Greetings, and welcome to Valero Energy Corp. Third Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Brian Donovan, VP of Investor Relations. Please go ahead.
Good morning, and welcome to Valero Energy Corporation's Third Quarter 26 Earnings Conference Call. Today, I am joined by Lane Riggs, Chairman, CEO and President Gary Simmons, Executive Vice President and COO Richard Joe Walsh, Executive Vice President and general counsel Harminder Bhullar, Senior Vice President, and CFO and several other members of Valero's senior management team. If you have not yet received a copy of our earnings release, it can be found on our website at investorvalero.com.
Included with the release are supplemental tables providing detailed financial information for each of our business segments, along with reconciliations and disclosures for any adjusted financial metrics during today's call. If you have any questions after reviewing these materials, please feel free to reach out to our investor relations team. Before we begin, I would like to draw your attention to the forward looking statement disclaimer included in the press release.
In summary, it says that statements made in the press release during this conference call that express the company's or management's expectations or forecasts of future events are forward looking statements. And are intended to be covered by the safe harbor provisions under federal securities laws. Actual results may differ from those expressed or implied due to various factors, which are outlined in our earnings release and filings with the SEC.
I will now turn the call over to Lane for opening remarks.
Thank you, Brian, and good morning, everyone. During the third quarter, business teams executed well in all reporting segments. The market volatility and tight product inventories we saw in the prior quarter continued through the third quarter.
Our teams remain focused on execution in running our refineries at near record levels of utilization and helping keep the market supplied with critical transportation fuels. Our ethanol segment also achieved a quarterly record for production during the third quarter, supplying fuel and contributing to our overall performance. Financially, we remain in a strong position.
During the quarter, we continued to honor our longstanding shareholder commitments while also strengthening our cash position. As we look ahead, we remain constructive on the long term outlook for our business. Refining fundamentals remain favorable supported by low product inventories, limited excess refining capacity, and continued demand for transportation fuels.
Compared to other regions around the world, United States is well positioned in the current market environment. and the U. S. Gulf Coast continues to be 1 of the most advantaged regions globally supported by abundant domestic crude production and access to cost competitive feedstocks. Combined with our strategically located refining system, and the flexibility of our commercial team, these advantages support our ability to respond to changing market conditions, and support resilient customer demand. Turning to strategic capital projects, we completed the FCC unit optimization project at St.
Charles Refinery during the third quarter on schedule and within budget. This $230 million investment has already increased production of higher valued products, including alkylate and gasoline. We continue to evaluate additional strategic opportunities to further strengthen the competitiveness and long term value of our refining system.
However, as we assess these opportunities, we remain committed to our disciplined investment process that has served us well for more than a decade. In closing, our third quarter performance underscores the quality of our assets and our consistent operational commercial and financial performance. This is a result of a long term strategy that we have been committed to for well over a decade.
With that, I will turn the call over to Harminder.
Thank you, Lane. For the third quarter of 26, net income attributable to Valero stockholders was $6.8 billion or $23.89 per share, compared to $1.1 billion or $3.53 per share for the third quarter of 25. Excluding the adjustments shown in the earnings release tables, adjusted net income attributable to Valero stockholders for the third quarter of 26 was $6.8 billion or $23.90 per share, compared to $1.1 billion or $3.66 per share for the third quarter of 25.
The Refining segment reported operating income of $8.8 billion for the third quarter of 26 compared to $1.6 billion for the third quarter of 25. Refining throughput volumes in the third quarter of 26 averaged 3 million barrels per day. Refining cash operating expenses were $5.3 per barrel in the third quarter of 26.
The Renewable Diesel segment reported operating income of $353 million for the third quarter of 26 compared to an operating loss of $28 million for the third quarter of 25. Renewable diesel segment sales volumes averaged 3.4 million gallons per day in the third quarter of 26. The Ethanol segment reported operating income of $272 million for the quarter of 26 compared to $183 million for the third quarter of 25.
Ethanol production volumes averaged 4.8 million gallons per day in the third quarter of 26. G&A expenses were $308 million for the third quarter of 26, Depreciation and amortization expense was $684 million for the third quarter of 26. Net interest expense was $144 million and income tax expense was $2.1 billion for the third quarter of 26.
The effective tax rate was 23%. Net cash provided by operating activities was $6.9 billion for the third quarter of 26, Included in this amount was a $526 million unfavorable impact from working capital and $205 million of adjusted net cash provided by operating activities associated with the other joint venture membership share of DGD. Excluding these items, adjusted net cash provided by operating activities was $7.3 billion in the third quarter of 26.
Regarding investing activities, we made $432 million of capital investments in the third quarter of 26 of which $371 million was for sustaining the business, including cost for turnarounds, catalysts and regulatory compliance, and the balance was for growing the business. Excluding capital investments attributable to the other venture member share of DGD and other variable interest entities, capital investments attributable to Valero were $429 million in the third quarter of 26. Moving to financing activities, we remain committed to our disciplined capital allocation framework.
Shareholder cash returns resulted in a payout ratio of 52% for the quarter. Also in the third quarter, we repaid the outstanding principal balances of our $100 million note that matured in July and our $426 million note that matured in September. An additional $146 million of debt maturing later this year will be repaid using proceeds from the debt we proactively issued in the first quarter during a lower rate environment.
Turning to the balance sheet, we ended the quarter with $8.6 billion of total debt $2.4 billion of total finance lease obligations and $9.8 billion of cash and cash equivalents. The debt to capitalization ratio net of cash and cash equivalents was 4% as of 9/30/2026, reflecting the cash build this year. While our long term $4 billion to $5 billion cash target remains unchanged, continue to maintain cash above the high end of that range to preserve optionality in a volatile market environment consistent with our messaging throughout this year while also honoring our payout commitment.
Overall, we ended the quarter well capitalized with $5.3 billion of additional liquidity excluding cash. Turning to guidance, we still expect capital investments to attributable to Valero for 2026 to be approximately $2 billion. This includes expenditures for turnarounds, catalysts, regulatory compliance, joint venture investments and the estimated cost to repair the DHT unit at our Port Arthur refinery.
Approximately $1.7 billion is allocated to sustaining the business with the remainder directed toward growth projects. Repairs to the Port Arthur DHT unit remain on track for completion by year end. Total repair costs are still estimated to be approximately $250 million which are included in our sustaining capital guidance.
As previously guided, we expect a substantial portion of the cost to be covered by insurance. In the meantime, the refinery continues to operate at normal throughput rates. Our growth projects continue to be focused on shorter cycle opportunities that improve crude and product flexibility optimize the value of our product mix and maximize utilization of existing conversion capacity across our refining operations.
We have also been pursuing efficiency and capacity expansion projects at our ethanol plants. These investments should enhance the earnings power of our assets. For modeling our fourth quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.855 to 1.91 million barrels per day Mid Continent at 440 thousand to 460 thousand barrels per day, West Coast at 100 to 110 thousand barrels per day, and North Atlantic at 480 thousand to 500 thousand barrels per day.
We expect refining cash operating expenses in the fourth quarter to be $4.85 per barrel. For the renewable diesel segment, we expect sales volumes of approximately 25 million gallons in the fourth quarter. Operating expenses should be 53 cents per gallon, including 23 cents per gallon for non cash costs such as depreciation and amortization.
Our ethanol segment is expected to produce 4.9 million gallons per day in the fourth quarter. Operating expenses should average 38 cents per gallon, which includes 4 cents per gallon for non cash costs such as depreciation and amortization. For the fourth quarter, net interest expense should be about $135 million and total depreciation and amortization expense should be approximately $700 million Lastly, G&A expenses for 2026 are expected to be approximately $1.1 billion Thanks, Harminder.
That concludes our opening remarks. Before we open the call to questions, I would ask that you limit each turn in the Q&A to 2 questions. If you have more than 2 questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions.
Thank you.
Ladies and gentlemen, the floor is now open for questions. Our first question is coming from Sam Margolin of Wells Fargo. Please go ahead.
Question on industry fundamentals. If we could start out and on crude differentials, which have been pretty topical and also outsized recently. I think some of the crude differential move has been attributed to freight, but if you could just talk about it for a minute and give your views on whether it is structural what is happening with crude differentials because there is more heavy supply coming or if you think this is more of a cyclical condition related to some constraints and external factors.
Hi, Sam. Good morning. This is Randy.
Obviously, the market remains a extremely volatile. We just get headlines every day, every night. around events in the Middle East, and we are obviously keeping a close eye on that on global trade flows. Over the last several weeks, it does look like we are seeing sustained higher flows moving through the straits.
We have seen media sources over the last couple days indicating that the volume over the last week has been actually higher than prewar levels. In addition to that, we have had some recent, SPR releases. So, overall, our indications from what we see in the market both on spreads and trades flow, looks like the market is pretty well supplied with oil.
And as you mentioned, the main story right now in the market is freight rates. As the flow through the straits increase, you know, the inefficient process of the ship to ship transferring they are doing of crude oil in the Gulf of Oman, is really tying up global shipping to require more tankers to move the same amount of oil. You know, this is in addition to, you know, insurance risk premiums, transshipment delays, higher bunker costs.
They are all just kind of driving freight higher. As an example, this extreme run up in freight, I mean, the cost to move a VLCC from the Gulf Coast to Asia is now averaging around 30 to $35 per barrel. That compares with the 2025 average of around $5 a barrel.
We are seeing this freight increase kind of play out in all markets around the globe and across all shipping classes. Mainly on the dirty freight side. And this is causing severe dislocations in our global crude pricing as refiners seek to find barrels that are closer to home and sellers are forced to discount barrels to account for the freight cost.
You know, fortunately for us, the bulk of our systems in The Gulf Coast which has access to a wide range of crude and crude qualities. is now a large exporter of crude. Since this crude must price to export, the sharp run up in freight costs have forced the discounts to widen all grades giving the US Gulf Coast some of the cheapest crude costs in the world, especially on the heavy sour. And the Gulf Coast is also a freight advantage for heavy barrels out of Latin America with a Brent alternative.
And discounts for these foreign barrels are also having to compensate for the large freight increase. As Lane mentioned before, the Gulf Coast remains 1 of the most advantaged crude markets globally, and this freight run up only further supports that. You know, looking ahead, our long term outlook on crude differentials remains very constructive as incremental supply looks to be dominated by heavier and more sour barrels especially out of Canada, Venezuela, The Middle East, which further supports the value of our Gulf Coast system.
Okay. Thanks. Yeah.
I mean, I was gonna ask a follow-up on freight. It sounds like you characterized your position fairly completely there. And so, maybe this follow-up is just for Harminder And on the cash balance, you know, you are carrying a lot of cash. it is an interesting position because you have a lot of optionality.
I mean, even if you are just earning a treasury rate on the cash, it is a massive number at this point. And so just your thoughts on how the balance sheet is structured today, whether you know, it is a point in time that is not necessarily meaningful over the long term or if you kind of like having this optionality with an outsized cash position? Structurally.
Thanks.
Yeah. Hey, Sam. I guess, let me just start by kind of reiterating what we have said all throughout this year that our initial decision to, you know, start building cash earlier this year was really around you know, prudently managing volatility in commodities prices.
Right? The risk that we have talked about is when you have a rapid pullback in commodity prices, it is generally accompanied by a draw on working capital and a draw on cash. And so you know, in that event, you wanna make sure.
Mike, we wanted to make sure that we are not on our ability to return cash to shareholders even if there is a significant draw on cash. In fact, I would say we wanna make sure we are in a great to lean into shareholder returns in that event. So, in an environment that remains pretty constructive, we are comfortable where we are with respect to a payout.
We continue to pay out above 50%. And continue to build cash. You know, you touched on it, but we do not have a lot of other kind of commitments to cash.
We do not have a lot of maturities over the next year plus. We have a little under $150 million that matures later this year. And a little over $500 million next year.
So we have plenty of flex flexibility as you highlighted. Obviously, we have talked about this before, but we are not gonna change our approach to capital investments just because we have a lot of cash. So in short, we do not have a lot of other uses of cash.
So while the volatility is probably not behind us at this point, we are in a good position to be even more aggressive with shareholder returns especially if volatility returns as we ultimately move back towards our long term cash target balance of $4 to $5 billion. In any event, I think whether margins and cash flow profile of our business remains strong or not, our long term targets on cash have really not changed. So over time, all the excess cash we are accumulating will ultimately be directed towards our owners.
Thank you.
Thank you. Our next question is coming from Manav Gupta of UBS. Please go ahead.
Good morning. I actually just wanted to follow-up a little U. S. Margins look very good, but what we are hearing is when you take into account some of your freight cost back backwardation, some of your Brent or European peers, they are not doing as well And, again, you are also the low cost refiner in the world. So I am just trying to understand, are we seeing a bifurcated scenario where 1 region of the world is at a good margin and can run much harder versus other parts of the world, which are struggling to source crude.
And even when it gets there, it is very expensive. So can you talk a little about those dynamics, please?
Yeah. Manav, this is Gary. I think we see the exact same thing you are staring at, which gives us high confidence that this current crack spread environment is very sustainable.
When you look at some of the low complex refining capacity in the Far East, freight cost to get crude to that refiner, and freight cost to get back into the export markets. It looks like their margins are in the $2 to $3 a barrel range. You know, in addition to the margin squeeze they are currently facing, we are also seeing natural gas prices begin to take off in those regions, which puts even a higher floor on where crack spreads need to go in order to force those refineries to continue to run at high utilization rates.
And I think the world needs that capacity to be running today. Thank you.
And my quick follow-up here is have you seen any signs of any kind of demand destruction Or can you generally talk about what you are seeing in the both US demand as well as export demand as Valero sees it out there? Thank you.
Yes, Manav, I will go through some of what we are seeing on the wholesale side. For the most part, I would say we are not seeing any signs of demand destruction at all. On the gasoline side, our US wholesale network, 7 day average sales are actually up 4% year over year.
In Canada, they are flat year over year. In The UK, flat year over year. Second quarter call, I mentioned that we were seeing some demand destruction in The UK.
But actually, in the third quarter, demand recovered nicely there. So gasoline demand has been very resilient to the higher prices. And then the export demand also very, very strong.
You could see in all of our export markets, we are seeing a good pull from The US Gulf Coast. Certainly, we have seen gasoline cracks come off a little bit. Some of that is just seasonal as you have transitioned out of driving season.
And also get the swell from higher butane blending with the winter grade gasoline specs. But the underlying gasoline fundamental looks very, very strong. We do not have a Transatlantic arb to ship gasoline from Northwest Europe.
Into pad 1. We really do not have storage economics to begin to make summer grade gasoline in store it, you know, which is very constructive to the spring. I think the biggest thing, you know, when I look at the gasoline market, here we are in October out of driving season.
Into high RVP gasoline season, and you still have backwardation in the gasoline market. Which is really telling you that the prompt market is very tight for gasoline supply. And I think all of that is very constructive to gasoline longer term.
On the distillate side, similar trends. Our wholesale network would indicate about 2% year over year growth in sales 7 day average sales. Both the UK system and Canadian system are showing flat year over year sales.
The only area where we are actually seeing lower sales is home heating oil in The UK. It is off about 10%. When you visit with our commercial teams over there, they think that is a combination of a couple of reasons. 1, you have had unseasonably warm weather.
And 2, you have also had customers that are really trying to delay filling their tanks as long as they can. So what that actually could tell you is you could see a surge in demand in The UK when you actually get cold weather. Export demand for diesel also very, very strong.
Both the Latin America and Europe. So for us, no indication of demand destruction. And in fact, some of the leading indicators, you know, both GDP remaining flat and also a lot of the trucking surveys actually picking up.
You know, which would tell you the diesel demand is hanging in there very nicely. Thank you so much.
Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.
Yes. Thanks, guys. And maybe the first question is just on volumes.
The volume guide you provided for 4Q probably a little higher than what we thought. And so just maybe you could talk about you are running the system hard in the fourth quarter. I guess the DHP is back up too.
So that should be a help as you go into the fourth quarter. And then maybe stepping back for the industry broadly, we did run so hard in 2026, you think 2027 is gonna be a decent sized turnaround year for the industry? Any thoughts around that?
Yes, Neil. So I will start with the DHT. We really do not expect to have a mechanical completion of the DHT until the end of the quarter.
So it will not have a the DHT will not really is not in the guidance. We are. You know, it is a light maintenance quarter for us, and so we will run the assets hard.
With margins where they are. In terms of the rest of the industry and deferring of turnarounds, you know, we have been public. We do not really defer any of our maintenance.
We will continue on our schedule for turnarounds. What you do hear from consultants is that was that about a million and a half barrels a day of refinery turnarounds globally. That was deferred, which means, you know, turnaround activity is currently a little lighter than normal, and you would expect a heavier turnaround season next year.
that is helpful. And then, just in terms of Q4 considerations, maybe this is for you Harminder or Gary, but just we have averaged the charts a quarter, the Gulf Coast indicator is up the mid indicator is up as well. And just any thoughts as we think about the fourth quarter seasonally, things tick down.
But we start off the quarter pretty strong. Any advice for us as we model out the fourth quarter?
Yes. So I think the big tailwinds for the fourth quarter, typically, you get the uplift of blending butane into gasoline. In our North Atlantic system, you generally have a nice uplift after we start to make Arctic diesel that carries some premium there.
Seeing some good tailwinds on the feedstock side with the heavy sours discounted and a lot of feedstock optimization opportunities. And then we are starting to see jet regrades turn positive again, which is also a tailwind. Outside of that, you know, when you look at secondary products, it is kind of a of a mix.
Propylene and naphtha are off a little bit, but aromatics are up. So overall, I would say mainly tailwinds when it comes to capture rates for the fourth quarter. Thanks, Kier.
Thank you. The next question is coming from Theresa Chen of Barclays. Please go ahead.
Good morning. Gary, as we look at the very recent volatility in cracks, keeping in mind your comments about demand resiliency across your footprint plus the floor being incrementally higher for international refiners given high freight costs, natural gas and so on. How would you explain the recent downside volatility?
Is that a result of incremental crude and products finding its way through the straight? What explains this and how do you expect these factors to evolve over the near and medium term?
Yes. It looks like some of the downward pressure on cracks is really related to more headlines. People announcing releases from strategic reserves, lifting of Russian sanctions, some of those type things is what is actually driving some of the downward pressure on cracks.
I think when you digest the data and you look at how much volume is actually coming out, and then lifting of sanctions is more just a change in trade flows. Think we will see a recovery in cracks moving forward.
Got it. And we have seen various headlines about the Trump administration potentially working with operators to reopen US refining capacity that is been idled in the last 10 years. How seriously should we take these efforts?
And more broadly, how do you think the supply shortage of the market would be most effectively addressed?
This is Richard Joe Walsh. I will try to answer that 1. I really think you are focusing in here on Benicia.
And so I have just remind you that the status of that refinery is it is safely idle and has been since April. And we have no plans to restart it. You know, we.
When we first announced and you know, and even just before we announced the shutdown of that facility, we had lots of discussions with both the state and the federal government and private parties. And, you know, none of those efforts actually materialized anything. You know, it is just--it is a tough environment to operate in the West Coast, and we just do not see the potential for that.
So and the last thing I would just remind you is that, you know, to restart that refinery, you know, you would have to, reinventory it. You would have to restaff it. You would have to undertake a rather extensive turnaround.
You know? So it is not it is not a simple process, to restart it.
So Hey, Theresa. This is Lane. I will add to that.
I think, you know, what you are thinking broadly. More broadly speaking, you know, almost any refinery that is been shut down will take a while to start up. It would It would be very difficult for them to help the prompt situation.
We have not had a lot of inbound from the administration with respect to starting up other refineries. But I. You know, we have heard the same things you guys have. So I am not saying that is not occurring, but I think in the idea that it is going to.
You know, the there is these refineries that you can just sort of walk in and put the lights on and they are going to start running is not exactly the case. But, you know, we will just see what is happening with respect to on a longer term basis with how this all plays out.
Thank you. Thank you. The next question is coming from Philip Jungwirth of BMO Capital Markets.
Please ahead.
Inter quarter, we saw a lot of Venezuela upstream investment plans announced and some pretty ambitious production growth targets. That. So just wondering where you are now on Venezuela throughput versus capacity and just what would it take to have enough confidence to invest in increasing the ability to run more heavy crude?
Yes. Philip, this is Randy. We continue to see pretty good availability of Venezuelan crude in the Gulf Coast system.
And as you mentioned, we are pretty encouraged by some of the new investments that is going on in there to grow production moving forward. You know, we have been for a long time, and we continue to be the largest consumer of Venezuelan crude. And in The US Gulf Coast, we are we are the largest by far.
In fact, in the third quarter, we saw the Venezuelan crude compete very favorably compared to other heavy sour alternatives. As a result, we set a new processing record for Venezuelan barrels in the Valero system during the quarter.
As we moved into the fourth quarter, we have seen the economics shift some. The higher freight market has especially impacted the heavy crude market. We have seen discounts for Canadian crude in the Gulf Coast widened to as high as 27 to $30 under Brent.
Making the Canadian barrel much more competitive versus the Latin barrel. You know, as we kinda touched on before, our system's very flexible. So our ability to flex between different grade is a big competitive advantage.
And as we move forward, we are going to continue to look at opportunities where we can further increase consumption of those barrels. Yeah. This is Lane.
I will add to that. I mean, definitely 1 of the buckets that we look at in terms of our projects or even acquisitions with respect to with respect to this sort of heavy sour position. We feel pretty.
We feel like this an area to help us with our feedstock optimization, and we are looking for debottlenecking opportunities and other opportunities. And that is space. So increase our exposure to be able to run heavy sour.
Okay, great. And then can you hit on the outlook for DGD margins and some of the just the noise in 3Q, 2Q around capture, anything 1-off to keep in mind there? And how you see that metric trending into the fourth quarter?
Yes, Philip, this is Eric. I think just as a quick refresher, 2Q had a lot of 1-off, 1-time benefits like IEPA recovery as well as a lot of modeling updates and year to date true ups. And so you had kind of an unusually high second quarter because some of the onetime benefits.
Also had the benefit, and we have talked about this on previous calls, there is there is a lag on how feedstocks price when they when they come into DGD. And you combine that with the volatility that we are all seeing it creates a lot of noise in margin capture. So if you look at 2Q, you had feedstocks that we had bought in 1Q that were still much cheaper than the margin indicator.
So you had that advantage, and then you had, if you recall, a lot of the comments about the conflict were kind of waning And so as ULSD fell, even though that is the base commodity price for DGD, it did help with some of the volatility in the positions of how carbon was specifically pricing in that quarter. 3Q, you had the exact opposite. We had the impact that, obviously, we had the outage. We had the storm in DG 3, which forced us to run a higher percentage of foreign feedstocks that were on the water.
So, you know, foreign feedstocks do not capture PTC, so we had a lower PTC capture than the margin indicator. And then you also had a lot of noise around the D4. And so with the conversation about SREs and whether or not they are gonna be reallocated, we saw a pretty significant drop in the D4.
And as those product--as those product cargoes were pricing, we had we saw a lot of volatility impact hit that lag as well. So it is it is really all tied up in lag and the volatility of both ULSD and the D4. If I think about 4Q, I mean, you still have a structured high D4 RIN.
So we continue to see DGD very positive from a margin standpoint. We see positive cash flow. And I think the real strength of like the refining segment where Gulf Coast is the most advantaged from a feedstock availability standpoint.
Combined with Darling being the largest producer of domestic feedstock PTC benefits domestic feedstock. So we are pivoting into, as always, maximizing the feedstock from Darling, now maximizing vegetable oil runs, really going into this D4 short that is going to continue into 27.
So captures a very difficult thing to. The next question is coming from John Royall of Piper Sandler. Please go ahead.
Hi, good morning. Thanks for taking my question. So my first question is a follow-up on the demand side.
And I think you have mentioned that it is been relatively stable, despite significantly higher prices on both gasoline and diesel. I was wondering if you guys are in this market every day. Are you surprised we have not seen more demand response?
And maybe do you have a view on if there is a price level where maybe we would start to see a little more elasticity?
Yeah. So I would say, especially with all the headlines about pricing, we have been surprised that you do not really see any demand response so far. In terms of, you know, price level where you would expect some kind of demand destruction, I do not really know where that is because most people would have predicted we would have already seen it.
Fair enough. Thank you.
And then I guess, Palmer mentioned in his opener that you might be looking at some capacity growth in ethanol. I was hoping you could dig in a little on that in terms of timing and magnitude and any other color you could give there.
Sure. This is Eric. With the new PTC or benefits with the 45 z, it is encouraging really all ethanol producers to take a look at higher volumes.
And so we are looking at mostly capacity creep, So it is not--I mean, on a refinery scale, this is not significant capital. And it is very quick hitting capital. But, you know, it is small capacity creep.
Continuing to pursue our carbon sequestration projects. At a couple of our sites. We are hoping, you know, those are hitting somewhere between late 27 to mid 28.
All of that will grow both ethanol volume as well as lower ethanol CI. Which makes it more attractive for exports. So we continue to see pretty strong export demand for ethanol and our capacity is all pointed at growing exports.
Thank you.
Thank you. The next question is coming from Matthew Blair of Tudor, Pickering, Holt. Please go ahead.
Hey, good morning. Thanks the question. On the freight rates, you mentioned the benefits on the crude side.
In your Gulf Coast system. We have 2 follow ups here. So 1, are these higher freight rates a headwind to your North Atlantic and West Coast refineries?
Or are you able to use, like, substitute crudes And then 2, what kind of impact are the freight rates having on your netbacks for your Gulf Coast products? Exports? Is it Is the rate just passed through or is it pulling down the economics for S. Product exports?
Yes, this is Gary. For the most part, the higher freight rates actually give us an advantage into the typical export markets in the Latin America. You are largely competing with European barrels into those markets and so we have a freight advantage there.
The only place that it does tend to hurt us is the exports, the diesel exports going to Europe. And I would tell you what it what it causes is just a lot of volatility with the arb going open and closed. Basically, Europe is short diesel and needs it.
And so when the freight rates spike, their prices have to adjust to keep those arms open and keep the barrels flowing.
Yes. On the crude side, this is Randy. We do have some exposure to higher freight at our Pembroke refinery into the West Coast.
And to a smaller extent into Quebec City even though that refinery is mostly supplied via pipeline. However, the, you know, the benefit of the Gulf Coast impact far outweighs that. In addition, we do have a large fleet of time charter vessels, which tends to buffer some of the impact of the higher spot freight rates.
Greg. Thank you. And then do you have any insights on the refining situation in Russia?
Do you have any estimates on how much capacity is down? How long it might take to bring that capacity up? And then what are you thinking on potentially Russia diesel exports picking up here?
Thank you.
Yes, this is Gary. I think that the data we see shows that on a 3 month average basis, compared to a 2024 equivalent period of time, there was about 1.4 million barrels a day of refining capacity offline in Russia. So still significant.
Most consultants estimate that it will take quite a long time to get that capacity back. I cannot really give you a duration. On the diesel exports, I think if you look at the volume that was announced, it kind of puts it at July levels Of where Russian diesel exports would be, which is still 2.7 million barrels a day below where Russia was.
Last year at this time. So it is not a significant volume. And as we have always stated, really, the sanctions or lifting of sanctions just result in change of trade flows, not really incremental supply coming onto or off of the market.
Thank you.
Thank you. Our next question is coming from Joe Lacch of Morgan Stanley. Please go ahead.
Greg. Good morning, Tim and thanks for taking my questions. So I wanted to just ask on St.
Charles. So following the completion of the FCC work during the third quarter, could you just talk about how that unit is performing relative to expectations? And then maybe what kind of improvement should we expect in product yields or capture rates as we moved into the fourth quarter and beyond?
And then maybe more broadly beyond St. Charles, can you talk about where you are seeing the greatest signals in opportunities to deploy future growth CapEx?
Sure. I will start with the Saint Charles project. Yeah.
The project came online, and despite the fact that it was not fully operational, during the third quarter, The EBITDA generated in the third quarter actually exceeded our forecast for the project. So it is performing very well. As Lane mentioned, you know, a lot of the project is really fully utilize the alkylation capacity that we have there.
And so, typically, you would see the greatest benefit from that during gasoline season, so we would expect more of a benefit in second and third quarter than what you would see in the fourth quarter and first quarter.
Yes. And I will add to it. This is Lane.
I mean, in terms of projects that we like, it really is feedstock flexibility. If you think pre, I am going to say, Ukraine invasion, a lot of the a lot of the shore up to the barrel that require to fill out US refining capacity with VGO and other intermediates coming from that part of the world. And so consequently, as we went through the summer, even though we had wide margins over time when you had to go out and buy spot in VGO, your actually FCC margins were low.
So 1 of the buckets that we see opportunity in is to be a little more--make our system a little more resilient if the not be quite so dependent on the VGO out there to find ways to increase VGO production. I said earlier, I. You know, we are optimistic about Venezuela and the Canadian sort of build out for heavy sour. We will look at ways to debottleneck our sort of our heavy sour capability.
Greg. Thank you. that is helpful. And then just given the significant cash generation that we have seen and excess cash building on the balance sheet, can you just talk about how you are thinking about potential M&A opportunities here across refining, renewable fuels and ethanol?
I will start. We always look at like every earnings call, we look at everything that comes on the market. We in particular like our Gulf Coast system.
We been unapologetic about that. We think it has the most add the most value when we can actually optimize in our system. So we continue to look for opportunities in that, in terms of and we also like the ethanol business.
We will continue to look at the ethanol business But again, we are going to be very, very we are going to adhere to our disciplined approach to capital. You are not gonna see even though we are sitting on a lot of cash, we are not gonna change our approach in terms of our hurdle rates and our return metrics and how we think about capital allocation framework that we use, that we have been using for the last 10 years. That all makes sense.
Thank you very much.
Thank you. Our next question is coming from Doug Leggate of Wolfe Research. Please go ahead.
Hey. Good morning, guys. Hopefully, you can hear me okay.
Yep. Hey, guys. I got a couple of questions on reliability and the elevated refinery runs you guys have been able to deliver.
Not just for Valero, but I guess for the industry. Clearly, maximizing exposure to the current environment is you know, is your I guess, you are you are showing the market leading by example. What does this mean for the maintenance cycle, the reliability of your system, and more importantly, the reliability of the industry's capacity to run at these elevated levels.
Do you see any risk of unplanned downtime, I guess, as we think about 2027 going forward? I know it is a generic question, but I am just curious on your views.
Yeah. So as I mentioned, you know, we have really changed anything in terms of our philosophy on maintenance and taking our turnaround. They are going as planned.
And so I do not think you would expect to see anything different in terms of our reliability. If you do, you know, believe the consultant data that says, you know, a million and a half barrels of refinery turnarounds were deferred. It does lead you to believe that you know, there could be some unri.
Reliability there and a and a heavier maintenance season next year.
I, I guess we are we are hear. We are hearing a couple of, worries emerging from Europe in particular, which is why I asked question, but I appreciate your perspective. I guess my follow-up is we have obviously got massive reset in market expectations of mid cycle.
I am curious if you can offer any thoughts on how this might impact your view on how you return cash to investors. I am thinking specifically about if we really are in a higher mid cycle environment, how would your dividend policy shift relative to, let's say, your share buyback policy? And I will leave it there.
Thanks.
Hey, Doug, it is Harminder. I mean, I think we look at both the dividend and share repurchases as a component of our total shareholder return. We do have a higher mid cycle view for all the reasons that, you know, Gary, Randy and Lane mentioned.
But we still operate in a cyclical industry. You are asking about dividend. Think I will add, like, in theory, a higher mid cycle increases your debt capacity too, but we are not obviously levering up.
Much like our balance sheet, we wanna make sure our dividend is durable both in good times and bads. And the dividend is obviously a permanent commitment we have made, which we will use and have used the balance sheet to defend as we did during the pandemic. That was not too long ago where our ability and willingness to pay dividend was challenged.
So the dividend is a 1 way ratchet. We wanna make sure we have some ratable element to dividend growth through cycle. And then also, we look at dividend yield in the context of our closest peers, and we are kinda right in between both.
So with all this in mind, we are gonna be more ratable on dividend growth, but, obviously, ensuring a predictable and attractive total return is a key aspect of our value proposition to our owners, and continue to round out that total payout with share repurchases as a more efficient and flexible means of delivering on that promise over the long term. Very clear. Thanks, guys.
I appreciate it. Yeah. Thank you.
Our next question is coming from Jason Gabelman of TD Cowen. Please go ahead.
Yes. Hey, just wanted to go back and revisit the demand destruction discussion for a second because we have seen diesel prices in New York Harbor having a tough time really sustain over $5 a gallon or around $200 a barrel as crude continues to trend higher. So it does seem like maybe at that level, is some destruction or for whatever reason, it is difficult diesel prices to move higher.
And so as crude moves higher, is a potential for some compression in the diesel margin. Is that a risk you see going forward relative to where cracks are right now on the diesel side?
Yeah. I think that is a fair characterization. You know, we have always felt like 1 of the things that is benefited refiners during this conflict is the fact that crude really has not gotten very you know, as expensive as it is to what it could have gone.
And so if for some reason crude runs up, you know, I do think that, you know, it could cause some compression of refinery cracks.
Yeah. Thanks. My follow-up is just quickly on the M and A comment.
You obviously mentioned you would want to grow in the Gulf Coast an asset became available, which makes sense. But, you know, the North Atlantic, Quebec market, there is a couple of private assets up there, those refining margins have been strong. there is probably some synergies within the business. Is that another region you would look to consolidate if there were assets that became available and made sense to you?
Yeah. Hey. This is Lane.
So as long. You know, with. it is another region that we like. So if something came available and again, it met our investment criteria, which again, we want to be disciplined and we want to make sure the thing makes sense for the entire economic cycle and not sort of get romanced by the prompt situation.
But it is it is a region that is. That we feel like we have a really good position in, and if we could add to it and increase our flexibility and our ability to trade around it and create shareholder value, we would certainly be interested in. Great.
Thanks for the answers, guys.
This brings us to the end of today's question and answer session. I would like to turn the floor back over to Mr. Donovan for closing comments.
Yes, we appreciate everyone joining us today. And as always, feel free to contact the Investor Relations team if you have any additional questions. Have a great day.
Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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