Listening in: Valero on recent earnings, then Q&A with investors

Repost from The Motley Fool
[Valero’s profits continue at massive levels, although not as high as in 2017 when the Republicans gave corporations unheard-of tax windfalls.  I have  highlighted  the only reference to west coast production.  Of special interest: search this long transcript for the 9 references to “exports” and the 18 references to “rail.”  – R.S.]

Valero Energy Corp (VLO) Q4 2018 Earnings Conference Call Transcript

VLO earnings call for the period ending December 28, 2018.
By Motley Fool Transcribers, Jan 31, 2019 at 4:36PM
Logo of jester cap with thought bubble.
IMAGE SOURCE: THE MOTLEY FOOL.

Valero Energy Corp  (NYSE:VLO)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 10:00 a.m. ET

Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator

Good day, ladies and gentlemen, and welcome to the Valero Energy Corporation’s Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Homer Bhullar, Vice President of Investor Relations. Sir, you may begin.

Homer Bhullar — Vice President, Investor Relations

Good morning, and welcome to Valero Energy Corporation’s fourth quarter 2018 earnings conference call. With me today are Joe Gorder, our Chairman, President and Chief Executive Officer; Donna Titzman, our Executive Vice President and CFO; Lane Riggs, our Executive Vice President and COO; Jason Fraser, our Executive Vice President and General Counsel and several other members of Valero 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’ll turn the call over to Joe for opening remarks.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Thanks, Homer, and good morning, everyone. We are pleased to report that we completed another good quarter where we ran our business well and delivered solid financial results. Throughout the quarter, we maintained our unrelenting focus on operations excellence, which enabled us to operate safely and reliably in an environmentally responsible manner.

We also delivered on our commitment to invest in growth projects and acquisitions that increase Valero’s earnings capability, while maintaining solid returns to our stockholders. In 2018, we matched our 2017 record for process safety performance, and we continued to outperform the industry on our personnel injury rates.

For logistics investments we made over the last several years are contributing significantly to earnings. Our investments in Line 9B, the Diamond Pipeline and the Sunrise Pipeline expansion increased our systems flexibility, allowing us to take advantage of the opportunities available in the fourth quarter of 2018. In fact, we set a record for total light crude runs at 1.5 million barrels per day and a record for North American light crudes process at over 1.3 million barrels per day.

We also continued to maximize product exports into higher netback markets in Latin America. Turning to capital allocation, we continued to execute according to our disciplined framework. Our projects in execution remain on track. Construction is scheduled to finish on the Houston alkylation unit in the second quarter and the Central Texas pipelines and terminals are expected to be completed in mid 2019.

In November, the Board of Directors of Valero and Darling Ingredients approved an expansion of the Diamond Green Diesel plant to 675 million gallons per year of renewable diesel production and the construction of a renewable naphtha finishing facility. With respect to cash returns to stockholders in 2018, we paid out 54% of our annual adjusted net cash provided by operating activities. Exceeding our target annual payout range of 40% to 50%. Our solid financial position and a favorable outlook for our business enabled us to further demonstrate our commitment to our investors. As last week, our board approved a 12.5% increase in the regular quarterly dividend to $0.90 per share or $3.60 annually.

Lastly, earlier in January, we closed the acquisition of Valero Energy Partners. This transaction was immediately accretive and its greatly simplified our structure, while Valero will no longer have a publicly traded midstream business, VLP’s assets and ongoing logistics investments at Valero will continue to enhance our feedstock and product flexibility.

Now as we look ahead, we remain committed to our capital allocation framework. There has been no change in our capital discipline strategy, which prioritizes our investment grade ratings sustaining investments and paying our dividends.

We expect our annual CapEx for both 2019 and 2020 to be approximately $2.5 billion, in line with where it’s been over the last several years. And you should expect incremental discretionary cash flow to continue to compete with other discretionary uses including cash returns, growth investments and M&A.

In closing, with a growing economy, a year-over-year increase in vehicle miles traveled and low fuel prices, we are encouraged for 2019. We expect good demand in domestic and export markets this year. Despite seasonal weakness in the gasoline market, days of supply for distillate inventories remain below the five-year average. Expected incremental diesel demand and discounts for sour feedstocks associated with the impending global fuel oil sulfur reduction also give us reason to remain optimistic.

We believe that our systems flexibility to process a wide range of feedstocks, it reliably supply quality fuels, as evidenced by our fourth quarter 2018 results positions Valero well for whatever opportunity the market presents to us.

So, with that, Homer, I’ll hand the call back to you.

Homer Bhullar — Vice President, Investor Relations

Thank you, Joe. For the fourth quarter, net income attributable to Valero stockholders was $952 million or $2.24 per share compared to $2.4 billion or $5.42 per share in the fourth quarter of 2017.

Fourth quarter 2018 adjusted net income attributable to Valero stockholders was $900 million or $2.12 per share compared to $509 million or $1.16 per share for the fourth quarter of 2017.

For 2018, net income attributable to Valero stockholders was $3.1 billion or $7.29 per share compared to $4.1 billion or $9.16 per share in 2017. 2018 adjusted net income attributable to Valero stockholders was $3.2 billion or $7.37 per share compared to $2.2 billion or $4.96 per share in 2017.

The 2018 adjusted results exclude several items reflected in the financial tables that accompany this release. While the 2017 adjusted results exclude an income tax benefit of $1.9 billion from the Tax Cuts and Jobs Act. For reconciliations of actual to adjusted amounts, please refer to those financial tables.

Operating income for the refining segment in the fourth quarter of 2018 was $1.5 billion compared to $971 million for the fourth quarter of 2017. The increase from 2017 was mainly attributed to wider discounts for North American sweet crudes and certain sour crudes relative to brent partly offset by weaker gasoline margins.

Refining throughput volumes averaged 3 million barrels per day which was in line with the fourth quarter of 2017. Throughput capacity utilization was 96% in the fourth quarter of 2018. Refining cash operating expenses of $3.92 per barrel were $0.34 per barrel higher than the fourth quarter of 2017 mostly due to higher natural gas costs in the fourth quarter of 2018.

The ethanol segment generated a $27 million operating loss in the fourth quarter of 2018 compared to $37 million of operating income in the fourth quarter of 2017. The decrease from 2017 was primarily due to lower margins resulting from lower ethanol prices.

Operating income for the VLP segment in the fourth quarter of 2018 was $88 million compared to $80 million in the fourth quarter of 2017. The increase from 2017 was mainly due to contributions from the Port Arthur terminal assets and Parkway Pipeline, which were acquired in November 2017.

For the fourth quarter of 2018, general and administrative expenses were $230 million and net interest expense was $114 million. General and administrative expenses for 2018 of $925 million were higher than 2017 mainly due to adjustments to our environmental liabilities.

For the fourth quarter of 2018, depreciation and amortization expense was $531 million and income tax expense, which includes certain income tax benefits as reflected in the accompanying earnings release tables was $205 million. Excluding these benefits, the effective tax rate was 21%. With respect to our balance sheet at quarter end, total debt was $9.1 billion and cash and cash equivalents were $3 billion.

Valero’s debt to capitalization ratio net of $2 billion in cash was 24%. At the end of December, we had $4.4 billion of available liquidity excluding cash. We generated $1.7 billion of net cash from operating activities in the fourth quarter. Excluding the unfavorable impact from a working capital decrease of approximately $120 million, net cash generated was $1.8 billion.

With regard to investing activities we made $771 million of growth and sustaining capital investments in the fourth quarter of 2018. Of which $254 million was for turnarounds and catalyst. For 2018, we invested 2.7 billion, of which approximately $1.9 billion was for sustaining and $800 million was for growth.

Moving to financing activities, we returned $965 million to our stockholders in the fourth quarter. $627 million was for the purchase of 7.7 million shares of Valero common stock and $338 million was paid as dividends. As of December 31st, we had approximately $2.2 billion of share repurchase authorization remaining.

We expect capital investments for 2019 to be approximately $2.5 billion with approximately 60% allocated to sustaining the business and approximately 40% to growth. Included in the total our turnarounds, catalysts and joint venture investments.

For modeling our first quarter operations, we expect throughput volumes to fall within the following ranges. US Gulf Coast at 1.67 million to 1.72 million barrels per day; US Mid-Continent at 440,000 to 460,000 barrels per day;  US West coast at 265,000 to 285,000 barrels per day ; and North Atlantic at 475,000 to 495,000 barrels per day.

We expect refining cash operating expenses in the first quarter to be approximately $4.05 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 $0.42 per gallon, which includes $0.06 per gallon for non-cash costs such as depreciation and amortization.

For 2019, we expect G&A expenses excluding corporate depreciation to be approximately $840 million. The annual effective tax rate is estimated at 23%. For the first quarter, net interest expense should be about $110 million and total depreciation and amortization expense should be approximately $550 million. Lastly, we expect RINs expense for the year to be between $400 million and $500 million.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Blake Fernandez with Simmons Energy. Your line is open.

Blake M. Fernandez — Simmons Energy — Analyst

Thanks. Good morning, guys. Congrats on the stellar results.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Thanks, Blake.

Blake M. Fernandez — Simmons Energy — Analyst

Yeah, I appreciate the outlook for two years on CapEx. I think there were some perceptions maybe with the project sanctioned last year that there would be upward pressure, and we’re actually seeing a $200 million decrease year-over-year and that sustained into 2020. Can you talk a little bit about where maybe some of that deflation is coming from, whether it’s the growth component or sustaining or turnarounds?

R. Lane Riggs — Executive Vice President and Chief Operating Officer

So, Blake, this is Lane. I wouldn’t call, deflation. I would call that we had a lot of sustaining capital with respect to Tier 3 and plus the reliability project in our Corpus Christi refinery in 2018. Our run rate is like what we said is normally about $1.5 billion to sustain our assets. We had a little bit more than that in this past year and there is obviously timing involved in all that whether our turnarounds get a little bit lumpy or again we end up having to do something a little bit special on — on some environmental stuff — currently we don’t have anything on our sort of forward view of that.

Blake M. Fernandez — Simmons Energy — Analyst

Okay, great. The second question is on Venezuela, obviously, very topical. I guess for one could you confirm how much you’re currently importing crude there, but then I guess more importantly, I’m just curious in order to replace those barrels. Are you looking to resort to more light sweet domestic crudes or is your system largely maxed out on light sweet to where you’re actually going to have to resort to the global market for kind of medium and heavy sour replacement barrels? Thanks.

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yeah, Blake, this is Gary. Of course with the sanctions, we’re currently not taking anything from Venezuela, but it was about 20% of our heavy sour that we run was Venezuelan barrels historically. We’re certainly hopeful that they will see comp less resolution to the crisis, not only for the benefit of the crude markets, but for the welfare of the people of Venezuela. We’ve seen production decline in Venezuela for years, and we’ve also known there was a threat of sanctions. So, we put alternatives in place to be prepared for this, of course the announcement was just made Monday. We’ve only had 48 hours to respond. Our top priority really has been to get the next 30-day supply planned covered, and I can tell you we’re in a lot better position today than we were on Tuesday, but we still have some holes to fill in our supply plan. We really run Venezuelan barrels at two of our refineries in the Gulf, St. Charles and Port Arthur. The St. Charles refinery did begin a turnaround on their crude and coker unit. So, that definitely minimizes the impact that the sanctions have on our system. To your point, current economics are certainly pushing us to maximize light sweet in the system.

Blake M. Fernandez — Simmons Energy — Analyst

Great, thank you.

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Thanks, Blake.

Operator

And next question comes from Doug Terreson with Evercore. Your line is open.

Douglas Terreson — Evercore ISI — Analyst

Hi, everybody. Congratulations on your results.

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Thanks, Doug.

Douglas Terreson — Evercore ISI — Analyst

I wanted to see, if we can get some elaboration on Joe’s points that he made a few minutes ago about market fundamentals and specifically while distillate demand and inventories appear to be positive in both the US and the Atlantic Basin, the converse seems true for gasoline, although seasonality and net exports should be supportive. And then also could you just spend a minute covering how fuel markets are likely to sort out this year, given the uncertainty that Blake just highlighted about Canada and Venezuelan heavy feed stocks and how you might adjust?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yeah, this is Gary again. Of course, seems like early in the year, during this call we always were kind of panic on the gasoline markets. We feel very good about gasoline demand moving forward, high employment and low gasoline prices should result in a good gasoline demand. The wildcard of course becomes refinery utilization. So, with the 20-year high refinery utilization we saw last year, we are starting the year with a bit of an overhang. The overhang in gasoline is primarily been PADD 1, PADD 2 and PADD 3. If I look at those regions individually, I could see that we build a little bit more inventory in PADD 1, the market structure is such that there is an economic incentive to make summer grade gasoline and put it in tankage in New York Harbor and there’s still tankage available. So, that would tell me, you could see some inventory gain in PADD 1. I think you’ll see some significant improvements in both PADD 2 and PADD 3 moving forward. PADD 2, I think, a lot of the gasoline build was a result of the crude discounts. The margins were just very strong, so typically in PADD 2, you see refinery utilization drop-off in the winter to balance the market, but with the crude discounts where they were they ran hard, but if I look at the PADD2 market now there looks to be more planned maintenance this year than was last year as we move forward, and then currently with the cold snap hitting PADD 2, there seems to be quite a few refinery issues in that region. In fact the explore pipeline between Group 3 in Chicago is now prorated indicating there’s a big poll for products in that region. So, I think, you’ll see gasoline inventories draw in PADD 2, and I also think you’ll see some good gasoline draws in PADD 3 as well. In the Gulf, early in the year, we typically have fog issues, which hinder our ability to export product, and we saw that again this year. We also saw a bottleneck trying to get gasoline into Mexico, which is obviously our largest export destination, and then we saw a lot of refinery buying interest in the Gulf as well as people built some inventory in preparation for turnaround, so they can cover their supply during their outages. So, I think, all of those things, you see lower utilization in the Gulf as a result of planned maintenance beginning, and you see exports pick up. I’m confident you will see inventories in PADD 3 grow as well. So, I think, we feel pretty good about gasoline. We feel very good about gasoline demand and again the wildcard is what utilization is going to be going forward.

Douglas Terreson — Evercore ISI — Analyst

Okay. Any insight on fuel oil to?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yeah, fuel oil, I think, it definitely is the issues you’ve talked about. There’s been a lot of significant hits to fuel oil on the supply side with OPEC cuts in the Iranian sanctions, now Venezuelan sanctions and production cuts in Western Canada. If you look at the forward curve on fuel oil, it’s backward about $1 a month and a lot of that is tied to the IMO 2020 fuel spec change. We do see fuel moving weaker as a result of lower demand for high sulfur fuel oil, and then there’s some signs that some of the production can be coming on, the Alberta Government did announce that they’re going to go ahead and raise production in February at least 75,000 barrels a day. So , some of those things will help as well.

Douglas Terreson — Evercore ISI — Analyst

Okay, thanks a lot guys.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Thanks, Doug.

Operator

Our next question comes from Paul Cheng with Barclays. Your line is open.

Paul Cheng — Barclays Capital — Analyst

Hi. Good morning, guys.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Hi, Paul.

Paul Cheng — Barclays Capital — Analyst

Before I ask my question since that I told John Locke, if your Gulf Coast realized margins going to be filed in excess of 650, I will publicly lobby that Joe used to give Gary and his crude supply team a backbone. So, I’m lobbying you.

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Paul, you’re really helpful to me here.

Paul Cheng — Barclays Capital — Analyst

But anyway so other than that, two question. First, we are looking at the current level in the fourth quarter, I mean, I think everyone is already trying to maximize on the distillate yield. So, in your system, is there any more that you can actually do that to shift from gasoline to distillate. And also, you said, you are running a record 1.5 million barrels per day in the light oil. Is there any more that you can, can you quantify that how much more, if there’s any, that you can actually move from light into — from medium and heavy into light?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yes, so I would tell you on the gasoline to distillate swing, there is very, very little else we can do. We’re pretty much maxed out on distillate today. On the light crude, we would tell you that the numbers, Joe, gave you that was about 90% of our light sweet capacity, and so there is some room there to push some additional light sweet crude into our system.

Paul Cheng — Barclays Capital — Analyst

So, Gary, you mean that if 90% that means that most you can push is another 100,000 to 150,000 barrels per day?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Exactly, so we’ve been saying, we have about 1.6 million barrels a day of light sweet crude capacity.

Paul Cheng — Barclays Capital — Analyst

Okay. And secondly that do you expect the Mexico export that you’re shipping there that do you expect to increase in the coming weeks. Given the fuel shortage there? And if we look back in the last two months, have you seen any noticeable decline in your gasoline exports to Mexico?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

No, we really haven’t. Historically, we see a lot of buying interest in December for Mexico, and we see these bottlenecks then trying to get the barrels into the country, and obviously the crackdown on fuels that have to made that even worse. We’re seeing good demand for Mexico not only waterborne barrels, but you know, we continue to ramp up our business have actually importing the barrels into the country, and we’re seeing very good demand for barrels delivered all the way in the country as well.

Paul Cheng — Barclays Capital — Analyst

Thank you.

Operator

Thank you. Our next question comes from Manav Gupta with Credit Suisse. Your line is open.

Manav Gupta — Credit Suisse — Analyst

Joe congrats on a good quarter, and Homer congrats on joining a great team. We will all miss John Locke and would like to wish him all the best in his new role.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Yeah. Thanks, Manav.

Homer Bhullar — Vice President, Investor Relations

Thanks, Manav.

Manav Gupta — Credit Suisse — Analyst

So, I just have a quick question on Diamond Green Diesel expansion like if you look at the current margins. Is it fair to assume that this is like a 35% plus return for project for you? And the second follow-up on it is what advantage does Darling Ingredients brings to the table? Are they just a financial partner or they give you some kind of competitive edge on your peers who are also trying similar projects?

Martin Parrish — Vice President of Alternative Fuels

So, this is Martin, on Diamond Green, we’re looking at historically, and we think going forward, we’re going to be at about $1.25 a gallon for doing the math, you’re probably in the right ballpark with that return on EBITDA margins. Darling is not just a financial partner, Darling process is about 10% of the world’s meat by products, they also do a significant work on collecting used cooking oil. They’ve been in these markets for years. As Diamond Green we’ve been in this fat market for five years now, 5.5 years, they’ve been in for a long time. They bring a lot to the table around sourcing the fat pre-treating the fat for the units. So, it’s a really good synergy here, we’ve got our refining expertise, we’ve got expertise in marketing the product, they’ve got pre-treatment expertise and bringing the fat into the joint venture. So, it’s a really good partnership.

Manav Gupta — Credit Suisse — Analyst

Thank you, guys. Thanks for taking my question.

Operator

Thank you. Our next question comes from Doug Leggate with Banc of America Merrill Lynch. Your line is open.

Douglas Leggate — Banc of America Merrill Lynch — Analyst

Thanks. Good morning, everybody. Joe, you guys did a great job of making the sales side look really done every quarter, it’s a great quarter obviously, but my question is a $30 correction in oil prices, obviously, there’s some lag effect in your capture rate. I’m just curious as to the capture rate move that we saw a north of 100% on our numbers is running about 30%, 40% above what you would normally deliver. Was that this lag effect or is there something structural going on such as the shift to the lighter grades that we should pay more attention to going forward?

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Doug that’s a good question, you guys.

R. Lane Riggs — Executive Vice President and Chief Operating Officer

Yeah — this is Lane I’ll take a shot at it and give Gary for retuning whatever I’m saying here, but there’s really a few couple of reasons. One is, as we alluded to in the opening remarks, we’ve had the pipeline projects. We had the Line 9 and we had the Diamond Pipeline and then the Sunrise. And all of those put us in position in the Mid-Continent and in our Quebec refinery position us to take advantage of essentially these distressed markets in the fourth quarter. And then the other side of that is on the product side, really the lower RIN prices allowed us to capture essentially higher net-backs on our product prices. I’m sure there’s a contribution on the other things like pet coke all the other stuff, the contributor capture rate, but really is the first two things that really drove our capture rate in the fourth quarter.

Douglas Leggate — Banc of America Merrill Lynch — Analyst

So , should we consider that the capture rate is structurally moving higher?

R. Lane Riggs — Executive Vice President and Chief Operating Officer

I would say you should on the product side with the lower RIN prices, yes, on the crude side it’s just a matter of how distressed those markets are. And then you have a line, you have a view of what Artesia look like and you have a view of what Midland looks like and Cushing.

Douglas Leggate — Banc of America Merrill Lynch — Analyst

Okay. Thank you for trying to answer that. I know it’s a tough one. My follow-up is really is kind of a follow-up to Doug Terreson’s question I guess. Normally, we would see this, the industry pivot obviously between distillate and gasoline to some extent as you move through the summer, but obviously you’ve got this IMO event going into 2020. So, I’m wondering is there a possibility that we see Valero specifically maintain a maxed distillate bias through the whole of 2019 as one part of the solution to the gasoline overhang? And I’ll leave it there. Thanks.

R. Lane Riggs — Executive Vice President and Chief Operating Officer

It’s Lane again — we absolutely believe that will be the case, I mean, we’ve been in active mode for a while now and we will continue to be in that way through the — at least the way we see the rest of the year going in 2019. Obviously it’s early, but that’s the way the forward market will be pointing us right now.

Douglas Leggate — Banc of America Merrill Lynch — Analyst

Great stuff. Thanks a lot, guys. Great quarter.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Thanks, Doug.

Operator

Our next question comes from Prashant Rao with Citigroup. Your line is open.

Prashant Rao — Citigroup — Analyst

Thanks. Good morning, guys, and thanks for taking the question.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Hi, Prashant.

Prashant Rao — Citigroup — Analyst

Hi, Joe. So, I guess, my question, I wanted to circle back to crude sourcing and drill down a little bit, obviously, really strong performance there. And as Paul said you know makes us all look — we underestimated you this quarter. On the Maya or other Central American heavy sours, I just wanted to get a confirmation, I mean, a lot of those grades that price themselves out of the market we saw in 4Q, but were you — what was your purchasing like in 4Q, is it — were you not running as much and should we — how should we expect that to look now that we’ve seen some price normalization as we go forward in 1Q?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yes. So, I think, on the heavy side we’ve definitely seen that Maya is probably not the best marker for what we’re paying for heavy sour crudes. So, in the fourth quarter, if you look Maya was priced at 450 discounts to Brent. WCS or Western Canadian Select in the US Gulf Coast was trading at a $10.60 discount to Brent, and we believe that the Canadian quote was much more representative of our actual delivery to heavy sour into the system. In addition to that and there were certainly some things with the connect, disconnect in Western Canadian pricing, you know, we had a significant uplift on the crude by rail, we did 43,000 barrels a day of heavy Canadian by rail into Port Arthur and those were very discounted barrels.

Prashant Rao — Citigroup — Analyst

Okay, thanks. And I guess that sort of leads nicely to my second question. My follow-up is on the Canadian barrels. Year-to-date it seems like the import data and purchasing data what we’ve heard in the market is continued to be able to get good access to those Canadian barrels. Just wondering, if you could give some color on the sourcing, especially, given that we’ve had production cuts up in Canada, what the dynamics for like those barrels also coming in by rail or are there more available in the market. Just any color on how we should think about the variety of sourcing there?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yes. So, in the fourth quarter we also set a record on the volume of Canadian heavy that we ran our system. We ran over 180,000 barrels a day at heavy Canadian, and it is sourced via pipe delivered into the Gulf, and then we do about 40,000 barrels a day crude by rail. Our view is that crude by rail will be necessary into one of the major pipeline projects gets approved out of Western Canada.

Prashant Rao — Citigroup — Analyst

Thanks, Gary. I appreciate it, guys. I’ll turn it over.

Operator

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

Roger Read — Wells Fargo — Analyst

Sorry, I clicked off the mute there. Good morning.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Hi, Roger.

Roger Read — Wells Fargo — Analyst

Hi, guys. I guess maybe to dig in a little deeper thinking about the summer time here with gasoline. So, you’re running max distillate presumably most, if not all the industry is doing the same. So, if we see relatively speaking weaker gasoline cracks this summer. Does that imply that to get things in balance effectively the industry has to employ run cuts or should we think about additional toggles that you can do, if you ended up with a summer time situation with stronger distillate cracks relative to the gasoline especially with IMO staring us in the face by the latter part of the summer?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yeah, Roger. It’s difficult to answer. I certainly think that the gasoline situation is a combination of yield, which certainly we expect to be in the max distillate mode. And then the other thing I referred to is just what the utilization of rate of the refining capacity is and whether that 20-year high that we saw last year sustainable.

Roger Read — Wells Fargo — Analyst

Yeah, I mean, I would think with this — with more light barrels available, there’s no reason to think US refining throughputs have to come off, right. It’s strictly a margin decision. We’ve heard other companies, other refiners talk about different things you can do in terms of how hard you run your FCC units versus other decisions you can make. I was just curious if there’s anything like that, that occurs for IMO as you look at your overall system?

R. Lane Riggs — Executive Vice President and Chief Operating Officer

Hi, Roger, it’s Lane. I’ll take a stab with that. So, we do, FCC is obviously are pivotal part of our operation and there’s certain inflection point, economic inflection point, and it almost always make sense to fill our alky. So we’ll run up to the point to make sure our Alkylation units are full. And so the marginal capacity, we’re always looking at it to make sense with the run-pass to that point. And to your point interestingly enough that the stream that we put in these out, it also can go into the fuel market for the half way percent to meet the IMO reg. So, we do think structurally at least one of the things will happen here, that the FCC probably won’t run a whole lot pass, drilling their alky. It’s certainly in the context of how IMO 2020 is going to work out.

Roger Read — Wells Fargo — Analyst

Okay, thanks. And then, Joe, you’ve done a great job and over the years here in terms of capital allocation, the decision to rollup VLP kind of brings the balance sheet more into like the true issue on cash and debt as opposed to the non-recourse side. I was wondering, if you think about future capital allocation. Is there anything you want to do on the balance sheet. Is there a goal to reduce debt here or maybe to increase kind of future flexibility, if you were to pursue anything on the acquisition front.

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Roger, that’s a good question. I would say generally there isn’t anything that we’re expecting to change. We’ve set the targets within the capital allocation framework, debt to cap of 20% to 30% range. Donna has got kind of a minimum cash balance target of $2 billion, things like that, those are just things that we operate with as — there’s fundamental assumption day in and day out as we go forward. We get asked periodically about somebody raised the issue about the sustainability of the dividend and that’s a really interesting question to come up at this point in time because in October we were all being out, but we’re going to do with all of the cash that IMO 2020 was going to provide. So, that being said, I think when I look at Valero, I realized that we understand our business that we are making decisions for the long-term based on our strategic view of the market and not high. And so we always try to position ourselves financially to be able to deal with whatever the market might giving us. So, I mean, if we think in terms of the dividend, for example, I can just say without reservation that we consider the sustaining CapEx and the dividend to be totally non-discretionary, and we’re going to defend them as we allocate cash. We’ve got a really strong balance sheet and we certainly wouldn’t have raised the dividend, if we thought sustainability was any kind of issues there, and really that’s hit around that from an acquisition perspective, we’ll continue to review in the context of growth projects, and when you think in terms of the rollup of VLP, it kind of takes you to the question, well, are you going to continue to invest in logistics projects going forward. And the answer to that would be, yes, to the extent that they benefit Valero’s business. And if you recall even with VLP as a publicly traded entity, we always started with a need at Valero. And then that will, if we did the project to satisfy that need at VLP and paid VLP a 12% rate of return, would it still makes sense for Valero to do the project, OK, that was kind of the calculus that we went through, and if it was, yes, we proceeded. Now, we just look at these projects as an aggregate project. So, the Diamond Pipeline, for example, we get a huge benefit on the crude sourcing in the Memphis as a result of the Diamond Pipeline and VLP was getting the 12% rate of return. Now all that’s rolled in to one set of economics, and we look at it in the context of 25% rates of return on refining projects. So, you know, the way we structured the framework, it’s flexible enough to allow us to adjust a little bit from time to time, but it hasn’t fundamentally changed what we’re doing and what we’re focused on. So, that was a really long answer to a pretty simple question, Roger. So, sorry about that.

Roger Read — Wells Fargo — Analyst

No, I appreciate that. I just can’t believe you accused (inaudible) to be in fickle.

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yeah. I know it’s hard to match it.

Roger Read — Wells Fargo — Analyst

Yeah, absolutely. All right. Thank you.

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Thank you.

Operator

Our next question comes from Phil Gresh with JPMorgan. Your line is open.

Philip Gresh — JPMorgan — Analyst

Yes. Hi, good morning.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Hi, Phil.

Philip Gresh — JPMorgan — Analyst

So, first question, Joe would be, you’ve talked it for a couple of years now about the illustrative EBITDA that you can generate from these projects that you have under way. And, I think, in your slides you talked about $175 million incremental for 2018 from completed projects. So, I’m wondering how you think about that ramp in 2019 and 2020 that we should be thinking about from the projects under way?

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Well, we haven’t been that explicit in giving EBITDA forecast for ’19 and ’20, right. And I don’t think we’re going to go there. I think what you’ve got to rely on really Phil is the chart we’ve got in the slide deck. And if you look at our return thresholds for our projects and you say you’re going to invest this much strategic capital year in and year out, what kind of EBITDA you expected to produce and our numbers are $1 billion to $1.4 and that includes the benefit of the coker project of our ownership interest in DGD of all the pipeline, the terminal project we got going on the alky and so on. And we are still very, very comfortable with those numbers. And so in terms of moving the needle from an EBITDA perspective in light of our capital allocation framework and the clear recognition that capital is a finite resource. We’re going to invest it accordingly in the projects we’re targeting, we are going to produce $1 billion to $1.5 billion of incremental EBITDA.

Philip Gresh — JPMorgan — Analyst

Okay, fair enough. Second question is just coming back to your comment on the minimum cash balances. If I take your ending 2018 takeout $950 million for the VLP buy-in in the first quarter. I think you’re kind of around that 2 billion level. I realized working capital has also been a pretty big headwind in 2018. So, trying to think about that. Is there some kind of perhaps reversal that could happen with crude oil prices now going back up and just generally wondering how you think about that in the context of the capital return plans and things of that nature?

Joseph W. Gorder — Chairman, President and Chief Executive Officer

It’s a good question. Donna, you want to?

Donna M. Titzman — Executive Vice President and Chief Financial Officer

Sure. So, in regards to the working capital, I mean, yes. So, to that extent prices would go up, you would see a shift in the more positive direction in 2019. A lot of the negative working capital that you saw in 2018 had to do with some timing on some tax payments that were really due in ’17 that were pushed to 2018. So that has sort of easened itself out, but certainly there are some other movements in the working capital in 2018 that could repurchase themselves.

Philip Gresh — JPMorgan — Analyst

Okay. And then just in terms of VLP taking that down to $2 billion cash balance. So, I mean, you basically saying that you’re kind of at the levels you want to manage out or is there flexibility around that $2 billion or how do you think about that target?

Donna M. Titzman — Executive Vice President and Chief Financial Officer

So, clearly that was a big amount of cash going out in January, but we’re going to continue to make money, generate cash, and so you should see the cash balance recover. But again we’re at that $2 billion minimum, we’re comfortable carrying it at that level.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Yeah, Phil, I mean, and we’ve said this for years now. We never, our plan was not to carry $5 billion of cash quarter-to-quarter to quarter-to-quarter and we were just finding ourselves in that situation. And so there was an intentional plan here to try to tighten this down a little bit. Now, Donna has got her target set. She is the CFO and we’re going to try to abide by the target, but there’s no reason for us to sit here with $5 billion of cash on the balance sheet.

Philip Gresh — JPMorgan — Analyst

Yeah. Okay, thank you.

Operator

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

Neil Mehta — Goldman Sachs — Analyst

Good morning, team, and congrats here on a good quarter.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Thanks, Neil.

Neil Mehta — Goldman Sachs — Analyst

So, Joe and team, I just wanted to start talk a little bit here about IMO 2020. It’s funny we’re 40 minutes since the call and it’s got a lot less tense than probably six months ago, which is a reflection perhaps of what you’ve seen in the forward curve where you’re seeing diesel FO. While it’s still favorable has compressed in 2020-2021 as you look at this dynamic of IMO 2020 has anything changed in the team’s mind about the potential upside from it and just can you talk about how you see it playing itself out through the markets and the sustainability of that tailwind?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Sure, Neil. This is Gary. I don’t think our view of what will transpire as a result of IMO 2020 has really changed at all. We still see that you’ll see a significant uptick in diesel demand, and you’ll see weakness in the high sulfur fuel oil markets. The shape of the high sulfur fuel curve is pretty much as we assumed it would be, the starting point is a little higher with high sulfur fuel oil trading 94% of Brent today, but you still see steep backwardation in high sulfur fuel oil curve. I think the one to us that we keep staring at is that the ULSD forward curve really isn’t showing any IMO impact at all. And we still believe there will be significant demand increase as a result of IMO and strong diesel cracks as a result of that as you approach that in January 2020 date.

Neil Mehta — Goldman Sachs — Analyst

I appreciate that. And then the other follow-up you know will be about the good — RINs you know just your thoughts on that market. Again, it seems like something we haven’t paid as much attention to lately prices have been lower for a period of time here. Is there any risk that you see in the RINs market that could send prices higher and just your thoughts on how it plays out from here?

Jason Fraser — Executive Vice President and General Counsel

Yeah, this is Jason. Just from a policy side, we don’t see any seismic shift come in, I mean, the EPA has several rule makings. So, we are looking at these 15 waiver for the upcoming summer for the ethanol guys to give more ability to put more in the market, tied with the market reform aspects. Some rules have been hopefully improved the functioning of the RIN market. It’s an RFS reset. But what’s happened is those have all gotten stalled out with the government shutdown. So, we don’t see any change in course more just a delay right now, but I don’t see any big catalyst to change things.

R. Lane Riggs — Executive Vice President and Chief Operating Officer

Well, and then the small refiner exemption is another piece of this, right. And the EPA followed the rules last year and got a small refiner exemptions where they were appropriate, and that certainly took some of the pressure off in the RIN market also. We expect them to continue to follow the rules to comply with the legislation as it’s crafted and issue the small refiner exemptions where they were appropriate. And so, Neil, I’m Jason, I don’t see a whole of change in this market going forward.

Neil Mehta — Goldman Sachs — Analyst

Thank you.

Operator

Thank you. Our next question comes from Paul Sankey with Mizuho. Your line is open.

Paul Sankey — Mizuho Securities — Analyst

Good morning, everyone.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Hi, Paul.

Paul Sankey — Mizuho Securities — Analyst

Joe, this is good result obviously in Q4, but it feels like a tremendous number of things have changed into Q1 equally feel that your comments about gasoline for example. It’s not a good time in January to sort of turn bearish. Can you talk a little bit about what the really big earnings impact changes have been? And obviously I’m thinking about OPEC cuts, Alberta cuts, Venezuela, gasoline markets. It’s just a very different environment. How do you expect things to progress in some of those things through 2019 and how different is the environment even in January compared to this very good result in Q4? Thanks.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Paul, I mean, that’s a very good question, and you hit on the point, I mean, it is a very interesting market because there are so many moving parts right now. But the thing that we always have to keep in mind is that January always stinks, OK. Gasoline is usually weak at this point in time. If the winter is warm, distillates not too salty, a lot of time, Paul, we’ve been at your conference in the past in January when everybody wanted to slip their risk because things were so miserable, right. But the reality is that we’re managing our business for the long-term and we have been in this for a very long time, and we understand the cycles in the business. And so what do you do? You make adjustments day in and day out in your operations to try to deal with this and to be as profitable as possible. I mean Lane mentioned some of the things we’ll do around cash. Gary is changed in the way he’s sourcing crude — on a weekly daily basis to try to get the best net-back that we can in the plant. The things that we don’t change. We don’t change our commitment to the things that make Valero really good, which is operating safely, reliably, honoring environmental stewardship, managing our capital appropriately. Those are the things we can control, and that we pay a lot of attention to. Day in and day out optimization based on certain market conditions, OK. We’re all over that too, but we don’t have a crystal ball, and so we just managed the business for the long-term and we do our best. Lane, you and Gary want to talk any specifics around that?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

One thing I would add on Venezuela, Venezuela at some point going to have to put oil on the market even if you sanction the employees. So, there’s going to be a balancing time through here where whoever bought any alternatives they’ll build by Venezuelan oil and that oil will come to our market. So, I mean, it will also allow you just quoted in a interim time period here where that’s got to play out. And of course if something changes in Venezuela then it’s just back to status quo. On OPEC, OPEC is clearly going to be looking at trying to set the amount of oil in the market based on what are the markets and what’s the structure of the market. And again, as Joe alluded to everyday we wake up and we do, we optimize our assets around what’s available out there. We have a great system better than anyone in the markets to get the most value and understand these markets.

Paul Sankey — Mizuho Securities — Analyst

Great. Thanks, guys. And Joe I greatly appreciate the shot out (ph) for our January refining conference. Saying that you are the only major refining out there this year, but do you remember that we’ve got our — don’t forget we’ve got our Napa Valley Energy Summit on the 1st and 2nd of April and you’re most welcome to join us in major piece — of clients. I apologies for the shameless plugs.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Paul, I would expect nothing less, and if you are buying, all I can see, we can make it work.

Paul Sankey — Mizuho Securities — Analyst

I appreciate that guys. Thanks very much indeed.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Thanks, Paul. Take care.

Operator

Our next question comes from Brad Heffern with RBC Capital Markets. Your line is open.

Bradley Heffern — RBC Capital Markets — Analyst

Hi. Good morning, everyone. Lane, I was just hoping you could sort of expand on the comments that you just made about crude sourcing. I mean, it seems like all the numbers we see on the screen for pretty much anything sour waterborne. It’s just not the math that you would normally expect. So is Mars at minus 2 or Oriente at minus 4? Are those crudes actually pricing their way into the system or is there a chance that in the sort of interim period where the trade routes are sort of getting really drawn that we see cut and runs just because the mediums and heavies are not competitive?

R. Lane Riggs — Executive Vice President and Chief Operating Officer

So, I’ll take a shot and Gary obviously can tune me. Today, where we are is the most profitable crude that we run is our sweets and then it’s sort of medium and heavy you are sort of at parity with one another and it depends on what part of your refinery is trying to sellout. But on the Mars like the last barrels we try to run on the system where it’s really sweet and they also still have margin, positive margin between open crude unit. So, it’s just really trying to navigate and get the right dive into our assets. In terms of just the way trade routes are deploying, I think, again as I said, I mean, OPEC you’ve got — they aren’t always going to be cuts. And we got to watch how Venezuela plays out on the sanctioned side. And it’s just like what happens when around — same thing. So, these all worked, they’re not the permanent trade we pass, but the world rebalances when these things happen.

Bradley Heffern — RBC Capital Markets — Analyst

Okay. Got it. Thanks. And then I was just wondering if you could give any color on your union contracts, obviously, the steel workers union negotiations going on right now and the contract expires tomorrow. So, I know you guys didn’t have any impact four years ago, the last time that we saw this, but just curious if what do you expect this time around?

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Sure. So, Shell is really negotiating on behalf of the industry for the pattern bargaining. In terms of Valero, we have two refineries and it’s actually tonight at 12 midnight that these contract expire. And we have two refineries that these contract will expire that is our Memphis refinery and Port Arthur. We have a tentative agreement with our Memphis refinery right now in terms of just sort of local agreement pending the sort of the Shell negotiations, and we’re still working on our issues at Port Arthur. We don’t expect a work stoppage during this whole process, we just never know. So, we’re prepared for that. We have a completely trained temporary workforce to take over the assets in the event, there is a walk out. I’m not trying to say we’re going have one, but we’re certainly prepared for it, as you would expect it to be.

Bradley Heffern — RBC Capital Markets — Analyst

Okay. I appreciate it. Thanks.

Operator

Thank you. Our next question comes from Craig Shere with Tuohy Brothers. Your line is open.

Craig Shere — Tuohy Brothers — Analyst

Good morning. Congratulations on the terrific quarter.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Thanks, Craig.

Craig Shere — Tuohy Brothers — Analyst

So, picking up on Neil’s IMO 2020 question. I just wonder if you could speak to the expanding wastewater regulations that appear to be limiting the option of ship based scrubbers?

R. Lane Riggs — Executive Vice President and Chief Operating Officer

Hi. This is Lane. I think what you’re asking about, there are some of these environment, there are some sort of ports that are saying they’re not allowing the discharges that what are you talking about?

Craig Shere — Tuohy Brothers — Analyst

Exactly.

R. Lane Riggs — Executive Vice President and Chief Operating Officer

Yeah. So, that again, that’s just makes it a little more difficult for the ship to invest in scrubbers, I mean, again that technology takes the SOX out of the air and puts it into the water. And I think some of these local ports are fully aware of that. It’s just another headwind in terms of making it more difficult to try to solve this long range problem out of IMO, which is this really heavy bitumen that’s historically been burning these ships, and there’s only a few other pathway to try to get rid of it. And as Gary mentioned that’s where you really see the forward market trying to understand exactly how it’s going to happen is that particular strength.

Craig Shere — Tuohy Brothers — Analyst

So, would you agree that’s just another data point suggesting — perhaps deeper and more prolonged benefit to the refineries?

R. Lane Riggs — Executive Vice President and Chief Operating Officer

Exactly. That’s exactly, right.

Craig Shere — Tuohy Brothers — Analyst

And also just picking up on Roger’s M&A balance sheet question. 2018 was a robust acquisition year. We had the ethanol plants, the Peruvian terminaling and the VLP rollup obviously. Do you think that convergence was just a one-off event or do you see ongoing opportunities that can continue to soak up cash balance?

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Craig, I mean, our practice is not to really kind of foretell what we’re looking at from a acquisition perspective, but I can tell you there is nothing on the radar screen at this point in time. We’ll continue to evaluate opportunities as they arise, but we don’t have any pressing need to fix our business sort of fill that gap with acquired assets. I can’t call it coincidental, because we made the decision to do the acquisitions last year, right. So, it’s far from a coincidence. But the facts are we saw some opportunities that we felt satisfied our strategic interest, and that really was to extend our supply chain and to continue to grow one of our businesses, the ethanol business, buying assets that were priced very attractively in the market. And so we took advantage of the opportunity, but I’m going to tell you there, I would not model for a repeat act in 2019.

Craig Shere — Tuohy Brothers — Analyst

So, borrowing ongoing strong M&A, and relatively steady billion dollar growth CapEx, robust margins like we’re seeing in the opportunity for IMO 2020. It seems like if anything is going to flex, it’s going to be the share buybacks, which we saw in the fourth quarter?

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Yes, sir.

Craig Shere — Tuohy Brothers — Analyst

Okay, great. Thank you very much.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

You bet.

Operator

Thank you. Our next question comes from Matthew Blair with Tudor, Pickering, Holt. Your line is open.

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

Hi. Good morning, everyone.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Hey, Matthew.

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

Homer, did you say 3.8 on ethanol throughput guidance for Q1, and if so does that reflect any economic run cuts or maybe a big turnaround or something else going on?

Martin Parrish — Vice President of Alternative Fuels

Well, this is Martin Parrish, yeah, we have a cut back a little bit or run in all our plants, but we had some cut back a little bit, there’s just not much fund in it right now, but we take a long-term view, and we expect things to turn around, ethanol demand in the US is going to grow marginally, and export demand way up this year, and we expect that to continue, it’s more mandates worldwide, and even better than that just blending economics worldwide for ethanol where it’s priced and we just don’t think that can stay that way where ethanol prices is as cheap. So, that’s the plan.

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

Okay, sounds good. And then I was also hoping you could talk about Octane in upcoming alky expansion, when we look at Gulf Coast octane spreads coming in around $5 a barrel. A couple of years ago that was more like $10 to $12 a barrel. So, is the alky unit what are the economics on today’s pricing, and would you expect a widening octane spread going forward?

R. Lane Riggs — Executive Vice President and Chief Operating Officer

This is Lane. Our Houston alky will come on stream in the second quarter. Our FID decision, I think, the EBITDA will come around 105 million or something like that. So, I’d have to go back and look and see where compared to now, but we are still committed with the idea that a) going forward octane is going to be more valuable, there’s a couple of reasons for that. One, is the auto is going higher octane, and two you still haven’t seen Tier 3. All this Tier 3 investment get in and sort of potentially pressure the octane. And then finally just all this light crude puts a lot in that out there. So all that put together, essentially, we believe that octane is going to be valuable where it goes — where it is versus our funding decisions where we just have to check, but we still feel like it’s a good project and the same true for our St. Charles, Alkylation project.

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

Great. Thank you.

Operator

Thank you. Our next question comes from Craig Weiland with US Capital Advisors. Your line is open.

Craig Weiland — US Capital Advisors — Analyst

Yeah, hi. Good morning, and thank you for fitting my question, and congrats on the great quarter.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Hi, Craig.

Craig Weiland — US Capital Advisors — Analyst

You have about a quarter of your Gulf Coast refining capacity located in Eastern Louisiana and it looks like probably bridge is about to start up here, start delivering barrels into St. James at some point, maybe this quarter also a slew of other proposed projects that have been introduced in recent weeks and months designed to move crude into that market over the next couple of years. So, I’m curious if you could elaborate on how you think Valero’s crude procurement options will develop on the back of these projects and what type of impact they could have on your Gulf Coast feedstocks. Appreciate any color you can share.

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yeah, I think, the biggest thing for us in the Eastern Gulf that St. Charles is obviously a heavy sour refinery and getting better access to heavy Canadian crude would be a big advantage for us there. And so we’re certainly looking at some of the projects that are out there namely the Capline reversal has a potential to be able to get more cost effective heavy sour crude in the St. Charles is a big benefit to our system.

Craig Weiland — US Capital Advisors — Analyst

I appreciate the color. Thank you.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Thank you, Craig.

Operator

Thank you. Our next question comes from Jason Gabelman with Cowen. Your line is open.

Jason Gabelman — Cowen & Co. — Analyst

Hey guys, congrats on the quarter. Just a couple of questions, a follow-up on the comments about running the FCC just to maximize alky production. The inputs into the FCCs, are those able to be blended into the marine fuel pool or is there from a technical standpoint an issue with meeting marine fuel specs, if you try to blend that backing gas oil into the marine pool?

R. Lane Riggs — Executive Vice President and Chief Operating Officer

Hi, Jason. This is Lane. So, yes, that — the fees particularly the marginal fee which is low-sulfur VGO into these FCCs will fit into the half a way percent fuel oil market.

Jason Gabelman — Cowen & Co. — Analyst

Okay, great. And there’s not an issue with any of the other spec outside of meeting the sulfur spec?

R. Lane Riggs — Executive Vice President and Chief Operating Officer

We’ve done a lot of work, in terms of blends, making sure that there’s some compatibility. There is not — the spec for — is not that rigorous, it really ends up being, there’s just sulfur spec. So, really what you really got to be careful of is for something that you do to the blend that creates compatibility. I’m pretty confident, ultimately, industry will work through all that. It’s not to say that really on there won’t be some of those issues. We’ve worked with some of these people to try to work on our own blends around that. So, that’s really the only issue this potentially could have.

Jason Gabelman — Cowen & Co. — Analyst

All right, great. And just looking more near-term obviously 4Q benefited from some better capture then and anticipated and trying to figure out, if that could continue into the first quarter. One area I think where they would be some upside is on the butane blending, it looks like butane prices have fallen pretty hard against where gasoline prices are. Do you expect that to support capture rates in the first quarter relative to its support in prior first quarter?

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Yeah, we see the spread that — it’s not a real meaningful contribution to our overall earnings for the quarter.

Jason Gabelman — Cowen & Co. — Analyst

All right, great. Thanks a lot, guys.

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Thanks, Jason.

Operator

Thank you. This concludes the question-and-answer session. I would like to turn the call back over to Homer Bhullar for closing remarks.

Homer Bhullar — Vice President, Investor Relations

Thanks, Shannon. We appreciate everyone joining us. Please feel free to contact the IR team, if you have any additional questions. Thank you.

Operator

Ladies and gentlemen this concludes today’s conference. Thanks for your participation, and have a wonderful day.

Duration: 62 minutes

Call participants:

Homer Bhullar — Vice President, Investor Relations

Joseph W. Gorder — Chairman, President and Chief Executive Officer

Blake M. Fernandez — Simmons Energy — Analyst

R. Lane Riggs — Executive Vice President and Chief Operating Officer

Gary K. Simmons — Senior Vice President of Supply, International Operations and Systems Optimization

Douglas Terreson — Evercore ISI — Analyst

Paul Cheng — Barclays Capital — Analyst

Manav Gupta — Credit Suisse — Analyst

Martin Parrish — Vice President of Alternative Fuels

Douglas Leggate — Banc of America Merrill Lynch — Analyst

Prashant Rao — Citigroup — Analyst

Roger Read — Wells Fargo — Analyst

Philip Gresh — JPMorgan — Analyst

Donna M. Titzman — Executive Vice President and Chief Financial Officer

Neil Mehta — Goldman Sachs — Analyst

Jason Fraser — Executive Vice President and General Counsel

Paul Sankey — Mizuho Securities — Analyst

Bradley Heffern — RBC Capital Markets — Analyst

Craig Shere — Tuohy Brothers — Analyst

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

Craig Weiland — US Capital Advisors — Analyst

Jason Gabelman — Cowen & Co. — Analyst

More VLO analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Valero Energy

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Valero Energy wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of January 1, 2019


Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Share...