VALERO ENERGY CORP earnings calls

Why crude price gaps and freight effects

Q (Sam Margolin · Wells Fargo): Analyst asked whether recent crude differential moves are structural (more heavy supply) or cyclical (constraints and external factors). He also asked about the company's large cash balance and whether that optionality is intentional or temporary.

A: Management said freight and ship-to-ship transfers through the straits are the main driver of dislocations and higher freight costs, which favors Gulf Coast crude access and discounts on heavy sour barrels. They said the company built cash prudently to manage commodity volatility, will keep paying out above 50%, has limited near-term maturities, and ultimately intends excess cash to be returned to owners as they reach their $4 to $5 billion target.

"So over time, all the excess cash we are accumulating will ultimately be directed towards our owners." — Harminder S. Bhullar (CFO)

Regional margin gap and demand strength

Q (Manav Gupta · UBS): Analyst asked if some regions can run harder with good margins while others struggle to source crude and whether there are signs of demand destruction in the US and exports.

A: Management said they see a bifurcated market: lower-complex refiners in the Far East face margins around $2 to $3 a barrel because of freight and higher natural gas, while the Gulf Coast is advantaged. They also said they see no signs of demand destruction: US gasoline wholesale sales are up 4% year over year, Canada and the UK are flat, export demand is strong, and distillate sales are up about 2% with UK home heating oil down about 10%.

"It looks like their margins are in the $2 to $3 a barrel range." — Gary K. Simmons (COO)

Q4 runs and industry turnarounds

Q (Neil Mehta · Goldman Sachs): Analyst asked why 4Q volume guidance is higher, whether the DHT is in guidance, and if deferred turnarounds make 2027 a big turnaround year for the industry. He also asked about seasonal and product factors to model for 4Q.

A: Management said the DHT is not expected to be mechanically complete until the end of the quarter and is not in the guidance, and that Valero will run assets hard in a light maintenance quarter. They said consultants estimate about 1.5 million barrels a day of global refinery turnarounds were deferred, implying a heavier turnaround season next year, and they listed Q4 tailwinds like butane blending into gasoline, Arctic diesel premiums, discounted heavy sours, and improving jet regrades.

"We really do not expect to have a mechanical completion of the DHT until the end of the quarter." — Gary K. Simmons (COO)

Why cracks fell recently

Q (Theresa Chen · Barclays): Analyst asked why crack spreads showed recent downside volatility despite demand resilience and freight/natural gas headwinds abroad, and how these factors might evolve.

A: Management said the recent downward pressure on cracks is largely headline-driven, citing strategic reserve releases and lifting of Russian sanctions, and that when you digest the actual volumes they expect cracks to recover. They indicated these are shifts in headlines and trade flows rather than sustained supply increases.

"It looks like some of the downward pressure on cracks is really related to more headlines." — Gary K. Simmons (COO)

Restarting idled refineries

Q (Richard Joe Walsh): Analyst asked how seriously to take efforts to reopen idled U.S. refining capacity and what it would take to address the market supply shortage.

A: Management said the Benicia refinery is safely idle since April and they have no plans to restart it, noting restart would require reinventory, restaffing and an extensive turnaround. They added that most idled refineries would take a long time to restart and likely would not help the prompt supply situation, and they have not seen much inbound from the administration on restarts.

Venezuelan barrels and DGD margins

Q (Phillip Jungwirth · BMO): Analyst asked about current Venezuela throughput versus capacity and what would be needed to invest to run more heavy crude. He also asked for outlook on DGD margins and the 2Q/3Q capture noise.

A: Management said Venezuelan crude availability in the Gulf Coast remains good, Valero is the largest consumer and set a new processing record in the third quarter, and they are encouraged by upstream investments. They noted freight shifts made Canadian discounts more competitive (citing discounts as high as 27 to $30 under Brent), said the system is flexible and they are pursuing debottlenecking to run more heavy sour, and explained DGD quarter-to-quarter noise was due to one-offs, lags and storm outages but they expect DGD to be very positive into 4Q with structured high D4 RINs and strong feedstock positioning.

"In fact, in the third quarter, we saw the Venezuelan crude compete very favorably compared to other heavy sour alternatives." — Randy Hawkins

Demand elasticity and ethanol plans

Q (John Royall · Piper Sandler): Analyst asked if management is surprised by the lack of demand response to higher fuel prices and whether there is a price level that would cause elasticity. He also asked for details on planned ethanol capacity growth and timing.

A: Management said they have been surprised not to see demand response and do not know the price level that would trigger demand destruction. They said the new PTC benefits (45 z) encourage ethanol producers to seek higher volumes via small, quick capacity creep, and that carbon sequestration projects targeted at late 27 to mid 28 will grow ethanol volume and lower CI to support exports.

"With the new PTC or benefits with the 45 z, it is encouraging really all ethanol producers to take a look at higher volumes." — Eric Honeyman

Freight effects and Russia refining

Q (Matthew Blair · Tudor, Pickering, Holt): Analyst asked whether higher freight is a headwind to North Atlantic and West Coast refineries or whether substitutes exist, and how freight affects Gulf Coast export netbacks. He also asked about Russia's refining outages and diesel exports.

A: Management said higher freight generally advantages the Gulf Coast into Latin American markets versus European barrels, though it hurts diesel exports to Europe by causing volatile arbs. They said Pembroke and Quebec City have some exposure but the Gulf Coast benefit outweighs it and their time-charter fleet helps buffer spot rates. On Russia, they said about 1.4 million barrels a day of refining capacity was offline on a 3-month average versus 2024, it will take a long time to bring back, announced diesel flows only restore July levels and are still 2.7 million barrels a day below last year, and lifting sanctions mainly changes trade flows rather than adding supply.

"I think that the data we see shows that on a 3 month average basis, compared to a 2024 equivalent period of time, there was about 1.4 million barrels a day of refining capacity offline in Russia." — Gary K. Simmons (COO)

St. Charles FCC and growth capex

Q (Joe Lache · Morgan Stanley): Analyst asked how the St. Charles FCC work performed versus expectations and what improvements to yields or capture rates to expect into 4Q. He also asked where the best opportunities are to deploy future growth CapEx and about M&A appetite.

A: Management said the St. Charles project came online and, despite not being fully operational, third-quarter EBITDA exceeded their forecast, with greater benefit typically seen in gasoline season (Q2/Q3). They said future projects are focused on feedstock flexibility, increasing VGO production and debottlenecking heavy sour capability; on M&A they will look at Gulf Coast and ethanol opportunities but remain disciplined with hurdle rates and return metrics.

"The project came online, and despite the fact that it was not fully operational, during the third quarter, The EBITDA generated in the third quarter actually exceeded our forecast for the project." — Gary K. Simmons (COO)

Reliability of high runs and payouts

Q (Doug Leggate · Wolfe): Analyst asked about the maintenance cycle and risk of unplanned downtime from running at elevated rates, and how a higher mid-cycle view would change the mix of dividend versus share buybacks.

A: Management said they have not changed their maintenance philosophy and turnarounds are proceeding as planned, though deferred industry turnarounds could create reliability risk and a heavier maintenance season next year. They said the dividend is a permanent commitment they will defend using the balance sheet, will grow ratably through the cycle, and they will use share repurchases to flexibly supplement total shareholder return.

"The dividend is obviously a permanent commitment we have made, which we will use and have used the balance sheet to defend as we did during the pandemic." — Harminder S. Bhullar (CFO)

Diesel cracks and regional M&A

Q (Jason Gabelman · TD Cowen): Analyst asked if diesel margins could compress if crude rises further given diesel price limits, and whether Valero would pursue North Atlantic/Quebec M&A if suitable assets appear.

A: Management said it is a fair characterization that if crude runs up it could compress refinery cracks. They added that the North Atlantic/Quebec region is attractive to them and they would consider assets there if the opportunities meet their disciplined investment criteria and are evaluated for full economic cycle returns.

"And so if for some reason crude runs up, you know, I do think that, you know, it could cause some compression of refinery cracks." — Gary K. Simmons (COO)