Valero Energy's (VLO) CEO Joe Gorder on Q4 2015 Results - Earnings Call Transcript

| About: Valero Energy (VLO)

Valero Energy Corporation (NYSE:VLO)

Q4 2015 Earnings Conference Call

January 28, 2016 11:00 AM ET

Executives

John Locke - VP, Investor Relations

Joe Gorder - Chairman, President & Chief Executive Officer

Mike Ciskowski - EVP, Chief Financial Officer

Lane Riggs - EVP, Refining Operations and Engineering

Gary Simmons - SVP, Supply, International Operations & Systems Optimization

Rich Lashway - VP, Logistics Operations

Analysts

Blake Fernandez - Howard Weil

Neil Mehta - Goldman Sachs

ED Westlake - Credit Suisse

Evan Calio - Morgan Stanley

Paul Cheng - Barclays

Jeff Dietert - Simmons

Roger Read - Wells Fargo

Sam Margolin - Cowen & Company

Phil Gresh - JPMorgan

Ryan Todd - Deutsche Bank

Doug Leggate - Bank of America/Merrill Lynch

Chi Chow - Tudor, Pickering & Holt

Faisel Khan - Citigroup

Brad Heffern - RBC Capital Markets

Vikas Dwivedi - Macquarie Group

Operator

Welcome to the Valero Energy Corporation reports 2015 Fourth Quarter earnings conference call. My name is Yolanda, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

It's now my pleasure to turn the call over to Mr. John Locke. You may begin.

John Locke

Good morning, and welcome to Valero Energy Corporation's fourth quarter 2015 earnings conference call. With me today are Joe Gorder, our Chairman, President and Chief Executive Officer; Mike Ciskowski, our Executive Vice President and CFO; Lane Riggs, our Executive Vice President of Refining Operations and Engineering; Jay Browning, our Executive Vice President and General Counsel; 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 Valero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call.

I would 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 filings with the SEC.

Now I will turn the call over to Joe for a few opening remarks.

Joe Gorder

Well, thanks John, and good morning, everyone. The fourth quarter and full year 2015 were really great for Valero. We operated safely and reliably achieving our lowest ever employee injury rate in refining and reaching an annual average refinery utilization rates of 95%. The markets were favorable during the quarter. Domestic product demand grew supported by lower pump prices and sour crude discounts relative to Brent were attractive to our highly complex refining system.

While distillate margins were pressured during unseasonably warm weather in North America and Europe, distillate demand in Latin America remained robust. In fact we exported record volumes of distillate and gasoline in the fourth quarter. We continue to execute well in our projects. In the quarter, we successfully commissioned the new Corpus Christi crude unit, the Port Arthur gas oil hydrocracker expansion and the McKee crude unit expansion.

Our Quebec City refinery also began receiving crude via Enbridge’s Line 9B. We exercised our option with Plains All American to acquire a 50% interest in the Diamond crude oil pipeline project. Once completed this project will connect Cushing with Memphis and provide us with crude optionality and long-term cost savings versus sourcing crude oil from St. James.

Additionally, Valero Energy Partners continue to execute its growth strategy and Valero GP’s interest in VLP reached the high splits with the distribution increase we announced earlier this week. We also continued to advance our refining growth strategy. Construction of the Houston crude unit remains on schedule with start-up planned in the second quarter of 2016. And earlier this month, our Board of Directors approved the Houston Appalachian project. This project is estimated to cost $300 million and is expected to be completed in the first half of 2019.

And finally regarding cash returns to stockholders, we paid out 80% of our 2015 adjusted net income exceeding the 75% annual payout target. Further demonstrating our belief of Valero’s earnings potential, last week our Board of Directors approved a 20% increase in the regular quarterly dividend $.60 per share or $2.40 annually.

With that John, I’ll hand it back over to you.

John Locke

Okay, thank you Joe. Moving on to the results, we reported fourth quarter 2015 adjusted net income from continuing operations of $862 million or $1.79 per share versus $952 million or $1.83 per share for the fourth quarter of 2014. Actual net income from continuing operations was $298 million or $0.62 per share, which compares to $1.2 billion or $2.22 per share in the fourth quarter of 2014.

Please refer to the reconciliations of actual to adjusted amounts as shown in the financial tables that accompany our release. For 2015, we reported adjusted net income from continuing operations of $4.6 billion or $9.24 per share compared to $3.5 billion or $6.68 per share for 2014. Actual net income from continuing operations was $4 billion or $7.99 per share in 2015 versus $3.7 billion or $6.97 per share in 2014.

Fourth quarter 2015 refining segments adjusted operating income of $1.5 billion was in line with the fourth quarter of 2014. Stronger gasoline and other product margins combined with higher refining throughput volumes were offset by lower distillate and petrochemical margins and lower discount for sweet crude oils relative to Brent crude oil.

Refining throughput volumes averaged 2.9 million barrels per day which was 34,000 barrels per day higher than the fourth quarter of 2014. Our refineries operated at 97% throughput capacity utilization in the fourth quarter of 2015. Refining cash operating expenses of $3.47 per barrel were $0.29 per barrel lower than the fourth quarter of 2014, largely driven by favorable property tax settlements and reserve adjustments and lower energy cost.

The Ethanol segment generated $37 million of adjusted operating income in the fourth quarter of 2015 versus $154 million in the fourth quarter of 2014 due primarily to lower gross margin per gallon driven by a decline in ethanol prices versus relatively stable corn prices.

For the fourth quarter of 2015, general and administrative expenses excluding corporate depreciation were $206 million and net interest expense was $107 million. Depreciation and amortization expense was $494 million and the effective tax rate was 28% in the fourth quarter of 2015. The effective tax rate was lower than expected due primarily to a reduction in the statutory tax rate in the United Kingdom and the settlement of income tax audits in the United States.

With respect to our balance sheet at quarter end, total debt was $7.4 billion and cash and temporary cash investments were $4.1 billion, of which $81 million was held by VLP. Valero's debt-to-capitalization ratio, net of $2 billion in cash, was 20%. We have a $5.6 billion of available liquidity excluding cash. The cash flows in the fourth quarter included $732 million of capital investments, of which $164 million was for turnarounds and catalysts, and $136 million was for our investment in the Diamond pipeline.

For 2015 capital investment included $1.4 billion for stay-in business and $1 billion for growth. We returned $1 billion in cash for our stockholders in the fourth quarter which included $240 million in dividend payment and $767 million for the purchase of $11.1 million shares of Valero common stock. For 2015 we purchased 44.9 million shares for $2.8 billion. For 2016, we maintain our guidance of $2.6 billion for capital investments including turnarounds catalyst, joint venture and strategic investments. This consists of approximately $1.6 billion for stay-in business and $1 billion for growth.

For modeling our first quarter operations we expect throughout volumes to fall within the following ranges. US Gulf Coast at 1.61 million to 1.66 million barrels per day, US Mid-Continent at 430,000 to 450,000 barrels per day, US West Coast at 245,000 to 265,000 barrels per day, and North Atlantic at 465,000 to 485,000 barrels per day.

We expect refining cash operating expenses in the first quarter to be approximately $3.85 per barrel. Our Ethanol segment is expected to produce a total of 3.8 million gallons per day in the first quarter. Operating expenses should average $0.37 per gallon, which includes $0.05 per gallon for non-cash cost, such as depreciation and amortization.

We expect G&A expenses excluding corporate depreciation for the first quarter to be around a $175 million and net interest expense should be about $110 million. Total depreciation and amortization expense should be approximately $470 million and our effective tax rate is expected to be around 32%.

That concludes our opening remarks. Now before we open the call to questions, we again respectfully request the callers adhere to our protocol of limiting each turn in the Q&A to two questions. This will help us ensure that other callers have time to ask their questions which are also important. If you have more than two questions please rejoin the queue as time permits.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Blake Fernandez from Howard Weil. Your line is open.

Blake Fernandez

Guys, good morning. Just a quick question on the alkylation unit. First, can you provide any kind of return expectations that you have for the project? And then secondly on the spending profile, it looks like your CapEx guidance in the 2016 is about the same as it was before. So, I’m just kind of confirming that most of the spending probably is weighted towards 2017 and 2018?

Lane Riggs

Well, hey, Blake, this is Lane. Yes, the Board approved the alkylation unit [normally] [ph] about $300 million, the [indiscernible] EBITDA is about $105 million, if you use 2015 prices it would be about $140 million EBITDA. With respect to the budget we, when you look at our original - when we gave out the 2016 guidance on our budget for this year two years ago, it’s up about a $100 million and it’s normally the Port Arthur turnaround. We have little more turnaround than we had in our outlook was two years ago, but certainly and then all the rest of it, the alky is clearly fitting inside our $100 billion a year strategic capital, it’s normally about $100 million a year and it is back-weighted like you said towards 2017 and 2018.

Blake Fernandez

Okay, Lane. Secondly, just maybe if you don’t mind sharing some thoughts around light heavy spreads into 2016 and I guess what I am thinking especially in light of Iranian barrels coming to market that could potentially displace some other barrels globally, seems like maybe that would have an indirect benefit to Valero given your - given your leverage to Gulf Coast in heavy processing?

Gary Simmons

Yes. Blake, this is Gary Simmons, you know overall, yes, we’ve seen very good spreads between the medium sours and light and heavy sours as well. And certainly the Iranian production coming online will put further pressure on those differentials. I think we see several things in the market, you know the increase in OPEC productions, putting medium sour barrels into the Gulf. You see Gulf of Mexico deep-water medium sour production rising at the same time we’re seeing some of the light sweet production falling off here in the United States so it’s leading to very good differentials.

I think the other thing that you know, a fundamental shift is where fuel oil had been trading around 80% of Brent, it’s now trading around 60% of Brent, which should mean that, we would expect to see good medium sour and heavy sour differential throughout the year. I think the other thing for us, the Iranian production, of course we won’t be running any of those barrels, but we do think the market rebalances and make some additional heavy and medium grades available to us from Latin America.

Blake Fernandez

Great, thanks for the color, Gary. I appreciate it guys.

Operator

And our next question comes from Neil Mehta from Goldman Sachs. Your line is open.

Neil Mehta

Hey, good morning.

Joe Gorder

Good morning, Neil.

Neil Mehta

So Joe and Gary, you guys have a unique window into what’s happening from a product demand perspective, it’s one of the big debates in the oil markets right now. Can you talk about what the export markets look like from your perspective for diesel and gasoline, and then to piggy back off of that, you’ve seen four weeks now of these gasoline builds in the [BOEs] [ph], is that consistent with what you’re seeing on the ground?

Gary Simmons

Yes, Neil, this is Gary. I think we continue to see very good export demand for our products, as Joe mentioned we had record volumes in the fourth quarter, we continue to see good demand for both distillate and gasoline abroad. Our rack volumes remain very strong; we’re moving a lot of products over the racks, have seen good domestic demand for our product as well. Certainly, I think when you get this early in the year it’s kind of hard to dissect the [BOE] [ph] data, we’ve seen large builds as well, some of the data does look a little suspect.

I think we’ve seen a lot of weather issues in the Gulf, that our belief may have been that it hindered some of the waterborne barrels from being able to leave due to fog and weather that we have had in the Gulf. The Mississippi River flooding also has hindered some of the refiners along the river, their ability to clear those barrels as well. I think we’re just too early to really get a good view of what demand’s going to look like, but everything from us, our perspective looks good.

Joe Gorder

Yes. The fundamentals I think for strong demand are still there. There is no question about that, I mean we continue to have prices that are very attractive at the street and then there is a lot of data that’s coming out recently on vehicle miles traveled being up and also on, auto sales being skewed towards larger SUVs and light heavy trucks. So, again as Gary said, it seems like every January Neil we find ourselves in a situation where we’re looking at the year and everybody is trying to figure out, oh gee, is this over and is demand going to be totally eroded, and as he said I think it’s just a little early to tell, but fundamentally it looks like things should go well for us going forward.

Neil Mehta

I appreciate that. The second question Joe, this to you is, just the outlook for M&A and I think in the past you’ve said that you want to see that relative multiple between Valero and the Group move a little bit higher before you be more aggressive around M&A. So just your latest thoughts there and then also at the parent level and the also at the midstream level.

Joe Gorder

Okay, and Neil, we gave, we gave Ciskow the responsibility for this M&A activity, which he greatly appreciated, the added a responsibility. So if I give him a crack at this to start?

Mike Ciskowski

Yes, thanks Joe. I appreciate it. For Valero our appetite for midstream M&A and M&A in general hasn’t changed. We continue to look at opportunities particularly those that support the earnings growth that we can achieve in our core business. The good news is we have a great portfolio and significant earnings capability as we demonstrated in 2015. More specific to the VLP, VLP hasn’t reached the size where it can execute most of the M&A transactions on its own. But we do continue to evaluate opportunities there as well.

But as we said before we remain committed to VLP’s dropdown growth strategy and we’re not interested in a step up transaction that would change VLP’s risk profile or its growth story.

Neil Mehta

I appreciate that Joe and Ciskow, thank you.

Operator

Thanks Neil. Our next question comes from ED Westlake from Credit Suisse. Your line is open.

Ed Westlake

Good morning. Congrats. I think this time last year I’d said I was going to drive down an F350 to Disney World and would that be enough gasoline yield from Valero and other refiners in the summer to make it possible for me to do so? So, I’m going to ask the same question after a year of looking at gasoline markets and some very strong cracks and strong demands. What are you guys doing to be able to make more summer grade gasoline?

Gary Simmons

In the short run, I don’t think we really have anything that we have on the horizon that’s going to be able to increase our gasoline yield, but the big thing is the alky project that Lane mentioned that will give us additional ability in terms of making additional gasoline when that project comes online.

Joe Gorder

We are in maximum gasoline mode now though it’s [indiscernible].

Gary Simmons

That’s right, we are.

Ed Westlake

Okay. And then switching to the self help, obviously the toppers coming on stream, so we start to see them maybe in 4Q and into this year. You used to have sort of $500 million number, I think that’s gone down to 430 million, just a reminder what you think key drivers will be in terms of the spreads driving that 430.

Lane Riggs

Hi, this is Lane. So the funny decision on both those units we had Brent and LLS, [indiscernible] pretty much in that environment if you want to - and we like to reference the historical price set. So if you look at those projects in 2015 the Corpus unit would give us about $200 million of EBITDA and the Houston crude unit would be about 230, so those are - and those are slightly [indiscernible] obviously are funding decision that in the current market we’re pretty much at our funding decision. Maybe and as Joe allude to the Houston crude unit will start up in the second quarter and we fired up the crude unit in Corpus Christi without any incident and started fine.

Ed Westlake

Okay. And it’s mainly crude against [VGO] [ph] spreads we should look at?

Lane Riggs

That’s right, the driver here is crude versus really resid, so low sulphur resids.

Ed Westlake

Okay, helpful. Thank you.

Operator

And we have a question from Evan Calio from Morgan Stanley. Your line is open.

Evan Calio

Good morning guys. Maybe a follow on to the product demand question, given the macro uncertainty pacing your cash returns to the net income makes sense on a quarterly basis. Ye how do you think about using the balance sheet to fund the cash returns buyback and has that changed at all given that macro uncertainty or share price volatility?

Mike Ciskowski

Well, our balance sheet is, Evan this is Mike, balance sheet is very, very strong and we intend to keep it that way. Our guidance is to pay out 75% of net income for 2016. So, as far as levering up [indiscernible] to meet that target, I'm not sure it will be required to do that. It's early in the year. So we'll just have to see how the year plays out.

Evan Calio

Got it. And then, maybe a different follow-up on you shared the EBITDA on all these new projects, it will be contributing in 2016 and Corpus, Port Arthur, McKee and Houston in 1Q. I mean any color in aggregate how they affect your crude slate flexibility or just related, given, the right economic indicators, where do you need to max out your heavy sour and medium sour runs?

Gary Simmons

Yes. So the topper really just gave us more capability to run domestic light sweet barrels or foreign light sweet barrels. It really added to that. We haven't done anything that really materially changes our ability to process medium or heavy sour grades in our system. It was mainly of those two units are adding 160,000 barrels a day of light sweet capacity.

Evan Calio

Right, and then but the up-tick quarter-to-quarter on overall heavy and medium sour runs, where could that be? And I'm sure that's an average number. So I'm just trying to get a sense of -- if you are kind of max flexed to this point or where you could take that?

Lane Riggs

I’d like to give you a little color on that, Evan. I will take the topper out so you can kind of have an apples-to-apples comparison. If you take the toppers out between last quarter and where we are today, we backed out about 400,000 barrels a day of lower 48 domestic light sweet crude and we've replaced that with medium sour grades and foreign light sweet imports. That's the big change in our system; heavy sours are about the same.

Evan Calio

Got it. Appreciate it.

Operator

Paul Cheng from Barclays, your line is now open.

Paul Cheng

Hi, guys. Good morning.

Joe Gorder

Hi, Paul.

Paul Cheng

Mike, actually this is for you. I'm going to ask from the other angle on the balance sheet. The last several years that you guys have done phenomenally well both operationally and financially and also the return to shareholder. I was just curious that as the cash flow remain strong at this point, does it make sense even though you already have a very, very strong balance sheet to maybe utilize a part of the free cash flow, maybe 20% or so, to further strengthen the balance sheet. I think that we all live through the up and down while I'm always on the market, I could be wrong. And that we have seen what happened, everyone was bullish in 2007 and then the bottom fell off because of the economy. So should we actually pick maybe a slightly different view at this point just as a safeguard to ensure that we build up some additional cushion even though your balance sheet is already remarkably strong but if the cash flow cut by half then maybe that will allow you to even have better opportunity to strike and pick the opportunity everyone is weak?

Mike Ciskowski

Okay. That's a quite a question Paul. And I remember those days very well. Our balance sheet is very strong and we intend to keep it that way. If you're suggesting that we build cash here, our current focus is to continue to look for opportunities to grow our business and increase our earnings per share. But if you are suggesting that we prepay some debt, the majority of our remaining debt contains make whole provision that made those prepayments less than compelling.

Paul Cheng

I see. So that you won't -- you won't able to prepay and you won't say add-on some additional cushion into your balance sheet by adding cash?

Mike Ciskowski

No. I don't think at this time that’s what we will be doing. I think we can execute on our payout strategy and all that as I said earlier without levering up the balance sheet.

Paul Cheng

And that, Joe, just curious that with that, I think that some of the other company in distress and look like some retail asset maybe become cheaper. If you're looking at your portfolio, does it make sense that the entry point is right for you to reenter into retail by doing so that can -- maybe that cushion your gains, over the [indiscernible] gains, any win -- win cost increase or that to provide even a more direct outlet to your own refi product? Or that this is you’re really not interested in going back into that business?

Joe Gorder

No, Paul, that's a good question. We look at it periodically. The retail business is materially different from the refining business, and you know that, I mean we’re refining is capital intensive and [indiscernible] people and the retail business is people intensive. And we – when we look at it, I think our view would generally be that we don’t need to control the retail outlet to be able to be a very good supplier into that market. And so frankly what we’re focused on is, it’s further extending our wholesale business, where we can have contractual relationships and support the Valero brand hit the street from the wholesale side rather than from a direct retail operation. If you reflect back on our retail volumes when we owned CST in the 1000 or so sites in Canada, the volume we moved through them was about a 125,000 barrels a day. And when you look at that as its order of magnitude relative to the total motor fuels that Valero is producing it’s a very small percentage.

It would take a real huge step for us to have any kind of material presence to really allow us to hedge the benefits associated with owning retail directly. So, I don’t know that unless there was really something that was just incredibly good are allowed us to sustain our contractual relationships with customers I don’t see us reentering that market in the retail business.

Paul Cheng

Thank you.

Operator

And our next question comes from Jeff Dietert from Simmons and Company. Your line is open.

Jeff Dietert

Hey, it's Jeff Dietert with Simmons, good morning.

John Locke

Good morning, Jeff.

Jeff Dietert

I appreciate the update on all the projects, I think the St. Charles hydrocracker, I didn’t see an update on that, I apologize if I missed it. But could you talk about St. Charles?

Lane Riggs

Hi, this is Lane. So, we’re currently changing the catalyst out and the capital - it’s a small capital project, $40 million and it’s just really a catalyst change out which is based on the cycle that we, when we change out the catalyst and the capital implementation or doing it right now. So it will be ready to go here in the second quarter.

Jeff Dietert

Okay. And could you talk about your EBITDA expectations on Port Arthur and St. Charles hydrocrackers what those are expected to contribute?

Lane Riggs

Well, we spent normally about $80 million on the two and our funding decision EBITDA somewhere between a total of $60 million to $80 million so these are an example of the sort quick hitting, self-help, these were also the low hanging fruit to sort of arbitrage out that there may be some [indiscernible], enough to figure out where we can put a little capital and get a pretty good hit on it, so I don’t know if that will show up in the revenue stream or something like that to you guys, it will certainly show up in our margin capture going forward.

Jeff Dietert

And could you talk a little bit about Line 9 now that it’s started up and what your flexibility is to take Canadian heavy versus Syn crude versus Bakken, what’s the flexibility there in an environment where you are encouraged to take those grades.

Gary Simmons

Yes, this is Gary. So Line 9 we began taking crude in December, it’s fully up and operational and at capacity; in terms of flexibility of grades, all of our crudes to Line 9 through Montreal and we really don’t have logistics to be taking heavier or medium sours, it’s pretty much just for light sweet crude for the Quebec refinery.

Jeff Dietert

Great. Thanks for your comments.

Operator

Our next question comes from Roger Read from Wells Fargo. Your line is open.

Roger Read

Yes, thank you. Good morning.

Joe Gorder

Hi, Roger.

Roger Read

I guess maybe coming back to the gasoline question for this summer, octane ability as you look around what do you think the biggest roadblock will be again, is it going to the Octane alkylate side, is it going to be blending stocks and what is your assumption for gasoline demand growth this year, as you set up your expectations and budget?

Gary Simmons

Hey, Roger. This is Gary. I think we see that as long as we have a strong gasoline market and we have [indiscernible] sub-octane blend component like naphtha the gasoline pool is going to try to draw naphtha in and it’s going to mean octane is fairly expensive. And so we expect to see alkylate values fairly strong again this summer. I don’t see anything on the horizon that really leads me to believe that it’s going to change anytime soon.

Roger Read

Then where, where will the industry look, I mean if you thought about it as a long hanging fruit thing, where would you be looking to pick up octane? I mean one of the thoughts is if US light sweet is declining and we are importing a light barrel, maybe we create a little bit more that way since the US barrel’s tended to be on the low end for octane, but where else should we consider?

Gary Simmons

Well, I think for us we’ve tried to look everywhere we can and this alky project was the best thing that we really felt was out there; we’ve studied reforming, expanding reforming [indiscernible] new reformers and the alky project has the best return in our system.

Roger Read

But I mean more near-term, is there, are we just going to struggle 16 and 17, I mean I understand where we are in 19 but…?

Gary Simmons

Yes, I think we will. I don’t see anything in the near term that that’s going to have a significant impact on the octane balance.

Roger Read

Okay. Great. Thank you.

Operator

Sam Margolin from Cowen & Company

Sam Margolin

Hey, good morning.

Joe Gorder

Hi, Sam.

Sam Margolin

I wanted to ask one more about the alky project here. There is a couple of others out there in the system, a lot of times these units as newly built units are paired with like a midstream acquisition or some other project to produce the feed by the operator. But is it fair to say that there is no real necessity to commit capital to source incremental NGLs here there is plenty available and so this alky unit can be built as a standalone or actually is it, does it, is it paired with maybe something coming off the toppers or another attribute of your yield right now?

Lane Riggs

Hi, Sam. This is Lane. Ours is a little bit different I’d say than other people in the industry and what we’re doing is we’re taking existing alkylation unit at Houston and we’re converting it to alkylate C5 olefins; normally alkylation units alkylate C4 olefins and sometime C3 olefins. So we’re taking the existing blend and retrofit it such that alkylate C5 olefins and we are building a new C4 olefins. What we are really doing if you draw, drew a boundary around the Houston refinery is we are shifting C5 olefins that are going out [indiscernible] gasoline, bringing in IC4 from Mont Belvieu which is readily available and inexpensive that’s really what’s happening in making an alkylate and also blending some additional butane for the low RVP, that’s really what this project is. So it is different than I would say other people that are looking at this, and we are clearly ahead of everybody else in the industry with this projects.

Sam Margolin

Okay. Yes, that makes sense. I think it’s been evaluated for quite a while, so it’s clear that there is a lot of, I guess, gone into the process. This next one is sort of a moon shot, as you know, it’s been reported Aramco is maybe looking to monetize some assets, you might also know that Shell has a fairly aggressive divestment target too. I don’t know, is it fair to say that Motiva today is at least as attractive or as sensible of a consolidation candidate as maybe CITGO was two years ago in terms of sort of what’s out there to bring into the fold, to the extent that I think Mike kind of alluded to the appetite hasn’t changed but I don’t know maybe availability of assets has?

Joe Gorder

Well, Sam that is a moon shot. I mean Motiva has a good business and they’ve got good assets and if they we’re for sale I’d suspect that we’d take a really good hard look at it, but we are not hearing anything, I hadn’t heard anything that they are in the market.

Sam Margolin

All right, appreciate it. Have a good one.

Joe Gorder

You bet. Take care.

Operator

Phil Gresh from JPMorgan. Your line is now open.

Phil Gresh

Hey, good morning.

Joe Gorder

Hi Phil.

Phil Gresh

First question just on VLP, how are you thinking about the drop down potential of VLP this year? Last year I think you had committed to a billion in drops, but you didn’t give any specific commentary on the release. So I’m just curios how you are thinking about the MLP market more broadly, evaluation, impacts etcetera?

Mike Ciskowski

Okay. Yes I feel right now a billion is our current plan toward the dropdown. But, the capital markets are pretty challenging right now. So we’ll just have to continue to monitor this as we move through the year.

Phil Gresh

Okay. Second question is just there has been some talk about the uplift we could see from greater utilization rates from these Chinese refineries and the impact that could have on product export by China. I’m just wondering how your speaking about this risk and do you think China’s product quality can complete on the global market especially on the gasoline side?

Gary Simmons

I can, Phil. This is Gary, I don’t know that I can really comment on the quality of their products, overall to me that capacity is capacity that’s going to be very challenged globally because of the weak fuel market. It’s going to be very difficult to run load complexity, capacity with the very low fuel environment.

Phil Gresh

Okay. Thank you.

Operator

Ryan Todd from Deutsche Bank. Your line is now open.

Ryan Todd

Hey, thanks, good morning gentlemen, maybe said I wanted to say, maybe a quick follow up on the prior question on potential drop to VLP, I mean any thoughts as to what the next might look like between cash proceeds and equity, the Valero or any thoughts on evolution of multiples of those drops or too much uncertainty in the market at this point.

Joe Gorder

While there is a quite a bit of uncertainty in the market. So, at this point in time I really can’t comment on how the cash proceeds would be and how the financing of those drops would be structured.

Ryan Todd

Okay. And then, maybe one follow up, I appreciate the comment you made earlier in terms of, some of your thoughts on medium sour and heavy sour differential in the sustainability going forward. Maybe can you give me any thoughts in terms of how you see light sweet desk whether its Brent WTI or LLS WTI evolved over the next three to six months, so we are going to need to see a widening of those spreads in order to clear Cushing and to incentivize imports and in particular I was kind of curious given the fact that you backed off 400,000 barrels a day of lower 40 light crude to your system, just generally how you’ve seen, what your outlook is for the light sweet differential going forward over the next, over the course of this year?

Gary Simmons

This is Gary. I think over time LLS and Brent traded pretty close to parity, but I think we are going to have a lot of volatility between the grades as the year goes on. So, you know you can see LLS got, has to pay a premium for LLS and Brent, so we started importing foreign light sweets, we have the inventory gains here in the US, which I think tells you LLS was too expensive, so that LLS we discounted. I think we’ll go through that volatility for the next six months, where we swing in and out of domestic light sweet production into our refining system.

Ryan Todd

Thanks. I appreciate that.

Operator

Doug Leggate from Bank of America/Merrill Lynch. Your line is now open.

Doug Leggate

Hi. Thanks. Good morning everybody. Thanks Joe. So Joe, I wanted to go back to your comments on gasoline, I think you said you were in max gasoline mode right now, what I am trying to understand is what happens to gasoline yields as the US swings back to imports on light sweet crude declines, I know everyone is focused on octane but, I’m just wondering if you start to see a tightening of the balance [indiscernible] gasoline at this point I’m guessing that’s because --, I’m just trying to understand the interplay as you see, things going in for the summer. So, I guess I’m really looking to your prognosis on how those things bounce at?

Joe Gorder

Gary do you want to go ahead?

Gary Simmons

Yes. Overall, if you look at foreign light sweet barrel versus an Eagle Ford or Bakken type barrel and nasty yield from West African Saharan barrel is about the same as Bakken or Eagle Ford. So in terms of refining yield it’s not significantly different whether we are running at West African barrel or we’re running at domestic light sweet barrel.

Doug Leggate

Well as you swing back towards medium-heavy, does the yield makes change to them?

Gary Simmons

Yes, for medium to heavy barrel, it would accept for most of the refineries were running those barrels are very high complex refining assets. And again we don’t see much of a yield difference with the complexity of our refineries when we’re running a heavier diet. The only thing that we can get into is as we go heavy in some of our plants it can lower our utilization. So we get a lever effect by running light sweet at some of our refineries. So we have a big incentive to run much heavier crude diet it can mean that we are running slightly lower crude rate at some of those plants.

Doug Leggate

It tells me about the old school I guess. Thanks for that. My follow-up, it’s probably more a Ciskowski question. Mike, , the tax rate looks like it’s been consistently low now or becoming kind of a regular thing, so should we be looking at tax rate guidance moving lower as kind of permanent shift?

Joe Gorder

Well, we had a couple of unique items this past – this past quarter, because of the tax law finally was, they got final approval in the UK and then we had, we have some audits that are underway in the US and we happened to get those settled this quarter, and so that was reflective which pushed the rate down to 28%. So, we tried to do, the best that we can and given that guidance to you. But, 31%, 32% is what I would say for the first quarter.

Doug Leggate

Is that a good run rate going forward?

Joe Gorder

Yes, right now that would.

Doug Leggate

Okay, helpful. Thanks everybody.

Operator

Our next question comes from Chi Chow from Tudor, Pickering & Holt. Your line is open.

Chi Chow

Great, thank you.

Joe Gorder

Hey Chi.

Chi Chow

Hey, how are you doing Joe. Back on the products markets, can you comment on how you’re assessing the supply demand balance of the global distillate market heading into this year? We saw material weakening of the diesel cracks as the year progress last year and just wondering on your thoughts on cause of this?

Gary Simmons

Yes, Chi, this is Gary Simmons. Overall, I think if you look at what drive distillate demand, its weather and then its economic activity and thus far, both in the US and in North West Europe we’ve had warmer winters than what we’ve historically had and so it led to lower distillate demand. So in terms of how do we correct from here, I think a lot of that correction gets back to some of this low complexity refining capacity with discounted fuel oil pricing, I think you know we’ll see some economic run cuts and some of that low complexity, capacity that will bring the distillate market back into balance .

Chi Chow

What about the economic activity side of things, I mean you are seeing, you mentioned your exports are still pretty good, but are you concerned about global slowdown on the economic front?

Joe Gorder

I don’t know that I can really comment on the global economic activity, but I can say we continue to see very robust demand for our products throughout the globe.

Chi Chow

What your exports of gasoline and diesel in the quarter?

Joe Gorder

Yes. In gasoline we did 157,000 barrels a day of gasoline, we did 264,000 barrels a day of diesel, if you add kerosene in with that it would be 307,000 barrels a day of total distillate.

Chi Chow

Okay, thank you. One other question, this is just kind of specific to your Gulf Coast system, we just noticed that your realized margin capture rate versus your index is always better in the fourth quarter in the Gulf Coast than the other three quarters of the year and that been pretty consistent last four years running. Why is that the case, is there any specific reason for that?

Joe Gorder

Well, I would say, certainly the butane blending would come into play there and so as butane has been discounted and we’re able to blend it into the pool, it helps our capture rates, I don’t know if you have anything else.

Lane Riggs

Hi, Chi. [This is Lane]. I want to add, normally seasonally what you see is medium to heavy sour discount widen out. So when you’re using for the standard capture rate versus light sweet we always outperform on that as well.

Chi Chow

Okay. Hey, thanks Lane, I appreciate it.

Operator

Our next question comes from Faisel Khan from Citigroup. Your line is open.

Faisel Khan

Good morning guys.

Joe Gorder

Good morning.

Faisel Khan

Just quick question on the timing of the projects that came online in the fourth quarter, the Corpus Christi crude unit, the hydrocracker and the expansion of the key and it is also Line 9B sort of highlighted that was December startup, how did those start up in the quarter I’m just trying to understand so what the contribution was from the commissioning of these assets in the quarter, just sort of we get sort of the uplift right going into 2016?

Lane Riggs

Hey, it’s Lane. The key we finished that project which really took us about two years fully implement the entire scope that which was two things one was energy efficiency project and distillate recovering the second was sort plus crude rate. We finished it in October. I assume that what you’re after. You’re sort of after the timing --. And further again hydrocracker was down in October and they replaced the catalyst and did the expansion and then Corpus Christi really started up during sort of early to mid December so wouldn’t see anything with respect to it, fourth quarter improvement that’s really going to be entirely 2016 thing.

Faisel Khan

Okay, got it. And the key we would have seen full contribution in the quarter, but sounds like Port Arthur was down in October and then of course nothing from the Corpus?

Lane Riggs

That’s right. Nothing from Corpus and obviously St. Charles are doing right now.

Faisel Khan

Okay. And then, right now given were crude prices are in Canada versus the Atlantic Basin is it make sense to max out Line 9B or where are we with the market in terms of how we benefit from that?

Lane Riggs

Yes. So, I would tell you on Line 9B we are seeing some value in the Bakken that we are running most of the Western Canadian light sweets we are not seeing material difference in being uplift in running those barrels compared to foreign light sweets that we get acquired into Quebec.

Faisel Khan

Got it. Okay. Great, thanks for the time guys, I appreciate it.

Operator

Our next question comes from Vikas Dwivedi from Macquarie Group. Your line is open.

Vikas Dwivedi

Hey, guys, quick question on gasoline and ethanol now, they’ve been inverted for a while. Does that change how you guys blend or any of the approach to the overall gasoline operation given, sort of upside down from formal?

Martin Parrish

It's Martin Parrish, it’s really the impact on the blending margin not only refineries margins, ethanol is selling at about its blend value everything kind of the blend value that’s high octane. You have to remember that the blender still gets the RINs if they choose to blend ethanol. So, I know it works out, I don’t, I would say there’s really no impact – get it blended.

Vikas Dwivedi

Got it. And coming back to the LP plant is the C5 technology is that also a call on, kind of an oversupplied ethane or ethylene market down the road?

Joe Gorder

I don’t know want to, it’s not my call, it just really, you look at whole NGL market it’s been pretty, if this is been long, and it really a view that we can take and move NGL into the gasoline pool and we can do it by [alkylating amylene] in the refinery which is a little bit different and it makes a good high octane low RVP component which then in turn allows us to blend additional butane in the summer in particular.

Vikas Dwivedi

Got it. And we were just thinking if it was a call that would be a great call. I think when we are drowning in the lighter end of the NGL barrel for a long time that?

Joe Gorder

I wouldn’t call it ethane, it’s a whole NGL space right which we believe is virtually long going forward to.

Vikas Dwivedi

Yes. All right. Thank you, guys.

Operator

We have a question from Brad Heffern from RBC Capital Markets. Your line is open.

Brad Heffern

Good morning everyone.

Joe Gorder

Good morning.

Brad Heffern

Circling back to the VLP, I’m just curious we all know the uncertainty the turmoil in the capital markets, but it seems like the strategy is basically unchanged and you have 55% of the growth in 2016 in terms of budget going into VLP. At point do you think about that and maybe re-examine the pace of growth given that the market doesn’t necessarily seem to be rewarding growth as much as it once was?

Joe Gorder

Yes. We will continue to – right now our plan is to do the billion dollars, but we’ll continue to examine and monitor the markets as we move through the year. It is very challenging right now, we do have our revolver that we could use that as a financing source for some of the drops. So, the bank market seems to be a little bit more attractive than the capital market at this point in time.

Mike Ciskowski

Brad, let me just add to what Mike said. The capital that we’re investing in logistics assets at Valero Energy are assets that can be dropped to VLP, so we’ll continue to build the droppable EBITDA base. But the motivation behind it and we’ve shared this before, the motivation behind Valero investing in logistics assets are projects that better fit Valero’s core business, its core refining business that project that helps us optimize our operations. And we are not taken flyers on projects that we wouldn’t be willing to commit what contractually long-term to. And so, again the things we are investing in today for example the diamond pipeline, I mean that is going to be a direct benefit to the Memphis refinery and provide crude optionality there that they don’t currently have today. So, this is a long game and even though markets are challenged right now, I don’t think we should sit here and throw the baby out with the bath water and totally redirect strategies to try to accommodate it. The other thing that Mike hasn’t mentioned is that, VLP is in a great position like at very high coverage ratios to maintain distribution growth, that the targets we’ve talked about is not going to be an issue. And here again we are running the business to continue to improve the business and drive the EPS growth at VLO and VLP is going to go along for the ride. Anyway, that’s just a little more color.

Brad Heffern

Thanks for that Joe, I think that's clear. And then thinking about logistic opportunities as well, I’m curious obviously lifting in the crude expo we are seeing negative for refiners in general, but I think there might be some opportunities that present themselves to Valero given the amount of dark space in general footprint in the Gulf Coast set. Have you thought along those line Joe?

Rich Lashway

Hi. This is Rich Lashway. Yes, we thought about that, that opportunity. We are in conversations with lot of different parties on projects that they have that they willing to share now that they might not have been in the past. And so we could see quite a bit of opportunity out there given not just the declining crude price, but also the export opportunity.

Brad Heffern

Okay, thank you.

Operator

And our last question is a follow up question from Paul Cheng from Barclays. Your line is open.

Paul Cheng

Hey, guys, real quick, may be this for Gary. Gary just curious that crude inventory over the last several weeks quite substantial, do you have any rough idea there was a split between the financial buyer, buying it to take advantage on the contango curve, or what percentage is the operator actually the refiner who are building inventory here ?

Gary Simmons

I don’t suspect this a lot of refiners building inventory, most of our tankage and most refiners tankage is more operational in nature. So it’s hard to really utilize that tankage for a contango play. Most of that you see some inventory builds in Cushing, but I don’t know that I really could comment in terms of the build. I think you know what we had happened is LLS got at a premium to a foreign light sweet alternative and Valero along with many other refineries started buying light sweet and it caused the inventory to build and certainly the markets structures incentivized people to store as well.

Paul Cheng

Okay, thank you.

John Locke

Okay, Elanda I think that’s last for the question. So we want to thank you everyone for calling in today and please feel free to call me and Karen if you guys have further follow up questions. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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