Valero 2Q15 Earnings Call Notes

Plenty of pent up demand for gasoline is supporting the price?

“we certainly expected some price demand elasticity for gasoline with the fall in flat price. And we’ve seen that, and we didn’t really know exactly what the magnitude of the pent-up demand would be. And it’s been a very pleasant surprise, and I think we do expect that that response will continue into the future.”

We’re running all of our gasoline producing units at max utilization

“We’re certainly running all of our gasoline producing units at max utilization. We’ve seen good utilization in Europe. And as you’ve mentioned, we’re having trouble keeping up with gasoline inventories. So I think it will be here for an extended period.”

Growth and return of cash aren’t mutually exclusive

“we believe that growth and return of cash to shareholders aren’t mutually exclusive, and I think that we’ve been demonstrating that.”

Production has held up even with the decline in rig count

“I think we’ve been surprised with the decline in rig count, production still seems to be holding. I don’t really know that I can give you much insight whether that will continue or not.”

As the Brent/TI spread narrows, people start importing crude

“The Brent/TI [WTI] spread comes in and incentivizes people to start importing foreign light sweet. As we talked about in the past, the first place we tend to do that is our Quebec refinery, which we did in the second quarter. In fact, the Brent/TI spread got narrow enough that we even took some foreign light sweet into St. James.”

There are a lot of crude inventories and we’re headed into a refiner maintenance period, so you’d expect that to pressure prices

“We’re sitting on a pretty good overhang of crude oil inventory here in the U.S. We’re 90 million barrels above where we were last year. So with that overhang and then heading into a typical maintenance period where refiner demand is down, you would think that that would add pressure on the price of crude oil.”

Export volumes were down a little because domestic markets strong

“Our export volumes of gasoline were down a little bit in the second quarter, and it was primarily just due to the strength of the domestic markets. We exported 76,000 barrels a day of gasoline. Most all of that volume went to Mexico and Latin America.”

More gasoline demand at this lower price

“I think that the big driver for gasoline demand has just been the lower flat price and demand elasticity and the response to the lower flat price. And so I think as long as we’re in this lower price environment, we’ll see good gasoline demand moving forward.”

Strength of west coast will be driven by supply

“Certainly, as you know, as we head out of driving season, demand weakens a little bit, and then you get more butane blending into the pool. That will swell production some. So to me, a lot of what happens on the West Coast will be supply-driven. And some of these refinery outages that we’ve been seeing, will they continue or not will really determine how strong the West Coast market will be.”

Valero 1Q15 Earnings Call Notes

Crude price spreads have been favorable for us

“On a percentage discount basis these crude were priced more favorably in 2015. For example, in the first quarter of 2015 my [ph] priced on average at a 20% discount to Brent versus a 17% discount in the first quarter of 2014. Our significant crude side flexibility allows us to adjust feedstocks and optimize margins based on the discount environment.”

Cracks continue to be strong, seeing good demand

“Yes, I think we are – the cracks continue to be strong and we continue to see good discounts on the crude. The big change probably has been in the crude market, some of the discounts could commence and we’re run the lot more light sweet crude in our system today than what we did in the first quarter. But again I think we’re seeing good demands both in the export markets and domestic demands. And so feel very encouraged about the profitability moving forward.”

Don’t expect us to be moving up or down stream

“I don’t think you should expect us though to be looking upstream from where we are today in any material way or significantly downstream from where we are today. Although opportunities present themselves and you look at it but certainly that’s not part of our plan today.”

Kuwait seems interested in maintaining, growing market share

“Doug I would tell that primarily what we see from Kuwait is really not light sweet is more medium sour barrels and I would tell you that we have had many discussions with them and they seem interested on maintaining or actually growing market share in the U.S. on that grades of crude and the light sweet what we see happened is with all this volatility in the Brent TI moving in and out when the order comes in very narrow then we start to see incentives to import light sweet.”

Location advantage running domestic crudes

“I think overall even if the export ban is lifted we would continue to have a location advantage running the domestic crudes. We continue to have significant operating costs advantage with the cheap natural gas. And then we’re very happy with our portfolio of refining assets that are very complex very efficient refineries.”

Valero at Merrill Lynch Conference

Imported crude has been backed out of the market

“The imported crude has been backed out of the market. It is really primarily the light sweet crude, the West African crudes that has come into the U.S. Gulf Coast because we have the abundance supply of light sweet North American crude now and we just the foreign crudes haven’t been competitive.”

Low nat gas prices are significant

“You look at the right you can see the increase in natural gas production, obviously what this is doing is keeping pressure on natural gas prices which from a refiners perspective is significant to us because it makes up a significant component of our operating expense. I think in the Valero system we consume around 866,000 mmbtu’s per day of natural gas. So although we don’t have the pricing on here, a dollar change in natural gas price has a material effect on our P&L.’

Two important investments

the two most significant investments that I’ve said we have had in the company over the last several years and that’s the two major hydrocracker projects, one is Port Arthur, one at St. Charles we will probably quit showing this to you here at some point in time because the bottom line is that the units started very effectively, they are producing the high quality diesel that we expect it to get when we built them and the economies are on target. We have $800 million of EBITDA that we estimate we have got from these units over the last four quarters”

How will the crude inventory glut resolve itself

“So what’s going to happen? The U.S. refining industry is in a sort of seasonal turnaround, we’re like 86% utilization according to DOE stats, 88, this will all continue probably for the next month or two and what I think will happen at some point in there, is there will be a balance of things that will you will see Contango get steeper and steeper until the surfs trying to get push barrel back into the foreign crude market. And we will see what the U.S. refining appetite is for the crude as it comes online and balance that versus what are the production in North America is.

But the way you will see it manifest itself is you will look at the front end of the curve, the TI curve will get steeper, and steeper and steeper until when it’s full. The next question everybody asks is what is full? I don’t think we know what we — we know what [indiscernible] full looks like I don’t think we know what PAD3 looks like yet.”

We benefit from a glut in crude

“as long as there is a glut of crude in the world or specifically North America, Valero benefits. “‘

There is elasticity of demand for crude

The automakers are reporting truck sales are increasing again and so on so. Conceivably we could end up with a situation although consumer behavior changes slowly. Lower price environment is likely going to stimulate increased demand and although I can’t quantify for you, it looks like the other data points the associated data points would be headed the right direction for that to happen.”

Valero 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“Our second quarter 2013 refining throughput margin of $9.26 per barrel was over $1 per barrel lower versus the second quarter 2012 margin of $10.63 per barrel. The decrease was partly due to significantly lower discounts per heavy sour crude oil.”

“Production averaged 3.5 million gallons per day in the second quarter of 2013 for an increase of 156,000 gallons per day compared to the second quarter of 2012. The increase in production volumes was mainly due to the economic incentive of higher gross margins per gallon.”

“we are evaluating the formation of a master limited partnership for our logistic assets.”

“So [I’m] getting to be an old guy and I look at what management does, and I think part of management’s job is to take our cash flow and look at our alternatives. Do we have projects that will give our shareholders value, growth, over the long-term, and if we do and we look at our stock and how we think our stock is priced, but if we do have these, then we should presume for our shareholder, and if we don’t, we return cash.”

“what we have seen with WTI coming in so tight [to brent]…we expect that discount will open up again…we expect WTI discount to go back out to $7”

“cellulosic is not available. That is not on the EPA’s website, everyone says there is going to be a little cellulosic production this year, but it’s totally uneconomic as well. I think it was clearly, let’s pass the law and they will come, and it hasn’t happened.”

“And then on top of all of this, gasoline demand has not continued to grow. It’s actually down and now flat. So the whole thing is screwed up and that’s why, I said the other day it needs to be redone.”

“the realty, this is very unfair in the street, because you have winners and losers at retail and clearly in the refining segment, this is hurting the independent refiner, it is not hurting the majors.”

“Back couple of years ago, we made a decision. We weren’t going to buy any refineries, because we thought they were too high priced”

“I know it takes you guys a second to update your model, but it actually take years to get permit and construction and do all these things and to spend the money.”

“I am of the belief that United States can have a huge manufacturing and petrochemical resurgence here, our government will figure out how to get behind. But we’ve looked at the Gulf Coast plans, there are in the sense of our crown jewel assets. They give you access to the water, because some products would be exported”