Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Valero Energy Corporation (NYSE:VLO)

Barclays CEO Energy-Power Conference

September 12, 2013 10:25 AM ET

Executives

Bill Klesse - Chairman and CEO

Joe Gorder - President and COO

Ashley Smith - VP of IR

Matt Jackson - IR Specialist

Analysts

Paul Cheng - Barclays Capital

Paul Cheng - Barclays Capital

Good morning, our next presentation is Valero Energy, we are extremely happy to have the senior management team, the speaker will be the CEO and Chairman Bill Klesse, without further delay let me welcome Bill.

Bill Klesse

Well, thank you Paul and good morning. With me today is Joe Gorder, our President and Chief Operating Officer, Ashley Smith our Vice President Investor Relations, and Matt Jackson our Investor Relation Specialist down here in front. And for all of you that own Valero stock and have followed us over the years, we appreciate the ownership of our company and we thank you very much for your interest. We have a very extensive handout, I think most of you have picked one up, there's a lot of data in there in both the body and the appendix, I would encourage you to look there is info on Valero but there's also a lot of info on the entire industry. So Valero is a large independent refiner, we have 16 refineries, 2.8 million barrels a day of capacity, about 2.3 million of that is crude oil and the rest is other feedstocks, 7300 branded outlets with multiple brands as you can see on the slide. We're unique in this business as we're an ethanol producer; we're the third largest ethanol producer from corn and have a very well positioned business in the upper Midwest. We also have just started up a renewable diesel project at our St. Charles refinery in partnership with Darling and that business does renewable diesel which is different from bio diesel as it fits into other rigs. And also, we now have about 10,500 employees, this is about half of our employee base as we spun off our retail operation which I'll talk a little more about. Here's our footprint, we have the refinery in the United Kingdom in Wales in the upper right corner and you can see here where we market, where our refineries are located, we have the Quebec refinery in Canada and the green represents our ethanol plants.

More than 50% of our capacity is on the U.S. Gulf Coast and crude suppliers moving our way, so in this conversation and having to do a lot with our industry, if you think about refining in the U.S., the advantaged refineries are largely between the Rocky Mountains and the Appalachian Mountains down that entire corridor in North America, so it's very-very important location today drives many-many things. So when you think about our company, generally this is what we are doing. There's three main areas and as I said location is so important, so things are coming our way, there's exploit this North American resource advantage, whether it's natural gas, crude oil or NGLs, natural gas liquids. We are doing a lot of logistics work where you don't have the location you have to overcome it with logistics, so we have railcars, pipelines, terminals, tankages being added, dock facilities with more processing of light oil, exports have to grow the United States is not a growing market for refined products and we look at other opportunities and they are bolt-ons, there are project opportunities where we have synergies or can bolt this on to our existing hardware, alkylation, reforming, methanol, BTX extraction, we're already in some of those business. A lot to potential we spun off our corner stores it's not CST we still own 20% but 80% was spun to our shareholders, we are evaluating MLP and that process continues to move forward in returning cash to our shareholders. We have raised our dividend several times and of course we’re concentrating value by buying our stock. You think of the key trends, the first four are macro trends, the oil production increasing dramatically, natural gas liquids, condensates, all of this is going up dramatically, infrastructure is being added, natural gas is uniqueness to North America and is a huge competitive advantage for refining as well as petrochemical industries. And distillates continue to grow and even at Valero we have made investments to take advantage of distillates’ growth in the world which has a higher margin. And what this is resulting in is U.S. Gulf Coast is very competitively advantaged export into the growing and undersupplied markets, we're taking market in the Atlantic Basin, taking it from Western Europe and replacing in the sense shut down facilities, the Atlantic Basin though is an opportunity for Valero.

So production you all have forecast, I am sure you are going to other meetings here where the companies are talking about the opportunity that they have and I know your forecasts are up, every year this forecast has gone up some more, it is clearly, this is one that reviews, by the color code you can see the type of oil that is coming the Gulf of Mexico we shouldn't forget is in this orange and yellow and the Gulf of Mexico is going up by 2020 some forecast have it at 1.9 million barrels a day of production. So North America U.S. production is going up dramatically. This purple line is non-Canadian imports and obviously they are dropping dramatically and we'll continue to drop as we go out into the future years.

So our entire industry is investing in logistics with the U.S. Gulf Coast being the designation, now obviously there is rail for the West Coast, there is rail back to the East Coast, but lots of crude oil pipelines are being built and the focus of these pipelines is towards the U.S. Gulf Coast. You can see when you think about the pipelines and the capacity additions we have had the Permian Express, we have had Longhorn, we have Seaway, we have a Keystone XL, the southern lag which is getting done, we have bridge tax, we have many other companies looking at bringing this oil from the whole mid-continent candidate down toward U.S. Gulf Coast.

So we see that this pricing will, like in Houston it's going to be less than LLS, it's a lose market getting looser everyday as more and more oils coming to the Gulf Coast, and we have the Seaway expansion as well. And so we expect Valero is in a very good position here. So in our chart you can see how the oil is moving to the Gulf Coast, this is how we view the future. And then we put it on here this line that shows the light sweet crude imports in the U.S. Gulf Coast, and it is falling dramatically as you know.

And some people have asked us this morning when do you think it's going to go away and except for opportunistic situations I am sure by next year there is going to be enough capacity on the Gulf Coast, the light sweet crude import into the Gulf Coast are not going to happen, except for an economic situation.

So we have lots of opportunity to get this price advantage crude oil we have strategies and things that we're doing. Our refineries are linked to many of these crude pipelines. St. Charles refinery, so we don't have the pipeline connections, that's in New Orleans area, we’re building a rail rack, we also barging down the Mississippi as other companies are to get this advantage crew.

And we're doing about 35,000 barrels a day and the advantage with rail and barging is depending on where you picked the crude, you can get neat crude and there are advantages of not having to deal with the daily ones. So rail for sure we can load neat into cold and heated cars. In Asia, we had represented that we were going to have a rail rack by the end of this year, however we're having help by several groups, I think we should do an environmental impact assessment just to build a rail sliding.

And so since we have to do that this project is now delayed while we do that. And then in Quebec we just started up a rail facility, we unloaded our first train the other day, we're also involved in the reversal of pipelines, we're involved in the Enbridge Line 9, and we're working on dock so that we can move crude oil from Corpus Christi area to our refinery at Quebec.

So we talk about this, this is our view, we're saying in 12 to 24 months, but it's our view, and we put on here the representative cost, as an example in the West Coast if you look at railing crude oil to Washington area, what has clearly happened on the West Coast is the Washington refineries are far more competitive today than they were a few years ago but the premise of this chart is that the East Coast is going to be the balancing point for North American light sweet crude oil versus imports. So you come up into the U.S. East Coast area where you can take West African or other brand priced crude oils, North African into that market or you can bring Gulf Coast crudes into there so this is your balancing point on the East Coast and then the differentials all began to work back. So if it’s $5 or $6 to ship from the Gulf Coast to the U.S. East coast under the U.S. flagship, we get those numbers, obviously we can shift from the Gulf Coast to Canada on a formed flagship and we told you that’s about $2 a barrel, so you can see how these numbers work back [indiscernible] Gulf from the Eastern Gulf to St. James back to Houston back to Corpus Christi and all the numbers and work along here. Remember, the U.S. Gulf Coast has 7 million to 8 million barrels of day of refining capacity for the country. So this is kind of how we see the future. And more another thing to remember on the U.S. Gulf Coast you could still build and do projects.

Switching to natural gas, this is a huge competitive advantage for North America whether it’s the refining industry, manufacturing industry petrochemical industries, it doesn’t really matter it’s a huge competitive advantage. Here for a refining, we gave you some numbers on the chart, you can see if we have $4, it’s about $1.11 a barrel in our operation and then it’s about 50/50 between cost to goods sold and expense but it’s still cash, the delta between there and LNG say into India or somewhere at $16, for NCF say the delta is $3 a barrel, that’s a $0.08 a gallon, that overcomes any slight disadvantage. And this is one of the reason why natural gas in the low price in North America, it’s a great opportunity for refining and allow us to compete in the export markets.

When you look at the distillates, distillates are the business that the product that is growing, the chart on the lower right shows the demand in the world and then you can see it’s growing at about two times gasoline, gasoline is still growing in the world, so you can see what’s actually happening here in that distillates growing faster, it is a bigger market and if you go over to the chart on your left you can see that the margins are much better against brand and they continues that be that way and of course we are making more and more distillates every day in the Valero operation.

So looking at refining, in the last few years, it is changed dramatically the chart on your lower left is a huge change in this business, this is actually, it’s huge if somebody had told you United States refining industry is going to be an exporter and they told that five years ago I am sure you would have loved to try to passed them but it is unbelievable what is happened and it’s partly because the great recession which we all lived through, demand in U.S. has not recovered when we look at demand going forward, we see gasoline share with a better economy might come up housing industry, gets going come up a little bit but demand is not part of our story because you have CapEx and you have other things happening.

Diesel sure it will increase some but the world is where it is growing, we don’t see this grow so you have to be able to export in this business for some of the reason that I have mentioned already and if you look at the chart on the right, you can see that there are advantage places and actually we could make the west coast red as well although the entire west coast is not exactly the issue because I already mentioned the our Washington refineries are getting an advantage here incurred.

To put in prospective for you, Valero’s cash operating cost in its entire system about $3.70 about of that’s your cash operating, very efficient business that’s a$0.09 a gallon I tell people that you may save on paying $4 at the pump, it’s a $0.09 a gallon it’s our cash operation cost, a very efficient business. So if you get crude delivered to you at a couple of dollars less than some other market, it’s a huge competitive advantage and what’s you have on our chart on the lower right is what we believe is happening in this business between The Rockies and Appalachians that is your sweet spot in refining then they have obviously higher operating rates.

So I mentioned the Atlantic basin, some of the trade flow here, color coded for you with gasoline and diesel clearly Valero believes we are well positioned with our Pembroke Refinery, Quebec Refinery and of course U.S. Gulf Coast. These products move have a little more on this but Europe is systemically short diesel, Gasoline is going to Mexico, the Caribbean down into Brazil.

Diesel fuels actually got into Brazil. We removed products from Quebec but part of our business is trading and remember the natural gas comment it allows you to overcome some of the disadvantages because of the favorable decision that being freight, we can overcome it.

Now the world continues to grow. Even though I mentioned United States’ demand is really relatively flat, the world grows; we’re growing about 1 million barrels in the world, a little more you can see. We gave you a forecast number for ’14 being in the green the non-OECD, the U.S., just a little bit of growth primarily diesel and a couple of other products. Europe, very, very flat here for sure. But you see the world is still 1 million or so barrels a day of growth.

Now so it’s not all coming up roses because there is refining capacity being added in the world as you can see. And refining capacity is being added in excess of that demand slide. So you have to be very efficient; you have to have some competitive advantages here. So expects and indigent crude additions, capacity additions coming into the marketplace.

These tend to be in the emerging places where demand is growing. The Middle East, Asia, Latin America, and so our target to bottom shows you where these new capacity is coming on. So what does that mean, some of the markets like Brazil, Mexico, Ecuador, Peru, some of these capacity will be built, but not all of it. It’s very expensive.

When you talk about 230,000 barrel day refinery costing 12 to 15 billion, we talk about the Brazilian refinery, which is four years late and is now costing 20 billion. It’s so much money to build new capacity that a lot this will not be go because the U.S. Gulf Coast and thus the Gulf of Mexico there is excess products.

And that’s why products I think will move to those markets and not all that capacity rebuild. The Saudis will build, the Chinese will build, you have those come in. So then what has to happen is that we’ll continue to be shutdown and where is the price that’s long refining, very long and doesn’t have competitive advantage, Western Europe. And Western Europe is at least 1 million to 2 million barrels a day long.

Switching back to Valero, we have our capital spending here. In 2012 we spent 3.4 billion, capital spending has fallen. This year we’re in this 2.85 to 3 range, somewhere right in that range. Our capital spending has creeped up in ’13: one, because our St. Charles hydrocracker carryover into this year, spend couple of hundred million dollars that we’re not anticipating.

Our Diamond Green diesel project slept into this year. We’ve added some railcars. We’ve added purchases of some more working to logistics assets. So it’s creeped up and next year we’re giving you guidance of around $3 billion will be our budget for next year. Lot of the focus is on logistics because you have to have the logistics for the crude oil supply side and the marketing side.

So looking a little more at that growth component that orange on the previous slide. So on ’14, it’s 1.5 billion and in ’13 it’s 1.335. The two pie charts show you where that economic or discretionary capital is being spent. We give you how much is in logistics, which, as I mentioned, is obviously sizeable. You can see our hydrocrackers in ’13 now they go down. We’re still working a project at [Moro] to convert it to make more diesel fuel. You can see here that looking at our capital spending it’s gone from 50% discretionary to about 67% discretionary. The returns on the economic projects excluding the logistics but talking about these projects they are all exceeding 30% returns and that’s an IRR basis.

So talking some more about logistics. You can see here we’re doing, we have to be able to get the crude oil to the plants that are developing in areas that were not connected. So pipelines, rail, rail unloading, railcars, we bought 5,300 railcars. And then we have to be able to load the products more efficiently and also as I mentioned we're going to be able to load ships on our own dock in Corpus Christi for crude to send to Canada.

So all these assets that we're doing in this area though do have the potential to drop into an MLP and as this slide shows you, we're looking very seriously at MLP as we have disclosed, we are having to do what the other companies have had to, even though these businesses are profit centers within us they're not really set up as stand alone. So we’re having to go through, fix our tariffs, fix all of this stuff as the others had to do.

So our timing continues to move forward, our board has not approved this transaction but everyone is aware of the investor interests in us doing this and of the cost to capital benefits. And I would expect our timing is the first quarter of '14. Now the hydrocrackers are a big part of our business; we spend about 1.6 billion on each one of them, so about 3.2 billion. They're based on, or the strategy at the basis is low natural gas price, high oil.

So you go from natural gas to hydrogen, hydrogen to liquid, so there're gas to liquid project and then the strong distillate demand. You get a volume lift of about 20%. We’ve shown you in the past how that all happens in one of our appendix slides. But these are very good projects for us, we had to build new gas plants at each of the refineries so we’re able to handle more gas and running lighter oils as well.

So the Port Arthur is 57,000 barrels a day by permit, it’s performing very well, the St. Charles is 60,000 barrels a day, we were going to expand those right away and we're waiting on a permit at Port Arthur, at St. Charles. We have so much work that we’ve actually pushed those off to about 18, however we are continuing with our Meraux conversion which was the reason that we brought that refinery in the first place.

We had this plan to convert it to a basically hydrocracking distillate producing refinery and that continues and we’ll have that in '15. And even though this is a little different, we have our Diamond green diesel project with Darling as I mentioned and that is up and running as well. As other companies, we’re trying to figure out how to run more light sweet oil; it's coming to us very quickly.

So we had this strategy to replace some of the feedstocks we buy by running more, the chart on your right shows Houston and Corpus Christi so these are two refineries where we have more conversion capacity than crude oil capacity. So we're actually going to build crude toppers or crude fractionators there that will reduce our feedstock requirement with prices at basically world prices. So that we’re going to generate feedstocks based on this crude oil that's coming to the U.S. Gulf Coast, Houston and Corpus Christi, which will be advantage to St. James which will be advantaged against Brent.

So, we, these have very-very good returns as you can imagine, they're going to cost us somewhere in the neighborhood of about 350 million and we have the permits for these, so they're moving forward quickly. We have other opportunities at Port Arthur and Meraux to run more light sweet oil and us like other companies are clearly figuring out how to run more of this oil.

So most of the conversation we've had today is about swimming in light sweet oil on the U.S. Gulf Coast, and I would tell you that companies are figuring out ways to run more, they're still going to be discounted to the world market, it's going to push up the East Coast, it's going to push into Canada, but we are doing things just as other companies are.

We've also announced that we're looking at a methanol project at our St. Charles refinery we have a lot of hydrogen capability there which means you make Syngas CO; and so we are already in the BTX business, people forget that, benzene, toluene, and xylene, we're in the propylene business, we're in the sulfur business, we're in the asphalt business, we're in all these other business, we spend a lot of time talking about gasoline, diesel and jet, but we're in all these other businesses.

This is a nice little bolt on for us. We think this project, and the U.S. is an importer, the chart at the right shows some of the numbers, New Orleans is the biggest area where you import methanol with low natural gas prices making methanol in the United States, it just makes good sense. Because we have so much capability in hydrogen and Syngas we'll be able to do, we're going to take the Syngas, we'll buy some hydrogen at great numbers, we’ll go ahead and be able to do this project for about 50% of the cost that our grass roots plant, the U.S. as I said imports, you can see the size of the business, so we think this is a great opportunity for us to bolt something onto our assets at our St. Charles refinery. And we believe this will have well over 30% returns for Valero.

The other areas we're looking at is at alkylates, so remember in the refinery make a lot of alkylates. We have hydrofluoric products alkylation units, we have HF, we have sulfuric acid alkylation units. The chart on the upper right is the basis of what's going on here.

This is natural gas liquids, we talk about crude, we talk about natural gas, but here is the chart on natural gas liquids. If you just look at that between 2009 and '10 versus this forecast you can see here 2020, that's like a 1.5 million barrels a day in the liquids business. So the propane, the ethane, the butane, pentane they are coming and they are going to be at distressed pricing.

So what happens here is we're going to expand our alkylate unit at Houston, this is sulfuric acid unit and we think the returns will be well over 30% here. And as the chart in the lower right gives you an idea because you are taking butylenes, amylenes and you go ahead and react them with isobutene, you'll make alkylate. Look at the spreads, look what's happening to these spreads. So I think as you go through time you are going to see more gasoline made from some of these NGLs than from crude oil.

We have returned cash to the shareholders, as the year follows we spun off our retail, we say that was about $3.50 value for our shareholder, we still have 20% which we will sell, we have to sell with an 18 months at the spin. Most likely it will be sold by the end of the year. We have raised our dividend numerous times in the last two and three quarter years, we bought 41 million shares or about 8% of our stocks were an investment grade credit, we paid off debt over the last couple of years, our debt to cap is now 19%.

The chart in the lower right is only cash and it shows you how much cash we have returned to the shareholder and it does not include the retail spin that I just mentioned. So very shareholder focused here on returning cash to you our shareholders. So the core of our company, this is a refining and wholesale marketing company that has ethanol and has petrochemical opportunities and some in businesses, but we aren't improving our operations.

Many of our refineries were purchased and we have been improving them, our goal is first quartile and index surveys which is an industry benchmarking. Yes it bounces around very small differences separate these categories because U.S. industry is very efficient. But Valero will be in its portfolio of first quartile refining, and mechanical availability to one on the lower ride is key as you can imagine if your refineries are reliable than your safety performance, your environmental performance, your regulatory compliance are all better. And that's the last point on this page, you as our shareholders expect us to be all over this side, does it gets much pressed until something goes wrong.

So if we look at the third quarter versus the second quarter, gasoline is pretty weak on the Gulf Coast for sure. Remember our business is always seasonal and is always volatile, this is the business, it's a commodity driven business. Those fundamental changes that are happening they are solid natural gas crude oil NGLs, they are all happening in that corridor pipeline; it's all happening.

But yes we have today gasoline looks very weak, Gulf Coast has already switched the higher vapor pressure. So you see the big delta the New York harbor, New York harbor will switch here (15th) I think. You can see at the bottom in blue and red obviously Gulf Coast is a little better because the heavy [indiscernible] crude just widened, some of the other markets are weak. We gave you little guidance saying the third quarter capture looks about the same as the second quarter.

So we believe this is a volatile business; not for the weak of heart here. But we believe we’re in excellent buy, we believe there is corridor of U.S. refining is so well positioned to be a survivor in a market that's not really growing. The U.S. market is not growing, yet we have a very, very bright future. So the oil, the gas we think its common the infrastructure being built by us and others, no question about it. The Gulf Coast is the best place; remember what I said you can still do things on the U.S. Gulf Coast.

Natural gas is a huge competitive advantage and today it looks like our resource base in North America, it's almost on limit. I hate this, used words like that. But this technology breakthrough is just absolutely the biggest thing in my carrier, so we think we can competitively export, we have a balanced approach to investment in returning cash to our shareholder, we’ll be in very selective on projects and I do feel it’s our job to add shareholder value here.

It just happens though is be long term, these are capital intensive long term projects. We unlock value while the retail, we are working the AMLP and have that, we are growing our dividends and we have been concentrating value but we will add shareholder value but it’s a long term commitment that has to be made.

Thank you very much for your attention.

Question-and-Answer Session

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Valero Energy Corporation's CEO Presents at Barclays CEO Energy-Power Conference (Transcript)
This Transcript
All Transcripts