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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to Valero Energy Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Homer Bhullar, Vice President of Investor Relations. Thank you sir, you may begin.
Good morning everyone and welcome to Valero Energy Corporation's third quarter 2020 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 investor, 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 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 will turn the call over to Joe for opening remarks.
Thanks Homer and good morning everyone.
The third quarter was another challenging period in which refining margins continue to be pressured by pandemic imposed restrictions on global economies. These restrictions have limited individual movement and in-person activities across the globe, resulting in lower demand for finished refinery products. This in turn, has created less incentive to produce crude oil and has led to narrower crude oil discounts compared to last year.
Despite this challenging environment, there were a number of positive developments from the previous quarter, as product demand increased with incremental easing of restrictions on businesses, and the reopening of some schools.
Relative to the second quarter, DOE statistics show the gasoline, diesel and jet demand improved by 25%, 7% and 57% respectively, which is in-line with the increase in demand, that we experienced across our system.
Our wholesale volumes remain steady, moving over 50% of our total light products production. Our gasoline and distillate exports to Latin America and Europe were also robust in the third quarter. We exported 316,000 barrels per day in the third quarter, which is significantly higher than the 170,000 barrels per day we exported in the second quarter.
We also saw a steady increase in our wholesale volumes into Mexico, where we have been proactively expanding our logistics network for the last several years. In fact, Valero is now one of the largest, private fuel importers into Mexico. With the incremental easing of restrictions and higher product demand, our refinery utilization increased from 74% in the second quarter to 80% in the third quarter and we increased our ethanol plant production as well from 49% to 81% of capacity.
Our low-carbon renewable diesel business remains resilient, with another quarter of solid performance, realizing a margin of $2.72 per gallon and setting a record for sales volumes. In addition, we remain well capitalized. We ended the quarter with over $4 billion of cash and almost $10 billion of total available liquidity.
While we expect margins to improve as economies continue to reopen and product inventories come down to normal levels, we opportunistically raised another $2.5 billion of debt at very attractive rates to ensure that we're able to keep our high return projects on track and to honor our commitment to shareholders.
Even if the current low-margin environment persist for longer than currently anticipated. Turning to capital investments, we continue to execute on announced projects that are expected to drive long-term earnings growth. The St. Charles Alkylation Unit, which is designed to convert low-value feedstocks into a premium alkylate product, remains on track to be completed in the fourth quarter.
The Diamond Pipeline expansion and the Pembroke Cogen project are expected to be completed in 2021 and the Port Arthur Coker project is expected to be completed in 2023. We're also evaluating a number of other low carbon growth projects that are in the development phase of our gated process. Now, we continue to strengthen our long-term competitive advantage with investments in our renewable diesel business.
The Diamond Green Diesel expansion project at St. Charles, which is designed to increase renewable diesel production capacity by 400 million gallons per year to 675 million gallons per year is still expected to be completed in 2021. Diamond Green Diesel also continues to make progress on the advanced engineering review for a potential new 400 million gallons per year renewable diesel plant at our Port Arthur, Texas refinery.
As we look ahead, we expect to see improvement in margins, as product inventories approach the normal five year range. U.S. gasoline inventory is already in the middle of the five-year range. And although distillate inventory is higher than the five-year range, it's been trending downwards in recent weeks. Diesel demand should continue to improve, supported by winter heating oil demand and harvest season.
Oil refinery turnarounds coupled with recently announced and anticipated closures or conversions of less advantage refineries, should also further balance supply. Although there is a lot of uncertainty in the market, we remain steadfast in the execution of our strategy, pursuing excellence in operations, investing in earnings growth, with lower volatility and honoring our commitment to stockholder returns.
Our unmatched execution, while being the lowest cost producer and ample liquidity, position us well to manage this pandemic induce low-margin environment and maintain our position of strength, as the global economy recovers. Lastly, the guiding principles underpinning our capital allocation strategy remain unchanged. There is absolutely no change in our strategy which prioritizes our investment grade ratings, sustaining investments and honoring the dividend.
So with that, Homer I'll hand the call back to you.
Thanks Joe.
Before I provide our third quarter financial results summary, I'm pleased to inform you that we recently posted a Sustainability Accounting Standards Board or SASB Report on our website that aligns with the SASB framework for refining and marketing industry standards. As you'll see in our report, we are targeting to reduce and offset greenhouse gas emissions by 63% by 2025, through investments in Board approved projects.
The targets will be achieved through absolute emissions reductions through refining efficiencies, offsets by our ethanol and renewable diesel production and global blending and credits for renewable fuels. This is consistent with our strategy as we continue to 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 performance, we incurred a net loss attributable to Valero stockholders of $464 million or $1.14 per share for the third quarter of 2020 compared to net income of $609 million or $1.48 per share for the third quarter of 2019. The third quarter 2020 adjusted net loss attributable to Valero stockholders was $472 million or $1.16 per share compared to adjusted net income of $642 million or $1.55 per share for the third quarter of 2019.
Third quarter 2020 adjusted results, primarily exclude the benefit from an after-tax lower of cost or market, or LCM, inventory valuation adjustment of approximately $250 million and an after-tax loss of $218 million for an expected LIFO liquidation. For a full reconciliation of actual to adjusted amounts, please refer to the financial tables that accompany the release.
The refining segment reported an operating loss of $629 million in the third quarter of 2020 compared to operating income of $1.1 billion in the third quarter of 2019. Excluding the LCM inventory valuation adjustment, the expected LIFO liquidation adjustment and other operating expenses, third quarter 2020 adjusted operating loss for the refining segment was $575 million. Third quarter 2020 results were impacted by narrow crude oil differentials, lower product demand and lower prices, as a result of the COVID-19 pandemic.
Refining throughput volumes averaged 2.5 million barrels per day, which was lower than the third quarter of 2019, due to lower product demand. Throughput capacity utilization was 80% in the third quarter of 2020. Refining cash operating expenses of $4.26 per barrel were $0.21 per barrel higher than the third quarter of 2019, primarily due to the effect of lower throughput rates.
Operating income for the renewable diesel segment was $184 million in the third quarter of 2020 compared to $65 million in the third quarter of 2019. After adjusting for the retroactive Blender's Tax Credit, adjusted renewable diesel operating income was $123 million for the third quarter of 2019.
Renewable diesel sales volumes averaged 870,000 gallons per day in the third quarter of 2020, an increase of 232,000 gallons per day versus the third quarter of 2019, due to the effect of the planned maintenance that occurred during the third quarter of 2019. Operating income for the ethanol segment was $22 million in the third quarter of 2020 compared to a $43 million operating loss in the third quarter of 2019.
The third quarter 2020 adjusted operating income for the ethanol segment was $36 million. Ethanol production volumes averaged 3.8 million gallons per day in the third quarter of 2020, which was 206,000 gallons per day lower than the third quarter of 2019. The increase in operating income from the third quarter of 2019 was primarily due to higher margins resulting from lower corn prices.
For the third quarter of 2020, G&A expenses were $186 million and net interest expense was $143 million. Depreciation and amortization expense was $614 million and the income tax benefit was $337 million in the third quarter of 2020.
The effective tax rate was 47%, which was primarily impacted by an expected U.S. federal tax net operating loss, that will be carried back to 2015, when the U.S. federal statutory tax rate was 35%. Net cash provided by operating activities was $165 million in the third quarter of 2020.
Excluding the favorable impact from the change in working capital of $246 million, as well as our joint venture partner's 50% share of Diamond Green Diesel's net cash provided by operating activities, excluding changes in its working capital, adjusted net cash used by operating activities was $177 million.
With regard to investing activities, we made $517 million of total capital investments in the third quarter of 2020, of which $205 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance and $312 million was for growing the business. Excluding capital investments attributable to our partners, 50% share of Diamond Green Diesel and those related to other variable interest entities, capital investments attributable to Valero were $393 million.
Moving to financing activities, we returned $399 million to our stockholders in the third quarter of 2020 through our dividend, resulting in a year-to-date total payout ratio of 165% of adjusted net cash provided by operating activities. With respect to our balance sheet at quarter end, total debt and finance lease obligations for $15.2 billion and cash and cash equivalents were $4 billion. The debt to capitalization ratio, net of cash and cash equivalents was 36%.
At the end of September, we had $5.8 billion of available liquidity excluding cash. Turning to guidance, we expect approximately $2 billion in capital investments attributable to Valero for 2020, about 60% of our capital investments is allocated to sustaining the business and 40% to growth.
We expect our annual capital investments for 2021 to be approximately $2 billion as well, and approximately 40% of our overall growth CapEx for 2020 and 2021 is allocated to expanding our renewable diesel business.
For modeling, our fourth quarter operations, we expect refining throughput volumes to fall within the following ranges. U.S. Gulf Coast, at 1.41 million to 1.46 million barrels per day, U.S. Mid-Continent at 385,000 barrels to 405,000 barrels per day; U.S. West Coast at 230,000 barrels to 250,000 barrels per day. And North Atlantic at 400,000 barrels to 420,000 barrels per day.
We expect refining cash operating expenses in the fourth quarter to be approximately $4.35 per barrel. With respect to the renewable diesel segment, we expect sales volumes to be 750,000 gallons per day in 2020, which reflects planned maintenance in October. Operating expenses in 2020 should be $0.45 per gallon, which includes $0.17 per gallon for non-cash costs, such as depreciation and amortization.
Our ethanol segment is expected to produce a total of 4.2 million gallons per day in the fourth quarter. Operating expenses should average $0.37 per gallon, which includes $0.05 per gallon for non-cash costs such as depreciation and amortization.
For the fourth quarter net interest expense should be about $155 million and total depreciation and amortization expense should be approximately $590 million. For 2020, we expect G&A expenses excluding corporate depreciation to be approximately $775 million, which is $50 million lower than our prior guidance. And we expect the RINs expense for the year to be between $400 million and $500 million.
Lastly, as discussed on our last earnings call, due to the impact of beneficial tax provisions in the CARES Act, as well as the COVID-19 pandemic and its impact on our business, we're not providing any guidance on our effective tax rate for 2020.
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.
[Operator Instructions] Our first question comes from the line of Phil Gresh with JPMorgan. Please proceed with your question.
Just wanted to start-off by asking a bigger picture question around how Valero thinks about capacity management? Obviously recognizing Valero is at the low-end of the cost curve. The guidance here for 4Q and the results of past few quarters, you've had utilization in low '80s roughly.
So I'm just curious how philosophically you think about managing capacity, whether it's from a temporary perspective or from a permanent perspective. Just what are the decision point to think about? Or is it more just managing, say secondary units, given the situation with diesel is more challenging than gasoline are, just any thoughts you'd have would be helpful. Thank you.
All right. So, good morning Phil. This is Lane. I'll start by answering it with on a near-term, the way Valero looks out - and where we've been running our system is trying to optimize at a lower utilization nature that we have the - be very selective on the crudes we run and making sure we have the molecule where we want them.
Certainly and it's a challenging time to do that. You just got to be very careful, we've seen our ability to flex our refinery yields quite a bit, that you can do a lot of that when your lower utilization we've seen move gasoline yield.
So roughly 17% distillate yields up and down 10%, which is a little different than when you're full. So in the near-term, you just sort of trying to constantly optimize your operations, obviously to cash flow here.
Longer-term, I've sort of spoken about this in earlier calls, when a company or Valero looks at an asset, from a deciding whether we run through or not it's largely driven by a change in trade flow which means - what I mean by that is - you see there is lots of crude advantage or something has changed its products fundamentally changes it's sort of, I would say, it's gross margin competitiveness and here is and combined with obviously a big regulatory spend or CapEx.
Those are really the things that in terms of what drives I think, companies - and company like us another company it consider refinery closure. And so when you think about that criteria, where do you see that - you see that - in the U.S. it's on the West Coast, and the East Coast and you've seen companies like those decisions.
And certainly, we've always felt like Europe, because you know, Europe - they're bringing all their crude oil in and they're kind of - a lot of their products have to export. And that's a tough situation, if you don't have a structural advantage on OpEx. And so that's sort of my answer on that.
The second question would just be around the third quarter results themselves. Obviously, in the prepared remarks, Joe, you talked about tighter crude differentials as a factor that drove the sequential capture rate declines, particularly in the Gulf Coast and Mid-Con. But I was just curious, are there any other say one-time factors in the quarter. I'm thinking perhaps, multiple hurricanes on the Gulf Coast as one that might have led to a more challenging performance versus what you would maybe ordinarily thought of?
Good question, Phil. Lane will take a crack at this and then, Gary, can follow on.
Yes. So you're correct. Our Port Arthur refinery, we had to close [technical difficulty] and are really, really come back up was impeded by the utility provider got really hit hard us. So it’s regional, sort of the utility provider and they had a difficult time providing power, they did a great job recovering, but ultimately that slowed our ability to bring the refinery back up. So we had some volume, where - how we would characterize the volume variance levels for those refinery.
Yes, the only thing I'll add, as you know we provide ourselves a space in the U.S. Gulf Coast system on our ability to optimize and really well define a lot of these disadvantaged - discounted feed-stocks. And those opportunities, really just weren't there in the third quarter has certainly impacted our Gulf Coast operations.
Okay. Great, thank you.
Our next question comes from the line of Manav Gupta with Credit Suisse. Please proceed with your question.
Joe, in your prepared remarks, you had indicated that the renewable diesel margin for the quarter was about $2.72. And in the last quarter this number was $2.22. So there was almost a $0.50 increase quarter-over-quarter. And when I look at the renewable diesel margin indicator you provide every week, which is very helpful. That was indicating a $0.01 improvement. So if you could help us sort of us out a little - as to how that $0.01 in indicator margin actually translated to over $0.50 in actual capture for the renewable diesel business segment?
Good morning Manav. Listen I'll let Mark can a crack on that one.
So in the indicator margin as you know, as he says the gross margin, but it is a proxy for feedstock, we will use the soybean oil price and we're obviously not paying soybean oil price for feedstocks for our waste feedstocks. So that fluctuates quite a bit Manav. So that's the biggest reason, is the actual feedstock versus a soybean oil.
Okay. And then quick follow-up is, I'm sure you have already secured the feedstocks for the St. Charles expansion. But again, there are a number of announcements out there. So are you in - already in the process of securing more feedstock for Port Arthur, if you could help us out there, a little?
Well, I think the backup, there is a lot of announcements out there and time will tell. If you look back historically, there's always been a lot of announcements and the announcements came and the projects never came, will it be different this time. It may be somewhat different. But you know, we're just confident in our ability to source waste feedstock going forward.
Waste feedstock supply is tied to global GDP growth and our partnership with Darling, gives us the benefits of vertically integrated access to low cost, low carbon intensity feedstocks. We also get the benefit of Darling's experience in the global feedstock markets. Darling also helps us procure feedstocks from other people. So we just feel like we have a unique position here and that's going to allow us to maintain these superior margins versus the competition.
Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.
I guess a follow-up question on the renewable diesel front. And clearly the energy transition is a big theme along with ESG investing, happy to see the additional disclosures consistent with the SASB framework. Can you talk about how you view your renewable diesel position, as far as the defensibility of your projected return. How many of these projects that have been recently announced? Are you factoring in - as - once that could come to fruition. And also on the LCS prices as well. Do you see any risk there?
Sure, I'll take a stab at that. This is Martin. Obviously we keep track of all the announced projects. We also keep track of all the new policies that are coming, and what we expect to come. And it's cloudy. I mean there is nothing but cloudy, in the farther you go out, the cloud you gets. You're making projections here.
But if you just again step back and look at where we're at, a lot of these projects aren't going to get bill. That's just a fact. And you've got more policies coming. So right now, you've got California, you've got rid too in Europe, the Renewable Energy Directive and then you've got British Columbia and Ontario, those are in the major markets.
While in the future, Oregon's ramping up. We're going to have a nationwide clean fuel standard in Canada, Sweden, Norway, Finland, are being more aggressive, not huge demand there. But a huge percentage of renewable diesel. And you got the state of Washington, that keeps moving these steps forward, few steps back. And you've got Midwest states and Colorado, announcing policies too. And then the biggest one though is the New York, which the preliminary information they put out, has a lot of renewable diesel in the plant.
So we really feel good about the demand. And then if you look at renewable diesel, just the molecule, right. It's available. It's a drop in fuel, it's low carbon intensity. There is no blend wall. So you have to think too, if you take California, they've hit the brakes a few times when - low carbon wasn't available right. They slowed down the program, if it is available. I would expect these regulators to hit the accelerator. So you know at the end of the day, all that being said, is there advantage demand of first mover.
Yes, I would think so, and we're the first mover in the United States and we feel really good about our position and we feel really good about what we've laid out to do.
Understood. And Joe related to your statements about the other low carbon growth projects under development. Can you give us a flavor of what kind of projects and this could pertain to? Are you talking about additional investment in biofuels and if it hydrogen related, any color that you can share there.
Yes. This is Lane. So what we're really - what we're looking at right now is carbon sequestration projects largely and really trying to tie those two, the markets of - Mark was talking about. This is - where we think that we can make investments in lower our CIS of fuels and make them more competitive for these markets.
Your next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.
So you made a pretty clear from the remarks and the press release and your remarks on the call that there is no change to the capital framework or the dividend part, I think, you said in your prepared, even if this COVID weakness goes on for longer than expected. Can you just add a little more color around that. If we see four more quarters of less than minus $1 EPS, do you still see everything is being unchanged or what point do you have to re-evaluate, how you think about. Thanks.
Yes. Brad. That's a good question. Let me give - let Jason give you some insights here and then maybe I'll follow on.
Yes, this is Jason. We basically feel we're a long way from rethinking the dividend. At the end of September, we all saw - we had a little over $4 billion in cash and about $5.7 billion of liquidity available under our committed facilities. We saw positive signs in the third quarter, demand improved, export volumes picked up.
So we think things are headed in the right direction. It's just a question of how fast, in course of vaccine would really accelerate things alone. Looking bigger picture this pandemic is an isolated event.
And we very reluctant to revise our long-term capital allocation framework that served us well for so many years. With our cash and liquidity position and the way things appear to be headed right now, this time we just don't think adjusting the dividend something a step we're going to need to take.
Yes, let me just add to this, I mean, there has been a lot of question out there, regarding the dividend. And I've been in this job a little over six years now. And we came out with the capital allocation framework and our approach to rewarding shareholders at that time. We have done nothing, every step of the way, but walk at top. And we've been very clear in our communications and we've demonstrated our commitment to our owners and we're going to continue to do that.
I think one needs to decide when they're trying to determine who they're going to listen to and who really understands what's going on. There is going to be a management team and is demonstrated their commitment to their shareholders for six years or with somebody, who is taking a position from a basis of very little knowledge and trying to create opportunities for movement in the equity. And it certainly affects our long-term shareholders.
So anyway I would, if I were you, I would encourage everybody to listen to us and listen to our messaging. And I think we've been pretty clear about at this time and I think Jason's answer was exactly right.
And then maybe for Lane or Gary. Just on the West Coast, obviously, as part of the renewable diesel discussion, we've seen a couple of closures out there. I know historically you've thought about that market is sort of being an option value market for Valero. Do you think on the other side of - all this COVID stuff that it's potentially a stronger market that's less like option value or sort of how do you see that playing out?
This is Lane. I would say, we're always going to manage it by being very careful what we've send out there. But we certainly, we believe ultimately the COVID will pass and gasoline and diesel demand will recover and you've changed the balances out there. So in the near term, it's an improved market for.
So, while I think strategically we think we don't look at [technical difficulty] and take advantages of what - or at least in the near term, looks like a pretty good opportunity.
Our next question comes from Prashant Rao with Citigroup. Please proceed with your question.
My first one is on the balance sheet. Jason, I wanted to ask a couple of follow-ups here. Given the inventory adjustments, the LIFO liquidation and the liquidity management, you've done. I don't want kind of wanted to focus on balance sheet, cash and cash equivalents, you need to keep on hand for working cap in the current environment.
Is that lower now going forward, I know, that we used to think about, it is sort of the slightly sub $2 billion bouquet for balance sheet cash but or the needs slightly lower, does that give you a little room under the caller, as we think about managing through the next couple of quarters into the recovery?
We still target to be in that range. So - I think that's still a good assumption.
Yes, clearly I think as we go forward, I mean one of the things that we did is took advantage of the opportunity in the market today to reassess it. And as Lane spoke about earlier, the supply chain has changed. And so the working capital, the inventory volumes essentially that we need are different than they were in the past.
And so we took the P&L impact this year, but we run our business to - and we try to target proper operating levels for all of our inventories. And that's what guides us, it's not so much, jeez we need to take a LIFO impact or anything like that is more what - this proper operating level for our inventories and we adjusted to that. And so we've seen some benefit from the cash side.
Okay, thank you, I'm sorry.
No, you're good. Go ahead.
All right. Sorry, little bit static on the line here. I had another question on sort of the macro-specific on products on jet fuel. We're sort of trying to get our arms around what would happen on this with a slower jet demand recovery. What does that look like for a sort of refining margins and how does the system cope with that, if it takes a few more years to get back, let's say, in a bear case scenario the normal jet fuel demand.
Can you maybe help us with some color on what that means for how you run your operations where you're sort of comfortable with jet fuel recovering to and maybe staying lower for longer, is it 70% of typical demand or 80% of typical demand.
At what level, is it really not that much of a headwind, sort of - little bit of color on how to think about that and where we can think about you that stopping, pressuring distillate inventories not just in your system, but overall, globally?
Yes. So overall, I think you could see, we have full flexibility to pretty much not yield any jet and lend all of those molecules in ULSD and where it really does, it gets overall impact our refinery utilization. So the advantage of jet demand improving is that we can start to pull those molecules out and raise utilization along with it.
I think, overall, we've been very surprised that the rate recovery of the jet markets, second quarter to third quarter was up 57% increase. And so far, the fourth quarter, the airline data - 15% to 17% increase in passenger headcount, which is encouraging. You know to - also go along with that, I would say, our nominations for the airlines it's - reserving are also up.
The other thing you can start to see is jet, jet is now trading at a rate adjust petrodiesel maybe ULSD. I think that's the thing, that you'd like to see in the market is generating around - adjusted petrodiesel ULSD, which allows us to pull those molecules out of the diesel fuel and you will start to see that result in higher refinery utilization.
Our next question comes from Doug Leggate with Bank of America. Please proceed with your question.
Let me just say, Joe, first of all. I for one and I think a lot of people appreciate you being as articulate and direct as you've been about the dividend question because of too much responsible investment analysis out there. And I think, you're right, people need to listen to you guys.
So I appreciate you making that statement. With that, I've got two quick questions. First one is on debt tolerance, can you just talk about, you've added some debt, obviously as last quarter. You're positioned with plenty of liquidity. But what do you see as the debt tolerance? Your bonds are trading just fine it seems. If you needed to what do you think about the balance sheet here.
Yes, I mean, you're right. The bonds are trading well. We've got a lot of cash given the steps we've taken, we still have our $5.7 billion of untapped liquidity, which we could rely on is, if we needed to - we don't expect the need more liquidity and I'm sure we could. There are other things we could do if we needed to. We feel like we're in a pretty good spot.
Yes, I think, Joe lot of the business, Jason mentioned earlier, I think that you finance the business, when it's attractive to do that and there is no sense of adding any degree of risk to - for the operation. And so just it's debt. I was very impressed with the rates we got, the demand was very high for the offerings and we remain committed to the investment grade rating. No question about it. But we think, there is room if we needed to do something else.
There is room to do more, we don't anticipate that we're going to need to do more, but we certainly believe we could, if we needed to, we do great. Yes, So, - answers that question, Doug?
Yes, it does. Thank you. And my follow-up is really more of a housekeeping issue, maybe I missed some subtlety in prior calls, I don't know. But in your last presentation, you still have the non-discretionary spending at our - run about $1.5 billion. Your guidance today says a couple of billion 2021 and the sustaining capital is 60% and that's obviously $1.2 billion. Is that just a low point? Is it sustainable at that level or is something changed, that has reset your sustaining capital. And I'll leave it there. Thanks.
Thanks, Doug. Sorry, Doug, This is Lane. So it's that - that's on the lower side and when we talk about our spend or sustaining Capital. We're really talking about, is over three or four-year cycle. That's roughly the average that we feel like we need to spin. We have heavy turnaround years and lighter turnaround years. So you have to remember in that $1.5 billion is - our turnaround activity. So that's - I'll leave it with that.
Our next question comes from Paul Sankey with Sankey Research. Please proceed with your question.
Doug, kind of hit on what I wanted to hits on. So because the question really being the extent to which CapEx is flexible, I think you answered very well. Separately, could you talk about, just give us the latest update and I know it's a difficult question on the election and what do you think the top risks that you faced from the potential outcomes hopefully abide and when, what are the biggest concerns and do you think overblown concerns about a potential for example democrats suit. Thank you.
So, this is Rich. I'll talk a step trying to answer this. I mean, I think, if you look at this, we have a Democratic win directionally, they're going to, they're probably going to want to look at higher taxes and probably more regulation. But regardless of who win, you're coming out of the pandemic here. So you've got a first priority, which is high unemployment rate, you need to stimulate the economy, the focus is going to be on those kinds of things and it's really hard to layer on a whole bunch of policies that with some other an effort to recover.
So I think. I think what you going to see is a lot of campaign rhetoric right now. And then you're going to see a lot of that have to run into the wall of reality once they get through the election. The other part of it is, if you just look at Biden and his history. He is not you know, one of these real ideologically driven individuals. He saw a long history of being supportive of manufacturing and supportive of union jobs and those facilities.
And so he spoken positively also about the renewable industry. So we - because you'll be supportive in that area as well. So we - it's never, it's never as bad as I say, it's going to be in and it's never as good as I say is going to be. And so I think there's a lot of institutional and structural reasons why these changes will not be as good coming in and some people think. And so we feel pretty good. We think there is going to be demand recovery here, as we go through the economy. And we don't think that the administration we are doing anything that's going to really materially alter that.
Yes, the one thing I think that we see Paul is - there is a kind of stimulus package following the election. It doesn't matter which part you get selected is Rich referred to. They're going to have to get the economy rolling. And so I would say it is rolling off, but there is. Our view is there is going to be some kind of stimulus package. And any type of stimulus package. Just going to trigger greater demand for products that we produce.
And so we're - all over watching it carefully and we'll - we are well positioned and organized company to deal with whatever comes, I think, we're not as pessimistic as many are about the potential outcome for a change of administration.
Great, thanks. And I'd like the wall of reality comfort. Thank you. The follow-up.
That's what we try to live Paul.
Joe, the follow-up is, there's a lot to talk about further to stimulus about bailout for airlines sort of stuff. Can you just remind us how to what extent you've been helped out by federal government programs if any. Thank you.
What I'm trying to think, I mean,
Yes, I mean, I think there are substantial efforts here to pop-up the airlines and provide them with protections and we think any of the bills that are coming through, you're likely to see more support for the airline industry and obviously supporting them helps reinforce the demand for jet. So I think, that's where we would think we would benefit from that. I think that…
So obviously your response implies that Valero has not received much?
No, no.
Yes, I just wanted to clarify that. Thanks a lot.
Our next question comes from the line of Roger Read with Wells Fargo. Please proceed with your question.
Lot of the stuff has been hit. I guess maybe if we could go back and address a little bit kind of the issue with the way the industry is losing money hand over fist at the current environment. And that's likely to continue at least a little bit longer. What do you see, even if you don't want to name any particular company or particular unit that would be at risk. I know, you've talked about the regions.
But what are the kind of things that we should pay attention to you from the outside that would indicate someone that made the decision to shut a unit, if not absolutely permanently at least for the foreseeable future. I mean, everybody is losing cash. But is it a crude supply changes, it is a demand concern, is it, I think, the high maintenance costs in the very near term then cited previous times. Just anything else I suppose that questions for you Lane but whoever wants to jump in there.
Now, after the practice of losing money hand over - I kind of spoke earlier about the change in trade flow. And what I really mean by that is, you can really see that in some of those place or maybe product demand is falling. And they don't have a crude advantage. So that's obviously a part of it. I think. - and then I have talk about regulatory spend. The other spend they can have is [technical difficulty] a large turnaround like I don't want to say, it probably it's like an FCC sort of base turnaround, where you have the FCC and those end up very large.
And that - well, that might be of companies that maybe have stretched balance sheet or are struggling and you had layer on of these other issues and based on their location that might factor into some of the companies, thinking about whether they either just sort of shut part of a refinery down or maybe consider something [technical difficulty].
Yes, certainly going to be sort of an interesting - will continue to be interesting. I guess one on last questions, and so much of it has been on the negative front, lot of stress in the system. A lot of questions about longer-term viability of fuel demand. But if you were believing in the long-term success of refining, are there or would you expect any interesting opportunities to come along, particularly in the areas that you already operate in where you could, really get some synergies built in there. So kind of the M&A wish list question, so to speak.
Yes, let me just start and then we'll see Rich wants to add anything to this. But certainly, we do believe in the long-term viability of refining. I mean, it is totally impractical to think that we would live in a world over, certainly I would guess my lifetime. Because I know this is more than the couple of years, we’re losing money hand over fit. In my lifetime where we're going to be able to displace fuels, motor fuels, liquid fuels that are produced from fossil fuels.
I mean it's just, it is part of what is necessary to makes the world function that we live it. And so anyway, we are believers in the long-term viability of refining. Cleaner fuels will be a part of it. We're obviously making investments to take care of that. But we do believe that our refining business is going to continue to be strong and successful going forward. So, Rich, anything on the M&A front.
No there's really, nothing to say other than it's hard to justify any kind of an acquisition given that we're preserving cash, and we've got a queue of good organic projects that we've kind of can push back. So in - we're not buying back shares. So in this environment, it's really difficult to see any kind of M&A activity.
Our next question comes from Paul Cheng with Scotiabank. Please proceed with your question.
Two question one. It is for Jason, and I think that we're strict forward. One maybe longer term. For Jason, have you received any cash tax refund, given your loss, and if you are - what is your expectation that - what percentage of - if the tax loss, reported tax loss in the next 12 months to 18 months and what percentage you would be able to receive as cash tax refund. The second, should I also tell you guys, my second question or should I wait until Jason answer that first?
Paul do you mind repeating the question real quick. It is tough to hear you.
The first question is on the cash tax refund. You guys receiving any given the tax law and you have tax loss carry-forward, maybe back into 2015, when you are making money. And if you are receiving cash tax refund from the government. Over the next 12 months, let's assume if you're still reporting loss, what percentage of that tax benefit would we actually we see it as a cash tax refund.
Okay. So the first part of it is NOL right - was the value of NOL to…
We expect to get it in second quarter. We expect to receive cash related to the refund.
Jason you said, always that the second quarter for the previous year.
Yes, yes.
So - so in other words that 2021, if you have a loss those cash tax refund, we will receive in 2022. Any idea on the 100% dollar to dollar, or that is a percentage.
No, to be clear. And this is Mark. The tax loss that we're incurring, this year - we received the tax refund in April of next year. So that has nothing to do with what our results might be in 2021.
I understand, I understand. So I'm saying that we - if you have your - in your book, if you report your tax and let's say for this year, argument they did, $300 million. If the entire $300 million you expect to receive that cash or that is only a portion of that?
Well, I'm not sure I really totally understand your question. But if you look at the effective tax rate that we're running that would probably give you a good idea of what the refund would be next year.
My second question is that Joe and Lane, if we look at the regulatory environment in Europe and in California, in both areas that the government is trying to detect their current law, saying that they will ban the sale of the hydrocarbon or to the gasoline or even diesel hydrocarbon base vehicle by 2035 or so.
How that impacts your outlook on your game plan for the facilities in those areas. And - also that on long that way. Some of your bigger customers has been talking about energy transition plan. Do you think that is something for level need to have a plan.
Okay. So we'll take the first part first, you want to go.
Yes, I'll take the first part. So it's obviously still early, trade flows on regulatory environment, can drive some - how you think about assets, I think, the one thing I would [technical difficulty] government's intensions and plans and targets, we live in the aspirational world as the tendency to put. And lot of markets that are trying to do that or regulators that are trying to do to - their tenancies to put a goal out there, but the feasibility of the goals has a tenancy to push the goal out. I don't necessarily think that either California or the U.K. or Europe, you're going to have zero fossil fuels, gasoline transportation going for.
Now with that said, there is what they're trying to do. And so ultimately, as I said earlier, what are we doing in West Coast, what are - number of very, very careful in the CapEx that we - how we run and we're very careful and trying to manage the cost of those refineries, whether it's through our regime, cost or current [technical difficulty] very careful.
And you know, Paul, on the question of the future and positioning the company strategically for the future. We continue to work on that. And obviously, I think we've been a leader on several fronts. We were early to get into the ethanol business. Now we're looking at ways to lower the carbon footprint of the ethanol that we produce in - on market that into the market seeking, and rewarding lower carbon fuels. And the renewable diesel business is another example of that.
We will continue to evolve the portfolio based on what the market is calling for and using the strong refining base that we've got, is a basis for the cash flow to do this kind of transition. But you know, and we can, I think we put out our documents now, what our targets are for further reductions over the - which now 2025 with already - projects are already approved by the Board. So we're clearly working this direction. We don't have our heads buried in sand on that front by any stretch. And will position Valero to be very successful for a very long time.
Our next question comes from the line of Ryan Todd with Simmons Energy. Please proceed with your question.
Maybe a follow-up on some of the conversations from earlier on the renewable diesel side. You talked about some of the advantages, obviously that the Darling partnership fossil on the feedstock side. Can you say - as you think about your expansions of the one coming in 2021, the possible one for 2024.
Can you talk a little bit more about how you see those, being positioned on things like how do you compare transport cost in terms of transporting - product to California versus operational cost of running a plant like that in Louisiana or Texas as opposed to California. How do the relative economics, do you see those in terms of competitive positioning.
Sure, this is Martin. Well, we would just flat I would say, we feel like to get Gulf Coast is the best place to be. It's lower capital cost to build, it's lower operating cost. And then also when you think about just the logistics, the rail infrastructure getting into the Gulf Coast from wireless, you've going to source of feedstocks as great.
And then the logistics getting out. We don't know, where the highest-priced market is going to be in the future and it's going to move. So whether we're going to California, Canada, Europe somewhere else. We just - the Gulf Coast is just have to be. We've been at the seven years now and what we always try to do is to build the advantaged, low OpEx and high flexibility plants.
And what we've learned is that you need to co-locate with the large operating refinery. It needs to be an operating refinery and by doing that reduce this cost. And again I can't stress the logistics enough that we just have a huge advantage there and we intend to keep that. But been in the Gulf Coast.
And then maybe just a follow-up on the macro side on refining. I mean, third quarter differentials, where a large headwind. I mean, even more so on the spend in the second quarter. And particularly, sweat and sour differentials have been tough. I mean, is there a scenario on which the outlook for sweet tower or crude differentials in general improve meaningfully, without a meaningful recovery in oil demand or absolute prices from here. How do you think about just if you look forward over the next six months to 12 months.
Yes. So, this is Gary. Certainly, we saw very, very narrow crude quality differentials in third quarter. Some of that - lot of balancing in the market came from those production. We got some of that production back in August. Additionally, they had the storms that affected the Gulf of Mexico, leads our production. So getting some of that production online is held.
And so you've seen the ASCI differential, kind of move out a little bit wider so far. You - in fourth quarter Amaya's tended to follow it. But we believe, you know, it really needs to have that - is as global continues to improve a greater percentage of that will be incrementally build from OPEC production sour barrels. And so you will have more of a gradual recovery in all the differentials it go along with that.
Our next question comes from Jason Gabelman with Cowen. Please proceed with your question.
So I wanted to ask about the investment grade rating and kind of the metrics that are critical for determining that - the cap is over 30%. So I'm assuming that's now what's really driving the conversation between Valero and the credit rating companies. So when we're trying to assess kind of your targets for the balance sheet, what are the right credit metrics to kind of look at outside of that the cap?
Yes, this is Jason. I can talk a little bit about that. As you know, our investment grade ratings are key top priority for us and we've discussed this with the rating agencies. We have excellent liquidity, which is really whether most key factors for them. They also right through the cycle for the long term, right. They're not just like the next 6-months and 12-months. And need to clearly recognize our strengths. Longer term if you read their reports, talk about our excellent facility, top operators.
So I don't think there is any concerns on their part with us being investment grade. It also, the way we structured our debt. You will notice that at least our most recent offering, the big one was biased towards the shorter term. And we did that intentionally, we have a lot of maturities in '23, '24, '25, '27 and we have the ability to call the $575 million tranche through your floaters as early as next fall.
We did have to give us the flexibility to deleverage more quickly, in all circumstances right. And the ratios we looked at, they looked at each agency looks at all the ratios, but they have their own ones or ones if they are highlight the most are versions of debt-to-EBITDA and retained cash flow. And those type of things and then net cash flow. I mean, net debt to cap. But they look at kind of the same things but we don't think we're at all at risk for investment-grade rating.
And we did get put on negative outlook, when we did this last offering rating. And I could tell you a little bit at least about what, the way I think they were thinking about that. So each of them does our own analysis and has their own separate view.
But really think that outlook change was mainly driven by the change in expectations for the timing of the recovery versus the assumptions that were made, when they last looked at us back in April. The deal in April was, if this would be a one to two quarter event with pretty full earnings recovery in the fourth quarter. That's what we were looking at. I think that was their view too.
But there - that was before the summer infection spikes hit and things clearly going to take more than getting back to absolute normal in the fourth quarter. And we really think that view - that there is going to be delayed recovery, along with our new debt which will then will all lead to a longer period with elevated credit ratios.
And that's really what the negative outlook reflects. They look out the next 12 months and are you going to have a higher ratios and what they like new regular baseline. And the answer is yes. And that is true. But it would - doesn't affect their view of us as an investment grade credit longer term.
Great. That's really clear. So they're thinking about or recovery when they're assessing the rating in 2022-ish?
Yes. That's right. I think, I can't remember exactly they stated in their reports. What I was thinking second half of next year. And they admit that they think Valero's thinks is going to happen more quickly and all the - what I don't think was as clear. But I think the next 12 to 18 months, generally.
Okay, great. And then I want to ask a follow-up on Lane's comment on carbon sequestration, which I think you mentioned was one of the low carbon investment opportunities. What's the economic case for that is that driven by the U.S. tax credits offered or is there something else driving the potential to generate returns from investing in that.
And then on the topic, I'm surprised that hydrogen was I mentioned just given that there is a lot of interest globally in investing in the hydrogen value chain and refineries produce a lot of hydrogen already. So just wondering, any thoughts on that. Thanks.
Well, this is Lane. So I'll add to that - I'm sure some other people might want to well. So when we're looking at these projects - our first filter our first where we think about from developing them. It does improve our carbon intensity as Philadelphia at those market that's where we see the higher value per [technical difficulty] and we can get the biggest bang for our buck.
And then we for a stress test, with the U.S. tax credit and trying to understand what that looks like as well. So that's how are developing and looking at these types of projects. On the hydrogen, we're just - we're starting to look at some of those things.
Again, we're looking at in the context of some of our existing hydrogen plants and their technology and we have the ability to obviously get the carbon dioxide out of those streams to lower their intensity, not so almost trying to make hydrogen for fuel cells.
Yes. There's a lot of things like that - that you take a look at. But at the end of the day, the economics just don't work and like the 45 tax credit. It is a key one, when you looking at the sequestration going forward, where day looks like you can or return on some of these projects into it LCFS market, as Lane said borrowing that a lot of these projects just don't have economics.
And so that's why it's interesting to talk about it. It's like the topic du jour but is there - are these feasible enough that's one of things if we look at. And we're certainly not fair to announce that these step that direction is disappoint.
Thank you. We have reached the end of our question-and-answer session. So I'd like to pass the floor back over to Mr. Bhullar for any additional closing comments.
Great, thank you and thank you everyone for joining us. Appreciate everyone's questions. Unfortunately, we're out of time. So if you have follow-up questions feel free to reach out to the IR team. Thanks again.
Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation and you may disconnect your lines at this time.