瓦萊羅能源 (VLO) 2024 Q3 法說會逐字稿

Okay.

So thanks.

No, no, greetings, and welcome to Valero Energy Corp. Third Quarter 2024 earnings conference call.

At this time, all participants are on a listen only mode.

A question and answer session will follow the formal presentation.

If anyone require operator assistance during the conference, please press star zero on your telephone key pad.

Has a reminder, this conference is being recorded.

It is now President, Investor Relations and Finance.

Thank you may begin.

Good morning, everyone, and welcome to Valero Energy Corporation's Third Quarter 2024 earnings conference call.

With me today are Lane Riggs, our CEO and President, Jason Fraser, our Executive Vice President and CFO, Gary Simmons, our Executive Vice President and COO, 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 on our website at investor. valero.com.

Also attached to the earnings release are tables that provide additional financial information on our business segments and reconciliations and disclosures for adjusted financial metrics mentioned on this call.

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

I would now 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 earnings release and filings with the SEC.

Now I'll turn the call over to Elaine for opening remarks.

Thank you, Howard, and good morning, everyone.

Our third quarter results reflect a period of heavy maintenance in our refining segment during a relatively weak margin environment

.

Our refineries operated 90% throughput capacity utilization in line with our guidance for the quarter.

Solid demand across the system remains strong with our US wholesale volumes exceeding 1 million barrels per day for the second consecutive quarter.

On the strategic front, we remain committed to executing projects to continue to enhance the earnings capability of our business and expand our long-term competitive advantage.

I'm proud to report that the Diamond Green Diesel, sustainable aviation fuel or fast project of now mechanically complete and is in the process of starting up.

The project was completed on schedule and under budget and is a testament to the strength of our projects and operations teams.

On the financial side, we continue to honor our commitment to shareholder returns.

The strong payout ratio of 84% for the quarter and the year to date payout of 81%.

Looking ahead, improving diesel demand against the backdrop of low light product inventory should support refining margins.

Increases in OPEC plus crude supply should widen our sour crude oil differentials and further increase margins.

And longer term, we expect product demand exceeds supply with the announced refinery shutdowns next year, unlimited capacity additions beyond 2025, supporting long-term refining fundamentals.

In closing, our focus on operational excellence, capital discipline and honoring our commitment to shareholder returns has served us well and will continue to anchor our strategy going forward.

So with that, Homer, I'll hand the call back to you.

Thanks, Lane.

For the third of 2024.

Net income attributable to Valero stockholders was 364 million or $1.14 per share compared to $2.6 billion or $7.49 per share for the third quarter of 2023.

The refining segment reported 565 million of operating income for the third quarter of 2024 compared to 3.4 billion for the third quarter of 2023.

Refining throughput volumes in the third quarter of 2024 averaged 2.9 million barrels per day or 90% throughput capacity utilization, refining cash operating expenses, or $4.73 per barrel in the third quarter of 2024.

Renewable diesel segment operating income was $35 million for the third quarter of 2024 compared to $123 million for the third quarter of 2023.

Renewable diesel sales volumes averaged 3.5 million gallons per day in the third quarter of 2024, which was 552,000 gallons per day higher than the third quarter of 2023.

The ethanol segment reported 153 million of operating income for the third quarter of 2024 compared to 197 million for the third quarter of 2023.

Ethanol production volumes averaged 4.6 million gallons per day in the third quarter of 2024, which was 255,000 gallons per day higher than the third quarter of 2023.

For the third quarter of 2020, for G&A expenses were 234 million.

Net interest expense was $141 million.

Depreciation and amortization expense was 600 to $85 million and income tax expense was $96 million.

The effective tax rate was 20%.

Net cash provided by operating activities was $1.3 billion in the third quarter of 2024.

Included in this amount was 166 million favorable change in working capital and 47 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD.

Excluding these items, adjusted net cash provided by operating activities was $1.1 billion in the third quarter of 2024.

Regarding investing activities, we made $429 million of capital investments in the third quarter of 2024, of which 338 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance.

And the balance was for growing the business, excluding capital investments attributable to the other joint venture member share of DGD. and other variable interest entities.

Capital investments attributable to Valero were $394 million in the third quarter of 2024.

Moving to financing activities, we returned 907 million to our stockholders in the third quarter of 2024, of which $342 million was paid as dividends and 500, 65 million was for the purchase of approximately 3.8 million shares of common stock, resulting in a payout ratio of 84% for the quarter.

Sure.

Year to date, we have returned 3.7 billion to our stockholders in the form of dividends and buybacks, resulting in a payout ratio of 81%, well above our long-term minimum commitment of 40% to 50%.

In fact, since the start of 2021, our total cash flows from operations have exceeded our total uses of cash over this period, including capital investments over $4 billion of debt reduction and over 18 billion returned to stockholders through dividends and share buybacks.

With respect to our balance sheet, we ended the quarter with $8.4 billion of total debt, 2.5 billion of finance lease obligations and $5.2 billion of cash and cash equivalents.

The debt to capitalization ratio, net of cash and cash equivalents was 17% as of September 30th, 2024, and we we ended the quarter well capitalized with 5.3 billion of available liquidity, excluding cash.

Turning to guidance, we still expect capital investments attributable to Valero for 2024 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance and joint venture investments.

About $1.6 billion of that is allocated to sustaining the business and the balanced growth with approximately half of the growth capital towards our low carbon fuels businesses and have towards refining projects.

For modeling.

Our fourth quarter operations wheeling mangers Gulf Coast at 1.83 to 1.8 million barrels per day, Mid-Continent at 425 to 445,000 barrels per day.

West Coast at 230 to 250,000 barrels per day and North Atlantic at 300 to 80 to 400,000 barrels per day.

We expect refining cash operating expenses in the fourth quarter to be approximately $4.60 per barrel.

With respect to the renewable diesel segment, we still expect sales volumes to be approximately 1.2 billion gallons in 2020.

For operating expenses in 2024 should be $0.45 per gallon, which includes $0.18 per gallon for noncash costs such as depreciation and amortization.

Our final segment is expected to produce 4.7 million gallons per day in the fourth quarter.

Operating expenses should average $0.37 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization.

For the fourth quarter, net interest expense should be about $140 million and total depreciation and amortization expense should be approximately 690 million.

For 2024, we expect G&A expenses to be approximately 975 million.

That concludes our opening remarks.

Before we open the call to questions, please limit each turn into terminated.

two questions.

If you have more than two questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions.

Thank you.

The floor is now open for questions.

If you would like to ask a question, please press star one on your telephone keypad.

At this time.

A confirmation tone will indicate your line is in the question queue, you may press star two.

If you would like to remove your question, the Q&A for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

That's star one to register a question at this time.

Today's first question is coming from Manav Gupta of UBS.

Please go ahead.

So you're more imminent.

All.

Good morning and good morning, sir.

My first question here is, can you talk a little bit about the demand for key as we are coming to a close in 2024?

Sure, Manav, this is Gary.

You know, obviously a much weaker refinery margin environment and we know from the third quarter than we've seen the last couple of years on.

The interesting thing does is it looks like the underlying market fundamentals actually improved during the third quarter and have continued to improve as we move into the fourth quarter.

Despite that, as you know, the market fundamentals, market sentiment, seized of team turned more negative in driving crack spreads even lower to us in the markets where we have a presence, things look very similar to what we've seen the past couple of years.

Lane had alluded to our sales in the third quarter through wholesale over 1 million barrels a day.

We averaged 1.8 million in the third quarter, which is actually up year over year.

Gasoline sales were fairly flat year over year.

Diesel sales actually increased year over year thus far in the fourth quarter, we've actually seen about a 40,000 barrel a day increase in sales to our wholesale channel.

So it's actually gone up.

You kind of compare that to get an indication of demand with some other indicators.

You know, vehicle miles traveled were up about 1%.

So that kind of matches with our numbers, even the DOE date, although there's a lot of noise week-to-week, if you look at that year to date, demand numbers from the DOE would kind of show gasoline demand is flat to slightly up.

And so we think that's kind of where we are.

Again, I said diesel sales in our system up a little bit year over year.

Again, if you look at some of the other indicators of demand, especially the freight indices would indicate, you know, demand for diesel is a little bit softer.

Compare that to the daily numbers in the year to date daily numbers would show diesel demand down, you know, close to 100,000 barrels a day.

I think we think that's pretty close.

Some of that gas demand in about half of that.

So net net, I think in the US, we feel like total light products kind of flat to slightly down year over year markets outside the US where we have a significant market presence in Canada, the UK, Mexico, all very similar trends.

I think all three of those markets have witnessed a year over year growth in gasoline demand year over year growth in jet demand and the decline in diesel demand.

So demand looks pretty strong outside those markets.

We continue to see good export demand on gasoline exports in the third quarter, about 100,000 barrels a day.

Typical markets, Latin America and Canada.

Diesel exports in the third quarter were 200, 60,000 barrels a day, again, kind of South America and Europe.

So we continue to see demand that looks very similar to what we've seen the last couple of years in the markets where we have a strong presence.

Perfect.

Gettington.

My quick follow-up is if there are no renewal rate for that appeared in demand, it's mightn't be softer than we had such strong cloud site.

Why did we suddenly hit this in light of maintenance CapEx on kind of trending below mid-cycle and in that?

And do you see different transient if the demand who is the tax should be able to get back to mid-cycle or maybe even higher?

Yes, Manav, I would say, you know, some of this typically on the third quarter earnings call, you tend to have a little more negative market sentiment and there's some some reasons for that.

You know, each year around Labor Day, you typically had some hurricane hype in the market that tends to go away.

As people view.

You're out a hurricane season.

You've gone through RVP transit, you start our review transition on gasoline swelling, the gasoline pool Labor Day kind of marks the end of driving season.

So you can certainly understand some negative market sentiment around gasoline.

And typically the fourth quarter and first quarter tend to be driven more by strength in the distillate cracks.

I think we came into this year.

And although so, you know, the US economy has been fairly resilient.

You know, we've seen some pockets of economic weakness throughout the globe, which has driven down diesel demand a little bit and cause the pessimism around diesel cracks.

If you look at where things are, though, you know, the fundamentals look strong and we're going into the year with very low end inventories of gasoline inventory, 10 million barrels below where we were last year at this time and below the 5-year average.

Some of the key things we tend to be focused on in the gasoline markets at this time of year market structure, market structures backwards.

So there's no incentive to produce and store summer grade gasoline.

Typically in the fourth quarter of the first quarter, you will have a positive transatlantic Guard, the shift from Europe to New York Harbor, at least on paper that our bridge close those throughout the fourth quarter on export demand for gasoline remained strong and we're seeing good export demand in Latin America.

So things look good for gasoline.

I don't think you're going to see any big moves in the gas crack anytime soon.

But you know, as long as inventory remains in check, you get back into driving season RVP transition and we respect gas cracks to respond on the distillate side.

Again, you know, like gasoline, the key thing is, although we've seen a little bit less demand than we'd hoped for discipline, inventories are trending toward the lows that we've seen the last couple of years.

I think you saw economic run cuts throughout parts of the world that took some supply off the market here recently, we've had turnaround activity decreased supply as well.

So it put us in a pretty good position heading into winter.

And I think you know, if you have some uptick in demand from heating oil demand with some colder weather, you'll see distillate cracks respond as well.

Thank you so much for taking my questions.

Thank you.

The next question is coming from Jim Boyle of J P Morgan.

Please go ahead.

Hi, good morning.

Thanks for taking my question.

So my first question about capital allocation.

You were very aggressive on your buyback program in 3Q despite what's been a downtick in cracks.

You've been pretty clear in your planning work and sort of a mid-cycle and above environment.

But assuming we statements lower margin environment, can you talk about how your approach to returning capital may or may not change in terms about 70s or 80s percent, CFO type range you've been in it?

Would you use your balance sheet a little bit?

It will wear parts of the cycle.

Good morning, John.

This is Jason.

I'm going to ask Harbir to respond to your question, Susan.

Hey, John.

Yes.

I mean, I think in this environment we're in and with the strength of our balance sheet, you should absolutely should continue to expect us to be in our content in our posture.

As I mentioned in the opening remarks, you can go back to 20 to sort of 2021.

We've been able to fund all our uses of cash, including capital.

We've paid down over 4 billion of debt and returned over 18 billion to shareholders over that period all through cash flow from operation nations.

So turning to where we are now, let me start by reiterating that the 40% to 50% is a minimum commitment, not a target.

So we're always going to honor that.

As you noted, we've consistently been well above that despite the pullback in margins.

And I think you can attribute that attribute our ability to do that because of our low-cost profit profile and then disciplined use of capital.

So given the strength of our balance sheet, our cash position, I think you should rest comfortable that the 40% to 50% will continue to be a floor and all excess free cash flow will go towards buybacks.

Sequentially the color there?

And then my last question is just on California.

We've got news of a new closure out there, which all other things equal will be a good thing for those who named.

But there are some new legislative pressures there.

And you've also mentioned strategic alternatives.

I think in your 10 Q, was wondering if you could just give us an update on how you're thinking about continuing to operate the refinery in California and what those strategic alternatives might be.

John Lane.

I'll let Rich start with the job at this time.

You know, whether we're in which one of these various policies that the state keeps proposing, you know, coming out of these legislations, so was just kind of have to lap to kind of see how that plays out.

You know, a lot of these are driven by a lot of political revenue rhetoric that you see, um, you know, coming out of out of the state.

And you know, I think when we see that passed from the legislature and the political arena back over to the CEC. for implementation, thank you.

Seem struggle with a lot of these ideas, you know their their their ideas that you know, the sand good politically.

But when you start putting them into the market realities, it has the potential to make things even more costly for consumers.

So that was the reality is that your California policies costs the state a number of refineries, including this most recent announcement.

And so you can't have policy that that impair supply and than expected to lower prices for coal customers.

So consumers.

So you will recall all of the regulations have a caveat on that require on the CC. to implement it only if they find that the actions will lower costs for consumers.

And that's that's going to be the challenge for them.

So and while strategy we've been consistent for over a decade, probably been longer than that in terms of how we manage through the West Coast and is largely driven by California, probably we've minimized strategic CapEx.

We've make sure we maintain a really reliable operation through our maintenance CapEx, which in turn positions us as well for call option on West Coast cracks in Odessa, California is increasing as regulatory pressure on the industry.

So it really considering everything at all in all, all options are on the table.

So thank you.

The next question is coming from Theresa Chen, Barclays.

Please go ahead.

Good morning.

And can you unpack some of the earlier comments on the evolution of our global product supply over the more, I guess, medium to long term and taking into account a continued ramp of facilities abroad as well as plant closures in 2025?

How do you think trends?

And do you expect changes in trade flows as a result?

Yes.

Theresa Chen trial, you know.

So overall, when we look at 2025, we see about a million 40,000 barrels a day of new refining capacity coming online.

And so our there's about 740,000 barrels a day of refinery closures announced.

So, you know, net net about a 300,000 barrel a day net capacity additions and then forecast for total, I product demand we're looking at is about an increase of 700,000 barrels a day.

So for next year, really it all comes in, you know, it, it becomes about timing.

When do those refineries close?

When did the new capacity come online?

So it gives a lot of uncertainty into next year, even the demand side is a little uncertain.

You know, a lot of the economic stimulus in China, how long does it take to come into effect, but we see tightening balances through next year.

And then when you get past next year, you kind of have a fairly extended period where when you look at net capacity, the additions and total lead to product demand growth, there's a pretty good gap there.

So we see an extended period with with tighter and tighter balances around the refining margins.

Helpful, thank you.

And then turning at either to the new renewables plants.

And we should be able to provide an update on how the SaaS unit and is operating at following its recent in service and any other and commercial discussions to broaden this offering as well your views on the subsidy crisis.

Thank you.

Yes, I'd say this is Eric.

three SaaS.

The SaaS startup looks great.

As we said in the call, projects finished ahead of schedule and from our original timing that we had for 1Q of next year and finished under under budget.

So project execution for Valero have once again demonstrated its exceptional ability to beat expectations.

And then if you expect that performance as we go into full operation.

So so far, startup looks very good.

I don't think we have any doubt it's going to meet its design capability.

And commercially, we're seeing a lot of interest and continued contracting of the product, both from a SBK. standpoint as well as a blended SaaS standpoint.

And I know, Gary, if you wanted to comment on any of that now I'm not going to go into a lot of details, but there's been some press releases, you know, with some of the airlines Southwest and JetBlue about the contracts that we signed.

In addition to that, we're dealing with freight carriers been an announcement with DHL, so you're not going to go into a lot of the commercial details there.

But when we made the decision to fund the project, we said we expected it to exceed our minimum return threshold of after tax, 25%, still confident with the contracts we have in place and the volume sold that we'll do that.

Thank you.

Thank you.

The next question is coming from Doug Leggate of Wolfe Research.

Please go ahead.

Thank you.

I appreciate you taking my questions guys.

Gary, I wonder if I could go back to the balances question.

I know it's an imperfect imprecise assessment that we're all trying to make here, but but I wanted to use the lateral as an example.

Um, I look back at your obviously your mechanical availability has been one of the hallmarks of the investment case 2018, third quarter, 99% from 1994% pre-COVID, 20% to 95%, 95% last year.

My point is that you guys have obviously got a lot of upside to your potential utilization.

And the same is probably true them of anyone who's cutting runs at this point, Singapore or whatever.

So when you think about supply additions, what are you assuming for the response of from a potentially oversupplied market raising utilization and some of those more challenge, if I understood and I guess what I'm getting at is not reasonable to assume we didn't want to run the refinery closures before we get back to the above mid-cycle, you were talking about?

Yes, we look at historic refinery utilization rates and we look at the balances and kind of assume it's going to be in line with historic utilization rates.

However, you know, I do think you can see a lot of refining capacity in the world that underwater, some of that is in need of a lot of capital investment.

And so I think you will see additional rigs, binary closures as well.

Okay.

So I guess to be, is that something you'd keep you have any insight to or are you guessing?

No, we can't name refiners that would close, but you can kind of see that refiners that are under pressure on some in Europe, some in the Far East.

And, you know, our expectation is you'll see some additional announced closures coming China.

Okay.

Well that on the topic, as my follow-up is you don't mind and that's come back to your comments about California.

I mean, obviously, we've had some on ABX to one, I guess is it the title of it, the inventory question, and it seems that on wind Phillips 66 shutdown deal, there was an equal and opposite impact from imports seems to offset any potential tightened in the West Coast to, um.

So I guess as you look at your portfolio overall and particularly the West Coast on, how do you see the cost competitiveness?

Is the only asset and the only area in your portfolio that lost money this year to this this past quarter as possible on any color you can give on how you're thinking about, Paul, fully adjustments going forward on a value play and sort of alluded to before is clearly our highest profit structure operation.

Historically, they've had been challenged with respect to cost of crude that we think about OpEx, the regulatory environment and the supply situation in the West Coast in out of the challenging.

So in very different than maybe some of the other areas that we operate.

And again, what we've historically done is tried to position the assets to be a call option for when things get out of balance because the supply chain so on.

So with respect to these regulations will just have to see what we actually tried to do, but clearly the California regulatory environments, putting pressure on operators out there and how they might think about going forward with their operations current, we'll keep watching guys.

Thanks for taking my question.

Appreciate it.

Thank you.

The next question is coming from Roger Read of Wells Fargo.

Please go ahead.

Yes, thanks.

Good morning.

Tom, I'm going to come back and hammering the California question as well.

The most recent 10 K and 10 Q you put out you've highlighted issues with California from our asset value or an ongoing concern kind of question with Philips closing down their unit or announcing the closure of their unit, California, obviously hypersensitive about the pace of fuels to consumers regardless of what their policy may do you think going forward, if you have to make a hard decision on a California and refining unit that someone else went first, I mean, sort of does it invite more political interference and how would that work for?

I mean, I don't I don't know that that really factors into our thinking necessarily.

I mean, I think what we would be looking at is, you know what, I what are the regulatory programs at California puts forward.

You know, a lot of a lot of these programs are announced.

I mean, the initial one, the margin cap was announced almost two years ago and that there's still been collecting information and studying the market.

I mean, I think one of the one of the realities is there's the market's incredibly efficient until you until you interfere with it.

And I think them the California is, I think, starting to realize that, you know, as the more they interfere, the worse, the situation gets.

And so that's that's, I think, the challenge there.

So I think we have to wait and see what they're going to do and what they decide.

I mean, it's their choice.

And then we just have to we just have to react to that.

And what others do that's there.

That's their decision.

We have great assets out there and we have great people operating them.

So I think I think we like we like our position appreciate that richer more of an optimist in me because I don't really believe they are quite grasp all the impacts of hypotheses in terms of the outcomes.

The follow up question.

I'd just like to ask probably to Gary.

Diesel demand does look like it's starting to improve here in the US the last kind of let's call it two months worth.

Is there anything you're seeing that in terms of DOE. information?

And is there anything you're seeing as you look at that in a more short term basis versus just like your full year commentary carry on demand?

I think both gasoline and diesel, we saw a little bit of demand softness and it's picked up as the year's gone on.

I mentioned over the last two weeks, we've actually seen a surge in the last two weeks.

We have about a 5% year over year increase in diesel demand, kind of consistent with your comments.

And I think you're seeing some of that in your Europe as well.

You can see the two one one in Europe is gone up two or $3 in the last few weeks, kind of indicating that some of that topping capacity, the diesel from some of that hydroskimming and topping capacity is needed to supply.

The market is things are getting tight heading into winter.

Great.

Thank you.

Thank you.

The next question is coming from Paul Cheng of Scotiabank.

Please go ahead.

Hey, guys, good morning.

I apologize, but add one one two or are they at?

one question is on kind of funny also, I think Gary and I know historically coating that we find that doesn't just shutdown that we find that just because they are not making money a typical day way until that's a substantial CapEx outlay requirement may be a major tenant while before that, they've been a push to make hard decisions just Q2.

Is that in your up and ensure we finally, can you say that what that may be the time line, say at what pawn that would be the next major title update that you need to put that you will have to make a decision or that more likely that we'll make you time to have a deficient, but that that is a viable ongoing business or not?

Then on UK?

Yes, he calls his line volume for.

That's a good tried capital that we don't normally provide outlooks with respect to our turnaround activity at your premise is correct.

I mean, clearly, in not only the cost structure after higher than the cost of the turnaround out there is significant, we hire and so waive any big outlay on turnaround in the West Coast and the way you think about assets going forward, it will in any other asset really in the world.

That matters largely driven by the next big capital well, but in terms of guidance on and we're going to do our next turnaround, we is the general, Paul.

We just don't do that.

Okay.

Understand and you will or that you are locked Atlantic Margin catches in nominated.

And it's interesting because I mean, Europe, the market condition quite finding it difficult.

So is the strong margin capture is really driven by Bill, your Quebec City.

We finally all of that is I mean, Europe is also doing.

Let's just trying to help us understand.

I mean over the past two or three years, quite frankly, that you are a lot of it then takes off in time.

Supplies, that's on the upside.

So trying to understand what's going on there.

Hey, Paul, it's Greg.

So you had a couple of things that impacted the North Atlantic in the third quarter.

one, we had some very good results from the commercial team that helped contribute.

And then the second thing you talked about Quebec, that really crude cost for that region.

Sometimes it's Quebec, sometimes it's Pembroke, but the crude costs were fairly favorable.

Some of that with some of the Canadian grades coming into pull back, some of that was just the relative value of the grades were running versus Dated Brent.

And so while that market might have been challenged, remember that either the captures relative to kind of a market based reference crack.

And so we take into account and where the markets that have been putting that together, and we performed pretty well relative to that reference.

Okay.

And okay.

I think I said oh eight to 2 questions for yourself at And that's it for me.

We appreciate everybody participating fall.

Thank you.

The next question is coming from TD account, various Bank of America.

Please go ahead.

Good morning.

You referenced the growing OPEC supply next year and is primarily benefits to try and heavy sour gas, but I believe also in some of the high-sulfur intermediate margins and the continuous feed stocks.

And can you just go over the different ways that increasing OpEx, if I could manifest in different markets and your expense?

Okay.

Yes.

So we see several bright spots in terms of supply fundamentals around heavy sour crude unit, obviously, OPEC 180,000 barrels a day on the market starting in December.

On seasonally, we expect Canadian production to ramp up as well.

We think Canadian corporate production could hit record highs over the winter.

Then you have continued Venezuelan of production growth.

And this time a year you get to where you're past the period of time in the Middle East where there where they're burning fuel for power generation.

So all that puts more barrels on the market.

You get into the first quarter in line, Dell's just down.

It takes them some demand is way as well.

So all those things and should be positives in terms of, you know, quality discounts.

Okay, great.

I'll leave it there.

Thank you.

Thank you for this question is coming from John Glass with Morgan Stanley.

Please go ahead.

Great.

Thanks.

Good morning, and thanks for taking my questions.

So I wanted to go back to the RD. side and it continues to be a tougher market environment for the industry.

Overall the margins up recently as we look towards 2025, could you just talk to how you're thinking about the moving pieces around credits, including winds, LCFS prices as well as our feedstock costs as it relates to profitability?

Sure.

This is Eric.

The it looks like a lot of good tailwinds start in 2025.

So California intends to approve their LCFS modifications.

November eighth tightened the credit bank through 2025, an increase LCFS prices.

You've got that you've got Europe and U.K. starting their Fit for 55, which starts to SaaS mandate of 2% in that region for watching the the Canadian BC election very closely to see what they do with the CFR.

But nationally, that will still be in play in in 2025.

And all these obligations naturally ratchet as you go in to next year.

And then lastly, the IRA with the with the switch from the blenders tax credit to the production tax credit does create a lot of tailwind for us because that will switch from $1 for everyone to a CI. base where we're the most advantaged.

And it does not have allow importers to qualify for the credit.

So if you looked at those two benefits of the IRA, that that is a good tailwind for DGD., those things are all on paper that's waiting for a lot of policy clarification between now and the end of the year.

But the one thing we look at is that is the policy intent of all those programs and most of those take legislative action to change and so that we think will be difficult.

And that means those policies probably go forward as designed at least initially.

So well waiting on seeing how that develops in oh nine couple of months.

I think the whole renewables segment is all asking for this guidance to be given so that we can move forward with plans.

But all of that looks looks pretty constructive.

On the feedstock side, we've mostly seen prices equilibrate.

There was previously a lot of advantage in a foreign feedstocks.

We've seen that largely equilibrate.

We've seen the market really level out a lot of the price lag we've talked about for the last several months as has evened out.

So I think what you're seeing is the world is recognizing that waste oils are still the most advantaged.

Our partnership with Darling still gives us the most advantage access domestic feedstock and some of their foreign feedstock that they now produce other South America and Europe.

All of that looks advantaged.

And as we see vegetable oil and BD. are going to be marginal going forward and that will set a floor in this whole space.

So as the blenders tax credit goes away, BD. will be significantly underwater without an adjustment to the rents for the last piece that I think is positive is the expectation that rents will have to go up to offset the loss that BD and vegetable oil RD. takes as we migrate to the PTC. so that there's a lot of expectation that rooms will increase.

That won't happen overnight.

But that's that does it is of significant tailwind to DGD. and D.

Thanks to all of the detail there on that.

I just wanted to ask on the naptha side, specifically exports to the Gulf Coast been strong the past couple of months, which I think has been supportive of margins.

What are you seeing on your side and how you're thinking about the outlook for naptha here?

Yes.

I think there's a couple of things.

You know, driving the relative strength to naphtha unit.

Some of that is with the economic run cuts, assemble hydro skimmers, you see less and that's on the markets.

The US Gulf Coast supplies had a step in for that, but we're also seeing a bit of a pickup for petrochemical demand for naptha, which looks to be improving.

And so that's also true rating, some of the export opportunities.

So we expect it to continue.

Great.

Thank you all.

Thank you.

The next question is coming from Ryan Todd of Piper Sandler.

Please go ahead.

Thanks.

Maybe what I know Lee, and I know how much you wanted to talk about the concept of capture rate, but it has been there for the entire sector.

It's kind of been steadily declining over the last 18 months.

And some of that obviously is just the absolute level of margins coming down.

But can you maybe talk about some of the things that have been headwinds and then what when they happen to see improvements on that?

And that is it absolute margins, wider crude differentials, crude backwardation, secondary product pricing improvement?

Any any signs of encouragement as you look at the end of the fourth quarter 2025 in terms of maybe improvements in some margin capture?

Yes, Brian Lane.

I'm fortunate to get the hand that off the grid half of that work.

Hey, Ryan.

So I think you noted most of the key factors, and we've talked about some of them are already at crude market.

Backwardation certainly has been a bit persistent and strong here, particularly late in 2024.

That's certainly a factor Factor VIIa.

Look back in early 2023.

We're actually in contango.

So there's no data that continuing on an ongoing basis is not something you would necessarily expect.

So see an improvement.

There will help capture.

Are you thinking about the US in particular?

We've talked about heavy maintenance on a number of quarters here recently.

So that's definitely a factor more in some regions and others.

I mean, there's always going to be some maintenance in our system industry as well.

So I think there's been some heavier periods that have had some impact.

And then you mentioned secondary products.

I think the ones that really come to mind there are those related to pet Cam.

So things like propylene and APT and Gary just talked about it as we're seeing in pet can start to improve.

You'd expect those values to improve as well.

And that's going to have some positive impact on capture.

Great.

Thanks.

And then maybe one follow up on some earlier comments on sustainable aviation fuel from as we think about I mean, the message over the last couple of years laden And this, I think there was clearly an expectation that the market, the South Africa was going to be understood applied some which is going to be good for.

You guys have been a lot of moving pieces in that still view the market over the next 12 to 24 months as undersupplied.

And then if you think about some, you're probably one of the few domestic producers that can qualify to sell into Europe, how you think about some potential optionality of being able to sell into into Europe versus is kind of domestic markets and pricing here?

Yes, Eric, I think we're our view is consistent that the market is physically undersupplied.

Given the ramp in mandates that is occurring over the next year to five years, you're absolutely correct.

Europe will be the most attractive market and we do have capability of supplying into that market.

That will be one of our primary outlets as we start up some.

But I think the policies are always, as I mentioned before, we're waiting for a lot of clarification there.

The mandate in Europe is very clear.

How that will be implemented is waiting on a lot of minority at all these kinds of details that make finishing the contract difficult.

But we see that is all solvable book between now and the end of the year for Gen one compliance.

And I think in the US, the IRA clearly favors SAP over our die from a from a credit standpoint.

Again, we're waiting for clarity on that and as well as a lot of our customers and blenders are waiting for clarity so that we can get the contract language perfected.

But but all of that is moving forward and we're confident that's going to get solved contractually, especially once we get clarity on on this policy guidance.

Thanks.

Thank you.

The next question is coming from Neil Mehta of Goldman Sachs.

Please go ahead.

And good morning, ladies and team have the first question is just around operating expenses.

It's always been a hallmark of a flare as your ability to keep it keep that OpEx low per barrel, your perspective on how some of those moving pieces as we move into the next couple of years and how you're thinking about it even geographically as well?

Hey, Neal, it's Greg.

So you we keep those expenses under control at one of the things we focus on every day, a couple of parts.

I think that are probably notable energy costs have been low natural gas drive, and that has been not been a help.

And so it looks like those prices will move back towards kind of a middle of the cycle kind of range here, at least that's what folks are thinking.

But that's been helpful.

Inflation has made it a bit hard after we've seen the effects of that on both maintenance costs, maintenance costs, Catalyst chemicals, those kinds of things.

We work hard with our partners to trying to make sure we keep those cost competitive.

And so as inflation moderates, we'd expect to see some of that yet improve as well.

Those are probably the two biggest parts to think about and really the things we focus on every day.

Yes, yes.

Understood.

On the energy side.

And then the other one is on just on the Port Arthur coker.

I think when you have I data, you talked about three 25 of EBITDA.

And then at then, you talked about it actually run rate of closer to 400 million.

Kind of how do you think as you think about that project specifically about about one, the current economic and then how those economics could evolve as you think about the path back to mid-cycle?

Yes.

Yes.

Yes, I think we still see that project giving us the returns consistent with what we showed at FID.

Yes, current market is a little different than where we started.

We got real good benefits earlier this year when we did the turnaround on the old coker, and we expect to see some strong, some strong value there.

So I don't think anything has changed in our view.

And then again, obviously, that project is hinged on being able to run a lot of heavy sour crude and upgraded to light products.

And so as those sour differentials move around, that's going to give us a chance to capture some more value.

Thank you.

Appreciate it.

The next question is coming from Matthew Blair of TPH.

Please go ahead.

Thanks and good morning.

Correctly.

I think the 4.7 ethanol volume guidance for Q4 might be an all-time record and just community at a time when ethanol margins are really crumbling on paper.

So could you help us reconcile about that a function of increasing export opportunities or maybe there's a lag we should be thinking about on ethanol indicator?

Yes, Eric, we have increased our ethanol production capability this year.

Most of this year has been pretty positive for that expanded capability.

We have also expanded our export markets.

Again, talking about policy.

There's there's interest in US ethanol, especially of a lot of our ISCC. qualified ethanol in Europe.

We also see that because of US corn being the most attractive feedstock in the U.S. with the largest carry out one of the largest harvest we've ever seen, it is giving a lot of opportunity for ethanol exports.

So that's what we're seeing is increased demand.

We're seeing new markets for E10 in the world.

And we see Brazil is increasing its ethanol mandate as well as the SaaS mandate beginning in 25.

So we've grown our capacity in anticipation of a lot of this expanded its interest globally.

And ethanol.

Sounds good.

And then there's been a little bit more chatter lately about increasingly global parents and your exports are a big part of the outlook for US refiners.

So when you hear about the potential for Splunk increases in tariffs, what do you think that is a concern going forward?

Well, I'll take an effort to that.

I mean, you when you look at those tariffs, a lot of homes that are really focused around manufactured goods in most countries don't want to increase the cost of energy that they're trying to take.

And so, you know, when you think about targets for tariffs, I normally don't really wrap around energy.

And so I don't have it turns on that.

Great.

Thank you.

Thank you.

The next question is coming from Jason Gabelman of Cowen.

Please go ahead.

Hey, morning.

Thanks for taking my questions.

I wanted to circle back on the financial framework and you provided some helpful comments about the return of capital metrics of being a firm target.

And I'm wondering how you think about using the balance sheet in a downturn.

You have this TWD4 billion kind of target for cash for the balance sheet on?

Is that where you want headed into a downturn so you could lean on the balance sheet a bit more should the market we can.

Yes, this is Jason.

I'll be glad to share some of our thoughts about cash.

And at our targeted cash balance would depend on environment we're in.

But in a normalized environment, we'd like to keep the cash balance between 4 to 5 billion as a guideline.

Nash, no cash to move around a lot in any quarter due to things like working capital, but we're not going to hoard cash.

I think directionally you should expect that our cash balance to trend down a little from here.

I'd also like to know if it wasn't for the positive impact from working capital this quarter would have drawn cash over EUR200 million.

We also had strong buybacks for the quarter were 500, 65 without laid out on the balance sheet.

But to answer your question more directly, yes, you're right.

That 4 billion gives us a lot more room and flexibility in a downturn to continue our approach to buybacks.

I think that's a correct.

That's a big factor.

In sum it up for the $4 billion number.

Great.

Thanks for that color.

And then there are just on the market.

We've noticed a pretty strong product exports for gasoline and diesel out of the US and it's coming as fracs have fallen a bit here the past months and still see seems like prices are needing to fall to clear the US market and keep US inventories on kind of at healthy levels.

Is that a fair interpretation of what's going on in the market where there's kind of a push from the U.S. on product exports rather than a poll from international sources on those products?

Well, it's a good question.

You know that it would appear that what you're saying is correct.

But you know, in the face of that gasoline inventories are really pretty low, were 10 million below where we were last year.

You have a lot of the five year average of the inventories wouldn't indicate a need to push.

It would almost seem like it's more of a poll and were getting an export premium and that's why the barrels are flowing.

Okay.

And when you say you're getting an export premium, you're able to sell to international markets at a higher price than what you're selling at on the US Gulf Coast?

Yes, we are.

Okay, great.

Thank you.

Thank you.

At this time, I would like to turn the floor back over to Mr. Bowman for closing comments.

Thank you, Donna, and we appreciate everyone joining us today.

As always, please feel free to contact the IR team if you have any additional questions.

Have a great day, everyone.

Thank you.

Ladies and gentlemen, this concludes today's event.

You may disconnect your lines or log off at this time and enjoy the rest of your day.

Yes, yes, yes.

Yes, we are.

Yes, yes.