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CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page1of 24
ValeroEnergy(VLO)EarningsReport:Q32014ConferenceCallTranscriptThefollowingValeroEnergyconferencecalltookplaceonNovember4,2014,11:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
JohnLocke;ValeroEnergyCorp;ExecutiveDirector-IRJoeGorder;ValeroEnergyCorp;President,CEOGarySimmons;ValeroEnergyCorp;CorporateVP-Crude,Feedstock,Supply&TradingLaneRiggs;ValeroEnergyCorp;SVP-RefiningOperationsAshleySmith;ValeroEnergyCorp;SVP-IR,MarketAnalysis&StrategicPlanningMikeCiskowski;ValeroEnergyCorp;EVP,CFORichLashway;ValeroEnergyCorp;VP-LogisticsOperationsMartinParrish;ValeroEnergyCorp;VP-AlternativeFuels
OtherPart icipants
JeffDietert;Simmons&CompanyInternational;AnalystPaulCheng;BarclaysCapital;AnalystBlakeFernandez;HowardWeilIncorporated;AnalystDougLeggate;BofAMerrillLynch;AnalystBradHeffern;RBCCapitalMarkets;AnalystRyanTodd;DeutscheBank;AnalystRogerRead;WellsFargoSecurities;AnalystPhilGresh;JPMorgan;AnalystMohitBhardwaj;Citigroup;AnalystEvanCalio;MorganStanley;AnalystEdWestlake;CreditSuisse;AnalystSamMargolin;Cowen&Company;AnalystPaulSankey;WolfeResearch;AnalystAllenGood;Morningstar;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator:
WelcometotheValeroEnergyCorporationreports2014third-quarterearningsresultsconferencecall.MynameisDaniel,andIwillbeyouroperatorfortoday'scall.
(OperatorInstructions).
Pleasenotethatthisconferenceisbeingrecorded.
IwillnowturnthecallovertoMr.JohnLocke.Mr.Locke,youmaybegin.
JohnLocke (ExecutiveDirector-IR):
Thankyou,Daniel.
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page2of 24
GoodmorningandwelcometoValeroEnergyCorporation'sthird-quarter2014earningsconferencecall.WithmetodayareJoeGorder,ourCEOandPresident;MikeCiskowski,ourExecutiveVicePresidentandCFO;LaneRiggs,ourExecutiveVicePresidentofRefiningOperations;JayBrowning,ourExecutiveVicePresidentandGeneralCounsel;andseveralothermembersofValero'sseniormanagementteam.
IfyouhavenotreceivedtheearningsreleaseandwouldlikeacopyyoucanfindoneonourWebsiteatValero.com.Alsoattachedtotheearningsrelease,aretablesthatprovideadditionalfinancialinformationonourbusinesssegments.Ifyouhaveanyquestionsafterreviewingthesetables,pleasefeelfreetocontactourinvestorrelationsteamafterthecall.
NowIwouldliketodirectyourattentiontotheforward-lookingstatementdisclaimercontainedinthepressrelease.Insummary,itsaysthatstatementsinthepressreleaseandonthisconferencecallthatstatetheCompany'sormanagement'sexpectationsorpredictionsofthefutureareforward-lookingstatementsintendedtobecoveredbytheSafeHarborprovisionsunderfederalsecuritieslaws.
Therearemanyfactorsthatcouldcauseactualresultstodifferfromourexpectations,includingthosewe'vedescribedinourfilingswiththeSEC.Now,beforewereviewthequarterlyresults,I'dliketohighlightsomeofourstrategicaccomplishmentsinthelastquarter.TheseactionsalignwithourkeystrategiestoreducefeedstockcostsbyimprovingaccesstoNorthAmericancrudesandtogrowourlogisticsinvestmentsandValeroEnergyPartnersLP,oursponsoredlogisticspartnership.
InAugustwesecuredshippingrightsandtheoptiontopurchasea50%interestinPlainsAllAmerican'sDiamondPipeline.Whencompletedinlate2016,that440milepipelinewillconnectourMemphisrefinerytothecrudeoilhubatCushing,Oklahoma.RegardingValeroEnergyPartnersLP,wecompletedourfirstdropfor$154millionincashatthebeginningofthethirdquarter.
WealsocontinuedadvancingourcapabilitytoaccessandprocessadvantagecrudesduringthequarterwiththecommissioningofourrailunloadingfacilityatthePortArthurrefinery.WithitsstartupinSeptember,thisisthethirdcrudebyrailfacilitywe'vecompletedinthepast13months,withtheothertwocompletedfacilitieslocatedatourSt.CharlesandQuebecCityrefineries.
Asmentionedintherelease,wearealsoprogressingonourotherkeyinvestmentsaspartofourstrategy,includingthecompletionofinvestmentstoreceiveadvantagedcrudeatourQuebecrefineryonEnbridge'sLine9Bpipelinereversal.WealsoexpecttocompletehydrocrackerrevampatourMerauxrefinerylaterthisquarter.Nowlookingoutalittlefurther,thetwocrudetoppingunitsatourCorpusChristiandHoustonrefineries,areprogressingasplanned.
Movingontoourquarterlyresults.Asyousawinourearningsreleasewehadastrongquarter.Wereportedthird-quarter2014earningsof$1.1billionor$2pershare.Third-quarter2014operatingincomewas$1.7billionor$1.1billionhigherthanthethirdquarterof2013.Mostoftheincreasewasintherefiningsegment,althoughtheethanolbusinessalsocontributed.
Refiningthroughputmargininthethirdquarterof2014was$11.81perbarrel,anincreaseof$4.05perbarrelversusthethirdquarterof2013.WiderdiscountsonsweetandsourcrudeoilsversusBrentandstrongergasolinemarginsinmostregions,wereslightlyoffsetbyweakerdistillatemarginsversusBrentinmostregionsandahighernaturalgascost.
AlsocontributingtothehigherthroughputmarginwasourQuebecCityrefinery'shigheryear-over-yearconsumptionofNorthAmericanlightcrudeinthethirdquarter.Therefineriesfeedstockdietconsistedof79%NorthAmericangradesinthethirdquarterof2014,whichisupfrom6%inthethirdquarterof2013.
Inaddition,werealizedareductionincrudecostinourMid-ContinentregionwhenwecompletedourconnectiontoapipelineinChildress,Texas.Thisconnectionallowedustoreceiveanincremental40,000to
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page3of 24
50,000barrelsperdayofMidlandpricedWTIcrudeoil,primarilyforourMcKeerefinery.
LastlywecontinuetorampupNorthAmericancrudeconsumptioninourGulfCoastregionbyreplacinganadditional100,000barrelsperdayofforeigncrudeinthethirdquarterof2014,versusthethirdquarterof2013.WithsomeofthosevolumesdeliveredtoPortArthurbyournewrailunloadingfacilityImentionedearlier.
Refiningthroughputvolumesaveraged2.8millionbarrelsperdayinthethirdquarterof2014,whichisanincreaseof42,000barrelsperdayversusthethirdquarterof2013.Lessturnaroundactivityandhigherthroughputcapacityutilizationledtotheincreaseinvolumes,whichwassupportedbystrongproductexportsandtheincreasedavailabilityofNorthAmericanlightcrudeontheGulfCoast.Weoperatedourrefineriesat98%throughputcapacityutilizationforthequarter.
Nowrefiningcashoperatingexpensesinthethirdquarterof2014were$3.81perbarrel,whichis$0.07perbarrelhigherthanthethirdquarterof2013,duemainlytohigherenergycosts.Theethanolsegmentgeneratedrecordearningsof$198millionofoperatingincomeinthethirdquarterof2014versus$113millionofoperatingincomeinthethirdquarterof2013.
Theincreaseinethanolsegmentoperatingincomewasmainlyduetoa$0.27pergallonincreaseingrossmargin,drivenbylowercornpricesonanabundantcornharvestandhigherproductionvolumesfromthestartupofourMountVernon,Indianaplant.Ethanolproductionvolumesaveraged3.6milliongallonsperdayinthethirdquarterof2014.
Generalandadministrativeexpenses,excludingcorporatedepreciation,were$180millioninthethirdquarterof2014.Netinterestexpensewas$98millionandtotaldepreciationandamortizationexpensewas$430million.Theeffectivetaxratewas32.9%.Withrespecttoourbalancesheetatquarterend,totaldebtwas$6.4billionandcashandtemporarycashinvestmentswere$4.2billion,ofwhich$231millionwasheldbyValeroEnergyPartnersLP.
Valero'sdebttocapitalizationratio,netofcash,was10.5%,excludingcashheldbyValeroEnergyPartnersLP.Valerohadapproximately$5.6billionandValeroEnergyPartnershad$300millionavailableliquidityinadditiontocash.Cashflowsinthethirdquarterincluded$622millionofcapitalexpenditures,ofwhich$123millionwasforturnaroundandcatalysts.
Inthethirdquarterweraisedourdividendforasecondtimethisyearwitha10%increase.Wereturned$489millionincashtoourstockholders,whichincluded$145millionindividendpaymentsand$344millioninpurchasesofapproximately7millionsharesofValerocommonstock.Andsubsequenttothethirdquarter,wecontinuedtoreturncashtostockholdersbypurchasinganadditional3millionsharesofcommonstockfor$138million,whichbringsourtotalfor2014to18.4millionsharesfor$937million.
For2014,weareloweringourguidanceforcapitalexpenditures,includingturnaroundsandcatalystsby$100milliontoapproximately$2.9billion.Weexpectstayinbusinesscapitaltoaccountforslightlylessthan50%oftotalspendingwiththeremainderrelatedtogrowthinvestments,primarilyforlogisticsandadvantagedcrudeoilprocessingcapability.
Morethan50%ofValero'sestimatedgrowthinvestmentsin2014areforlogisticsandwebelievemostofthiswillbeeligiblefordrop-downintoValeroEnergyPartnersLP.Nowfor2015capitalexpenditures,includingturnaroundsandcatalysts,weexpecttospendapproximately$2.8billionconsistingofapproximately$1.8billionforstayinbusinesscapitaland$1.3billionforgrowthinvestments.Themajorityofgrowthinvestmentsareallocatedtologisticsandincreasingourcapabilitytoprocessadvantagedcrudes.
Soformodelingourfourth-quarteroperations,weexpectthroughputvolumestofallwithinthefollowingranges:GulfCoastat1.55millionto1.6millionbarrelsperday;Mid-Continentat450,000to470,000barrels
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page4of 24
perday;WestCoastat260,000to280,000barrelsperday;andNorthAtlanticat410,000to430,000barrelsperday.
Weexpectrefiningcashoperatingexpensesinthefourthquartertobearound$4perbarrel.Forourethanoloperationsinthefourthquarter,weexpecttotalproductionvolumesof3.7milliongallonsperdayandoperatingexpensesshouldaverage$0.41pergallon,whichincludes$0.04pergallonfornon-cashcostssuchasdepreciationandamortization.
WeexpectG&Aexpense,excludingdepreciation,forthefourthquartertobearound$190millionandnetinterestexpenseshouldbeabout$95million.Totaldepreciationandamortizationexpenseinthefourthquartershouldbeapproximately$425millionandoureffectivetaxrateshouldbearound35%.
SonowIwillturnthecallovertoJoeforafewremarks.
JoeGorder(President,CEO):
Well,thankyouJohn.
Andasyoumayhaveseenlastweek,weannouncedthatBillKlessehaschosentostepdownasChairmanofValeroEnergy'sBoardofDirectorsattheendofthisyear.SoonbehalfofourValeroteam,wejustwanttothankBillforallhe'sdonetomakethisCompanysuccessfuloverhis45yearcareer.AndwewouldreallyliketowishMargieandBillallthebestgoingforward.John?
JohnLocke (ExecutiveDirector-IR):
ThankyouJoe.
SobeforeIturnitovertoQ&A,Ijustwanttoclarifyonthe2015stayinbusinesscapital,itshouldbe$1.5billion--IbelieveIsaid$1.8billion.Sookay.
Daniel,wehaveconcludedouropeningremarks.Inamomentwewillopenthecalltoquestions.Duringthesegmentwerequestthatcallerslimiteachturntotwoquestions.Butcallersmayrejointhequeuewithadditionalquestions.
QUESTIONS&ANSWERS
Operator:
(OperatorInstructions).
JeffDietert,Simmons.
Jef f Dietert (Analyst-Simmons&CompanyInternational):
Yes.It'sJeffDietertwithSimmons.Goodmorning.
JoeGorder(President,CEO):
GoodmorningJeff.
Jef f Dietert (Analyst-Simmons&CompanyInternational):
SomyquestionhastodowithsomeofyourcrudefeedstockcostsandspecificallyonewithSaudihavingraisedtheirpricestotheUS.Itappearsthatsomeoftheircrudeswerenotterriblycompetitive.WesawthecrudeimportsforthetotalUSdropfrom1.6millionbarrelsadayinApriltolessthan900,000barrelsadayinSeptember.WhileSaudiwasincreasingpricesduringthatperiodoftime.
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page5of 24
Sincethenthey'vehadfourconsecutivemonthsofpricereductions.AndIwaswonderingifyoucouldprovidesomecolorastohowattractivetheSaudicrudeshavebeeninthemarketthroughthespringandsummer?Andwhetherornottheserecentreductionsinpricesmakethemmorecompetitivenow?
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
JeffthisisGarySimmons.You'reexactlyright,ImeantheSaudibarrelshavegottentowherewefeltliketheywereoncompetitiveversusouralternatives.InthethirdquarterourvolumesfromthetotalMiddleEastweredownconsiderablywherewe'vehistoricallyrun.
We'renowseeingthattheyaremakingpricingmovestobringtheirbarrelsbackandbecompetitiveinthemarket.IwouldsaywiththeirrecentannouncementontheirOSP--they'recompetitiveoratleastwithin$0.50ofours.
Jef f Dietert (Analyst-Simmons&CompanyInternational):
Okay.AndsecondlywiththeBrentpricingbeingweakandsomeoftheWestAfricanpricesbeingsoft,haveyouseenthosebarrelspricethemselvesbackintoeitheroftheEastCoastmarketortheGulfcoastmarket?WithsomeofthesoftnessrelativetoLLS,we'veseenthisfall.
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
Yes.Jeff.TheplacethatwepivotfirstisreallyourQuebecrefinery.AndwedefinitelyasBrentgotweakwesawincentivetostartbysomeWestAfricangradesagainandbackingoutsomeofthegradesthatweweretakingfromtheUSGulfCoast.
Jef f Dietert (Analyst-Simmons&CompanyInternational):
Yes.Soboththatsoundslikeincreasesinimportsinamarketwherewe'vegotprettysubstantialdomesticproductiongrowth.Doyouthinkdomesticpriceshavetosoftentobackthoseimportsbackoutofthemarket?
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
Yes.Andyoucouldkindofseethatinthemarkets.TheBrentgotthatweakaboutthreeorfourweeksago.Westartedtopivotasothersdidandthenwe'vehadthreestraightweekswherecrudeoilinventoriesintheUSbuilt.Soitkindoftellsyouthedifferentialshavetocomebackofftoforcethosebarrelsbackintothemarket.
Jef f Dietert (Analyst-Simmons&CompanyInternational):
Thanksforyourcomments.
Operator:
PaulCheng,Barclays.
PaulCheng(Analyst-BarclaysCapital):
Heyguys.Goodmorning.
JoeGorder(President,CEO):
Goodmorning,Paul.
PaulCheng(Analyst-BarclaysCapital):
Ihaveonerequestandtwoquestions.Therequestisthatitseemsthatsomeofthepartinlossesmayturnouttobeanemerginginvestmentteaminthesector.
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page6of 24
Iknowthere'sstillasmallnumber,butitwouldbehelpfulIthinkforyourshareholdersifinyourpressreleasesomewherethatyouputdownwhatistheGPcashflow.AndyourtotalnumberofunitsintheLPandalsothatthetotalLPunit--ImeaneventhoughthatthosenumberscanbefoundinyourVLPdisclosureit'sjusthelpfultobeinonedocument.
Intermsofthequestion,withtheannouncementorthatfromoneofyourcompetitorslastweekintermsoftheirstrategyindrop-downtheyhavesubstantially[theirrate],isthereanykeyormoretransparentstrategyordatathatyoucanputoneintermsofyourVLPdrop-downpaceorthedistributiongrowthforthenextseveralyears?
JoeGorder(President,CEO):
Yes.No,Paul.That'safairquestion.ThisisJoe.Since--ifwelookatVLP.SincetheIPOwe'vestatedthatwe'regoingtogrowourdistributionsbetween20%and25%ayear.We'reintargettobeinthemiddletothehighendofthatrange.Wejustcompletedadropandadistributionincreaseandwe'reworkingonthenextdrop.
NowVLPislessthanayearold.Wedon'thaveadebtratingyet.We'llbeintheprocessofgettingthatinthenextyearorsoandit'sourintentiontobeinvestmentgrade.WhenyouconsiderthesizeandthepaceofourdropstoVLP,ouroriginalplanwastostartwiththelogisticsassetsthatwouldbemoretraditional.
Andthat'swherewesaidthatwe'vegotthe$800millionofEBITDA.ThatisnotaspecificbusinessunitthatwehavewithinValero.It'sassetsthatareusedtosupporttherestoftheoperationsandsowehaven'thadP&L'sforthem.Thatbeingsaid,thatwecangoinandwecancalculatewhattheEBITDAwouldbeforthoseassetsbasedonmarketratesandthat'swhatwe'vedone.
Nowwhat'scomeuphererecentlyisthisadditionalsetofcasesthatwouldincludedoyouputfuelmarginsandprocessunits,intotheMLP?Sowe'regoingtotakealookateverythingandwe'regoingtoactaccordingly.Obviouslyit'sneverassimpleastakingEBITDA,puttingamultipleonit,andsayingthat'swhatthevalueis.You'vegotalotoftaxeffectsthatneedtobeconsidered.
Theotherthingtheniswiththeuseofproceedscouldtheybeused--Imean,Iexpectthatwe'regoingtousethemtodogrowthprojects.Ortoreturnthecashtotheshareholdersdependingonwhichoptionhasthehighestreturns.
ButoneofthequestionsweaskourselvesisifwedoacceleratethedropsarewegoingtogetsomeofthepartsvaluationincreasedinValero?Becausethat'ssomethingthatalthoughwe'veexecutedtheMLPwehaven'tseenityet.
PaulCheng(Analyst-BarclaysCapital):
Yes.ButatleastbasedonwhatTesoroandMPCreactiononthelastseveralweeksthatseemslikethatisstartedcatchingonasanewtheme.
JoeGorder(President,CEO):
Yes.Weseeittoo,Paul.
PaulCheng(Analyst-BarclaysCapital):
Yes.Asecondquestiononthe$2.8billionnextyearbudgetisthatincludinganythinginthemethanolprojects?AndifitisindeedgoingtogoforFID,shouldweassumeitisjustanadd-onorthatyou'regoingtobondandadjustingitsothatyoustillcouldgetthe$2.8billion?
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page7of 24
LaneRiggs (SVP-RefiningOperations):
HiPaul.It'sLaneRiggs.The$150millioninthe2015CapExwith$2.8billionisnotapprovedyet.We'reinthephasetwodevelopmentoftheprojectandwe'llhaveanotherreviewandsortofdecidegoornogosomewhereinthesecondquarterof2015.
PaulCheng(Analyst-BarclaysCapital):
AndLaneifyoudogoaheadshouldweassumeyou'restillkeep$2.8billionorthatthisisincremental?Inotherwordswillyouadjustyourotherprojectssothatyoudon'tgobeyondthe$2.8billion?
LaneRiggs (SVP-RefiningOperations):
Itisinthe$2.8billion.
JoeGorder(President,CEO):
YesPaul.The150is--wehavea$150millionasaplaceholderinthat$2.8billionbudget.
PaulCheng(Analyst-BarclaysCapital):
Okay.
JoeGorder(President,CEO):
Ifwedidn'tproceedwiththemethanolplantwewouldn'tspendthat$150millionandwe'dbeat$2.65billion.
PaulCheng(Analyst-BarclaysCapital):
Isee.Gotit.Thankyou.
Operator:
BlakeFernandez,HowardWeil.
BlakeFernandez (Analyst-HowardWeilIncorporated):
Goodmorning.Thanks.CongratulationsontherolloverinCapExinto2015.IguessthisiskindofacombinationofahighlevelquestionfromPaulandmaybeatieonfromJeffaswellaswithregardtotheSaudipricing.Itlookslikethelower--thelogisticsspendingisdecreasinglike45%ofthetotaldowntoabout30%ofthegrowthtotal.
AndIguessI'mjustwonderingwiththeSaudi'schangingtheirpricingandIguessI'mjustwonderingisthereachancewheresomeoftheinfrastructureinNorthAmericancrudeinvestmentsthathavebeenmade--wedowegettoapointwheresomeofthatisn'tquiteasnecessary?Doyoustillhavetheflexibilitytoshiftbackandforthtoforeignversusdomesticrunsinyoursystem?
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
YesaBlake.IwouldsayIthinkwe'vebeenveryselectiveonwhatwe'vechosentoinvestcapitalaroundlogistics.Westillthinkitmakessensebutasyoutalkedaboutwehaven'tdoneanythingtoloseouroptionalitythatwecancontinuetoimporttheforeignbarrels.AndifSaudimakesmoresensetorunthosebarrelswehaven'tlostanyofouroptionalitytobeabletodothat.
JoeGorder(President,CEO):
Yes,Blake,Garymakesagreatpointhere.Imeanwhatwe'redealingwitharemarketsthatarereally
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page8 of 24
volatile.Andtheopportunitytodayistheopportunitytodayandit' llchangetomorroworthenextday.
Andtheonethingthat'scertainisifyoudon'thavethelogisticsinplacetotakeadvantageoftheopportunitywhenit'sthere,it'sgone.Andsowefeelverygoodabouttheprojectsthatwe'veundertaken.Imean,therailcrudeprojectscanmoveheavysourcrudesin,areverygoodprojectsforusasaretheunloadingfacilitiesthatwe'vegot.OurcommitmentstopipelinesIthinkareverysolidforusgoingforward.
Andthefactthatyou'vegotthepressureonthecrudepricerightnowaffectingtheSaudi'swillingnesstomovebarrelsbackin,attheendofthedayisgoingtobegoodbecausewe'regoingtoseepressureonallofthebarrelsastheytrytofindahomeinarefinerygoingforward.Sowefeelprettygoodaboutwhatwe'vedoneandwhatwe'vegotontheplatetodogoingforward.
BlakeFernandez (Analyst-HowardWeilIncorporated):
Okay.Thanks.Thesecondquestionisonexports.We'veseenrecordhighutilizationlevelsearlierthisyearandyoumentionedproductexportsinyourpressrelease.Forone,canyougiveusacapacitynumberofwhatyourcurrentcapacityis?Andisthatkindofoneofthemaindriversthat'sbeendrivingthishigherutilization?
BecausewhenIlookatmymodelingitseemsliketheearningsin2012wereverycomparablewithwherewe'regoingtolandthisyearandbasicallythatinsinuatesit'snotreallythatmuchmoreincentivefromaneconomicstandpointtorun,soisitsimplyafunctionofadditionalexportcapacity?
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
Yes.Sowhatwedidinthethirdquarteriswedid90,000barrelsadayofgasolineexportsthatprimarilywenttoMexicoandLatinAmerica.Wedid227,000barrelsofstraightdistillateor240,000barrelsofdiesel,whenyouincludethekerosene.ThedistillateexportswenttoLatinAmericaandEurope.
Westillhavequiteabitofcapacityleftonthegasolineside.Wecanprobablydoabout255,000barrelsaday,around400,000barrelsadayofdistillateexports.Sowestillhavealotofroomtoincreaseourexports,butforusthisisjustanoptimizationthatwedoeveryday,Blake.
It'sjustamatterofwherewecangetthebestnetbackforthebarrels.Sowhenyoulooktodaythedomesticdieselmarketisverystrongandsosomeofourdieselexportshavesloweddownabit.Aswesendthebarrelstothebestnetbackmarket,whichtodaysomeofthedomesticmarkets.
BlakeFernandez (Analyst-HowardWeilIncorporated):
Okay.Thankssomuch.
Operator:
DougLeggate,BankofAmerica.
DougLeggate (Analyst-BofAMerrillLynch):
Thanks.Goodmorningeveryone.GoodmorningJoe.
JoeGorder(President,CEO):
HelloDoug.
DougLeggate (Analyst-BofAMerrillLynch):
Andbytheway,JoecongratsonyouascendingtotheChairmanshipaswell.It'snicetoseewithallofthe
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page9of 24
titles.
JoeGorder(President,CEO):
Thankyou.
DougLeggate (Analyst-BofAMerrillLynch):
My--you'veseewhatTesorohasdonehererecentlybytalkingaboutafull-serviceMLP.Andobviouslyalotof--there'salotofdifferentstrategiesseemtobegoingonwithinthespaceIguessPhillipsispursuingasimilarkindofthing.
IguessI'mcuriousastolookingoutsideoftherefiningbackyard,sotospeak,howdoyouviewyourMLPvehiclestrategicallyintermsofmaybemovingbeyondjustwhatwewouldassociateasanormalcourseofbusinessintherefining?
JoeGorder(President,CEO):
I' lltellyouDoug.Wedolookatitasanentitythat'stheretosupportthecorebusinessoperationsofValeroEnergy.Imeanwesetitupwiththatintent.WesetitupasatraditionallogisticsMLP.Itwasgoingtoprimarilyfocusontransportationandterminallingassets.
Obviouslythemarket'schangingherealittlebit.Ifpeoplearemakingdecisionstoputalotofthird-partyassetsin,insomecasesandtoputsomeofthemargin--thefuelsmarginintheassetsalso.Imean,that'ssomethingthatwe'lltakealookatgoingforward.Butourviewofitisaveryattractive,lowcostofcapitalwaytosupportaValero'scorebusiness.
DougLeggate (Analyst-BofAMerrillLynch):
Okay.IappreciateI' lltakesomefollow-upsoff-linebecausethere'sobviouslymultiplepathsyoucangodownwiththatone.ButIguessmyfollow-upquestionisreallytogetyourlatestthinkingonthefuelsmarketgenerally,thegasolinemarketinparticular.
YoustillhaveyourArubaRefinerymothballed.ItlookslikeHovensamighthavefoundabuyerandobviouslythewholecrudecomplexhascomedown.SoI'mjustkindofcuriousastohow--what'syourprognosisfortheAtlanticbasingasolinemarket?Andshouldweexpectthekindofresilienceincracksthatwe'veseeninthelastcoupleofyearsordoyouthinkthere'sanoversupplyriskemergingonthemargins?AndI' llleaveitthere.Thanks.
JoeGorder(President,CEO):
Thanks,Doug.
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
SoIguesstwoseparatequestions,Idon'tknowLanedoyouwanttoaddresstheArubaonefirst?
LaneRiggs (SVP-RefiningOperations):
Goaheadonthegasoline.
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
SooverallIthinkweseegasolinedemandintheAtlanticbasinfairlyflat.AndsoalotofthequestionontheAtlanticbasinisreallygoingtobewhathappensinWesternEuropeanddoyouhaverationalizationoccur,inWesternEurope?Andthat' llprobablybethebigdriverontheoverallsupply/demandbalanceisintheAtlantic
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page10of 24
basinmovingforward.
DougLeggate (Analyst-BofAMerrillLynch):
Thatassumesyoudon'thaveacrudeexportscenario,I'mguessing?
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
Yes.
DougLeggate (Analyst-BofAMerrillLynch):
Okay.AndontheimpactofHovensa,doyouseethatimpactingyourGulfCoastmarketsparticularly?
JoeGorder(President,CEO):
Hi,Doug.Look.Ithinkthatprojectisgoingtobeabitchallenged.AndImeanifthey'reproducinggasolineit'sgoingtohavetogosomewheresowe'llprobablyseeitinthemarket.ButIwouldstackupthecompetitivepositionofourGulfCoastrefineriesagainstanyrefinerylikethat.
DougLeggate (Analyst-BofAMerrillLynch):
Allright.We[don't]haveasimilarview.ThanksalotJoe.Iappreciatethetime.
JoeGorder(President,CEO):
Thanks.
Operator:
BradHeffern,RBCCapitalMarkets.
BradHef fern(Analyst-RBCCapitalMarkets):
Goodmorningeveryone.
JoeGorder(President,CEO):
Goodmorning.
BradHef fern(Analyst-RBCCapitalMarkets):
Sogoingbacksortoftoanearlierquestion,hastherebeenanychangeastothedemandthatyouguysareseeinginexportmarketscurrently?
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
No.IwouldtellyoufromthethirdquartertothefourthquarterwhatIwouldexpectisthatourexportswillprobablybeupalittlebit.Mostofthatwillbeingasolineexportswillincreaseintothefourthquarterdistillateexportsprobablyfairlyflat.Whichistypicalforus--gasolinetypicallytheexportsarealittlestrongerinthefourthquarterandfirstquarterandfalloffoverhereinsummerdrivingseasonhereintheUS.
BradHef fern(Analyst-RBCCapitalMarkets):
Okay.Gotyou.AndthenyouhadacompetitivelastweektalkingaboutsortofatightMayamarketontheGulfcoast,Iwaswonderingifyouguyshaveseenthatandhadanydifficultygettingsortoftheheaviercrudesinthedoor?
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GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
OurMayavolumesforthethirdquarterwererightatourcontractlevelsandupabout20,000barrelsadaywhatweraninthesecondquarter.
BradHef fern(Analyst-RBCCapitalMarkets):
Okay.Thankyou.
Operator:
RyanTodd,DeutscheBank.
RyanTodd(Analyst-DeutscheBank):
Great.Thanks.Goodmorninggentlemen.Acouplequestions.Maybeoneifyoucouldtalkalittlebitaboutcapturerateacross--variousruncaptureratesthatwesawacrosstheportfoliothisquarter.AndIrealizethatfallingcrudepricesprobablyincreasetheprofitabilityofthebottomendofthebarrel.
Butoutsideofthatcanyoutalkaboutmaybeanyotherdriversofstrongprofitabilityandhowsustainablemaybesomeofthosemightbeongoforwardquarters?
AshleySmith(SVP-IR,MarketAnalysis&StrategicPlanning):
Hi,Ryan.ThisisAshleySmith.Yes.Weperformedwell.Wehadverylimitedturnaroundactivityinthequartersootherquartersmightnotbeascomparablewhenwehadmoreturnaroundactivity.Butalotofthecapturerateispartiallyduetoourinvestments--thehydrocrackersarerunningwell.
InfactSt.Charleshydrocrackerisrunningandconsistentlyrunninginexcessivecapacity.Inadditionyousawsometypicalmarketstuffthat'snotintheindicatorsuchasBGOisrelativelycheapinthequarterandthatpaiduswelltoo.
RyanTodd(Analyst-DeutscheBank):
Okaysoprobablysomeobviouslynonrecurringthings,butitmaybeatleastunderlinedthereissomerecurringthingsfromyourpastinvestments?Iguessisthatsafetosay?
AshleySmith(SVP-IR,MarketAnalysis&StrategicPlanning):
Thatisvery--that'sbasicallyit.You'realwaysgoingtohavesomemovementintheitemsthatarenotintheindicator.Butwealsoareseeingbenefitsfromapreviousinvestments,particularlyinthehydrocrackers.
RyanTodd(Analyst-DeutscheBank):
Okay.Thanks.Andthenmaybeonemoreon--andIapologizeifthiswas--Imissedalittlebitofthecall.
OncrudeflowsfromCorpustoEasternCanada,Iknowyouguyshavemovedsomecrudethat'sgonearoundtheretotheEastCoastofCanadarefiningsystem.Howmuchhaveyoubeenmovingandhowdoyouexpectthattochangein2015?
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
Yes.Sowemoved124,000barrelsadayofGulfCoastcrudetoQuebec.Thatdidn'tallmovethroughCorpus.OurprojectatCorpuswillbeonlineandfullyfunctionalfirstquarter--earlyfirstquarter.Sowe'llstartusingourCorpusassetsinthefirstquarter.Butthevolumewemovedwaslargelyoverthird-partylogisticsassetsthatwemovedtoQuebec.
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RyanTodd(Analyst-DeutscheBank):
Okay.Andifyoujust--whenyoulookoutto2015dynamicsbothfromtheLine9BeventualstartupandQuebecisthatanumberthatyouthinkyoucangrowsubstantiallyin2015oraretheresomelimitthere?
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
WellwhenLine9Bstartsup,wewillrunthelessbarrelsfromtheUSGulfCoastthanwhatweraninthethirdquarter.Andwe'llsupplymoreofQuebec'svolumethroughLine9B.
RyanTodd(Analyst-DeutscheBank):
Okay.I' llleaveitthere.Thankyou.
Operator:
RogerRead,WellsFargo.
RogerRead(Analyst-WellsFargoSecurities):
Hi.Goodmorning.
JoeGorder(President,CEO):
HelloRoger.
RogerRead(Analyst-WellsFargoSecurities):
IguessjusttopickupalittlebitmoreonsortoftheCapExfor2015andmaybefor2016withthecrudetoppingprojectsandIguessCorpusandinHouston.Andthenmaybewhatthedecisiontimeframeisonthat?
AndI'mthinkingalso,alrightcrudesoftenedupalittlebitandmayseesomeslowdowneventuallyinUSproductionifthathasanyimpactonyourthinking?AndthenwhetherornottherecentdevelopmentsonthecrudeexportssidethinkingoftheDOEorEIAsreportongasolinepricesbeingdrivenbyBrentnotbydomesticpricesassortofashotacrossthemouthforbeinginfavorofexports.Crudeexports.
LaneRiggs (SVP-RefiningOperations):
HiRoger.ThisLane,I' llanswerthequestionsaboutthecrudeunits.They'reapprovedandthey'reunderconstruction,we'rebuildingthem.Andwe'll--rightnowwe'resortofforecastingthatthey'llbecomplete,mechanicallycompleteattheendofnextyear,oroil-inroughlythebeginningofthefirstquarterof2016.Somewhereinthattimeframe.
Intermsoftheprojectbasiseconomics,weassumedthatit[allelseisaparity]Brentandthat'snotwherewearetoday,sothosearestillgoodprojects.Theyhadreturnsaround30%andthatpricingenvironmentsowestillseethosegoodprojectsthatareultimatelyaboutbackingoutourintermediatepurchases.
Againwe'relongconversioncapacitysotodaywehavetogotothemarkettobuyintermediatelargelyfromWestAfricaandtheNorth-Seaandthisjustsortofchangesourfeedstock.Thewaywe'regoingtofeedoursystemandwhatwasthesecondquestion?
JoeGorder(President,CEO):
RogerYes,couldyourestateyoursecondquestion?
RogerRead(Analyst-WellsFargoSecurities):
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WellitwasjustmorealongthelinesofIwaspointingoutwiththeEIAhavingcomeoutwiththatreportongasolinewhetherthathadanyimpactontheseprojectsoverall.Imeanoriginallytheseweregoingtobeonlinein2015,soIwasjusttryingtofigureoutifyouwere--maybethequestioniswhyaretheynow2016insteadof2015?
Justdelayedonconstruction?Orwasthere--wereyoulookingatitinternallyandsaying,wellifthingschangemaybewedon'twanttogoforward?
LaneRiggs (SVP-RefiningOperations):
No.Theprojectswerealwayssortofinthefourthquarter2015,firstquarter2016.Andit'saboutmechanicalcompletionversusoil-indates.There'snotbeenanydelaywiththem.
We'renothesitantabouttheseprojectsandwe'regoingforwardwiththembecausewe'renotreallyabouttryingtoproducemoregasolineandmorediesel,thiswasabouttryingtofeedoursystemmoreeconomically.Right?Withdomesticoilversusaforeignimportintermediate.
RogerRead(Analyst-WellsFargoSecurities):
Okay.Andthenasyoulookatthefourthquarterhererelativetothethirdquarter,intermsofwhatwe'veseenincrudedifferentials,howhasitshakenupforyou?Iknowwecanlookatthescreensandmakeourguesses,butareyouseeinganythingsignificantlydifferentintermsoftheGulfCoast,let'scallitthelightheavieshere?
LaneRiggs (SVP-RefiningOperations):
No.Notanythingtoosignificant.OverallwhenyoulookattheLLSmarketandMars,MarscontinuestopricecompetitivewithLLS.AndIthinktheheaviescontinuetopricecompetitivelywithMars.AsyoumoveWestintheGulfyoustarttoseeabiggeradvantagetorunsomeofthelightsweets,butthat'snottoodifferentfromwhatwesawinthethirdquarter.
RogerRead(Analyst-WellsFargoSecurities):
Okay.Thankyou.
Operator:
PhilipGresh,JPMorgan.
PhilGresh(Analyst-JPMorgan):
Hey.Goodmorning.
JoeGorder(President,CEO):
GoodmorningPhil.
PhilGresh(Analyst-JPMorgan):
Yes.Couplequestions.Firstoneisjustonthecashflowforthequarterandjustwhattheworkingcapitalcontributionmight'vebeen?
Iknowtherewasafewsizablenegativesinthefirstquarterforworkingcapital.Wasn'tsureifthatwasareversalofthebigpositiveofthefourthquarteroflastyear,orjustkindofwherewestandworkingcapitalingeneral?Andhowdoyouthinkaboutthatinthefourthquarter?
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MikeCiskowski(EVP,CFO):
Okay.Ourchangeincashforthequarterwasanincreaseof$7millionandofthatamountabout$300millionofitwasattributabletoworkingcapital.Sowehadanincreaseinourpayablesreceivablesnet.Sothat'sprimarily--Imeanthat'sgoingtobeatimingissue.Mostlikely.
PhilGresh(Analyst-JPMorgan):
Andforthefourthquarter?Anythoughtsonwhetherthere'sadditionalcontribution?
MikeCiskowski(EVP,CFO):
TowardstheendoftheyearaswemanagearoundtheLIFOinventorylevels,there'sthepotentialthatwecouldhaveareductioninourworkingcapital.
PhilGresh(Analyst-JPMorgan):
Okay.Andthenjustwithrespecttothecashflowgenerationprofileingeneral,obviouslyverystrongandJoeyourstockischeaperonafreecashflowyieldthanmostrefiners.
SoI'mjustwonderinghowyou'rethinkingaboutimpactingthatvaluationwhetheritbe--youobviouslytalkedabouttheMLPstructureasanopportunity,butwhetherit'sincreasingbuybacksorameaningfulstepupinthedividendorsomethingelseyoucandotochangethegame?Justcurioushowyou'rethinkingaboutthings.
JoeGorder(President,CEO):
No.AndPhil,that'sagoodquestion.Whenwelookattheuseofcashwe'vegotsomeverygoodprojectssowe'regoingtocontinuewiththeprojectsthatwehaveunderway.Thesehaveverystrongreturnsandtheymakeasmuchmoreefficient.Andwerealizethatthere'sabalancebetweeninvestmentforgrowthandreturningcashtoshareholders.
NowIthinkouractionsinthethirdquarterandthroughthisyearreallyreflectthisrealization.We'vehadtwodividendincreasesandwe'vehadincreasedsharerepurchases,whilecontinuingwiththegrowthprojectsthatimproveouroverallbusiness.
Andtotheextentthatwehavefreecashflowgoingforwardandtotheextentthattherearen'ttremendouscapitalprojectstousethecashfor,Ithinkyoucouldseeuscontinueonthispath.Andwe'llbecomfortablewithreturningittoshareholders.
PhilGresh(Analyst-JPMorgan):
Okay.Thanks.I' llturnitover.
Operator:
MohitBhardwaj,Citigroup.
Mohit Bhardwaj(Analyst-Citigroup):
Yes.Thanksfortakingmyquestion.Joeifyoucouldjust--ifIcouldjustfollow-uponyourcommentsaboutAtlanticbasin.
IfyoulookatwherethecrudepricesarerightnowanditseemslikethereisexcesscrudesupplyintheAtlanticbasin,whatdoyouthinkitdoesfortherefiningbusinessintheUS?Andhowdoyouthinkproductionmovesorthesupplymovesgoingforward?
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JoeGorder(President,CEO):
Okay.Yes.Let'sletGarySimmonsgiveyouashotatthat.
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
Verydifficulttosay.IthinkthekeyquestionthereiswhatisthemarginalcostofproductioninNorthAmericaversusotherregionsintheglobe?Andofcoursewe'renotanupstreamCompany,soIdon'treallyknowhowallthatshakesout.
Ithinktheassumptionyou'rekindofmakingwiththequestionisthatascrudepricefallsthattheNorthAmericanproductionfallswiththeflatpricefallandthatmayhappen.ButIreallydon'tknowenoughtobeabletocommentonthat.
Mohit Bhardwaj(Analyst-Citigroup):
Right.Soifyoulookatthirdquarterversusfourthquarteroneofthethingsthatyousaidforthethirdquarterwasthatyouwereutilizingthefrontoftherefiningalotmore.
Sofillingupthe[tires]alittlebitmoreandutilizingthedownstreamunitsalittlebitlessandwheretheVGOpricesareandavailabilityoflightsweetcrude.Butdoyouthinkthatstillthecaseinthefourthquarter?
JoeGorder(President,CEO):
Lane?
LaneRiggs (SVP-RefiningOperations):
SoI' lltry--I' lltakeashotatit.ThisisLane.Oursignalsinthethirdquarterwereobviouslymaxedoneverythingandtotheextentthatwe're--therewasasignaltorunahighacruderateaspossible,becausewehadpositivecrudemargins.
AndwehavereallygoodconversionunitmarginsbecauseVGOpriceswereinexpensive.Westillseethosesignalsgoingforwardinthefourthquarter.They'renotasstrongastheywereinthethirdquarter,butwestillhavesignalstorunoursystemrelativelyfull.
Mohit Bhardwaj(Analyst-Citigroup):
Right.Andonefinalonefromme.JustontheDiamondPipeline.Sojusttobeclear,youguyshavenotexercisedthe50%optiononthepipelineyet?
Andifyoucouldalsofollow-uponifyoulookatsomeofyourpeersweretalkingaboutdoingastudyoncaplineandyouwerethemainconsumerasfarasMemphisrefineriesconcernedonthecaplinedoesDiamondPipelineoptionalsoallowyoutosortofifthereisareversalforcaplinetoparticipateinthat?
JoeGorder(President,CEO):
Rich,youwantto--
RichLashway(VP-LogisticsOperations):
Yes.I' lltakeacrackatthat.SotheDiamondPipelineisprogressing.Itisconnected--itwillbeconnectedtothecapline.Sotodaywe're--Memphisisconnectedtothecaplinepipeline.
SowewouldhavedualsupplysourceintotheMemphisrefinerypotentiallyandbeabletotakeadvantageofareversal.ButIthinkthey'rejustundertakingastudyaswespeak,soitmaybesometimebeforethat
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actuallybecomesareality.
JoeGorder(President,CEO):
AsfarastheoptionontheDiamondPipeline,--
RichLashway(VP-LogisticsOperations):
Yes.I'msorryImissedthatfirstpart.SoontheoptionwehavenotexercisedtheoptionwehavethatoptionthroughearlyJanuaryof2016tomakethatdecision.
Mohit Bhardwaj(Analyst-Citigroup):
Thankyoufortakingmyquestions.
RichLashway(VP-LogisticsOperations):
Sure,Mohit.
Operator:
EvanCalio,MorganStanley.
EvanCalio (Analyst-MorganStanley):
Hey.Goodafternoonguys.
JoeGorder(President,CEO):
Goodmorning,Evan.
EvanCalio (Analyst-MorganStanley):
Joe,canyouwalkusthroughthedecisiontoreduce2015CapExsequentiallyfrom2014?Isthata--isthatatop-downdecisiontoraisedistributablecashorafunctionofhigherhurdleratesortheprojectqueue?Andparticularlyasitmayrelatestomidstream?
JoeGorder(President,CEO):
Asitrelatestomidstream?
EvanCalio (Analyst-MorganStanley):
Justintotal--it'sdownsequentially,isthatadesiretoincreasedistributablecashfloworafunctionofhowthoseprojectsshookoutinthereviewprocess?
JoeGorder(President,CEO):
No.It'sthelatter.Evan,westartwithalistofprojects.Andifyoulookatitfromtherefiningperspective,Lanehasaprocessthathegoesthrough--atremendousrigorousreview.AndIthinkthefactthathe'sgotthisrigorousreviewshowsupinthetimingonthemethanolproject.Right?
Thisisabigprojectandwewanttobesurethatwe'vegotthecapitalrightsohe'sgoingthroughthisinaverymethodicalwayjusttobesurewe'reontarget.Weputtogetheralistofperspectiveprojectsandwedothiseveryyear.Andwhatwe'redoingnowis--ourlistofprojectsthatwetalkaboutarethosethatwe'vescrubbedtothepointthatwefeelthatthereisareasonableprobabilitythatwe'regoingtodothem.
Sotheprojectsthatwefeelwecanexecutenextyear,fromeithertherefiningsideorthelogistics,havebeen
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includedinthebudget.Wefeelwe'refairlycommittedtothat$2.65billionnumber,the$150millionfromethanoliskindofalet'sseewhatweget.Butitisakindofbottom-upwhatprojectsdowehavetotakealookatandthenwelookatitfromthetopdown.Andsaythesearetheonesthatwewanttoundertakebasedontheirreturnthresholds.
Thereisthoughageneralviewamongthismanagementteamthatwe'dliketotrytoreturnmorecashtoshareholders.Andsohavingacapital--havingourcapitalatthislevelissomethingwe'reverycomfortablewith.Webelieveitcreatesthatpropervaluebetween--orproperbalancebetweencontinuedinvestmenttogrowandoptimizethebusinessandrewardingtheshareholderforhisloyaltytous.
EvanCalio (Analyst-MorganStanley):
AndjustforclarificationIthinkintheopeningyoustatedthatmidstreamis50%ofthatgrowthCapEx,yetthereleaseis30%whichwouldbesequentiallydown.Isita--whichofthetwoismidstream,asafunctionofgrowth?
JoeGorder(President,CEO):
No.Ithinkifyoulookat2014versus2015we'vegotsignificantinvestmentforexampleintherailcarsin2014.Thatfallsoff.Wehaven'tintentionallytriedtoreducetheinvestmentsthatwe'remakinginthemidstreamsideofthebusiness.
Okay?Whatwe'vegotisprobablytimingissueshereofdevelopingtheprojectstothepointwherewe'rewillingtoputtheminthecapitalbudget.That'sallwe'redealingwith.
EvanCalio (Analyst-MorganStanley):
Okay.Soit'saplus$390million--orit's$390millionIpresumeifit'satthe30%figureandthenshouldwe--isthatright?
AshleySmith(SVP-IR,MarketAnalysis&StrategicPlanning):
Hey,Evan.ThisisAsh,yes.You'recorrect.Sowe'regoingfrom2014,itwasover50%,bothcapitalandlogistics.Andit'sbecauseofrailcarsfallingoffit'sjustgoingtobenextyearalittleover30%.Andyou'rerightit'srightaround$400millioninlogistics.
EvanCalio (Analyst-MorganStanley):
Great.SotheMLPEBITDA[exits]up$70million-ishestimateisthatreasonable?
AshleySmith(SVP-IR,MarketAnalysis&StrategicPlanning):
Itcertainlykeepsgrowing.
EvanCalio (Analyst-MorganStanley):
Right.Great.Allright.Goodluck.Ilookforwardtoyouranalysisoflargerscopeofdroppableassetsandgoodresultsguys.
JoeGorder(President,CEO):
Thanksalot.
AshleySmith(SVP-IR,MarketAnalysis&StrategicPlanning):
Thanks,Evan.
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Operator:
EdWestlake,CreditSuisse.
EdWest lake (Analyst-CreditSuisse):
Hey.Prettysoonwe'rejustgoingtocalltheselogisticsconferencecallsasopposedtorefiningconferencecalls.
JoeGorder(President,CEO):
WedidnoticethatEd.
AshleySmith(SVP-IR,MarketAnalysis&StrategicPlanning):
Iftheytradehigher,they'lldoit.
EdWest lake (Analyst-CreditSuisse):
Yes.Withthemultiple,arbitrageisprettyobvious.Solet'scarryoninthatvein.SoDiamondPipe,anysortofcolorontheEBITDAthatmightcontributeifyoumoveforwardwiththatplanoroverallinvestmentlevel?
AshleySmith(SVP-IR,MarketAnalysis&StrategicPlanning):
Well,Ithinkwe'vetalkedaboutthecostbeingapproximately$900million.Andwhenyoulookatapropermultipleofaround10timesthatwouldgetyou$90million.And50%ofthatwouldkindofbackyouintoa$45millionofEBITDA.
EdWest lake (Analyst-CreditSuisse):
Great.Andthenanotherstrategy--obviouslyIdon't--youmust'veseentheEPD/Oiltankingacquisition,whichwasasomewhatelevatedmultiple.Andobviouslyassumingthattherewasgoingtobealotofexportgrowthtoobviouslydrivethroughputsanddrivethatmultipledown.SoIlookatyourlogisticsandyourrefiningsysteminTexas.
IlookatwhatPhillips66hasdoneatBeaumontandtheBakkenpipeprojectthat'sassociatedwiththat.IlookatthePermianandtheEagleFordandstillgrowingandIthinktherehastobesomethingtobedone.Sohow--amIoffintermsofthelandscapeoraretherecompetitivebarriersforyoubeingabletocompeteaseffectively?
JoeGorder(President,CEO):
There's--Imeanthere'scompetitivebarrierstoeverything--right?Butthere'snoreasonthatwecan'tcompeteeffectivelywiththis.AndasImentionedearlierwhenwetalkedaboutthecapital,we'veincludedinthecapitalbudgetprojectsthatwe'rehighlyconfidentwe'regoingtodo.TheoneexceptionisthemethanolplantandI'mnotsayingwewillorwon'tdoit,we'rejuststillintheprocessoflookingatit.
Butwe'vegotalotoflogisticsprojectsrightnowthatRichLashwayandhisteamareintheprocessofdeveloping.They'renotfarenoughalongtoincludeinthecapitalbudget.Buttheywouldbelogisticstypeassetsthatwewouldusetosupporttheexistingrefiningportfolio.Andthere'ssomeofthemthatlooklikethey'reverygoodprojectsbutwe'renotgoingtogetoutinfrontofourselvesandshareinformationonthemuntilwegetitpinneddown.
EdWest lake (Analyst-CreditSuisse):
Okay.AndthenIshouldaskarefiningquestion.Withthatopeningremark--theturnaroundsobviouslywere
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prettyhighasyouconnectedupalotofthehydrocrackersanddidalotofreliabilityworkin2012and2013andobviouslystillinthesecondquarter.Andobviouslyit'seasytoseehowgoodyourthroughputswereinthethirdquarter.
AsyoulookoutfromhereImeandoyoufeelthatyouhaveamorereliablerefiningsystemoristherestillmoreworkthatneedstobedonetogetthereliabilitytowhereyouneedittobe?Andmaybeacommentongeneralturnaroundschedulesintonextyear.
LaneRiggs (SVP-RefiningOperations):
HiEd.ThisisLane.SoourlastreallybigreliabilityprojectwedidwaswithMemphisinthesecondquarterandthatwasreplacingthereactor.Andtheonlything--nowwe'reintheprocessofstartingupintheMerauxhydrocracker,whichisagainsortofreconfiguringthatrefinery.
Wedon'treallyhaveanythingquitelikethatgoingforwardinourcapitalplan.It'ssortof--otherthanwe'redoingthesecrudeunits,butthosewon'treallyimpactourthroughputsperse.Soreallyfromheregoingforwardwejusthaveour,whatIwouldsayis,ourregimenofstandardturnaroundexecution.So--
EdWest lake (Analyst-CreditSuisse):
Yes.Soallthingsequalweshouldexpectbettersortofoverallutilizationnextyearandperhapstheyearafterthatperhapsthelastthree-yearrunrate?
LaneRiggs (SVP-RefiningOperations):
Yes.Andwealways,Imeanournumberonefocusoneverythingwedoistotry--wellfirstissafety,butrightbehindthatisreallyreliability.Andwedohave--ourreliabilityspendisactuallyslowing,becausewe'reprettyconfidentthatwehavespenttherightmoneyontherightthingstomaintainahigherreliabilityrateinoursystem.
EdWest lake (Analyst-CreditSuisse):
Veryclear.Thankssomuch.
Operator:
SamMargolin,CowenandCompany.
SamMargolin(Analyst-Cowen&Company):
Hi.Goodmorningeverybody.
JoeGorder(President,CEO):
Hey,Sam.
SamMargolin(Analyst-Cowen&Company):
Alot'sbeencoveredIguessI' llsticktoethanolifrefiningquestionsareoutoffavor,too.Butthebusinesshasrespondedreallywelltolowercornprices.Obviouslyresultshavebeengettingbetterandbetter.
Juststrategicallydoyouthinkyoucan--itcantolerateanykindofstabilizingbusinesscomponent,atollingagreement,orsomethinglikethatmightmakeiteligibleforadifferentstructure?Oristhisjustnormalvolatilityintheindustrywithareallygoodcorncropthisyear,inyourmind?
JoeGorder(President,CEO):
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Doyouwanttospeaktothemarketaspectofhis?
Mart inParrish(VP-AlternativeFuels):
SureSam.ThisisMartinParrish.Onthemarketaspectwelikewherewe'repositioned.Production'sbeenhighasyoucanseeinventorieshaveonlybuiltlikeonemillionbarrelsintotalfortheyear.
Sowefeelreallygoodwherewe'repositioned.Exportsarehighwethinkmarginsgoingforwardaregoingtobegood.Welikethebusiness.
JoeGorder(President,CEO):
Asfarasatollingtypedeal,Imean--Samwhatareyouthinkingthere?Isthisaquestionaboutdowewanttomonetizethebusiness?
SamMargolin(Analyst-Cowen&Company):
Yes.Isupposethat.Imeanit'sbeenaprettysteadystreamofabetterandbetterresultsinthesegment.AndsoyoumentionedyoursumofthepartsearlierIwaswonderingifthisfactorsintoitatallnowthat--ifmaybeyouseeearningsgettingmorereliableorvisibleinthesegment?
JoeGorder(President,CEO):
Wellwe'dliketobelievethey'dstayattheselevelsforeverbutIthink2012itwas--wasn'tit,wouldremindedofjusttherecanbealotofvolatilityinthisbusinesstoo.Andwe'velookedattheethanolplantportfolioandittrades--ifyoulookatcompstherejustaren'tawholebunchofthemfirstofall.Andtheytendtotradeatthesamemultipleastherefiningassetstradeat.
Sothere'sreallynotabigsignificantincentiveforValerotogooutandmonetizetheseandtrytocreateadditionalvalue.AtthesametimeIwouldsaythatwe'reverypleasedwiththeoperationofthebusiness.Martinhasdoneafinejobleadingit.
He'sgotaverystrongteam.Andthecashflowthat'sbeingproducedbytheseassetsistremendous.Andwedolikehavingitaspartofourcorebusinessandwedobelievelong-termthatethanol'sgoingtobefundamentallypartofthefuelmix.Andsohavingthisbusinessaspartofourportfoliomakessense.
SamMargolin(Analyst-Cowen&Company):
Okay.Andthenjusttouchingonthatasafollow-up,theRFSweseemtobealittlebitbehindscheduleonanupdatehere.
Itseemslikeyourthesishasplayedoutbasedonrefiningmarginsthatwinsarekindofbeingpassedthrough.Isthat--doyouseethatasgivingmomentumtoIdon'tknowmaybeamandatereductionoranykindofmovementatall?Ifyou--ifwecangetanyupdatethatwouldbegreat.
AshleySmith(SVP-IR,MarketAnalysis&StrategicPlanning):
Yes.Idon'tknowifwehavealotofinsighthereIthinkwefeellikeit'sgoingtobeaftertheelectionsherebeforewegetthenewRVOandit'ssolateintheyearatthisstagethatwedon'tthinkthatit' llbesubstantiallydifferentfromwherewewerelastyear.
SamMargolin(Analyst-Cowen&Company):
Okay.Great.Sorry.
JoeGorder(President,CEO):
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Itisprettyinterestingthatwe'rehereinNovemberandwedon'tknowwhat2014obligationnumberisyetbut--
SamMargolin(Analyst-Cowen&Company):
Interestingisonewordforit.Yes.Iguess.
JoeGorder(President,CEO):
Thankyoupal.
SamMargolin(Analyst-Cowen&Company):
Thanksalotguys.Haveagoodone.
JoeGorder(President,CEO):
Youtoo.
Operator:
PaulSankey,WolfeResearch.
PaulSankey(Analyst-WolfeResearch):
Hi.Goodmorningeveryone.
JoeGorder(President,CEO):
HeyPaul.
PaulSankey(Analyst-WolfeResearch):
We'vecoveredalotofgroundherewithgettingtothepointsoftheethanolMLP.Iwon'taskafollow-uponthatone.Couldwejustsortofbringitalltogetherabit.
Joe--whatconcernsmeisIthinkwewerehopingforquiteasignificantstepdowninCapExnextyear.AndwhatI'mlisteningtoisthatyou'recompetinginanmaturemarketbutyou'restillspendingonthesenumbersaboutdoubleyourmaintenanceorstayinbusinessCapEx.WiththeremainderbeingobviouslygrowthCapEx.Can'twegettoaplacewhereyouaremuchmoreaggressiveaboutcashreturntoshareholdersasthekindofapredominantaim?
Iheargoodstuffaboutyoupotentiallynotdoingthemethanolprojectbutatthesametimethereseemstobeapotentialforlogisticsspendtostepup.AndasIsaytomethisisaCapExnumber,whichiskindofflatnextyearwiththisyearwhereaswewerehopingforsomethingthatwasquiteabitlower.Thanks.
JoeGorder(President,CEO):
Yes.AndokayPaulandIknowthishasbeenyourperspective.Whenwelookatthecapital--okay?You'vegot$1.4billion--$1.5billionthatweneedtospendontheassetstomaintainthem,thewaywewanttomaintainthem.We'vegotthecrudeunitprojectswhichhave25%plusratesofreturnandthey'renotputtinganymorejuiceinthemarketperse.They'reoptimizationprojects.
We'vegottheopportunitytodropathighermultiples,logisticsassets.We'regoingtocontinuetoinvestinthose.Ifyouextractthemethanolplant,the$150millionplaceholderfromthe$2.8billion--we'reat$2.65billion,thatiswellbelowthe$3billionthatweforecastedthisyear.Andwedon'tarbitrarilyselectprojectstoundertakewithoutlookingatthealternativeuseforthecash.
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
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Andsoifwe'redecidingtodoacapitalprojectIthinkwe'reverycomfortablemakingourdayincourtandsharingwhatthereturnsaregoingtolooklikeonthisandwhyit'sabetteralternativetousthanrepurchasingshares,forexample.SoIdothinkthatthismanagementteamhasreducedthecapitalspend.
Ithinkifwelookatitgoingforwardwiththerigorwehaveintheprocessandthethresholdswe'resettingforacceptanceofprojects,we'regoingtoseethiscontinuetobeatthislevel.Itmaycontinuetodecline.ButIdon'twanttonotdoprojectsthatimprovetheoperationofthebusinessthathavegoodreturnswhenthey'reavailabletous.
PaulSankey(Analyst-WolfeResearch):
Yes.Iunderstandthat.Iguesstheconcernisreallywhatyou'resayingisthat--youhavetoseeEuropeanrefineriesshutdown,inordertomakeroomforsomeofthisstuff.Andthat'sjustaconcernwehavethatthere'stoomuchcapitalgoingintothebusinessoverallthat'skindofdependentonthecompetitiveenvironmentmovinginyourfavor.
JoeGorder(President,CEO):
Okay.
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
Paul,keepmindourprojectsaredesignedprincipallytoreducefeedstockcosts.Andifwehavecheapercrudewe'regoingtoshutdown--Imeanthat'sgoingtoforceexcesscapacityinEuropetoshutdown.Sowewillbecomemorecompetitive.
PaulSankey(Analyst-WolfeResearch):
Great.Andjustmyfinalpartofthisiswhatdoyouthinkacompetitivereturntoshareholdersis?You'vegotacouplepercentyield,canyoujusttalkalittlebitmoreaboutthat,Joe?AndI' llleaveitthere.Thanks
JoeGorder(President,CEO):
I'msorry,PaulrealquickthoughareyoutalkingaboutatVLPorareyoutalkingaboutValeroEnergy?
PaulSankey(Analyst-WolfeResearch):
WellyesjustforexampleifIownaValerosharehowdoyouthink--whatdoyouthinkofasbeingagoodreturnstheshareholderintermsofyousayingthatyou'rerespectfulofcashreturnstoshareholders?
JoeGorder(President,CEO):
Fromacashperspectiveorjusttotal?
PaulSankey(Analyst-WolfeResearch):
Yes.Total'sfine.Imeanpeopleobviouslypreferaregulardividend,butIunderstandthatthevolatilityofthebusinessmakesthatatoughcommitment.
JoeGorder(President,CEO):
Yes.Okay.Ithinkwhatwewouldsayiswehaveacostofcapital.Okay?We'vegotacostofcapitalouttherewhichdictatesourassessmentofwhereweareinprojects.Andthenyou'vegotareturnoncapitalemployedthatwe'rehopingtohavebeinthis--wehaven'tsetthetargetperse,but10%range,12%range.
Andapieceofthatiscertainlygoingtobethedividendthatsharerepurchaseaspectofit.Butwerecognize
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page23of 24
thatwe'vegotaneedtoexceedcostofcapitalonourprojects.Andonourbusiness.
PaulSankey(Analyst-WolfeResearch):
Understood.Thankyouverymuch,Joe.
Operator:
AllenGood,Morningstar.
AllenGood(Analyst-Morningstar):
GoodmorningeveryoneI' llbebriefaswe'regettingherelate.SuncorCEOmadesomecommentslastweekaboutshippingCanadianheavytoEuropeanddowntheUSAtlanticCoastandmaybeeventotheGulfCoast.
Doyouseethatisaviablealternativelong-termtogetgreaterheavy--CanadianheavyvolumestotheGulfCoast?AndcouldthatevenbeapotentiallyasourceofopportunityforPembrokeatsomepoint?
GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):
Yes.SoofcourseforusIthinkwefeellikethere'sbetteroptionstogetCanadianheavytotheUSGulfCoastthantakingittotheEastCoastandaround.
Butabsentofanyofthoseopportunitiesmovingforward,wedefinitelyseethatit'sanoptiontogetadditionalheavysupplytotheGulf.AndwealsoseethatthereisanopportunitytomovetheCanadianbarrelstoPembrokeaswell.
AllenGood(Analyst-Morningstar):
Great.ThanksandthencouldyoujustgiveusanupdateontheprojectsyouhaveeitherunderwayorsortofontheplannedstagestoincreasecompetitivenessofCaliforniaandgetsomediscountcrudeoutthere?Andthenjustyourlatestthoughtsonyourassetsoutthereaswell.
LaneRiggs (SVP-RefiningOperations):
Yes.Allen,thisisLane,Iwouldalso--wearestillworkingonthattheBeniciarailproject.OurcommentperiodontheEIRisover.TheCityisansweringallthequestionsandwesortofexpectthattobefinishedinDecember.Wethinkpermitswillgetissuedinthefirstquarter.
Sothat'sreally--intermsofthestrategiccapitalthatwehavespendingontheWestCoast,that'sprettymuchit.Everythingelsewe'rebeingverycarefulinourspendontheWestCoast.BecausewehaveobviouslyagreatopportunitiesinourGulfCoastandourMid-ContinentandourNortheasternassets.Sowe'reverycareful.Werunaverytightshipoutthereandthat'ssortofhowwe'remanagingtheWestCoast.
JoeGorder(President,CEO):
Andthenfromofstrategicperspective,wethinkit'sgreattohavegoodassetswithstrongmanagementteamsouttherethatprovideustheoptiontotakeadvantageofthestrongmarginenvironmentsthatyoucanhavefromtimetotimeoutthere.
AllenGood(Analyst-Morningstar):
Great.Thanks.Iappreciateit.
Operator:
CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials
Industry:EnergyEventDescription:Q32014 EarningsCall
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Wehavenofurtherquestionsatthistime.
JohnLocke (ExecutiveDirector-IR):
That'sokay.Iwasjustgoingtosayweappreciateeveryonecallinginandlisteningtothecalltoday.Ifyouhaveadditionalquestionsordidn'tgetachancetoaskyourquestion,pleasecontactourinvestorrelationsdepartment.
JoeGorder(President,CEO):
Thankyou.
Operator:
Okay.Thankyoutomyspeakersandthankyouladiesandgentlemen.Thisconcludestoday'sconference.Thankyouforparticipating.Youmaynowdisconnect.
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