Valero Energy Corp (VLO) — Q2 2021 Earnings Call Transcript

Good morning, everyone, and welcome to Valero Energy Corporation's Second Quarter 2021 Earnings Conference Call. With me today are Joe Gorder, our Chairman and CEO; Lane Riggs, our President and COO; Jason Fraser, our Executive Vice President and CFO; Gary Simmons, our Executive Vice President and Chief Commercial Officer; and several other members of Valero's senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at investorvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call. I would now like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company's, or management's expectations, or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC. Now, I'll turn the call over to Joe for opening remarks.

Thanks, Homer, and good morning, everyone. Our system's flexibility and the team's relentless focus on optimization in a weak, but otherwise improving margin environment enabled us to deliver positive earnings in the second quarter. More importantly, cash provided by operating activities more than covered our cash used in investing and financing activities for the quarter, even without the cash benefits from our 2020 income tax refund and the proceeds from the sale of a portion of our interest in the Pasadena terminal. There was a significant increase in mobility in the second quarter, driving higher demand for refined products, particularly in the US. In fact, we're seeing demand for gasoline and diesel in excess of pre-pandemic levels in our US Gulf Coast and Mid-Continent regions. Jet demand continues to ramp up as well and is around 80% of 2019's level. We responded with higher refinery utilization to match product demand in our system. In addition, product exports have been picking up particularly to Latin America with the easing of lockdowns in the region. We exported 410,000 barrels per day of products from our system in June, which is the highest volume since 2018. Our Renewable Diesel segment continues to perform exceptionally well and once again set records for renewable diesel margin and sales volumes, highlighting Diamond Green Diesel's ability to process a wide range of discounted feedstocks and Valero's operational and technical expertise. Our ethanol segment also performed well and provided solid operating income in the second quarter as demand for ethanol increased, along with higher gasoline production. Carbon sequestration project with BlackRock and Navigator is moving ahead and has garnered strong interest from additional parties in the binding open season. Valero is expected to be the anchor shipper with eight ethanol plants connected to this system. This project serves to help achieve our goal to lower the carbon intensity of our products, while providing solid economic returns. Our Diamond Green Diesel two project at St. Charles remains on budget and is scheduled to be operational in the middle of the fourth quarter of this year. This expansion project is expected to increase renewable diesel production capacity by 400 million gallons per year, bringing the total capacity at St. Charles to 690 million gallons per year of renewable diesel and 30 million gallons per year of renewable naphtha. Our Diamond Green Diesel three project at Port Arthur is also progressing well and is now expected to be operational in the first half of 2023. With the completion of this 470 million gallons per year plant, DGD's total annual capacity is expected to be 1.2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha. Our refinery optimization projects remain on track with the Pembroke Cogen project expected to be completed in the third quarter of this year, and the Port Arthur Coker project expected to be completed in 2023. Looking ahead, we have a favorable outlook for refining margins, as product demand continues to improve with increasing global vaccinations and mobility. In addition, there has been significant refinery capacity rationalization in the US in the last couple of years and we expect further closures of uncompetitive refineries, particularly in Europe. We believe that product demand recovery, coupled with significant refinery rationalization should be supportive of strong refining margins. We also expect to see wider medium and heavy crude oil differentials as OPEC+ increases crude supply, which should further provide support to refining margins. And as low carbon fuel policies continue to expand globally, we remain well positioned. With the current projects in progress, we expect to quadruple our renewable diesel production in the next couple of years. In addition, we continue to explore and develop opportunities in carbon sequestration, sustainable aviation fuel, renewable hydrogen and other innovative projects to strengthen our long-term competitive advantage. So with that Homer, I'll hand the call back to you.

Thanks Joe. Before I provide our second quarter financial results summary, I'm pleased to inform you that we recently published an updated stewardship and responsibility report which now includes our sustainability accounting standards or SASB disclosures. In addition to being on track to achieve our previously announced target to reduce and offset 63% of our global refining greenhouse gas emissions by 2025 through investments in Board-approved projects, the report includes a new target to reduce and offset 100% of our global refining greenhouse gas emissions by 2035. These targets are consistent with our strategy as we continue to innovate and leverage our global liquid fuels platform to expand our long-term competitive advantage with investments in economic low-carbon projects. And now turning to our quarterly summary. Net income attributable to Valero stockholders was $162 million or $0.39 per share for the second quarter of 2021 compared to $1.3 billion or $3.07 per share for the second quarter of 2020. Second quarter 2021 adjusted net income attributable to Valero stockholders was $197 million or $0.48 per share compared to an adjusted net loss of $504 million or $1.25 per share for the second quarter of 2020. For reconciliations to adjusted amounts, please refer to the financial tables that accompany the earnings release. The Refining segment reported $349 million of operating income for the second quarter of 2021 compared to $1.8 billion for the second quarter of 2020. Second quarter 2021 adjusted operating income for the Refining segment was $361 million, compared to an adjusted operating loss of $383 million for the second quarter of 2020. Refining throughput volumes in the second quarter of 2021 averaged 2.8 million barrels per day, which was 514,000 barrels per day higher than the second quarter of 2020. Throughput capacity utilization was 90% in the second quarter of 2021. Refining cash operating expenses of $4.13 per barrel were $0.26 per barrel lower than the second quarter of 2020, primarily due to higher throughput in the second quarter of 2021. The renewable diesel segment operating income was $248 million for the second quarter of 2021 compared to $129 million for the second quarter of 2020. Renewable diesel sales volumes averaged 923,000 gallons per day in the second quarter of 2021 which was 128,000 gallons per day higher than the second quarter of 2020. The segment set another record for operating income and sales volumes. The ethanol segment reported operating income of $99 million for the second quarter of 2021 compared to $91 million for the second quarter of 2020. The second quarter 2020 adjusted operating loss was $20 million. Ethanol production volumes averaged 4.2 million gallons per day in the second quarter of 2021 which was 1.9 million gallons per day higher than the second quarter of 2020. For the second quarter of 2021, G&A expenses were $176 million and net interest expense was $150 million. Depreciation and amortization expense was $588 million and income tax expense was $169 million for the second quarter of 2021. The effective tax rate was 37% which was higher than our second quarter of 2020 primarily due to the remeasurement of our deferred tax liabilities primarily as a result of an increase in the UK statutory tax rate that will be effective in 2023. Net cash provided by operating activities was $2 billion in the second quarter of 2021. Excluding the favorable impact from the change in working capital of $1.1 billion and our joint venture partner's 50% share of Diamond Green Diesel's net cash provided by operating activities excluding changes in DGD's working capital adjusted net cash provided by operating activities was $809 million. With regard to investing activities, we made $548 million of total capital investments in the second quarter of 2021 of which $252 million was for sustaining the business including costs for turnarounds, catalysts and regulatory compliance and $296 million was for growing the business. Excluding capital investments attributable to our partner's 50% share of Diamond Green Diesel and those related to other variable interest entities, capital investments attributable to Valero were $417 million in the second quarter of 2021. Moving to financing activities. We returned $401 million to our stockholders in the second quarter of 2021 through our dividend, resulting in a payout ratio of 50% of adjusted net cash provided by the operating activities for the quarter. Earlier this month our Board of Directors also approved a regular quarterly dividend of $0.98 per share payable in the third quarter. And as Joe noted, we were able to cover all of our investing and financing activities which includes our dividend and capital investments in the second quarter with cash provided by operating activities even without the benefit from the cash tax refund and the proceeds from the sale of a portion of our interest in the Pasadena terminal. With respect to our balance sheet at quarter end total debt and finance lease obligations were $14.7 billion and cash and cash equivalents were $3.6 billion. The debt-to-capitalization ratio net of cash and cash equivalents was 37%. At the end of June, we had $5 billion of available liquidity excluding cash. Turning to guidance. We expect capital investments attributable to Valero for 2021 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts and joint venture investments. About 60% of our capital investments is allocated to sustaining the business and 40% to growth. And over half of our growth capital in 2021 is allocated to expanding our renewable diesel business. For modeling our third quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.6 million to 1.65 million barrels per day; Mid-Continent at 435,000 to 455,000 barrels per day; West Coast at 250,000 to 270,000 barrels per day and North Atlantic at 450,000 to 470,000 barrels per day. We expect refining cash operating expenses in the third quarter to be approximately $4.45 per barrel. With respect to the Renewable Diesel segment, with the anticipated start-up of DGD two in the middle of the fourth quarter, we expect sales volumes to average one million gallons per day in 2021. Operating expenses in 2021 should be $0.50 per gallon, which includes $0.15 per gallon for non-cash costs such as depreciation and amortization. Our ethanol segment is expected to produce 3.7 million gallons per day in the third quarter. Operating expenses should average $0.43 per gallon, which includes $0.06 per gallon for non-cash costs such as depreciation and amortization. For the third quarter, net interest expense should be about $150 million and total depreciation and amortization expense should be approximately $590 million. For 2021, we still expect G&A expenses excluding corporate depreciation to be approximately $850 million and the annual effective tax rate should approximate the US statutory rate. That concludes our opening remarks. 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. If you have more than two questions, please rejoin the queue as time permits. Please respect this request to ensure other callers have time to ask their questions.

Hi. Good morning.

Good morning, Phil.

Nice job in the organic dividend coverage despite choppy refining margins here. Joe, I know you touched on some of this in the opening remarks around the macro environment. June was obviously pretty tough. July is getting better here. What do you think needs to happen going forward to see sustainable improvement in margins back to more normalized levels? Is it just demand and differentials, or do we need some of these closures you were referencing in your remarks? Just any additional thoughts?

Hi, good morning, Phil. This is Gary. As Joe mentioned, mobility increased in the second quarter. We observed a solid recovery in mobility within the domestic markets, which led to on-road transportation fuel demand returning to pre-pandemic levels. However, the challenge we faced in the second quarter was that the recovery pace in the US was significantly quicker than in most other major demand regions worldwide. As our margins began to improve with increasing demand, our market started to diverge from global markets, prompting us to incentivize imports. Consequently, we experienced high import levels later in the quarter, resulting in inventory buildup. As the inventory grew, we eventually encountered margin erosion. The positive aspect as we move into the third quarter is that in the markets where we have good visibility, we are witnessing a rise in mobility similar to what we observed in the US during the second quarter. This increase in mobility is driving demand nicely, particularly in our Canadian markets, the UK, and Latin American regions. For sustained margin recovery, an uptick in global demand is essential. So far in July, we have seen margins that exceed those of the second quarter, which is encouraging. Regarding crude, there have been significant movements in the differentials, and we need OPEC barrels to return to the market. It's reassuring that OPEC plans to reintroduce 400,000 barrels per day post-August, and markets seem to be responding to that already. Currently, the heavy Canadian differentials in the Gulf for the fourth quarter exhibit about $0.75 wider discounts compared to the Brent market, indicating a noteworthy move despite the backwardation present in the Brent market. This discount represents a significant shift as we approach the end of the year.

Got it. Okay. Thanks for that color. I just want to switch over to renewable diesel for the second question. The indicator margins were down sequentially obviously because of the soybean oil-based indicator. Regardless, you put up another record quarter there up sequentially, again, presuming from the advantaged feedstock benefit. But how do you see the sustainability of this trend? Were there any transitory factors in the quarter or structural things that you're thinking about moving forward?

Hey Phil, this is Martin. If we take a moment to consider our renewable diesel segment, our refining expertise has been vital to the development and operations of renewable diesel, contributing to the success of that business. It's important to recognize that we were pioneers in this area and have gained decades of knowledge, far exceeding most of our competitors. Our operational reliability has been impressive, helping to set Diamond Green apart. We apply the same reliability processes in renewable diesel that we use in our refining system. Additionally, when it comes to pricing, both Diamond Green and other producers are likely to see improved results when prices rise, such as RIN and ULSD prices, because this value is immediately observable, with feedstock sales costs reflecting a delay. Therefore, the current rising price environment has been somewhat beneficial for us.

Got it. Okay. Thank you.

Thanks everyone. Good morning. I’d like to share my thoughts on the cash flow numbers. We need to confirm much of that. I expect to be second in line. I hope you can hear me well. Joe, or perhaps Jason can respond to this. Regarding cash flow, as we see improvements in the latter half of the year, you’ve demonstrated that cash coverage will be adequate, but you also have a commitment to return cash to investors while your balance sheet is somewhat elevated. Can you explain how you plan to prioritize additional cash returns over the next year? Will the balance sheet take precedence over dividends? That’s my first question, and I have a follow-up as well.

I'm happy to discuss this. As Joe mentioned, this quarter marked a significant change for us in a couple of ways. We generated profit for the first time and had sufficient cash to meet all our needs, which is a positive position to be in. Last year, we took on $4 billion in debt, and we have stated that as things stabilize, we will prioritize two objectives: first, rebuilding our cash balance to over $3 billion, and second, working on reducing our leverage. Our cash balance as of June 30 was approximately $3.6 billion, so we're on track with that. We're comfortably positioned and beginning to address our debt repayment. We have previously indicated that we are considering redeeming the tranche of three-year floaters that can be called as early as this fall, which is likely our initial step, and that is still the case. Looking ahead into this year and beyond, we will also explore further liability management opportunities. As earnings and cash flow continue to stabilize, as we hope, having more cash will provide us with greater flexibility. However, maintaining our credit ratings is also a key priority. We aim to achieve a net debt to capitalization ratio of around three times in a normalized environment, consistent with our historical performance. Our long-term target for net debt to capitalization remains at 20% to 30%. To address your question directly, we remain committed to our capital allocation framework. Our shareholder payout ratio for this quarter was 50%, and we continue to aim for a ratio of 40% to 50% on an annual basis. We anticipate being able to meet this target as we advance through the recovery and even while we pursue our deleveraging strategy. We believe we can achieve both objectives without needing to reduce the dividend or sacrifice our target.

Yes, I was thinking more about the discretionary aspects beyond the dividend, and that was a very complete answer. Thank you for that. Joe, I’d like to turn it back to you. I’m not sure if you want to address this or if someone else should, but in your prepared remarks, you mentioned the ongoing possibility of refinery closures outside the US, particularly those often prompted by capital events and turnarounds affecting the more vulnerable refineries. I'm curious if the inclusion of that in your comments reflects any specific thoughts or insights you have regarding the likelihood of those closures occurring at an accelerated pace this time. I'll leave it at that. Thanks.

Doug, that's a good question. And I don't think we've got any particular insight that anybody else doesn't have into specific assets. I think we can all look at them and say where the vulnerabilities are. I know Lane has spoken about this many times. Just want to share your thoughts?

Yes, Doug, we consider regions that face structural disadvantages, which we have mentioned before: Europe, the US East Coast, the US West Coast, and Latin America. Each of these areas has its unique challenges. We focus on these regions because we have operations there and we assess how conditions may evolve over time and how we'll adapt. When we operate in these regions, we conduct stress tests to understand the cash flow generated by our assets throughout an economic cycle. The factors influencing our assets often involve issues like trade flow or reliability, combined with significant capital investments, whether regulatory or through major upgrades. That’s when operators begin to strategize about their next moves. As Joe mentioned, we view everything regionally and consider where problems might arise or where closures could eventually occur.

Appreciate the answers, fellows. And I assume the Valero portfolio is, I don't think that you're quite happy with it where it is.

We always work very hard to make sure that we maintain our ongoing competitive advantage in all the markets that we operate.

Fair answer. Thanks, both.

Good morning. Thank you for taking my questions. Maybe first touching on DGD again. Just in light of the very strong profitability we've been seeing for many quarters in a row, given that LCFS credit prices have seen some volatility and faltering recently, how do you see that trend going forward? And what's driving that?

Hey, Theresa, this is Martin. One thing to note is that the credit bank in California has remained quite stable for five quarters. However, we haven't received any data from them since the end of 2020, which means there’s a delay. Tomorrow, we will see the first-quarter data. This may provide some insights, but it's likely a matter of limited information. The credit bank's stability over the past several quarters is important. Additionally, I think we should not be overly concerned. If there were a significant decline in pricing in California, I believe CARB would respond by adjusting the targets upwards since they have indicated they're comfortable with a carbon price around $200 per ton. Thus, we could expect a quicker pace of carbon reduction if there were a long-term price shift, which would ultimately drive the price back up.

Got it. That makes sense. And then, on the broader renewables front, I wanted to ask about your endeavors there. Many projects you have under development. And specifically on renewable hydrogen, what kind of projects are you planning to do there?

Hi, this is Lane. In our St. Charles and Port Arthur refineries, we are focusing on integrating our projects with Diamond Green Diesel. We are exploring methods to produce renewable hydrogen from the LPGs generated by those units, which will then be processed in an SMR. This hydrogen will help reduce the carbon intensity of the products from both refineries.

Thank you.

Yes. Thank you. Good morning.

Hi Roger.

I'd like to return to the initial question with you, Gary, regarding the improvements we're seeing. We've observed a significant reduction in inventories within the European market. As you assess this situation and the increase in mobility in some of these regions, what do you anticipate for imports over the next couple of months? Additionally, how might this influence margins to potentially be notably stronger in the third quarter compared to the end of the second quarter?

Yes, Roger. So I think a thing I'd point to is, they are to import gasoline from Europe, has really been closed most all of July. And so that's been encouraging to see. I think the last set of DOE data is really the first time we saw reflected in the data imports falling off. But it really has more of an impact than just the imports because we've also seen that we're again much more competitive in the Latin American markets. Not only was Europe exporting to the United States, but they were pushing into Latin America and causing us to lose some of the exports we typically send to that market. But as things have picked up in Europe, they're not only, not sending barrels to the US, but we're seeing our exports ramp up in the Latin America. So what I would say is more normalization of trade flows, which will help inventories continue to draw and support better crack spreads.

Great. Thanks. And then the other question a little off the typical beaten path here. But you're, obviously, moving aggressively more expansions in renewable diesels we've seen. A lot of talk about sustainable aviation fuel as one of the areas, I was just curious is there anything you're looking at in that front? Are the economics of sustainable aviation as attractive as renewable diesel as you look at them? And then what would be the, I guess to some extent interchangeability between renewable diesel and sustainable aviation fuel?

This is Martin. To produce renewable jet fuel or sustainable aviation fuel, additional equipment is necessary. There are a few methods to achieve this, but typically, you would need to add a reactor and definitely a fractionator, which requires more capital investment. As your yield pattern adjusts to produce more lighter components, you’ll need some support on the sustainable aviation fuel side regarding pricing mechanisms and a green premium to match renewable diesel economically. Currently, we do not see a strong economic incentive to produce sustainable aviation fuel, but we are actively studying it. We are monitoring how the landscape evolves globally, including legislative and regulatory changes. We expect to begin production at some point, so it’s not a matter of if, but rather when.

Thank you.

Hi everybody. How are you doing?

Hi Sam.

My first question is for Martin. If I could ask you to go into a little bit more detail about that yield comment you made at DGD just given the per gallon value of all the different credits flowing in a yield outcome is very powerful. So if you're able to can you just give a more detail around that and how sustainable it is and whether how far off sort of your plans you are in terms of yield outcomes and production efficiency?

I wouldn't say our yield is fully aligned with our expectations. It's not solely about the yield; it's more about the timing. We are currently in a market where ULSD prices have surged significantly, alongside a notable increase in RIN prices year-to-date. Although fat prices have also risen, the escalation in RIN prices has been greater than that of fat prices. Additionally, we are benefiting from buying our feedstocks at a much lower cost by utilizing 100% waste feedstocks compared to soybean oil. What I mean by timing is that in a rising market, you'll quickly notice the ULSD price and revenue, as well as the RIN price. However, there tends to be a delay in the feedstock prices affecting the cost of goods sold. Therefore, you can expect a more favorable margin environment when prices are on the rise.

Hi, Sam. This is Lane. I'll add to it a little bit. We have been working with catalyst suppliers in terms of improving the yield of the current units and essentially trying to maximize renewable diesel versus LPG versus naphtha and versus some of the off gases. So we have seen our yields improving over the life of our overall operating experience from 2013 till...

Okay, understood. Thank you. And then Joe in your prepared remarks you had a comment about light-heavy differentials potentially bottoming and starting to expand here as OPEC volumes come back. I think I'm still looking at the sulfur penalty. It's still very wide. Is there a signal around high-sulfur fuel oil discounts and what that means for when actual supply of sour expands? Is the expansion of that advantage going to be faster than normal, or are you still thinking about it as the normal relationship between supply and differentials?

No. I think some of the movement you've seen in high sulfur fuel really two primary drivers on high-sulfur fuel discounts. One just the prospect of getting more OPEC barrels onto the markets caused high-sulfur fuel oil to weaken some. And then some changes in the tax policies in China had caused them to kick out some high-sulfur fuel blend stocks, which caused high-sulfur fuel to move weaker. Today it's one of the more economic feedstocks we're running in our system, high sulfur fuel and high-sulfur fuel blend stocks is one of the highest margin feeds we have in our system today. And we expect that to continue.

Okay. Thanks everybody. Take care.

Good morning, everyone. The first question is for Martin regarding the ethanol segment. You achieved strong results in that business area. Could you share your thoughts on the sustainability of this ethanol recovery? Additionally, what are the factors influencing the prices from feedstock to product?

Sure, Neil. The second quarter was definitely strong. If you examine the weekly inventory data from that period, inventories were consistently declining. Generally, a decline in inventories leads to improved margins, and this trend is evident in the U.S. ethanol sector. However, starting in late May and continuing through June, we've noticed a reversal in that trend, resulting in lower margins compared to the second quarter. I'm uncertain how long this situation will persist. We are beginning to see reductions in production within the industry and have adjusted our guidance for the third quarter’s production down from what it was in the second quarter. Looking ahead, our long-term focus in ethanol is on carbon sequestration, which we believe will set us apart in the industry. With the 45Q tax credit valued at around $0.15 per gallon and entering LCFS markets which can provide around $0.50 per gallon, we are well positioned with our initiatives involving Navigator and BlackRock. Additionally, we're exploring standalone projects at Eastern ethanol plants for carbon sequestration. Ultimately, our goal is to reduce the carbon intensity of our product while remaining competitive and distinguishing ourselves in the market.

Yeah. No, that's great. And as a follow-up, it's just a big picture question. And I don't know if this is for Joe or Lane, but if I think about the demand side of the equation for both gasoline and diesel has come back really nicely. Obviously, we're still waiting here on Global Jet. Margins until recently didn't perform it just strikes us that the refining system in the United States was running too hard ahead of product. Do you believe that discipline in the U.S. refining system has broken down? Or do you see that as still a structural tailwind for the space that independent refiners will generally run at relatively low levels of utilization relative to demand enabling favorable inventories. It's a big picture question but one of the structural benefits certainly of the refiners over the last couple of years has been the discipline around runs?

Yeah. So Neil, this is Lane. I would say that independent refiners are much more disciplined today than the industry was a decade ago. Ultimately, we need to manage our assets to generate cash flow and make profits. In April and May, there was a clear indication to increase utilization, as the markets were signaling that. What actually happened, as Gary mentioned earlier, was just a temporary issue. The U.S. saw a recovery with increased mobility, which led to higher imports from regions that were still in lockdown. This created surplus capacity in Europe and other areas that attracted those imports. I wouldn't say the U.S. refining industry has lost discipline; rather, it was a matter of how we operated. The main concern was that there was capacity available that could be directed to the U.S., and as one earlier caller noted, the fundamentals in Europe appear to be stronger. So even though margins have increased, we're not seeing much coming from Europe to the United States.

Hey guys. Good morning.

Good morning, Paul.

I have a couple of quick questions, and perhaps this one is for Gary. Regarding the recent actions in Mexico by AMLO, does that raise any concerns from your perspective? Will you be slowing down your investments in the near term to assess the situation, or do you think it will be business as usual moving forward? Additionally, with the potential elimination or cancellation of a large number of import and export lines, have you noticed any changes in the market dynamics? That's my first question. My second question is for Lane. I'm curious about how you and the industry have adapted remarkably well in utilizing the flexibility of the refining system to process different types of crude over the past several years. For instance, Gulf Coast heavy oil refiners have significantly shifted to lighter crude. During the pandemic, there was also a substantial reduction in jet fuel, and now there’s an attempt to pivot towards gasoline. However, this has often deviated from the standard design model. While this adaptability is impressive, have you observed any inefficiencies or challenges that might have softened margin capture? Thank you.

Okay. Paul I'll start. And if Rich Walsh wants to add anything to it, I'll let him on Mexico. Really our strategy is unchanged. The one thing I would say is we're not really investing in Mexico. We partnered with IEnova and others that are really making those investments and then we signed long-term agreements to utilize the assets that they're investing in. But overall I think the strategy that we're using in Mexico is what they had intended when they started energy reform. They wanted to see investment in infrastructure in their country. And a lot of others are really not doing. They've kind of taken advantage of the legislation. We are investing in the country. And I think what we are doing in Mexico is exactly what was intended with the change in the regulation. So our strategy is still very much intact. Veracruz is fully operational now. We have our terminal in Mexico City that was commissioned during the second quarter. We will commission our terminal in Puebla in the third quarter. We've also started to bring jet fuel into Veracruz and we'll start jet fuel sales in the third quarter as well. So things are going very well for us in Mexico. And Rich I don't know if you want to add anything?

I think that sums it up.

And Paul to answer your second question, the industry did I think at least particularly we – I would say, Valero learned a lot going into the pandemic in terms of how to operate our refineries maybe differently and actually demonstrated more flexibility as you would expect us to figure out how to operate. I think in terms of margin capture what you'll see is you coming out of it is it's been contango, right? So as you – there was structural contango in the crude markets and as we're coming out of it, we've gone flat to slight backwardation. So I think what you'll see kind of moving ahead you have a combination of slight backwardation and obviously high flat price will cause some of the byproducts to maybe have some margin capture – will affect margin capture. It doesn't really affect so much our ability to generate EBITDA as much as when you think of in terms of market capture. In terms of anything that's happened post-pandemic, if anything we just learned a lot more about how to manage our business even more carefully than we had before.

Thank you.

Hey, guys. Just first want to congratulate Mr. John Locke and Homer for their promotions and wish them all the luck for all the new responsibilities they're taking within Valero. And I also wanted to congratulate you Joe. We know the capital discipline and shareholder returns are two strong pillars on which you have built this new Valero. So it was personally very important for you to achieve full dividend coverage. And so congrats on getting there despite a tough macro.

Yes. No. Thanks, Manav. And John and Homer are both going to need a lot of luck.

My quick question here is Lane or Joe is we have seen North Atlantic here actually sometimes outperform your Mid-Con do very strong. And this quarter came in a little weaker. I'm hoping it was just a turnaround and it's nothing to do with that one of the refineries that is located in Europe and Canada and just if you could give us some color on why North Atlantic was slightly weaker quarter-over-quarter?

Yes, you identified the main issue. Both refineries were undergoing maintenance in the second quarter, which affected the results.

Okay. Thank you for taking my question.

Thanks. Maybe one on – you announced that you moved up the timing of the Diamond Green Diesel Phase 3 start-up from the second half to the first half of 2023. What's allowed you to accelerate that? And maybe can you talk about the general environment out there? I think most people probably would have taken that over for most of the capacity expansion start dates out there I guess within that overall environment what are you seeing that's allowing you to kind of execute better than expected on your projects?

Sure. This is Martin. I think one thing you have to remember now is DGD 3 is pretty much a carbon copy of DGD 2. So that helped us. I mean all the major equipment, we changed a little bit but just tweaks. So we had a lot of the engineering done sooner than you typically would have. Now obviously, we knew that when we funded it but just getting out the market while steel prices and everything were up we kind of beat all that to the market. So we had placed orders before that happened. The delivery is good. I mean the shop space is there and the labor situation is really good on the Gulf Coast, where we're building. So all those things and then just having an experience we moved over experienced contractors from DGD 2 that had just built one of these units. So all the work, the structural work, the concrete work structural steel is already going up. So we just got a really quick start out of the gates and we expect to be able to maintain that. So in a nutshell that set an experienced construction team and getting out in front of these price increases and shop space has been really good for us.

This is Lane. I want to highlight what Martin has mentioned. Our strength lies not just in this area, but also in our exceptional project execution team. We are currently in the process of developing Diamond Green 2, from which we've gained valuable insights that have accelerated our schedule. We've applied these lessons to Diamond Green 3. This demonstrates our ability to operate effectively and execute projects well, not only within our refinery sector but also in the renewable diesel sector.

Thank you very much. Congratulations on the impressive results. I have a question regarding RINs and RVO. There has been a lot of recent noise and volatility in those markets following the Supreme Court's ruling on SREs and with the upcoming RVO. Since you are significantly involved in both the gasoline and biofuel sides of the issue, what are your thoughts as we move forward? How do you anticipate the EPA will attempt to balance these matters, and how do you see the market for RVOs playing out in the next few years?

This is Rich Walsh. There has been quite a bit of discussion around this topic, but ultimately, it boils down to the EPA needing to issue these RVOs. They seem to be pushing this out to move past the infrastructure debate and avoid complications while advancing the infrastructure deal. We anticipate that once this is resolved, the EPA will need to issue an RVO. As we are nearly through 2021, by the time they could finalize a rule, the year will almost certainly be over. This suggests we might see a combined rule for 2021 and 2022 or at least have them released simultaneously. Moreover, they understand the importance of setting an RVO that is both realistic and attainable, which we expect them to do. Regarding SREs, the Supreme Court ruling primarily focused on a specific issue concerning the continuity of the SRE ruling. Other elements of the Tenth Circuit ruling, which sent those SREs back to the EPA, remain unchanged, and the EPA has not issued an SRE since 2018. Consequently, the likelihood of SREs being issued likely remains unaffected by the Supreme Court ruling, as the EPA still has numerous issues to address stemming from the Tenth Circuit ruling. Ultimately, they must establish a mandate that is both attainable and achievable, which is what we anticipate they will do.

All right. I appreciate the comments. Thank you.

Hey, good morning. I want to follow-up on Martin's response on the LCFS question. Martin, I think you said that you expect CARB to move the goalpost to keep credit prices around $200 a ton. So just two follow-ups on that. One, mechanically, do you know how that would work? Does CARB have unilateral authority to do something like that, or do they need legislative approval, or is there like a public common period? And then two, what would you expect the refiner response to be if that happened? Just thinking about Valero, you have two refineries in the states that are incurring LCFS costs. There's some other refineries in the state that currently don't have RD production. So, is that something that refiners would fight, could they fight it? Any more color there?

The difference with the CARB regulations and LCFS is that the obligation is passed down to the racks, which means the price is ultimately transferred to the refiner in California, unlike how the RFS operates. Therefore, I wouldn't anticipate any resistance from the refiners regarding this. The question of CARB potentially moving the goalpost is more complex. I'm not certain about the specific requirements involved, but it's something we are looking into. My understanding is that they may have the authority to make such changes, so we will need to verify that.

Yeah. I mean that's…

Great. Thank you. I’ll leave it there.

Yeah. Good morning. I wanted to ask on 2Q, two aspects that could have been transitory. First, on biofuel blending and there was some thought that maybe blending biofuels instead of buying RINs, minimizes the cost of RINs you incur, but it's unclear if the actual sales and costs flow that way or not. So can you just kind of elaborate on if you're still seeing the same benefit from blending as you historically have and that it avoids having to go out and buy out RINs, or are you incurring some costs at a similar time to go and buy RINs? And then the second question also on kind of transitory items on the coproduct impacts on 2Q. Are those headwinds dissipating and turning into tailwinds as oil prices are declining, or are different products moving in different ways? Thanks.

In response to your first question, whether you are purchasing the RIN or engaging in blending, you end up achieving the same outcome. The market price of the RIN remains constant, so either way, the result is similar.

Yes. In response to the second question, there are byproducts produced in the refineries that do not move in tandem with crude prices, such as asphalt, pet coke, sulfur, and LPGs. These products tend to take longer to reach their equilibrium state when crude prices fluctuate. Therefore, if crude prices decrease, you might expect improvements in those byproducts. However, we are not speculating that crude prices will remain low for the entire quarter. That is simply how the market operates.

Sorry, can I just follow up on that first answer quickly. Is that to say there's no real benefit from going out on blending biofuels versus buying RINs? Because I was under the assumption that if you're blending biofuels, your side stepping buying RINs and there's kind of an embedded benefit in doing that?

Well, I would say there's a benefit. Obviously, not everyone can buy RINs; you'll also need to facilitate the movement of biofuels. We are considering both sides of that equation. If the market is functioning properly, there are parties that need to meet their obligations, which means there will be some blending involved. In a well-functioning market, you're working towards the same goal but utilizing both methods.

All right. I’ll leave it there. Thanks.

Thanks, Donna. We appreciate everyone joining us today. Please stay safe and healthy and feel free to contact the IR team, if you have any additional questions. Have a great day, everyone. Thank you.