldman Sachs.
Neil Mehta - Analyst
Good morning, guys.
Joe Gorder - Chairman, President and CEO
Hi, Neil.
Neil Mehta - Analyst
Joe, I want to start off on the product markets here.
We've seen a couple of weeks of gasoline inventory builds and I wanted to get your sense of what you think is going on there.
Is there an issue with underlying gasoline demand?
How do you see it playing out from here?
Joe Gorder - Chairman, President and CEO
Yes, that is a great question, Neil.
Gary do want to share your thoughts?
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes, Neil, I guess to me when you look at the DOE numbers, it's always difficult this early in the year to tell a lot from the numbers, but certainly when you look at gasoline demand, we've been trending below last year's level.
Last week's stats showed gasoline demand really at the lower end of the five-year range.
The part to me, though, when you look at implied demand, which includes the exports, implied demand is actually tracking above last year's level, which is a little confusing.
It's certainly confusing to us when we look at our operations, because what we've seen in our operations in the Gulf is we've had a number of weather impacts in the Gulf, primarily fog, which is hindering our ability to really load ships, which hinders our ability to do the exports.
At least in our mind, the exports in the DOEs are probably overstated, which would in turn tell you that domestic demand is understated and so I think you'll see a revision in the stats to where exports will be lowered and the domestic demand raised, but we'll have to see how that plays out.
Really, when you look regionally, we don't see any indication to believe that domestic demand is down.
You have a few locations, we had high levels of rain on the West Coast, which hindered our demand there.
You had some instances in the upper Midwest with some ice storms, but none of that's abnormal, so I don't think we see anything that tells us demand this year is going to be dramatically different than what we saw last year.
Neil Mehta - Analyst
So Gary, what do you make of the inventory builds?
Is that just a function of fog and having some issues getting product out, or the refining industry running too hard in response to the strong cracks to end the year last year?
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes.
I would say pad three, it definitely is a result of fog and weather clears and you'll start to see the pad three market clear.
Obviously, the concern is the pad one market and our hope certainly was with less carry in the market you would see a less of an incentive to put barrels into New York Harbor and store them for summer and really we've been on a similar trajectory as what we were last year.
I think the only thing that we see that's different in the market, we don't have a lot of line of sight to the barrels people are putting into tanks, but it does look to us like a lot more of the inventory this year is a winter grade gasoline which, if that's true, what you should see play out is before RVP transition, people will have to liquidate those barrels and the market will get a little soft but then you should see inventory clean up before you get to gasoline season.
To your comment, I do think part of this is obviously the utilization rates are just too high and we're producing more diesel and gasoline than the market can absorb.
When you look at the Northwest Europe crack, it looks like this week we've gone below a level where we generally start to see some run cuts in Northwest Europe.
I also believe regionally, the Rocky Mountain region, the upper Midwest Chicago market, those markets are long and you'll see some run cuts there, so you combine that with turnaround activity and I think you'll start to see inventories come back in line.
Neil Mehta - Analyst
That's great.
My follow-up here is for Cisko.
Cisko, there are a lot of puts and takes in the quarter.
You mind walk you through the tax rate, which was a little bit lower, the interest expense guidance, which was a little bit different, and some funkiness in other income?
Mike Ciskowski - EVP and CFO
Okay.
Yes, Neil, I can do that.
Okay.
First, on our tax rate, for the quarter we were at 21% versus our guidance of 31%.
We had a couple of things going on there.
First we had higher income than previously projected, with most of this being in Canada and the UK, which has the lower statutory tax rate, so that was worth about 3% on the tax rate.
Next, on a few of our tax audits, the statute of limitations expired.
Therefore, we reversed reserves associated with these audits.
Those reversals, along with a few other small adjustments, was about 7% on our tax rate.
Okay, we had a few items that we did -- we chose not to identify them as special items for this earnings call, but I will walk through those.
First, and you talked about one already, the debt prepayment penalty.
We inadvertently, on our last call, included that penalty in interest expense.
It actually flowed through other income.
That was a charge of about $42 million.
Offsetting that, however, was kind of a unique item.
It's the Canadian commercial paper recovery.
Back in 2009, we wrote off that investment.
Part of the deal, we exchanged our commercial paper for some notes and in the fourth quarter, we received payment on those notes.
That was about $50 million.
So those two kind of offset each other in other income.
Then lastly, we had in the fourth quarter, a LIFO charge.
We had a decrement and we had a LIFO charge of about $55 million, so we chose not to identify any of these four items as a special but I did want to go over that.
In summary, we had two expense items, the debt prepayment and the LIFO charge.
We had one income item, commercial paper recovery.
Then we had the lower tax rate.
So when you net those four items together, that was $0.02 per share on our earnings.
Neil Mehta - Analyst
That's great.
Thanks a lot.
Mike Ciskowski - EVP and CFO
You bet.
Operator
Doug Leggett, Bank of America Merrill Lynch.
Doug Leggate - Analyst
Thanks.
Good morning, everybody.
Joe, one of the other, I guess, policy moving parts that has emerged in the last week or so is Keystone.
Of course, OPEC, the newswires have suggest it's heavy barrels that are getting cut, so I'm just wondering, what can you share with us about the dynamics of what you're seeing on the Gulf Coast specifically as it relates to how you expect the heavy differential of discount to evolve over the next uncertain period, I guess, that we have?
Joe Gorder - Chairman, President and CEO
You bet.
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Doug, this is Gary.
What we've seen is we've certainly seen some impact of the OPEC cuts.
Our crude allocations have been cut a little bit, primary from Saudi Arabia and Kuwait, but we've seen minimal impact to our system from the cuts.
We continue to see good availability of grades from Latin America, Canada and US sources through volumes that have been lost from OPEC.
Thus far, the impact from the cuts has really been offset by lower refinery demanded due to refinery turnarounds, so it'd probably be April, May before the full impact of any cuts are seen.
Directionally, we really didn't see the medium sour discounts react at all into the OPEC cuts.
When the cuts were announced, you saw an increase in flat price but the discounts really didn't change.
Here over the last week, the medium sour discounts have come in a little bit, but we've actually seen heavy sour discounts move wider.
PMI adjusted their K factor to make (inaudible) a little more -- the discount a little wider and I think they had to do that to compete with Canadians, so we've seen a heavy discounts actually move wider.
We always look at 3% fuel oil as kind of a leading indicator where the discounts are going and 3% fuel oil has actually moved from 85% of Brent last week to 82% of Brent.
You see fuel oil inventories in Singapore that are above the five-year high.
The (inaudible) to ship fuel to Singapore is closed, so that we kind of indicate the discounts will actually move wider.
Doug Leggate - Analyst
Okay.
Just on the Keystone issue, I guess, I don't want to push the point too much because I realized how much uncertainty there is, but I seem to recall in the past you guys had -- maybe I've got this wrong with talking about becoming an anchor shipper with an option to even acquire an interest on that.
Have I got that wrong or is that back on the table?
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Well, so we are a shipper.
We are still a strong supporter of Keystone.
We don't have the ability to actually be an owner in the line so we're working with TransCanada as that try to better understand the Executive Order and drum up customer support.
Our belief that the direct connection from the Western Canadian production to the US Gulf Coast is a good thing because we have the most efficient capacity to really process those growing areas of production.
Our intent, again, would be to process those barrels in our system, not to export the barrels.
Doug Leggate - Analyst
Okay.
I appreciate that if.
I could squeeze in a last one, because that was kind of a follow-up, I guess.
Joe, (inaudible) I realize you addressed it earlier, but I just want to ask a question about it now very quickly.
It has MO of your tenure as CEO, the return to shareholders.
What are you thinking now in terms of the dividend yield, because you are now sitting with if not highest, pretty close to the highest yield in the sector.
Is that kind of -- do you have a target in mind?
Do have an idea of how that dividend growth can evolve a relative to buybacks?
What are you thinking in terms of the overall balance of one versus the other?
I'll leave it there.
Thanks.
Joe Gorder - Chairman, President and CEO
Yes.
Thanks, Doug.
The yield, obviously, is a function of the stock price and we can't control the stock price.
What we can control is how we reward the shareholders of the Company and how confident we feel about our ability to produce cash flows, free cash flows, within the Company.
That we try to manage, right, and we do it through the capital allocation framework that Mike mentioned earlier.
The dividend in our maintenance CapEx is non-discretionary in our minds and it will continue to be, so making commitments to our shareholder returns through the dividend is something we don't take lightly and we model extensively.
The buybacks and of the growth projects, organic capital projects and acquisitions, are areas that we consider to be competing for the use of free cash flow.
We look at the timing on our project development and activities.
We look at the return on our projects that Lane and his team are developing and that Rich and Martin have.
We compare it to the value of buying back shares and so we make the decisions accordingly to provide the highest returns for the shareholders.
We -- I would tell you I wouldn't -- I'd be lying to you if I told you that we look at the absolute yield and say that is what determines our decision around the dividend policy.
It's more, how do we feel about the cash flows that we can produce within the system?
Doug Leggate - Analyst
Appreciate the answer, Joe.
I guess we'll see you in a couple of weeks.
Thanks.
Joe Gorder - Chairman, President and CEO
You bet, Doug.
Thanks.
Operator
Ed Westlake, Credit Suisse.
Johannes Van Der Tuin - Analyst
Hi.
Thank you for taking the call.
It's Johannes here.
I have to pinch hit, unfortunately for you all, but fortunate for me.
Thank you for taking the call.
Joe Gorder - Chairman, President and CEO
Glad you're here.
Johannes Van Der Tuin - Analyst
The first question, I guess, has to do with the other big policy that's not in border adjustment taxes that is being pushed aside for the moment but still probably very important to you all and that's RINs.
You mentioned it earlier up in the call.
What sort of progress are you seeing in terms of trying to move the point of obligation or engaging with the EPA as there has been a transition?
I know that Scott Pruitt is not in his seat yet, but nonetheless, if you've got any sort of color on that?
Then would you expect the RIN market to move before any sort of policy change once there's some sort of clarity on which direction it's going, or are you modeling out for 2017 that the higher RIN expense because you don't think the market's going to move?
Joe Gorder - Chairman, President and CEO
Okay, fair enough.
Jason, you want to take a crack at our RIN?
Jason Fraser - VP of Public Policy and Strategic Planning
Sure.
You have to talk about the point of obligation effort and then maybe somebody else could speak to the RIN price.
Okay.
The comment deadline on our petition to change the point of obligation is February 22, so that period is still open and there are still comments be generated.
We firmly believe that once all the evidence is reviewed, the EPA's going to agree to change the point of obligation.
Regarding the introduction of the process of Attorney General Pruitt as EPA administrator, which there has been some discussion about that as whether that will change the dynamic.
In his confirmation hearing, he said that he would administer the RFS in accordance with Congress' statutory objectives and he would make his decision based on the evidence in their administrative record.
It all sounds great to us; that's all we would ever ask for.
We think that after hearing all the arguments and reviewing the facts and what's in the record and consulting with his staff that they're going to agree that it should be moved, so we don't really see anything changed due to this changeover of administrators.
Johannes Van Der Tuin - Analyst
Then on the actual RIN price and the trading price?
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes.
Our view is certainly you would see a reaction in the market if this gets done and you would see RINs come off.
We've seen some market reaction already.
It's difficult for us to model because of all the uncertainty around this stuff.
Jason Fraser - VP of Public Policy and Strategic Planning
But yes, I guess, Gary, we started the year at $0.95 per RIN and now it's at $0.50.
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Right.
Jason Fraser - VP of Public Policy and Strategic Planning
We've made the point all along that this is a market that we believe is ripe for manipulation and the fact that you've had this movement in it, it sure isn't based on fundamentals.
Johannes Van Der Tuin - Analyst
Sounds good.
Hopefully there will be some movement.
Jason Fraser - VP of Public Policy and Strategic Planning
Okay.
Johannes Van Der Tuin - Analyst
The other question I have, I guess, has to do with California margin weakness.
Clearly, the margin environment in California has come off quite a bit over the last six months.
Do you see an underlying reason for that, what the big driver is?
Is there a difference in the way the market is clearing?
Is it just that Torrance has come back online?
Is there some sort of dynamic, whether it be weather or something else, in terms of EMT that you would like to say?
Just kind of curious of what is going on out there from your eyes on an operational bases.
Joe Gorder - Chairman, President and CEO
Well, I certainly think Torrance coming back online has impacted the market.
Here the prop market, as I mentioned, we saw some weaker demand with rain on the West Coast, but overall LA is moving to summer grade spec today, which you pull butane out of the pool, which direct tightens it and the next month the Bay will go to summer grade gasoline.
All of those things should directionally help demand and bring supply and demand back into balance.
Johannes Van Der Tuin - Analyst
Okay, so you don't see any sort of a grinding issue there?
Joe Gorder - Chairman, President and CEO
No.
Johannes Van Der Tuin - Analyst
Okay.
Perfect.
Thank you very much for taking the call.
Operator
Paul Cheng, Barclays.
Paul Cheng - Analyst
Hey, guys.
Good morning.
Joe Gorder - Chairman, President and CEO
Good morning, Paul.
Paul Cheng - Analyst
I have to apologize, first.
I joined late, so if my questions you already addressed, just let me know.
I will take it off-line.
Two questions, if I may.
First, if I'm looking at the contango curve, the current structure seems to suggest that you want to build inventory, because that May and June the margin was very high for gasoline.
On the other hand, the stock is high right now, so just curious that internally, for Valero, how you guys contemplate on those diverging forces and when you obtain your -- one, how you go through the process.
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes.
Paul, for us, most of our tankage is more operational in nature and so we don't do a lot of storage plays to take advantage of the market structure.
We do some other, especially on the crude side, but it's more related to buying opportunistic barrels that we believe had a wide discounts and then you can also take advantage of the market structure, but overall, we don't do a lot of that.
Paul Cheng - Analyst
But I mean, with the inventory at that high to day, Gary, is that influencing your decision that you might want to slow down your run even if the physical (inaudible) availability is there or that you don't really do that just because of the (inaudible) that if you slow other people it is going to take up the slack anyway, so you're just going to max out your production, even end up that you may build inventory yourself?
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes, I think to me the key on the inventory build was that what we're seeing out of the market is a lot of winter grade gasoline and so our view is that those barrels are going to have to clear before we have our repeat transition and as those barrels clear it will bring the market down and you will see economic run cuts and lower utilization while those barrels clear before you actually get into summer driving season.
Joe Gorder - Chairman, President and CEO
Yes, but Gary, you're not suggesting that is Valero that's going to make the run cut.
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
No.
That's right.
Joe Gorder - Chairman, President and CEO
Paul, we're the lowest cash operating guys in the business and we don't have any strong interest in balancing the market ourselves.
Paul Cheng - Analyst
Very good.
If I may, the second question is that -- maybe this is either for Lane or for Gary, also.
Looking at the margin capture rate, system-wide in the fourth quarter, it's about [50, 650] 7%, which is 6% lower than the third quarter and 21% lower from the year-ago level.
If you're looking at your last five-year average there's about 65%, 66% and this year is about 60%.
Just curious, is that just because of the rising oil price?
What -- is there anything that you can see structurally what you see in your system or that in the market new condition to lead you to believe that this year is 60% margin capture rate is what the future may look like, or that this is really more of an one-off certain items impacting that?
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes, Paul.
This is Gary.
I'll take it.
Mike started the call with some comments that we took a LIFO charge in the fourth quarter of 2016 and really that LIFO charge explains the third0-quarter to fourth-quarter of variance that you talked about.
It also explains a portion of the fourth-quarter 2015 versus fourth-quarter 2016 results.
In addition to that, we had a couple other items.
There's really nothing operational that I see, but the other big thing that affects the year-over-year results, in 2015 the blenders tax credit was enacted in December of 2015 and so all of the credit was booked in the fourth quarter of 2015 whereas in 2016 that blenders tax credit was kind of spread out through the year, so that had an impact on the capture rates.
The other big thing that we're looking at in terms of the capture rates is just the cost of the RINs.
In the fourth quarter of 2015, RINs were around $0.49 whereas the fourth quarter of 2016 they were $0.96 and so that delta in the cost of RINs also wins back to our capture rates.
That really the bulk of it.
Paul Cheng - Analyst
Gary, I mean it certainly explains for the quarter and for the year RIN (inaudible) is a part of the explanation, but for the full year of 60% capture rate also seems quite low comparing to the last several years what you have been able to achieve.
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes.
We can dive into it more with John, I would suggest, but those are really the big items that we see.
We don't really see anything operational, Paul.
Paul Cheng - Analyst
Okay.
Thank you.
Operator
Roger Read, Wells Fargo.
Roger Read - Analyst
Thanks.
Good morning, guys.
Joe Gorder - Chairman, President and CEO
Good morning, Roger.
Roger Read - Analyst
I'll leave some of the policy to the side for now, but I guess, specific question for you, exports have been a huge part of -- on the product side, 2016 story looks like a good start to 2017.
Pemex saying that they intend to run a lot better in 2017 than 2016.
That's their forecast.
We'll see what turns out to be true but could you characterize maybe the incremental growth in exports for you as to where that's gone and if Pemex were to run better in 2017, is that a risk we need to be concerned about, or are there enough other growth areas internationally?
Joe Gorder - Chairman, President and CEO
Yes, Roger, it's hard to tell.
As Lane can tell you, takes a long time to improve refinery mechanical availability so we'll see what happens there.
I think, one of the things that we're looking at, we export to Mexico and to South America and certainly when you look at a lot of the consultant views, where Brazil has had negative demand growth over the last couple of years, they're forecasting some decent demand growth in Brazil so even if we were to lose some volume into Mexico, I think it can be absorbed in other locations in South America.
Roger Read - Analyst
Okay.
Second question, M&A, I know with some of the policy uncertainty, maybe sellers don't want to sell and buyers want to be a little questionable but I was wondering, Joe, as you kind of think about the longer plan here, Lyondell pulled their unit off the market but maybe some of the other opportunities that exist out there right now.
Joe Gorder - Chairman, President and CEO
Mike, do you want to speak to this?
Mike Ciskowski - EVP and CFO
Yes, Lyondell did pull their refinery back for now.
Other than a few things on the West Coast there are not opportunities really for -- in the refining space presently.
Roger Read - Analyst
Well, that was brief.
I've heard that Lane was a miracle worker, so maybe we could get him to work for Pemex.
That'll fix them.
Joe Gorder - Chairman, President and CEO
No.
We don't want to do that.
Roger, you're right, but what Mike said is exactly right and it was characterized earlier.
There -- the Lyondell refinery is a nice opportunity but they chose not to sell it and we're just not seeing a lot of refining assets that are for sale that would add any value to Valero's portfolio.
From an acquisition perspective, what do you focus on?
You focus on the opportunities in logistics and other areas where you can improve the earnings capability of the Company by improving your logistics, your feeds in, your products out, and then potentially upgrading your stream.
We are not in a position -- e don't believe we're in a position where we've got to go do a deal to balance out our portfolio.
We look at this a little differently and that we continue to seek ways to try to improve the quality of the portfolio we've got in place.
Roger Read - Analyst
Okay.
Great.
Thank you.
Operator
(Operator Instructions)
Chi Chow, Tudor, Pickering, Holt.
Chi Chow - Analyst
Thanks.
Good morning.
Joe Gorder - Chairman, President and CEO
Hi, Chi.
Chi Chow - Analyst
Hey, Mike, do you have the cash balance held by the Company's international subsidiaries as of year end 2016?
We've noticed that balance has been steadily growing over the last couple of years.
I was just wondering if you could also talk about whether, one, that cash is available for use for domestic CapEx and capital returns to shareholders?
Two, what are there -- are there any repatriation inefficiencies in the current tax structure?
Third, how do some of the tax policy changes proposed under the new administration impact repatriation of that cash going forward?
Mike Ciskowski - EVP and CFO
Okay.
Roughly, at the end of the year we had about $2 billion of cash that was in the UK and in Canada.
Presently -- okay.
Our current structure that we have today would allow us to move most of the cash back to the US without incurring a significant tax penalty.
We haven't needed it to do that presently, given where our US cash balance is as well.
(Multiple speakers) That was an incredibly clever way to ask three questions.
Chi Chow - Analyst
It's all related, right?
Mike Ciskowski - EVP and CFO
That was good.
Chi Chow - Analyst
Well, do you feel the need, any urgency to get that cash back, given the potential changes in the repatriation policies going forward here?
Joe Gorder - Chairman, President and CEO
The need to get it back?
I don't think we have a sense of need to get it back.
Would it be nice to have access to it, and Jason and the team are looking at the repatriation implications of the border tax adjustment.
You always want to have your cash totally accessible to you, so it'd be great to get it back, but I would tell you that this -- let's just assume that we were able to bring it back and bring it back in good shape.
The question is then what do you do with it?
Do you reinvested in the business?
I don't see us changing our approach to capital if we had the cash back, okay?
I mean, I don't think Lane is going to say, gee whiz, now I can do a whole bunch more, because we're not holding back on things that we're doing today.
I'd be wonderful to have access to it without paying any tax on it.
It's not likely.
But I don't think it changes anything we're doing, Chi.
Chi Chow - Analyst
Okay.
Great.
I'll leave it there.
Thanks, Joe.
Appreciate it.
Operator
Spiro Dounis, UBS Securities.
Spiro Dounis - Analyst
Hey, good morning, everyone.
Thanks for squeezing us in here.
Just wanted to follow up on the RFS.
Without getting into what does it look like and then we does it change, just thinking about, I guess, an environment where the point of obligation has actually moved away from the refineries.
Just curious in terms of a reaction or just change in behavior on your part, maybe the refining industry in general, what are some of the things that you think happens on day one without the point of obligation?
I think one thing we think about maybe is that exports actually go down, because of course that's a good way to avoid the RIN.
Just curious if you're thinking about anything else in terms of changes in product mix.
Joe Gorder - Chairman, President and CEO
Gary, you want to --
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
I don't know that -- to some degree, the export market has over time recognized the RINs, so I don't really know that it really changes the dynamics of the export market that much if the point of obligation moves.
Joe Gorder - Chairman, President and CEO
Yes.
We've all adjusted to this.
Really the frustrating thing from our perspective is the negative effect it has by shifting the value of doing business from us to the guy who's capturing the RIN.
Obviously, it would be beneficial to Valero if the point of obligation moved, which would reduce our burden, and frankly, we believe it would take a lot of the speculation and the manipulation opportunities out of that RIN market and it should lower the price of RINs.
Now, the RVOs will have a factor on that and so on but from a refiner, from an independent refiner's perspective, it will be positive.
Spiro Dounis - Analyst
Appreciate the color.
Thanks, everyone.
Operator
Jeff Dietert, Simmons.
Jeff Dietert - Analyst
Good morning.
Joe Gorder - Chairman, President and CEO
Hi, Jeff.
Jeff Dietert - Analyst
I'm sitting here in Houston looking out my back window and the fog has cleared in the Houston ship channel, so hopefully that's good news.
Joe Gorder - Chairman, President and CEO
That is good news.
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Do you see our ships loading, Jeff?
Jeff Dietert - Analyst
They're going out one right after another.
I had a question on your pace of MLP drops and there are a few things going on, one of your peers accelerating.
There's also the potential for lower corporate and individual tax rates under a Trump administration, potential for higher interest rates.
How do these things impact your thinking on MLP valuations and the attractiveness of drop downs?
Joe Gorder - Chairman, President and CEO
Okay, Rich, do you want to --
Rich Lashway - VP of Logistics Operations
Yes.
I will take a crack at the -- our peers accelerating.
We been pretty consistent in the execution of our strategy from the IPO that we're going to take a very measured pace.
We believe that, that's more of a prudent to our -- prudent to have a measured pace on our drop-downs.
Valero's exceeded their targeted total payout ratio for the past two years.
VLP doesn't really need to do any acquisitions or drop downs to meet our distribution growth.
There is not a need for the cash, as we've kind of talked about, cash balance at Valero, so we are just going to stick to our measured approach of growing, focusing on growing the distributions.
We've been clear that we're growing distributions in 2017 at 25% and at least a 20% in 2018, so it's really the focus is on the distribution growth at the LP and we've got the coverage to achieve this and without doing any drops.
Joe Gorder - Chairman, President and CEO
Then, Jeff, the tail on that it was the tax, interest rate changes?
Jeff Dietert - Analyst
Yes.
Mike Ciskowski - EVP and CFO
I mean, the lower corporate tax rate, if that's what gets put in place, obviously would make the corporation a little more attractive.
However, the MLP will still have the tax advantage structure versus the corporation.
Joe Gorder - Chairman, President and CEO
The interest rates, I mean, it provides an investor a different option, right?
But you still have the benefits of everything that you have today with an MLP ownership position.
Jeff Dietert - Analyst
Thanks for taking the questions.
Joe Gorder - Chairman, President and CEO
You bet.
Operator
Ryan Todd, Deutsche Bank.
Ryan Todd - Analyst
Hey.
Thanks.
You may have touched on parts of this over the course of the call and I apologize.
I missed some of it.
Can you talk through what you see as some of the similarities and differences as we look at the macro environment versus last at this time?
Margins are a little bit better, but we've seen some pretty significant inventory build of the last four weeks again.
What are some of the lingering challenges that are maybe similar to last year and what's different this year that gives you confidence that we won't just don't repeat the 2016 environment again?
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes, this is Gary.
I think the similarities are we continue to see the industry running at high utilization rates and so the production of gasoline and distillate is exceeding demand in the marketplace, which isn't good, causing inventories to build.
The difference we see is it looks like on the gasoline side, a lot of what's being put into inventory is winter grade, so again our view is this will have to clear before RVP transition could bring inventories down before gasoline season starts, which would make this year a little different than what we saw last year and should lead to better gasoline cracks.
On the distillate side, not too much different.
I think the things that we're seeing on the distillate side is slightly better demand.
Year over year we had a little colder weather here in the US and also a Northwest Europe, which aids distillate demand and then as we see some resurgence in the upstream, the drilling activity, it also leads into a little better incremental diesel demand.
Those are kind of the key factors we're looking at in the market.
Joe Gorder - Chairman, President and CEO
Ryan, we don't know enough yet about the infrastructure projects that are being talked about at the federal level right now and what the implications of those are, but anytime you get projects like that taking place, they tended to drive distillate demand.
Of course it would drive gasoline demand also.
Then there's the other things, petrochemical feeds, asphalt, things like that.
So we're actually encouraged by the outlook and by the focus on the infrastructure within the US, so we'll just see how it all plays out.
Ryan Todd - Analyst
I guess at a high level it's safe to say you're still -- is your view on 2017 that it's still a little bit better than 2016 but we'll wait and see?
Is that --
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
I think definitely we see the gasoline market being similar to 2016 but a slightly better diesel market than 2016.
Ryan Todd - Analyst
Okay.
Thank you.
Operator
Blake Fernandez, Howard Weil.
Blake Fernandez - Analyst
Gents, good morning.
I'm not sure I'm as good as Chi, but I'm going to do my best to get at least two in for one here.
The questions on pipelines, I know you talked about Keystone but I'm just curious for one, do have a sense of what the current transport cost is in the market and where that might go to once the pipe's in the ground?
Secondly on DAPL, can you think of any direct or maybe indirect positive impacts that may have, whether it's just additional crude light sweet on the Gulf Coast?
Thanks.
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes.
We -- that some of the things we're working with TransCanada on, so we don't really have guidance of were the Keystone XL tariff is going to be and that's certainly something that we're working with them on.
In terms of DAPL, yes, I think you kind of hit on it.
It definitely will be bringing more light sweet to the Gulf Coast, which should be good for us.
Blake Fernandez - Analyst
Good deal.
Thank you.
Operator
Faisel Khan, Citigroup.
Faisel Khan - Analyst
Good morning.
It is Faisel for Citi.
Thanks for squeezing mean here.
Just going back to XL for a second and back to, I think, Doug's question, have you guys talk to them about taking in equity interest in the pipeline?
I mean, now that you have the sort of MLP up and running, it might make sense for them to have an equity partner with their anchor shipper.
Joe Gorder - Chairman, President and CEO
Yes.
You should -- Faisel, you should never ask us that question we've got a guy who's responsible for the MLP in the room.
But to answer question honestly, no.
We haven't talked about an equity stake in Keystone.
Faisel Khan - Analyst
Only because it might make sense for them to syndicate out some of that risk, given how large the pipeline is.
I'm not sure --
Joe Gorder - Chairman, President and CEO
That may be true, but that doesn't mean that we would be the guy.
Faisel Khan - Analyst
There's always a price.
Joe Gorder - Chairman, President and CEO
That's right.
Faisel Khan - Analyst
Okay.
Thanks, guys.
Joe Gorder - Chairman, President and CEO
You bet.
Operator
Craig Shere, Tuohy Brothers.
Craig Shere - Analyst
Morning.
Thanks for squeezing me in.
Joe Gorder - Chairman, President and CEO
Sure, Craig.
Craig Shere - Analyst
A quick follow-up on Phil and Doug's questions about capital deployment and buyback questions.
It seems that the buybacks were kind of turbo charged a little bit in 2016 when shares were more in the mid-$50 area versus in the $60-plus area.
As you think about flexing buyback metrics from earnings to cash flow in a low margin environment, how does the share price itself factor into your analysis?
Joe Gorder - Chairman, President and CEO
Mike, you want to --
Mike Ciskowski - EVP and CFO
Well, I mean we don't have specific seasonal targets for our buybacks.
It's on an annual basis.
It's at least 75% of net income and our program does consist of both somewhat ratable purchases but also opportunistic purchases, too.
So we just evaluate when we want to accelerate that, depending on the stock price.
Craig Shere - Analyst
Is it fair to say that the mid-$50 area is a kind of turbo charged area for you?
Joe Gorder - Chairman, President and CEO
We couldn't answer that question.
I think Mike answered it properly.
It's -- we sure don't want to signal our timing on our buying, but we look at what we view to be the earnings capability of this Company and if the returns on the buybacks are better than the returns on a growth CapEx project, then we're going to buy back shares.
We've said for years that we're not going to hoard cash, so to the extent that we produce free cash flow, we'll continue to look at the buybacks.
Craig Shere - Analyst
Fair enough.
Thank you.
Operator
Paul Sankey, Wolfe Research.
Paul Sankey - Analyst
Hi, guys.
Good morning.
Forgive me if this has been --
Joe Gorder - Chairman, President and CEO
Paul, where have you been?
Paul Sankey - Analyst
On the Exxon call?
Let's be honest.
They made me wait until the end.
Further to an earlier comment about the Houston ship canal, the good news for you from New York is that it is snowing very heavily here, so there should be a bit more gas/oil demand, I guess.
Guys, I'm sorry if you answered this already but what's the latest of you on the border adjusted tax and what are you doing -- I guess you have to at some level plan for the potential for that to happen.
What would you do if it did occur?
I guess the question is, what's your understanding of the likelihood of that it happens and what would be your response to it if it didn't?
Thanks.
Joe Gorder - Chairman, President and CEO
Okay, yes, Jason did talk to that earlier.
Do you just want to give the likelihood and then we can talk -- Gary or we can talk about the other component of that question?
Jason Fraser - VP of Public Policy and Strategic Planning
Yes, we really -- at this stage, we hadn't put a handicap on the likelihood yet.
It's so early we don't even have any draft of the legislative tax floating around the committee, so we don't feel it's proper for us to try to guesstimate that now.
Paul Sankey - Analyst
Yes.
Joe Gorder - Chairman, President and CEO
Then Gary, on as far as -- Paul, it comes down to how are the markets going to react to this, right?
We've read all of the reports and we've read the consultants' reports.
Some think it is going to be really good for refining, some think it may not be as good for refining.
We talked earlier about the fact that we can adjust the crude slate but you know, Gary, the markets are going to react.
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes.
Everything we've been doing is to increase feedstock flexibility and also be able to grow these export markets and both of those things should align well with this and we can optimize the system around the border tax.
Paul Sankey - Analyst
Yes.
I guess the punch line goes back to 2010 to 2014 when we were trying to maximize -- use of US light sweets.
Where did you end up on all that?
How much more could you use at the end of the process?
Do you have any numbers to illustrate the flexibility?
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
Yes.
If you look in our IR presentation, I think it slide 9, it does a pretty good job of going through how we can swing our system between the individual grades.
We got to where we were processing over 1 million barrels a day of domestic light sweet crude.
I guess that was pre-toppers, though, wasn't it?
Joe Gorder - Chairman, President and CEO
That was pre-toppers.
Gary Simmons - SVP of Supply, International Operations and Systems Optimization
We've added some additional capacity since that time as well.
Joe Gorder - Chairman, President and CEO
Yes.
The interesting thing was that I guess at Port Arthur you were able to increase overall run rates, throughput rates, because we were running the later slate.
Paul, we'll be able to flex the system to deal with it.
I guess the question is, how to -- how do the global crude markets respond to the duty?
Do they price to continue to push their barrels into the market or do they find a different home?
I think Gary's made the comment in several of the meetings that we've had that the natural home for a lot of the heavy sour crudes tends to be the US Gulf Coast refining system, so I don't know that, that changes in any material way.
Paul Sankey - Analyst
Yes.
No, absolutely.
I guess the other question is we would assume that the gasoline price at the pump would go a pretty much by the amount of the tax in the short term.
Joe Gorder - Chairman, President and CEO
Look, that is certainly what we have read also, okay?
I think your friends at Goldman did a report here recently that I haven't gotten to study but it talked, okay, maybe they move up and then they move back down some as the markets adjust to it.
So, Paul, the interesting thing is because this is kind of the topic du jour, right?
Paul Sankey - Analyst
Yes.
Joe Gorder - Chairman, President and CEO
But none of us -- they've got the skeleton out there and the House seems very committed to this today, but they don't have the flesh on the bones and there's a lot of conversations that are taking place around, do you have a carve outs, don't you have carve outs and so on.
I think what I've encouraged our investor base to do is just to let's be patient, not over react to this and let's just see how it shakes out.
We will adjust to maximize the value to the Company, but I don't think anybody knows enough yet to really understand what the full implications are.
Then when we have seen changes like this, the markets tend to respond.
So here again I -- we don't have great deal of concern and consternation around this right now.
We're just trying to understand it better.
Paul Sankey - Analyst
Yes, I totally understand, Joe.
Thank you very much.
Operator
This concludes the question-and-answer session.
I will now turn the call back over to Mr. John Locke for closing remarks.
John Locke - VP of IR
Okay.
Well, thanks, everybody.
We appreciate you joining us today.
Please contact me after the call if you have any additional questions.
Thanks.
Operator
Thank you.
Ladies and gentlemen, this concludes today's conference.
We thank you for participating and you may now disconnect.