Valero Energy Q4 2024 Earnings Call Transcript

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Provided by AlphaStreet
January 30, 2025
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Operator

Greetings and welcome to Valero Energy Corp. Fourth quarter 2024 earnings conference call. At this time, all participants are on a listen only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press Star0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host home, Homer Bullar, Vice President of Investor Relations and Finance. Thank you. You may begin.

Homer Bhullar
VP of Investor Relations & Finance at Valero Energy

Good morning, everyone, and welcome to Valero Energy Corporation's Fourth Quarter 2024 Earnings Conference Call. With me today are Lane Riggs, our Chairman, CEO and President; Jason Fraser, our Executive Vice President and CFO, and Gary Simmons, our Executive Vice President and COO; and several other members of Valero's senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at investorvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments and reconciliations and disclosures for adjusted financial metrics mentioned on this call. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call. I would now like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our earnings release and filings with the SEC. Now, I'll turn the call over to Lane for opening remarks.

Lane Riggs
Chief Executive Officer and President, Chairman of the Board at Valero Energy

Thank you, Homer, and good morning, everyone. I would like to start by highlighting some of our team's accomplishments last year. 2024 was our best year for personnel and process safety and one of our best years for environmental performance. Safe and reliable operations drive overall performance and disciplined operations. In refining, we processed a record volume of heavy sour crude in the fourth quarter. This demonstrates our refining systems flexibility and highlights the capability of our commercial and operations teams to be able to secure and process the most economic crude oils. Finally, we set a record for ethanol production with the expansion of the Charles City plant and process optimization at other sites. Our team's relentless focus on operational excellence and low-cost operations enabled us to deliver positive results in the fourth quarter in an otherwise weak margin environment. On the strategic front, we continue to deliver on our commitment to grow Valero's earnings capacity through organic investments. The DGD sustainable aviation fuel project was successfully started up in the fourth quarter and is now fully operational. Looking ahead, we are progressing with an SEC unit optimization project at St. Charles that will enable the refinery to increase the yield of high-value products, including high-octane alkylate. The project is estimated to cost $230 million is expected to start up in 2026. And we continue to pursue other short-cycle, high-return optimization projects around our existing refining assets. On the financial side, we continue to honor our commitment to shareholder returns with a strong payout ratio of 78% for the year. And earlier this month, our board approved a 6% increase in the quarterly cash dividend, further demonstrating our strong financial position. Looking ahead, refining margins should be supported by low light product inventories ahead of the driving season. And longer term, we still expect product demand to exceed supply with the announced refinery shutdowns this year and the limited capacity additions beyond 2025 supporting long-term refining fundamentals. So with that, Homer, I'll hand it back to you.

Homer Bhullar
VP of Investor Relations & Finance at Valero Energy

Thanks, Lane. For the fourth quarter of 2024, net income attributable to Valero stockholders was $281 million or $0.88 per share compared to $1.2 billion or $3.55 per share for the fourth quarter of 2023. Excluding the adjustments in the earnings release tables, adjusted net income attributable to Valero stockholders was $207 million or $0.64 per share for the fourth quarter of 2024 compared to $1.2 billion or $3.57 per share for the fourth quarter of 2023. For 2024, net income attributable to Valero stockholders was $2.8 billion or $8.58 per share compared to $8.8 billion or $24.92 per share in 2023. 2024 adjusted net income attributable to Valero stockholders was $2.7 billion or $8.48 per share compared to $8.9 billion or $24.96 per share in 2023. The refining segment reported $437 million of operating income for the fourth quarter of 2024 compared to $1.6 billion for the fourth quarter of 2023. Refining throughput volumes in the fourth quarter of 2024 averaged 3 million barrels per day or 94% throughput capacity utilization. Refining cash operating expenses were $4.67 per barrel in the fourth quarter of 2024. Renewable Diesel segment operating income was $170 million for the fourth quarter of 2024 compared to $84 million for the fourth quarter of 2023. Renewable diesel sales volumes averaged 3.4 million gallons per day in the fourth quarter of 2024. The ethanol segment reported $20 million of operating income for the fourth quarter of 2024 compared to $190 million for the fourth quarter of 2023. Ethanol production volumes averaged 4.6 million gallons per day in the fourth quarter of 2024. G&A expenses were $266 million for the fourth quarter of 2024 and $961 million for the full year. Depreciation and amortization expense was $698 million, net interest expense was $135 million and income tax benefit was $34 million for the fourth quarter of 2024. The effective tax rate was 19% for 2024. Net cash provided by operating activities was $1.1 billion in the fourth quarter of 2024. Included in this amount was $119 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD. Excluding this item, adjusted net cash provided by operating activities was $951 million in the fourth quarter of 2024. Net cash provided by operating activities in 2024 was $6.7 billion. Included in this amount was a $795 million favorable change in working capital and $371 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD. Excluding these items, adjusted net cash provided by operating activities was $5.5 billion in 2024. Regarding investing activities, we made $547 million of capital investments in the fourth quarter of 2024 of which $452 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance and the balance was for growing the business. Excluding capital investments attributable to the other joint venture member share of DGD and other variable interest entities, capital investments attributable to Valero were $515 million in the fourth quarter of 2024 and $1.9 billion for the year. Moving to financing activities. We returned $601 million to our stockholders in the fourth quarter of 2024, of which $339 million was paid as dividends and $262 million was for the purchase of approximately 2 million shares of common stock, resulting in a payout ratio of 63% for the quarter. In 2024, we returned $4.3 billion to stockholders consisting of $2.9 billion in stock buybacks and $1.4 billion in dividends, resulting in a payout ratio of 78% for the year. In fact, since the start of 2021, our total cash flow from operations have exceeded our total uses of cash over this period, including capital investments. During this time, we delivered over $4 billion of debt reduction and returned approximately $18.7 billion to stockholders through dividends and share buybacks. Through share repurchases, we reduced our share count by approximately 6% in 2024 and by 23% since year-end 2021. With respect to our balance sheet, we ended the quarter with $8.1 billion of total debt, $2.4 billion of finance lease obligations and $4.7 billion of cash and cash equivalents. Debt to capitalization ratio, net of cash and cash equivalents was 17% as of December 31, 2024. And we ended the quarter well capitalized with $5.3 billion of available liquidity, excluding cash. Turning to guidance. We expect capital investments attributable to Valero for 2025 to be approximately $2 billion, which includes expenditures for turnarounds, catalyst, regulatory compliance and joint venture investments. About $1.6 billion of that is allocated to sustaining the business and the balance to growth. For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.72 million to 1.77 million barrels per day; Mid-Continent at 415,000 to 435,000 barrels per day; West Coast at 190,000 to 210,000 barrels per day; and North Atlantic at 455,000 to 475,000 barrels per day. We expect refining cash operating expenses in the first quarter to be approximately $4.95 per barrel. With respect to the renewable diesel segment, we expect sales volumes to be approximately 1.2 billion gallons in 2025. Operating expenses in 2025 should be $0.51 per gallon, which includes $0.22 per gallon for noncash costs such as depreciation and amortization. Our ethanol segment is expected to produce 4.6 million gallons per day in the first quarter. Operating expenses should average $0.41 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization. For the first quarter, net interest expense should be about $130 million, and total depreciation and amortization expense should be approximately $710 million. For 2025, we expect G&A expenses to be approximately $985 million. That concludes our opening remarks. Before we open the call to questions, please limit each turn in the Q&A to 2 questions. If you have more than two questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions.

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Operator

If you would like to ask a question, please press Star one on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys again. That's Star one to register a question at this time. Today's first question is coming from John Royall of JPMorgan.

John Royall
Analyst at J.P. Morgan

So my first question is maybe to Gary, just broadly on market color. You've always given us a good view of the fundamental picture in the sector. How do you view the supply-demand balances today for products and the outlook for cracks for this year? And what do you think are the key things we should look out for in terms of just any early indicators of when this market might turn back up?

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Yes, John. It's always difficult to get much of a read on the market this early. I'll tell you that we typically see our sales through our wholesale channel dipped fairly significantly through the holiday season kind of goes through the first couple of weeks of the year and then starts to recover. We saw that same dynamic this year. Sales kind of dipped to about 85% on average. The last couple of weeks, we've seen a nice recovery back to kind of million barrels a day level that we typically see. I think yesterday, we did 140,000 barrels a day. Gasoline sales in our system year-to-date are slightly down year-over-year. I think when you look at the concentration of our marketing, this makes sense. The snow in the south and southeast kept people off the road, and then the Colonial pipeline outage limited our volumes we had available to sell in some markets for that window, the pipeline was down. Our current 7-day average data shows gasoline sales up 2% year-over-year. Overall, what we can see is gasoline demand looks good, and we expect gasoline demand in the United States to be fairly flat to last year. Diesel sales year-to-date in our system are also off a few percent. This was a little more surprising to be mainly because of the cold weather that we've seen. But I think if you look into the data a little bit more, it makes sense. We had about 10,000 barrels a day of renewable diesel from Port Arthur that was going to our wholesale channel that we were selling. That material is now going to produce sustainable aviation fuel. So that's a chunk in the year-over-year decline in diesel sales. In addition to that, we saw the same dynamic on diesel with the snow impacting on-road diesel demand. And then I think if you look at Valero, we don't have a big marketing presence in the markets where you see high heating oil demand. So we don't really see that big uplift from the cold weather that you may see. We definitely get that on the bulk side but not through wholesale. Seven-day average shows diesel sales are up about 1%, and that's kind of what we expect for the year, about a 1% increase in diesel demand in the United States. Most consultants I've read, are showing about a 250,000 barrel a day increase in diesel demand just due to cold weather in the North Atlantic Basin. Not only do we expect diesel demand to be better, but we expect a greater percentage of that to be supplied by refinery derived diesel. Last year, we had the big wave of bio and renewable diesel projects hitting the market, we don't see that same dynamic this year. So I think overall, things are shaping up pretty nicely. We're at total light product inventory, 9 million, 10 million barrels below where we were last year at this time. So inventory is in good place. I think at the beginning of the year, the supply-demand balances look similar to last year. But as you progress through the year, you'll see gradual tightening of supply demand balances.

John Royall
Analyst at J.P. Morgan

Great. It's very helpful. And then my second question is on capital allocation. You finished the year with another quarter well above your 40% to 50% floor and high 70s for the full year. But assuming we don't have a significant recovery in cracks from here, how should we think about that payout ratio in a lower crack environment in '25. Should we expect you to move closer to that 40% to 50% floor?

Jason Fraser
Executive Vice President and Chief Financial Officer at Valero Energy

John, this is Jason. I'm going to ask Homer to give you a little more detail on that.

Homer Bhullar
VP of Investor Relations & Finance at Valero Energy

Sure. Yes, John, I mean, you're right, we had a 78% payout for the year, but that was partly funded by our excess cash balance going into the year. But if you want to put this into context with some numbers, if we had held our shareholder payout ratio at 50% for the year, we would have built almost $1.7 billion of cash for the year. Even if you excluded the $795 million of positive impact for working capital for the year, and include the $167 million debt repayment we did in the first quarter of 2024, we would have still built over $700 million of cash. Now taking that a bit further, even if you look at the low-margin environment in the fourth quarter, we still would have been able to honor our minimum payout commitment of 40% to 50% without leaning into the balance sheet or drawing down cash. So hopefully, this gives you some context of the earnings capacity of the portfolio even in a low-margin environment and our ability to invest capital, obviously, honor our shareholder commitment and flexibility with debt in our balance sheet.

Operator

Thank you. The next question is coming from Doug Leggate of Wolfe Research. Please go ahead.

Douglas George Blyth Leggate
Analyst at Wolfe Research

Oh, thank you. Thanks guys. I think Gary might be the most popular man on the call today, Lane, I apologize, but there was obviously a lot going -- so I've got to try just a couple -- someone's got to do it. I'm going to try a couple of high-level ones, if I may. The headlines I saw just a couple of hours ago, was that Trump is still going to go ahead with tariffs on Canada. And we -- I seem to recall that the last time there were problems with heavy oil supply at Canada, there was a -- there was a second order effect that everyone seems to have forgotten about, and I want to run this past through and just get your perspective on it, and that is that -- if you need to find a substitute for that much heavy oil, you're going to have run cuts, you're going to have utilization yield issues for in your system and so on. And I wanted to see if you guys thought there was any sense to that in the context of it actually became a thing as it relates to the substitution of lighter crudes or the heavy grades. What would you guys do?

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Yes. So Doug, this is Gary. I can tell you, we've been aware of this for a couple of months. And so our commercial teams and optimization teams have been working hard to develop every possible scenario we can think of and how we would respond to that. Of course, it's why we like our position on the U.S. Gulf Coast because you can source feedstocks from anywhere around the world and where we also like our feedstock flexibility. But yes, there is a point where if heavy feedstocks become limited, it affects rate and production of clean products, certainly from our assets, and we'd expect industry-wide.

Douglas George Blyth Leggate
Analyst at Wolfe Research

Assuming this is transitory, it's not a big deal, but if it did drag on for an extended period of time, particularly as we switch into summer grade I mean, could it be meaningful or is that a rounding out.

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

You want to, Greg.

Greg Bram
Vice President, Refining Services at Valero Energy

This is Greg. When we think about it and look at some of those different scenarios, you might see a 10% change in throughput. A lot depends on how far it goes and how deep you have to back off on some of those heavy barrels. But it wouldn't be driving things to a much greater degree than that, I don't think.

Douglas George Blyth Leggate
Analyst at Wolfe Research

Okay. I want to start meaningfully enough when you were talking about sit. So we're searching for green shoots as really to tell what these questions are about. So I apologize, I'm going to try another high level one, and it really relates to your throughput guidance. So obviously, everyone is focused on whether it's Tasos or Lyondell closing or Grangemouth or whatever happens to be. But it seems to me that coming out of COVID, utilization rates, the concentration or the absence of good maintenance got solved and the concentration of great maintenance meant everybody ran well..

And it seems to us with no storms and all the things you run through, Gary. They're probably about 3% or 4% of utilization that was kind of a best-in-class world for the U.S. last year, which is basically 4 refineries, if you think about it. And so when I look at your guidance for the quarter, you obviously don't give forward cadence for commercial reasons through the rest of the year. But at a high level, how do you see the likelihood that the industry, the U.S. industry specifically can continue to run at those kind of levels given the backdrop we've had and the fact that we're down 10% in the last three within utilization.

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Yes. So I think certainly, what you've seen utilization in the last few weeks is somewhat weather-related along with the maintenance activity. I think given the advantages that U.S. refineries enjoy on feedstock cost and energy cost, you should expect to see that U.S. refining continues to run at higher utilization rates. And when you have run cuts, they occur elsewhere in the world where they don't have the natural resource advantages that we have.

Douglas George Blyth Leggate
Analyst at Wolfe Research

I think I was thinking more about the reliability aspect as opposed to the cost advantage aspect.

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Yes. And I'm sure we've certainly seen an improvement in our system on mechanical availability, and I suspect our peers have as well, and it's something we always strive to get better and better at.

Douglas George Blyth Leggate
Analyst at Wolfe Research

All right, guys. Sorry for the high level questions, but I've had my two, so I'll leave it there.

Jason Fraser
Executive Vice President and Chief Financial Officer at Valero Energy

Thanks, Doug.

Operator

Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.

Neil Mehta
Analyst at The Goldman Sachs Group

Yeah, good Morning team. Just a couple of questions on the quarter itself. Renewable diesel performance came in, I think, better than what most market participants were expecting and better than implied by the indicators. Just curious on any thoughts there and the outlook for that business as we work our way through 2025.

Eric Fisher
Senior Vice President Product Supply, Trading and Wholesale at Valero Energy

Yes, this is Eric. I think a lot -- there was a onetime benefit with some inventory optimization at the end of the year, that was the bulk of that higher-than-expected performance. There is a little bit of staff in that, but I would make it clear that, that was mostly some inventory optimization we did at the end of the year. In terms of forward-looking in renewable diesel and SAP for us, we're all kind of waiting to see how this market is going to develop and how the policy is going to develop. But overall, things are very much staying in line with kind of what we thought was going to happen. The has now replaced the blenders tax credit. We can see that, that's now going to limit product imports into the U.S. It is going to make it a carbon intensity scale rather than a flat dollar to every renewable product. All of that is advantageous to Diamond Green Diesel in our platform because like the refining platform, our feedstock flexibility, our ability to export to any of the other markets and I think consistent with our outlook from last year, the most attractive markets are going to be in Europe and Canada compared to U.S. and California. So overall, we're waiting to see how RINs are going to respond, how LCFS is going to respond. And I think you'll see those changes emerging in the market in the next couple of months as some of those production and credit reports emerge on how the year ended. Gary already mentioned that we don't see any increase in renewable production this year. We -- it's still long compared to, say, RIN credit bank or D4 RIN credit banks and LCFS credit banks. But we do also expect you're going to see some correction and production that will eventually start to pull those credit banks down throughout the year.

Neil Mehta
Analyst at The Goldman Sachs Group

That's helpful. And then independent of tariffs, it was notable in the amount of heavy that you were able to run through the system. And I think there were some concerns about coking economics in the quarter, given how tight fuel oil was, but clearly, you were able to optimize the system to run over 600,000 barrels a day of heavy sour oil. So can you just talk about how you were able to do that in the commercial approach to maximize and heavy in a time when fuel oil is pretty tight.

Greg Bram
Vice President, Refining Services at Valero Energy

Neil, this is Greg. I'll start, and then Gary can talk some more about the market. But you hit on, I think, the key factor, which is as the fuel oil prices, those differentials narrowed that with fuel oil typically being a feedstock in our Gulf Coast system, we pivoted away from that towards the heavy crude as an alternative, which continued to show some good value. So that's why you see that shift towards more heavy sour crude, you also noticed a reduction on the heavy resid feedstocks that we processed as well. And that's kind of how we got to the high level of heavy crude processing. Also keep in mind, we've got the Port Arthur Coker online that shifts us to a bit of a heavier feed slate as well. So that's part of what you see in that number as well.

Homer Bhullar
VP of Investor Relations & Finance at Valero Energy

Thanks, Steve. Would you like to move on to the next question?

Operator

Yes, please. Thank you. The next question is coming from Theresa Chen of Barclays. Please go ahead.

Theresa Chen
Analyst at Barclays Bank

Good morning. Thank you for taking my questions. On the tariff topic specifically, understanding that you're not captive to any specific source of crude based on your footprint and the optionality you have on the Gulf Coast. But as we think about the tariff on Canada and Mexico, incremental sanctions potentially on Venezuela, how are you thinking about life heavy differentials as we move through the year?

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Yes, Theresa, this is Gary. I think I'll start with kind of fundamentals, but then cut to really what's driving the market. And certainly, on the fundamental side, typically, this time of the year, you see less buying of medium and heavy sours just due to turnaround activity. In addition to that, Lyondell coming down puts another 200,000 barrels a day heavy on the market calls for OPEC crude second quarter 2025, 180,000 barrels a day of medium solar crude. So all those things would be supportive of water quality differentials. But in reality, the discussions on sanctions and tariffs are really what's driving the market. And until we see some resolution to that, I don't expect any meaningful moves in the quality differentials.

Theresa Chen
Analyst at Barclays Bank

Understood. And related to the St. Charles FCC project, would you have been able to provide a little bit more color on this, what the optimization means in terms of incremental improvement in the yield of high-value products?

Neil Mehta
Analyst at The Goldman Sachs Group

Sure, Theresa. This is Greg. Lane mentioned it costs about $230 million. It definitely meets our investment hurdle at mid-cycle pricing. And one of the key outcomes for the project is increasing the production of light olefin product out of the FCC. And what that really means is that's additional feedstock we can use to fill the alkylation capacity we have downstream of the FCC there. And you might remember, we started up a C5 alkylation unit at St. Charles back in late 2020. And with some tweaks and optimizations we've done to that unit since. We've got some spare capacity in the alky and with this project, you will increase high octane outlet production by something on the order of 6,000 to 7,000 barrels a day. That's one of the key outcomes and things that drive the value. It's really a good example of -- I did find some key equipment constraints within the operation that when we modified those constraints of that equipment it allows us to take full advantage of the capability not only of the SEC unit in this case, but other equipment and other units in the refinery. And again, in this case, the alky. And that's how we generate a good return from the project.

Theresa Chen
Analyst at Barclays Bank

Thank you very much.

Operator

Thank you. The next question is coming from Manav Gupta of UBS. Please go ahead.

Manav Gupta
Analyst at UBS Group

Good morning. I wanted some additional color on the North Atlantic capture. It looks like it jumped from 102% last quarter to about 118%. And similarly, the Gulf Coast capture jumped from about 76% to 86%. So Gary, if you could help us out a little what were some of the factors helping you drive that kind of capture improvement?

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Sure. I'll let Greg answer.

Greg Bram
Vice President, Refining Services at Valero Energy

A couple of things I'd point out on the North Atlantic really, it's a bit of a system question. So it's North Atlantic and Gulf Coast as well. But we go into the winter time and we start blending more butane into the high RVP gasoline. That gives us a bit of a bump in capture as that adds value into the gasoline pool. In both those regions as well, you had good contributions from the wholesale side of the business, the commercial part. So we saw some benefit from that. On the Gulf Coast, the other notable item would really be -- if you look at Maya relative to the Canadian grades that we use for the benchmark, Maya was a bit more discounted certainly when you look at it quarter-over-quarter. And so that helped to improve the crude cost that we saw for the heavy crude into the Gulf Coast.

Manav Gupta
Analyst at UBS Group

Quick follow-up here is, we are seeing a very strong diesel margin and slightly weaker gasoline and I know Valero can move the yield around a lot. So are you already operating in max diesel mode or how much more can you swing the yield more towards diesel? Or do you think this is very temporary, like once you come February and March, the gasoline demand will improve and the cracks will start to balance out each other.

Greg Bram
Vice President, Refining Services at Valero Energy

Manav, this is Greg. Yes, we are definitely in max diesel mode. As you mentioned, the cracks would drive us in that direction. And we'll see as we get into gasoline season, whether the gas crack shifts enough to push us the other way.

Manav Gupta
Analyst at UBS Group

Thank you for taking my questions.

Operator

Thank you. The next question is coming from Paul Sankey of Sankey Research. Please go ahead.

Paul Sankey
Analyst at Sankey Research

Just continuing on the themes that we've had this morning. Can you talk a bit about the Atlantic Basin at all the trade arbitrages? And I think it's obviously tough to make a firm outlook here with all that's moving around. But I wondered, what have you been seeing, let's say, over the past 2 to 6 months in terms of the major Nigerian refinery. There's been a lot of action in the dollar versus the euro. There's obviously been all the cold weather effects. So I just wondered if you could describe a little bit what we've been seeing in the market in the Atlantic Basin and what your outlook is for the coming year. Tough question.

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Yes. So I'll start with the Dangote refinery. I think from what we can see and what we read, they do have their resid FCC up and running. We see that commercially. They're not offering out the fuel oil or the resid that we were buying from them. We also see less imports of gasoline into West Africa, which is all consistent with Dangote continuing to ramp up. With that, though, however, what we've seen is that generally tends to impact Europe more than it does in the U.S. gasoline that was going to West Africa gets back into Europe. We haven't really seen much of an impact from that. Our gasoline go to -- our gasoline exports primarily go to Latin America. You can see in the fourth quarter, we were 98,000 barrels a day of gasoline exports into that market, which is consistent with where we've been. I can tell you in the first quarter, that's we're right about that same level again. Diesel has been somewhat interesting. The cold weather in the U.S. kind of has the U.S. market strong. So you actually see a few cargoes from Europe actually booked in the New York Harbor, which is an abnormal trade flow. We do see that correcting when you get to the second half of February. We're already seeing an open arb to export back from the U.S. to Europe. So nothing too abnormal on trade flows. I think by and large, what you've seen is that -- the Dangote startup in the North Atlantic Basin has been largely offset with Lyondell coming down and Grangemouth coming down, and they're kind of counterbalancing each other and keeping trade flows about what we've seen historically.

Paul Sankey
Analyst at Sankey Research

That's great. And just if I could follow up, thinking about the reality of tariffs, could you describe maybe a situation of how they would work? I mean what happens? Do you just suddenly have to start paying it overnight? Or how does it work if you got any ideas that would be grateful.

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Without having really any clarity on what's going to happen, there's no reason for us, there are no way we can really speculate on how we deal with it. We're just going to have to deal with it when it comes up.

Lane Riggs
Chief Executive Officer and President, Chairman of the Board at Valero Energy

Paul, it's Lane. All I add is it depends on the market, right? If you're a captive market, they're going to -- it will somehow get shared between the refinery and the say, the Canadian crude producer because there's some captive markets in the Mid-Continent. In the Gulf Coast, somehow that will ultimately get sort of priced in depending on what -- how that refinery is configured and what their alternatives are. And then we'll just have to see how long it lasts. So.

Paul Sankey
Analyst at Sankey Research

Got it. Have there been examples of it happening in the past that you can think of where you suddenly have to pay 25% more for a given crude.

Lane Riggs
Chief Executive Officer and President, Chairman of the Board at Valero Energy

No. And I've been around a long time.

Paul Sankey
Analyst at Sankey Research

Yeah, gotcha. I'll take that later.

Operator

Thank you. The next question is coming from Roger Read of Wells Fargo. Please go ahead.

Roger Read
Analyst at Wells Fargo & Company

All right. Lane, I'm still chuckling from. You've been around a long time answer there. Maybe coming back a little bit on the whole changing in capacity. So obviously, you mentioned the shutdown of Grangemouth. We had to shut down here locally of Lyondell and we have some more stuff likely coming in Europe beyond what's been announced. I'm just curious how you all are seeing some of those dynamics play out in terms of just crude availability, let's leave the tariff thing aside and maybe how that's playing out along the Gulf Coast.

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Yes. So I think the only thing we can see is you've definitely seen the dynamic in the market of Lyondell stopping to buy and they were buying a lot of -- especially a lot of Canadian. And so we've seen more of those barrels become available to us as they backed off the market..

Roger Read
Analyst at Wells Fargo & Company

Does that materially change price? Or is it just an availability.

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

It's so difficult to tell because it's been going along at the same time with all these tariffs and sanctions discussions. So it's kind of -- those discussions have muted any market impact. There would be of Lyondell pushing the barrels back so far.

Roger Read
Analyst at Wells Fargo & Company

Okay. And then as a follow-up question from earlier about -- I think Doug was asking about the industry's ability to maintain utilization as you look forward through the year thinking about some of these closures that have happened. And if you look at on a year-over-year change of U.S. inventories, whether you look at crude alone or crude plus products or just products all are down year-over-year, a little more severe on the crude side than on the product side, but it would imply a lot of tightness. And if you can't say if you can, if the industry cannot maintain these levels of utilization, it would imply either much lower inventories or lower exports, but -- is there anything I'm missing in that general thought process?

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

No, I think you've got it. Nail on the head. When we look at the balances, the inherent assumption that you're going to see similar supply-demand balances the last year and gradually tightening is the fact that the industry had a high actual utilization is going to go up to meet demand. And so that certainly, we haven't had a major weather event the last year. Any kind of a major weather event and not capacity off-line or unreliability then can tighten things up a lot. If you look, we're especially on the diesel side, we're within 10% on inventory where we were in 2023 and in 2023, we had a $45 diesel crack versus where it is today. I mean the inventory position is not significantly different, yet the margin environment is fairly significantly different. It could change in a hurry.

Roger Read
Analyst at Wells Fargo & Company

Appreciate that. Thank you.

Operator

Thank you. The next question is coming from Ryan Todd of Piper Sandler. Please go ahead.

Ryan Todd
Analyst at Piper Sandler Companies

Thanks. Maybe a couple of follow-ups on the biofuel side. I mean you talked some about your -- like the broader 2025 outlook with all the moving pieces there. As we think about the early part of this year in the first quarter in particular, BTC goes away December 31. It feels like it's going to take some time, at least a few months for the market to kind of methane equilibrium with the 45V and some of the impacts on imports and domestic production. What's the -- is there a risk to -- like first -- how does this play out in the first quarter? Is there a risk that economics kind of fall off the table in the first quarter. Is this stuff gets sorted before it reaches kind of a better equilibrium later in the year?.

Eric Fisher
Senior Vice President Product Supply, Trading and Wholesale at Valero Energy

Yes. I think if you look at the conversion of the BTC where everyone got a dollar to now this carbon intensity based credit. We've run the U.S. Greek model that was just released. For veg oils, it's 0 for oil, it's $0.16 for soybean oil. And waste oils are in the $0.50 to $0.60 per gallon range. And so at the end of the day, that is all less than $1. So if you needed that dollar to break even and now you're getting $0.16 it's a fairly negative margin environment for nonwaste oils. I think everyone can see that. I think there's growing recognition that this is going to be very difficult to see a lot of the biodiesel side and vegoil side. operate at these lower incentives. How that plays out in terms of production reconciliation through the first quarter. Everyone is looking to say, well, but hand in hand. We also see the imports that were coming to the U.S. to get that dollar are now stopped. So how all that balances out? We haven't seen a lot of change in peak stock prices to reflect a lot of this, but I think there's growing recognition that there's going to be some movement in overall production and overall feedstock prices kind of as you go through the first quarter and see some of these early reports coming in on what are we seeing in terms of generation of credits. And so again, I think being a waste oil unit on the Gulf Coast, we're the most advantage in terms of how we can react to these things and it's still mostly favors, waste oils, which is our platform is based on. So I think we're still in a good position versus our competitors, it's just -- but there's no doubt, overall, there is a lower incentive for all of this in this PTC world.

Ryan Todd
Analyst at Piper Sandler Companies

And then maybe a follow-up on SaaS. I mean can you maybe just provide a little bit of an update in terms of your SaaS operations at this point level maybe some idea level of production and how you think about the contribution of economics here in 2025.

Eric Fisher
Senior Vice President Product Supply, Trading and Wholesale at Valero Energy

Yes. So Lane mentioned this in his opening comments. The project started up in the fourth quarter, again, credit to our project team on finishing ahead of schedule another budget. We have flawless startup. It started up on spec. We hear a lot of -- we spent most of the time in the fourth quarter doing test runs and initial fills on tanks. But throughout all our test run trials, we showed a very wide range of operability, all of which more than met our project goals operationally. So unit hardware looks great. Production has been very smooth, and we made our first sales in November, and we saw the QA/QC and all the traceability and accreditation flow all the way from production to meet staff, the blended staff to deliver the final customer. And so we spent a lot of time in the fourth quarter just sort of proving the system out. In terms of going forward, we're not going to really get into a lot of detail because what I'd say is what we have now is very good flexibility to meet all the project economic goals and that we set up with the original project. But if you look at, say, the Argus market in the EU and the U.K., right now, you see HBO at or better than SaaS. So we have flexibility to make either barrel into the European market. And so really, what we're doing now is just tuning that optimization as we see SAP customers really starting up in the first quarter because of the 2% mandate that you see in the EU and U.K.

Ryan Todd
Analyst at Piper Sandler Companies

Great, thank you.

Operator

Thank you. The next question is coming from Paul Cheng of Scotiabank. Please go ahead.

Paul Cheng
Analyst at Scotiabank

Maybe this is -- I want to go back to the PTC, I don't think that the detail is out. So when you guys report the first quarter, should we just assume that in your gross margin, the BTC is also that you will drop by a per gallon, but you're not going to record any benefit or do you put some kind of provisional and think that it will just come through. And also whether that you can share how much is the fourth quarter inventory benefit or optimization benefit that you are referring to earlier? That's the first question. The second question, maybe for Lane. U.S. natural gas price look like is going to be higher. So if we look at your system, do you see a lot of opportunity of reducing your energy cost further? Or that you have already done so much is really difficult that will be too expensive trying to have any meaningful reduction in the energy cost from the current level?

Eric Fisher
Senior Vice President Product Supply, Trading and Wholesale at Valero Energy

Okay. So I'll start on the margin indicator. We had the same discussion that our margin indicator still includes the dollar BTC in the calculation. One of the challenges in this PTC environment is because its carbon intensity based, that will vary with our feedstock slate. And so we haven't had enough run time or as you said, enough clarity to really know how this is all going to line out because we can think of scenarios where certain feedstocks get very cheap that might have a higher CI or we'll see -- continue to see the incentive to run the lowest CI feedstocks and those will obviously have higher benefits in the PTC. So it's a little hard to nail down the the -- how we want to adjust the margin indicator. So our decision -- we're going to keep it the same for now until we see a little more development on how we're going to be running in this new policy environment.

Paul Cheng
Analyst at Scotiabank

Eric, I'm sorry, I'm not asking about the margin indicator. I'm asking that when you report the first quarter result, in your result, should we just assume that you will take out the $1 per gallon for the BTC in your margin and not including any benefit from the PTC because that's not being finalized or that when you report the results in the first quarter, you actually will do some provisional estimate on what your DGD results should be under the PTC as you understand.

Lane Riggs
Chief Executive Officer and President, Chairman of the Board at Valero Energy

Paul, this is Lane. The way we do our financials is, particularly on that side, it's really on the act. We don't have -- there won't be a provisional like, hey, we think the PTC benefit is going to ultimately be this. If it's not -- if we don't have clear policy in the first quarter, it will be whatever it is.

Paul Cheng
Analyst at Scotiabank

Okay. So we will just take out the BTC benefit but not including any estimate for the PTC for guys.

Lane Riggs
Chief Executive Officer and President, Chairman of the Board at Valero Energy

Correct.

Paul Cheng
Analyst at Scotiabank

Okay. And how about in terms of, can you share what is the inventory benefit in the fourth quarter?

Eric Fisher
Senior Vice President Product Supply, Trading and Wholesale at Valero Energy

Yes, I don't think we're going to give that level of detail out. but it was just an end of year optimization that we did at both units for the fourth quarter.

Paul Cheng
Analyst at Scotiabank

All right. So how about about the energy cost?

Lane Riggs
Chief Executive Officer and President, Chairman of the Board at Valero Energy

I'm going to at least initially pitch this over to Greg. So go ahead, Greg.

Greg Bram
Vice President, Refining Services at Valero Energy

Paul. So with low energy costs, and a lot of that meaning low natural gas and low cost for power for our plants in North America. You don't see a lot of incentive to try to do a project to further reduce your energy consumption. There's just not a lot of opportunity there from a value standpoint. We do see opportunities in Penbrook. We've done some things at the refinery there to improve energy efficiency because their costs are quite a bit higher. So I would say, in general, that's unless you see a marked change in the cost of natural gas or power it's going to be hard to justify some kind of an improvement project. Always trying to be as efficient as we can be in the base operations. So there's no change there. But in terms of some kind of investment to make a step change, that's hard to do in the current environment.

Paul Cheng
Analyst at Scotiabank

Perfect, thank you.

Operator

Thank you. The next question is coming from Joe Laetsch of Morgan Stanley. Please go ahead.

Joseph Laetsch
Analyst at Morgan Stanley

Just wanted to ask a couple on the quarter. From our standpoint, it looked like the Mid-Con came in stronger on throughput and capture while the West Coast was say, remained a bit weaker, which I think was driven in part by maintenance. Could you just talk to any specific drivers during the quarter for the West Coast, in particular from a capture and throughput standpoint?

Greg Bram
Vice President, Refining Services at Valero Energy

Yes, Joe, this is Greg. So West Coast is fairly simple, and you hit on it. It was maintenance work primarily at Benicia, that impacted not so much throughput there, but it impacted the amount of transportation fuel we could make and so that had an impact on the capture rate. In the Mid-Con, throughput was higher. We actually saw a pretty good incentive to continue to maximize throughput there, good demand for products and so we were able to push through a little bit higher than we had planned going into the quarter. And then on the capture side, one of the factors there you saw crude market structure on WTI less backward than you saw in the prior quarter that had a benefit to capture rates in addition to some of the things I talked about earlier on butane blending.

Joseph Laetsch
Analyst at Morgan Stanley

Great. That's helpful. And then I wanted to shift gears and ask about the ethanol segment. So the indicator continues to grind to lower to start the year. Could you just talk to some of the puts and takes going on in the industry as well as your forward outlook and then also the potential for year-round E15, which was included in the executive orders released last week.

Eric Fisher
Senior Vice President Product Supply, Trading and Wholesale at Valero Energy

Yes. The ethanol market has been challenged with high inventories and high production rates. I'll say, surprisingly high production rates that have been sustained really for the third and fourth quarter and into the beginning of this year. We have seen some weather-related impacts to production rates. But I think overall, you're looking at high inventories and high production rates. And so it's keeping ethanol margins currently, I would say, below mid-cycle. So -- in terms of E15, there's always a lot of positive outlook for that. As you know, we've continued to see E15 approved by emergency order every 20 days. We don't see a lot of E15 movements. We don't see a lot of growth in that market. We do see Canada still talking about moving to E15 this year through their CFR program. I think there's a high likelihood, you'll more likely see incremental E15 in Canada before the appreciably in the U.S. But I mean, we'll see how this develops this year by policy. It's still a fairly significant logistics challenge to convert retail to E15. But overall, I mean, it's still something that certainly, the ethanol and ag industry sees as a positive development for ethanol outlook.

Joseph Laetsch
Analyst at Morgan Stanley

Great. Thank you all.

Operator

Thank you. The next question is coming from Matthew Blair of Tudor, Pickering, Holt. Please go ahead.

Matthew Blair
Analyst at Tudor, Pickering, Holt & Co.

Regarding the Canadian tariffs, you talked about some of the impacts on the crude side. How about the product side for Valero? And especially in regards to your Quebec City plant, what kind of volumes does Quebec send to the New York Harbor. And if there were tariffs imposed, do you think it'd be pretty easy to ship those volumes to Latin America or Europe or would we expect to see lower operating rates at Quebec City?

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Yes. This is Gary. For the most part, our Quebec system is short gasoline. So we import gasoline, a lot of that tends to come from Penbrook. There are periods in the year where we're long diesel. And typically, that does go to New York Harbor, we could place those barrels anywhere in the world. So I wouldn't expect to see a throughput reduction as a result of tariffs.

Matthew Blair
Analyst at Tudor, Pickering, Holt & Co.

Sounds good. And then you mentioned some of the potential impacts from the 45V. One other impact is that RD from foreign eco appears to no longer qualify for a credit is DGD a major importer of foreign UCO and if so, how would you expect to replace those volumes?

Gary Simmons
Executive Vice President and Chief Operating Officer at Valero Energy

Yes. So -- you're correct, for no longer qualifies for domestic RD. R4 in UCO is and has always been pointed at SAP going into Europe and the U.K. So the PTC doesn't really change what we were going to do strategically with that feedstock. And so that's our view as we'll continue to run that into the into the Europe and U.K. markets.

Matthew Blair
Analyst at Tudor, Pickering, Holt & Co.

Great, thank you.

Operator

Thank you. The next question is coming from Jason Gabelman of TD Cowen. Please go ahead.

Jason Gabelman
Analyst at TD Cowen

I wanted to ask first on the CapEx budget. I believe you said $1.6 billion of sustaining CapEx, which is about $300 million above the five-year average. It's the highest level since 2019. So I'm wondering if that is an indicator of above-average turnaround activity in your system for 2025? And if not, what's driving that higher sustaining spend?

Lane Riggs
Chief Executive Officer and President, Chairman of the Board at Valero Energy

Jason, this is Lane. So we nominally, we sort of talk about our sustaining capital in terms of sort of average. And so we average about -- we sort of think about it being $1.5 billion. That's inclusive of turnaround, inclusive of sort of CapEx for ongoing sort of sustaining operations. And so if you sort of -- and catalysts, so when you think in your mind, well, if it's lumpy, if it gets lumpy on the higher side or the lower side. The only thing it can be is additional turnaround work.

Jason Gabelman
Analyst at TD Cowen

Jason Gabelman TD Cowen

Okay. And my follow-up is just -- sorry, I'm going to ask another one. On the Canadian tariffs, Valero, I believe, has a lot of its refineries within foreign trade zones and those foreign trade zones typically aren't subject to tariffs. So given that 1Q just clarify that most of your U.S. Gulf Coast system is in foreign trade zones. And because of that, do you think you would be able to -- if the tariffs are implemented in a very direct way you'd be able to sidestep those tariffs in. Also, do you get any benefit now from operating in those foreign trade zones.

Rich Walsh
Executive Vice President & General Counsel at Valero Energy

Yes. This is Rich Walsh. I would just say that you can't tell anything until you see what the program comes out with, right? So it just depends on how this is all structured. So we also bring in a lot export a lot. And so that's really what the foreign trade zone helps with. And so I don't know that it's really trying to avoid domestic tariffs in any way along those lines. So until you see what they're proposing and how it's structured, you really can't tell whether there's going to be benefit or not.

Lane Riggs
Chief Executive Officer and President, Chairman of the Board at Valero Energy

But we do have foreign trade downs.

Rich Walsh
Executive Vice President & General Counsel at Valero Energy

Yes, yes. We have foreign trade downs.

Operator

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

Homer Bhullar
VP of Investor Relations & Finance at Valero Energy

Thank you, Donna. I appreciate everyone joining us today. Obviously, feel free to contact the IR team if you have any additional questions. Have a great day, everyone. Thank you.

Operator

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.

Corporate Executives
  • Homer Bhullar
    VP of Investor Relations & Finance
  • Lane Riggs
    Chief Executive Officer and President, Chairman of the Board
  • Gary Simmons
    Executive Vice President and Chief Operating Officer
  • Jason Fraser
    Executive Vice President and Chief Financial Officer
  • Greg Bram
    Vice President, Refining Services
  • Eric Fisher
    Senior Vice President Product Supply, Trading and Wholesale
  • Rich Walsh
    Executive Vice President & General Counsel
Analysts

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