Q4 2023 Earnings Summary
- Valero returned 73% of adjusted net cash provided by operating activities to shareholders in Q4 2023, resulting in a 60% payout ratio for the full year, and reduced share count by 11% in 2023 and 19% since year-end 2021.
- Strong performance in the North Atlantic segment due to improved crude costs, strong commercial margins, and processing Syncrude at a $7 discount to Brent, leading to higher capture rates.
- Expectations of stronger refining margins in Q1 2024, supported by heavy industry-wide turnaround activity and colder weather, which could lead to higher heating oil demand and favorably impact year-on-year comparisons.
- Uncertainty in Renewable Diesel Capacity: Valero's renewable diesel volumes may be impacted in 2024 due to upcoming catalyst changes and the conversion to sustainable aviation fuel (SAF), with potential changes in capacity not yet determined. Eric Fisher stated, "we're not sure what capacity will look like... until we get the project on the ground and start it up."
- Higher Operating Expenses per Barrel with Lower Throughput: Operating expenses are largely fixed, so declining throughput could lead to higher costs per barrel. As Lane Riggs explained, "the more barrels we run, the better that metric work."
- Weaker Product Margins in Certain Regions: Weather-related demand impacts have led to softer markets and weaker product margins in the Mid-Continent and West Coast regions. Gary Simmons noted that "we've seen that market a little bit softer than maybe you would typically see for this time of year."
-
Return of Capital and Payout Ratio
Q: Will payout exceed 40-50% target in 2024?
A: Management expects to exceed their 40-50% payout target , given their strong balance sheet and historical payouts averaging 57% before COVID. They view the 40-50% as a floor when the balance sheet is strong, with excess cash going towards buybacks. -
Market Outlook for Clean Products
Q: What's the supply and demand outlook for gasoline and diesel?
A: Demand for gasoline is following typical seasonal patterns and is in line with last year. Diesel demand is up 7% in their system. They expect tight supply-demand balances similar to last year, with 1.5 million barrels per day of new capacity coming online and demand growth of over 1 million barrels per day. Refinery maintenance and colder weather may tighten inventories in coming weeks. -
Renewable Diesel Margins and Outlook
Q: Will renewable diesel margins improve in Q1?
A: Yes, margins are expected to be stronger in Q1 due to lag effects from importing low-carbon-intensity feedstocks. Adjusting for the lag, capture rates would have been 93% in Q4. The longer supply chain with foreign feedstocks created a lag that affected Q4 results. -
Impact of New Refining Capacity
Q: How will new international refining capacity affect markets?
A: They anticipate 1.5 million barrels per day of new refining capacity coming online, with demand growth of over 1 million barrels per day, keeping supply-demand balances similar to last year. They believe new capacity will take longer to ramp up, delaying its impact until later in the year. -
Shipping Disruptions and Russian Impact
Q: How do shipping disruptions and Russian issues affect you?
A: Increased freight rates due to shipping disruptions provide a crude cost advantage over global competitors. Russian refinery issues have tightened the naphtha market, which may affect octane values. -
Capital Expenditure Plans
Q: Is higher maintenance planned in 2024?
A: There's substantial turnaround activity planned for Q1, but they don't expect it to impact capture rates. Industry-wide, a heavy maintenance season is anticipated. -
Feedstock Costs and Renewable Diesel
Q: How will feedstock costs affect renewable diesel margins?
A: Additional capacity may narrow margins, but feedstock prices are coming down. Waste oils, with a carbon intensity advantage over vegetable oils, will remain competitively advantageous. Diversifying into Sustainable Aviation Fuel (SAF) reduces reliance on renewable diesel margins. -
Sustainable Aviation Fuel (SAF) Market
Q: How is the SAF market developing?
A: They are in discussions with airlines and cargo carriers, using models to offset carbon footprints. They expect to finalize several contracts and foresee no issues moving all the volume from their project. -
Constraints on Buybacks and Cash Balance
Q: Why did cash balance increase despite high payouts?
A: They aim to maintain a minimum cash balance of $4 billion. With a net debt-to-cap ratio of 18%, there's no pressing need to pay down debt. The cash balance build results from strong cash flows and disciplined capital allocation. -
Operational Expenses and Cost Management
Q: What's driving higher refining OpEx?
A: Higher electricity prices and cost inflation pressures have increased OpEx. They are working to rein in costs and remain committed to being best in class with expenses. OpEx metrics are expected to improve with higher throughput. -
Asset Base Strategy
Q: Any changes to asset base, especially in California?
A: While California is a tough place to operate and getting tougher, they continue to evaluate assets but remain disciplined. They see transportation fuels being structurally short and look at opportunities through that lens. -
Octane Blending Outlook
Q: How will octane blending impact financials?
A: Similar dynamics as last year are expected, with increased light sweet crude creating more naphtha. Naphtha oversupply pressures octane values, but unless prolonged outages reduce naphtha supply, they don't foresee significant changes. They are fairly balanced on octane needs. -
Summer Grade Gasoline Inventory
Q: Is there a risk of tight summer gasoline due to low inventories?
A: There's no economic incentive to produce and store summer grade gasoline now. Current inventories are largely winter grade, but they expect this to work off over the next few months. Refiners may have held inventories due to weak Gulf Coast basis. -
Impact of TMX Pipeline on Heavy Crude Supply
Q: Will TMX startup affect heavy crude availability?
A: They don't expect TMX to materially impact their Gulf Coast system. They anticipate Gulf Coast barrels from Western Canada to continue, with TMX decreasing exports from the U.S. Gulf Coast. -
Growth in Mexico Market
Q: How is demand in the Mexican market?
A: Their business in Mexico is growing nicely, with volumes up 16% year-over-year. They now have 250 branded sites, making them the largest growing brand in Mexico. They expect continued growth, with Mexican gasoline demand recovering to pre-COVID levels. -
Cold Weather Impact on Operations
Q: Did recent cold weather affect operations?
A: There were some small operational issues, but nothing material that would impact quarterly results. Throughput guidance remains unchanged. -
SAF Production Capacity
Q: Will renewable diesel volumes stay above nameplate capacity?
A: They kept guidance at 1.2 billion gallons, with some catalyst changes this year. Converting to SAF may change capacity, as units run differently in that mode. -
Marketing Operations and Demand Insights
Q: Any insights on local demand in Mexico and the Caribbean?
A: Their volumes are up 16% year-over-year in Mexico, with business growing. They expect continued growth in gasoline demand in Mexico. -
Capture Rates and Commercial Optimization
Q: How are you optimizing capture rates?
A: Their commercial team is highly effective, with everyone understanding their roles. Alignment across the company and a focus on reliability contribute to strong capture rates. -
North Atlantic Margin Strength
Q: What drove strong margins in the North Atlantic?
A: Improved crude costs, especially in Canada, strong commercial margins, and lower compliance costs contributed to higher capture rates. Syncrude traded at $7 below Brent, benefiting their system.