Valero Energy Earnings Call Nuggets: Gulf Coast Gross Margin and the Logistics Capital

Valero Energy Corporation (NYSE:VLO) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Gulf Coast Gross Margin

Jeff Dietert – Simmons & Co.: You guys had a strong quarter throughput for better than expected cash operating costs lower, but I wanted to focus on gross margin in the Gulf Coast. I assumed that the feedstock advantage is probably flow through and contributed a very strong margin capture, could you talk about any one-time events or talk about how feedstocks changes could be sustainable in continuing strong margin capture? Any step function change in U.S. crude or Canadian crude influenced in the fourth quarter?

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Joe Gorder – President and Chief Operating Officer: Jeff, this is Joe. We did well in the Gulf Coast. If you look at the slate that we ran, we ran more heavy-sour and medium-sours in the fourth quarter than we did in the third quarter. Ashley mentioned during his comments what those discounts look like and they were very strong. We also ran a lot more resid, well we ran a bit more resid in the quarter, but we ran resid with better pricing than we had in the third quarter and lot of that had to do with the fact that the Libyan production was back on stream. So, basically the guys did just a very good job of optimizing the crude and feedstock slate into the plants. Actually in the quarter, we continued to push around more domestic light sweet crude which we were up over I think 700,000 barrels a day, so all-in, if you look at the crude slate we had this kind of crudes coming in, in really every form.

Jeff Dietert – Simmons & Co.: How do you see your feedstock changing with the addition of Seaway having started up an incremental 250 and the Permian pipes coming on like March or April, an incremental rail coming into the market, how do you see those benefiting you in the first quarter and second quarter going forward?

Joe Gorder – President and Chief Operating Officer: Well, I mean clearly we’re getting access to more crude, right? And we mentioned I think in the notes that we were a 100% domestic light sweet crude and we’re running sweet crude in the Gulf, so we back off all of our Board dollars. And Seaway has had an impact Jeff as you know, but they are not running at the rates that have been anticipated and I think that’s why we see that LLS is still trading at a bit of a premium to Brent. I think as you get Seaway up to speed and then we’ve got significant additional projects and are bringing more crude into the Gulf through 2013, you will end up seeing Brent trading at that discount that we’re all expecting to LLS going forward. As we run light sweet crudes and Lane and Bill can speak to the project that we’re looking at. I think you know some of those to allow us to run more light sweet crude. We’re going to be the beneficiaries of that.

The Logistics Capital

Evan Calio – Morgan Stanley: Just maybe a follow-up on some of those projects, I mean I know you mentioned fourth quarter replaced the imported lights with domestics in the Gulf Coast and Memphis, and you are pursuing several options. I think I believe you are considering condensate splitter clearly Gulf Coast will see more condensate moving out of the Eagle Ford rail was mentioned as an option. That would I think increase viability if Keystone is delayed or blocked. I mean could you comment just generally on what those projects are kind of the cost magnitude dimension maybe the logistic spending that’d be important as well as that could be put into different structure and whether any of these expenses are currently included in that $960 million of strategic 2013 CapEx?

Joe Gorder – President and Chief Operating Officer: We are looking at a lot of renewal projects and the logistics capital, if I look at the logistics capital that we have in the 2013 budget is a lot of it has to do with dock capacity just being sure that we have the ability to export the volumes that we’ve got and we think today we can put 225,000 barrels a day gas, on the water and we are looking at ways to increase that at St. Charles and Port Arthur. Diesel, we think we can move to $80 a day and we’re looking at projects to take that up to over 400,000 barrels a day. So, a lot of the capital that we have and the capital forecast is for that. In addition, we announced that we bought the railcars and we’re working projects to figure out where we want to take this crude with these railcars and we certainly have some things in mind, but we’re looking at projects, for example, at St. Charles to rail crude in. We got a project to rail crude into Quebec. We’ve got the two West Coast refineries that we’re looking at rail options for. Then Memphis, we think we can rail a significant amount of crude into Memphis. So, we’re working all those options and the guys are going through the overall logistics strategy for that including potentially additional railcars. So, as far as the capital attributed to it, right now we don’t have anything identified above the plan.

Ashley Smith – VP, IR: Just to clarify, all those things Joe was talking about, I mean those were included in our strategic growth category which is at just under $1 billion for ’13.

Evan Calio – Morgan Stanley: In terms of Memphis, you say that you backed out all foreign imports there which I presume. You used to come up with cap line. I mean, what are you running there and what is – how is it getting there and is there any yield pickup from the slate change at Memphis that’s improved its profitability?

Joe Gorder – President and Chief Operating Officer: I’ll speak to the crude supply piece and maybe Lane wants to talk to the yield improvements, but we’re running Bakken, it’s really still coming up cap line and so we haven’t changed the method of delivery into that refinery right now. We are looking at waterborne deliveries and the message going forward right now. The economics have supported continued use cap line.

Lane Riggs – SVP, Refining Operations: This is Lane Riggs. In terms of the quality of Bakken, it’s really nominally around LLS, but I would say because LLS has currently been a blended barrel made from a number of different components, Bakken is a neat barrel and it’s been a much – in terms of the tradability and our ability to steady our operations around running it. We are certainly getting the benefit of a more steady crude diet. It is lighter, so it’s really is value versus the LLS, directly function of what the gas frac is, but nominally it’s slightly just today it’s slightly just kind of on quality basis to LLS. For us, we’re getting quite a bit of value just of a steady operation running Bakken need for our refinery day-in, day-out to Memphis.

A Closer Look: Valero Energy Earnings Cheat Sheet>>