Earnings Call Transcript - VLO Q4 2020

Operator, Operator

Ladies and gentlemen, greetings and welcome to the Valero Energy Fourth Quarter 2020 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 were given. 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.

Homer Bhullar, Vice President, Investor Relations

Good morning, everyone, and welcome to Valero Energy Corporation's fourth 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 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.

Joe Gorder, Chairman and CEO

Thanks, Homer, and good morning, everyone. The COVID-19 pandemic has had an extraordinary impact on families, communities, and businesses across the globe. The energy business was among those confronted by unprecedented demand contraction, which began in the first quarter of 2020 as COVID-19 cases accelerated globally, resulting in an increase in crude oil and product inventories to record high levels. In response, we lowered our refinery utilization rates to more closely match product supply with demand. And as the pandemic-related restrictions were eased in some regions and mobility increased, product demand increased substantially, steadily reducing crude oil and product inventories. We ended the year with U.S. crude oil and product inventories within the normal five-year inventory band. Throughout the pandemic, our team has been thorough and decisive in its operational and financial response, while maintaining focus on safety and reliability. In fact, we set several operational records in 2020, recording our best ever year on employee safety performance, achieving the milestone two years in a row, and the best ever year for process safety and environmental performance. And applying our refining expertise to optimize our renewable diesel segment, we set records for sales volumes and margin in 2020. We also made significant progress on our international strategy to expand our product supply chain into higher-growth markets with the start of waterborne product shipments to our new Veracruz terminal, making Valero one of the largest fuel importers into Mexico. On the financial side, we improved our liquidity by raising $4 billion of debt at attractive rates, and we reduced our capital budget by over $500 million, while keeping our high-return projects moving forward. And in spite of all the challenges this past year, we continued to honor our commitment to our shareholders by maintaining the dividend and ending the year with $3.3 billion of cash and $9.2 billion of total available liquidity. Despite the pandemic imposed challenges and several hurricanes, we completed and continued to make progress on several strategic growth projects, including the St. Charles Alkylation unit, which was brought on line in the fourth quarter, on schedule and under budget. The project further increases the competitiveness of the St. Charles refinery and is a testament to the talent and efforts of our refining organization. The Pembroke Cogen project and the Diamond Pipeline expansion are on track to be completed in the third and fourth quarters of 2021. And the Port Arthur Coker project is expected to be completed in 2023. The Diamond Green Diesel expansion project at St. Charles, which we refer to as DGD 2, is designed to increase renewable diesel production capacity by 400 million gallons per year and is expected to be completed in the fourth quarter of 2021. As a result of continuous process improvement and optimization, the capacity of the existing St. Charles renewable diesel plant, DGD 1, has increased from 275 million gallons per year to 290 million gallons per year. With the completion of DGD 2, the total capacity at St. Charles is expected to be 690 million gallons per year. In 2020, we laid out our comprehensive roadmap to reduce greenhouse gas emissions by 63% by 2025. As part of this goal, we continue to reinvest capital into higher growth, higher return, low-carbon renewable fuels projects. To that end, we're pleased to announce that the Board has approved DGD 3, a new 470 million gallons per year renewable diesel plant at our Port Arthur, Texas refinery. We're moving forward with the project immediately, and we now expect the new plant to be operational in the second half of 2023. Once DGD 3 is completed, DGD’s combined annual capacity is expected to be 1.2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha. Looking ahead, we expect to see continued improvement in refining margins, as COVID-19 vaccines are widely distributed in the coming months, allowing people and businesses to get back to normalcy. We're already seeing encouraging signs with strong diesel demand and with U.S. total light product inventories now in the normal range. In addition, many uncompetitive refineries around the world announced shutdowns or conversions in 2020, and we expect further capacity rationalizations to be announced this year. In closing, we remain steadfast in the execution of our strategy, pursuing excellence in operations, investing for earnings growth with lower volatility and honoring our commitment to stockholder returns. We expect low-carbon fuel policies to continue to expand globally and drive demand for renewable fuels. And with that view, we're leveraging our global liquid fuels platform and expertise that comes with being the largest renewable diesel producer in North America to steadily expand our competitive advantage and economic low-carbon projects for a higher return on invested capital. So, with that, Homer, I'll hand the call back to you.

Homer Bhullar, Vice President, Investor Relations

Thanks, Joe. For the fourth quarter of 2020, we incurred a net loss attributable to Valero stockholders of $359 million, or $0.88 per share compared to net income of $1.1 billion, or $2.58 per share for the fourth quarter of 2019. The fourth quarter 2020 adjusted net loss attributable to Valero stockholders was $429 million, or $1.06 per share compared to adjusted net income of $873 million, or $2.13 per share for the fourth quarter of 2019. For 2020, the net loss attributable to Valero stockholders was $1.4 billion, or $3.50 per share compared to net income of $2.4 billion, or $5.84 per share in 2019. The 2020 adjusted net loss attributable to Valero stockholders was $1.3 billion, or $3.12 per share compared to adjusted net income of $2.4 billion, or $5.70 per share in 2019. Fourth quarter and full-year 2019 and 2020 adjusted results exclude items reflected in the financial tables that accompany the earnings release. For reconciliations of actual to adjusted amounts, please refer to those financial tables. The refining segment reported an operating loss of $377 million in the fourth quarter of 2020 compared to operating income of $1.4 billion in the fourth quarter of 2019. Excluding the LIFO liquidation adjustment and other operating expenses, the fourth quarter 2020 adjusted operating loss for the refining segment was $476 million. Fourth 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 $2.6 million barrels per day, which was lower than the fourth quarter of 2019 due to lower product demand. Throughput capacity utilization was 81% in the fourth quarter of 2020. Refining cash operating expenses of $4.40 per barrel were in line with guidance with $0.47 per barrel higher than the fourth quarter of 2019, primarily due to the effect of lower throughput rates. Operating income for the renewable diesel segment was $127 million for the fourth quarter of 2020 compared to $541 million in the fourth quarter of 2019. After adjusting for the retroactive blender's tax credit in 2019, adjusted renewable diesel operating income was $187 million in the fourth quarter of 2019. Renewable diesel sales volumes averaged 618,000 gallons per day in the fourth quarter of 2020, a decrease of 226,000 gallons per day versus the fourth quarter of 2019 due to the effect of planned maintenance. The segment set annual records for sales volumes of 787,000 gallons per day and margin of $2.66 per gallon. Operating income for the ethanol segment was $15 million in the fourth quarter of 2020 compared to $36 million in the fourth quarter of 2019. Ethanol production volumes averaged 4.1 million gallons per day in the fourth quarter of 2020, which was 197,000 gallons per day lower than the fourth quarter of 2019. The decrease in operating income from the fourth quarter of 2019 was primarily due to lower margins, resulting from higher corn prices and lower ethanol prices. For the fourth quarter of 2020, G&A expenses were $224 million and net interest expense was $153 million. G&A expenses in 2020 of $756 million were $112 million lower than 2019. Depreciation and amortization expense was $577 million and income tax benefit was $289 million in the fourth quarter of 2020. The annual effective tax rate was 45% for 2020, which was primarily the result of the carryback of our U.S. federal tax net operating loss to 2015 when the statutory tax rate was 35%. And we expect to receive a cash tax refund of approximately $1 billion in the second quarter of this year. Net cash provided by operating activities was $96 million in the fourth quarter of 2020. Excluding the unfavorable impact from the changes in working capital of $113 million 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 $140 million, and adjusted net cash provided by operating activities was $955 million for the full year. With regard to investing activities, we made $622 million of total capital investments in the fourth quarter of 2020, of which $214 million was for sustaining the business, including costs for turnarounds, catalysts, and regulatory compliance, and $408 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 $458 million in the fourth quarter of 2020 and $2 billion for the full year. Moving to financing activities, we returned $400 million to our stockholders in the fourth quarter of 2020 through our dividend and $1.8 billion through dividends and buybacks in the year, resulting in a total 2020 payout ratio of 184% of adjusted net cash provided by operating activities. And our Board of Directors just approved a regular quarterly dividend of $0.98 per share, demonstrating our strong financial position and commitment to return cash to our investors. With regard to our balance sheet at quarter-end, total debt and finance lease obligations were $14.7 billion and cash and cash equivalents were $3.3 billion. The debt to capitalization ratio net of cash and cash equivalents was 37%. And at the end of December, we had $5.9 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. Almost half of our growth CapEx in 2021 is allocated to expanding our renewable diesel business. For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges, Gulf Coast at 1.49 million to 1.54 million barrels per day; Mid-Continent at 410,000 to 430,000 barrels per day; West Coast at 170,000 to 190,000 barrels per day; and North Atlantic at 245,000 to 265,000 barrels per day. We expect refining cash operating expenses in the first quarter to be approximately $4.75 per barrel, which is impacted by lower throughput volumes due to planned maintenance activity. With respect to the renewable diesel segment, we expect sales volumes to be 790,000 gallons per day in 2021. Operating expenses in 2021 should be $0.50 per gallon, which includes $0.15 per gallon for noncash costs such as depreciation and amortization. Our ethanol segment is expected to produce 3.7 million gallons per day in the first quarter. Operating expenses should average $0.39 per gallon, which includes $0.06 per gallon for noncash costs, such as depreciation and amortization. For the first quarter, net interest expense should be about $155 million, and total depreciation and amortization expense should be approximately $575 million. For 2021, we expect G&A expenses, excluding corporate depreciation to be approximately $850 million, and the annual effective tax rate should approximate the U.S. statutory rate. 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. And please respect this request to ensure other callers have time to ask their questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Operator instructions were given. Our first question is coming from the line of Doug Terreson with Evercore ISI. Please proceed with your question.

Doug Terreson, Analyst, Evercore ISI

Good morning, everybody.

Joe Gorder, Chairman and CEO

Good morning, Doug.

Doug Terreson, Analyst, Evercore ISI

Regarding refining fundamentals, Joe, you mentioned a minute ago that inventories are starting to shape up a little bit in close to five-year levels, I think on an absolute basis, but they look like they're going to the same range adjusted for demand for both gasoline and distillate, which is a good thing. Margins are near year-ago levels in most U.S. markets, and we're starting to see feedstock differentials widen, too. So, my question is, have you been surprised by the pace of the recovery that we've seen? Do you think there is reason to believe that it's sustainable? And either way, what's your overall view for the recovery in refined products market for 2021? What's your outlook at this point?

Joe Gorder, Chairman and CEO

Doug, that's a good question. We'll let Gary and Lane speak to it in some detail. But we've been pleased with the pace of the recovery so far. And frankly, I think, you're going to see it accelerate as the vaccine rolls out more aggressively. That's kind of an obvious statement. But I think, sometimes we do take it for granted. If we can really get the government functioning appropriately on the distribution, I think, we're going to be in much better shape, perhaps quicker than we all realized. And we've got a member of our Board of Directors who thinks that there is such pent-up demand, certainly in the East Coast where he is and other parts of the country, that when we do get the vaccine rolled out, we get herd immunity in place, you're going to see this look a little bit like the roaring 1920s, and that's his point of view. I would tend to agree with that. So, with that, I'll let Gary and Lane provide a little more color specifically regarding the inventories and demand.

Gary Simmons, Executive Vice President and Chief Commercial Officer

Yes, Doug. This is Gary. Certainly, getting total light product inventory, we built a significant surplus, especially early on in the pandemic. So, seeing that surplus essentially gone and getting back into the five-year average range is very encouraging. As you know, as demand starts to pick up, it will allow margins to recover much quicker. I think, another encouraging sign is the fact, despite the fact that we've had a surge in COVID cases, gasoline demand for the DOE is still a little bit above 90% year-over-year where it was last year at this time. Our wholesale volumes are showing to be pretty close to that. So, the combination of reasonable gasoline demand and relatively low gasoline inventories has caused the propylene market to be a little stronger. I think, one of the key things there is the stronger prop market has really flattened the curve on gasoline. And so, it's taking away a lot of that incentive to store summer grade gasoline, and that certainly sets up for a stronger driving season in terms of gasoline margins. As Joe said, I think, we view that we'll see gradual recovery. Second quarter, you'll start to see things pick up. And then we expect things to be fairly normal by the third quarter, with the exception that we do see that there could be a lot of pent-up demand, and people that are spending disposable income largely buying things that they're ordering are going to spend that disposable income getting out and on experiences, family vacations, which could cause a surge in gasoline demand. On the diesel side, as you kind of mentioned, diesel demand is really hung in there pretty strong. DOE's are showing over 98% year-over-year diesel demand. Actually, at the seven-day average in our system, we were at 111% year-over-year, so actually showing diesel demand growth in our system. I think some of that heating oil demand has been strong, a little bit colder winter this year, starting to see some drilling activity pick up, which, of course, helps diesel demand. And then, of course, with people spending disposable income ordering things, on-road freight, trucking and rail has been strong as well. As we move throughout the year, we expect to see some incremental diesel demand coming from agriculture as you start to plant crops. And then, moving throughout the year, we also see that as jet demand begins to recover, it will lower diesel yields and help bring supply and demand into balance, which will set diesel up nicely longer-term.

Doug Terreson, Analyst, Evercore ISI

Okay. Good points. So, that kind of covers it for me. It sounds fairly encouraging.

Joe Gorder, Chairman and CEO

Yes. Doug, I mean, look, we are encouraged. I mean, I think we're through the worst of this. And we're looking forward to getting back to more normal lifestyles here and certainly a more normal business climate. But let me just say one thing before you get off. I understand that you're going to be repositioning this spring. And we've known each other for a very long time. And I'd be remiss if I just didn't say that without question, your wisdom and insight in this sector is unsurpassed. But more importantly than that, Doug, you're a very good man, and we're all better people for having had the opportunity to get to know you and to work with you over the years. And I, for one, am going to miss you greatly. So, I know we're going to have a chance to visit here sometime in March. But look, I just want to—on behalf of the whole Valero team, I think, we just want to wish you the best and tell you thanks for everything you've done for the industry over the years.

Doug Terreson, Analyst, Evercore ISI

Well, Joe, thank you, too. I mean, you guys have been capital management leaders, especially in this industry. Your stock reflects it over time, and you all are good guys, too. And so, you've been a really easy management team for me to support over the decades. And I just want to thank you for your leadership and really enjoyed our time together. And so, you guys pat yourselves on the back because you deserve the performance that has been demonstrated in the stock market for sure. Thanks again, Joe.

Joe Gorder, Chairman and CEO

Yes. Bless you, buddy.

Operator, Operator

Thank you. Our next question is coming from the line of Phil Gresh with JPMorgan. Please proceed with your question.

Phil Gresh, Analyst, JPMorgan

Hey. Good morning. Tough follow-up.

Joe Gorder, Chairman and CEO

Well, Phil, you're still a young guy. You'll get yours one day, but it probably won't be from me.

Phil Gresh, Analyst, JPMorgan

I guess, I'll follow-up on one part of Doug's question there, just on the differential side. You talked a lot about the product margin element, differential is obviously still pretty tight here, especially like on light-heavy. So, how do you guys see that playing out for the rest of the year?

Gary Simmons, Executive Vice President and Chief Commercial Officer

Yes. Phil, this is Gary. I think, we have seen very narrow crude quality differentials. In order to get those widened out, we need more OPEC barrels on the market. If you look at most consulting forecasts, they're showing global oil demand growing to the point where you'll need at least 3 million barrels a day of additional OPEC production online by the end of the year. And so, I think, our view is probably the back half of the year is where you'll see quality differentials begin to widen out. I think that's further supported by, if you look at the high sulfur fuel oil forward curve, where high sulfur fuel has been trading around 90% of Brent, you look to the back half of the year, and it gets more to 80% of Brent, which is more indicative that we'll see those quality differentials widen out again in the second half of the year.

Phil Gresh, Analyst, JPMorgan

Got it. Okay. And then, the second question, just trying to think through the capital spending cadence over these next few years with Phase 3 of Diamond Green Diesel. Obviously, you talked about a $2 billion spending level for 2021 being able to hold, despite still some spending for Phase 2. So, as you look out to 2022 and 2023, do you think you can do the Phase 3 project within the $2 billion or so capital budget as well? I'm just trying to gauge the free cash flow potential as we see the refining margins recover and DGD EBITDA come on?

Lane Riggs, President and COO

Hey Phil, this is Lane. So, we did about $2 billion last year, actually a little bit less than that. We maintained our pace on spending on Diamond 2 and developing Diamond 3. And we believe that we can continue to do that if for whatever reason, the cash is a little bit lower. Obviously, we want to get back to some other things at some point, but we can certainly maintain our spend on renewable diesel with our capital budget at a $2 billion level.

Joe Gorder, Chairman and CEO

Yes. And Phil, just from a broader strategic perspective, this $2 to $2.5 billion number is our target going forward. I don't think you should expect that we're going to go out and spend $3 billion in a year. So, we've said that timing of capital spend isn't necessarily calendar year spending. And so, some years, it might be less than $2 billion as it was this year and some years, it's going to be a little bit more than $2 billion. But, the target range for us remains in that $2 billion to $2.5 billion range, and I think, it will stay in this $2 billion range through 2021.

Operator, Operator

Our next question comes from the line of Prashant Rao with Citi. Please proceed with your question.

Prashant Rao, Analyst, Citi

I just wanted to follow-up on the renewable diesel market and its evolution, particularly outside of RINs, which I expect other people are going to ask about. But, I'm curious about the LCFS market in California and some of the other provincial and regional opportunities that we've talked about. I wanted to get your thoughts specifically in California. It seems like there's a lot of competing sources of capital. This pandemic has progressed capital towards sort of emerging energy. And while they're small now, there is a possibility for a little bit more electrification, more renewable gas, the other competing sources for that credit, or for diesel substitutes in California. I was just wondering, given the supply coming on line with Port Arthur and your longer term plans, how do you see that playing out in California? Is it fair to say that by the time DGD 3 is up on line, there might be a more meaningful opportunity outside of the California LCFS? And, how do you see the pace of that over the next few years? The other part of that also being, do you expect that California could reduce or increase the emissions reduction target, which would just move the goalpost and create a greater opportunity? There is a lot of pieces moving there, but the market's changed quite a bit since we were talking about this pre-COVID. So, I just wanted to get an update on how you see those moving parts playing out?

Martin Parrish, President, Renewable Fuels

Sure. Prashant, this is Martin. On California, obviously, the market’s been pretty stable as far as the carbon price the last few years. Renewable diesel is the largest carbon credit generator. You step outside California, I'll answer that part first. What we expect to happen in the next few years is the Clean Fuel Standard to be in place in Canada by the end of 2022. That will bring incremental demand in 2023. We've also got legislation in New York State and Washington State for LCFS programs. We think those states will implement an LCFS over the next few years. Timing of that is hard or impossible to predict, but we expect that's going to happen. Today, we sell to California, but we also sell to Canada and Europe. So, you're right—there's some electricity penetration, there's renewable natural gas, but still renewable diesel is the largest carbon credit generator. We don't expect that to change in the foreseeable future. And as far as the trucking, that's going to continue. Renewable diesel obviously is huge in that. California, if you look at their projections, they're heading for 2030, their internal projections are like a 40% blend rate for renewable diesel. We honestly think it might even be higher than that. So, there's really no blend wall. There's nothing to stop this. So, we're optimistic about demand in California, and we're optimistic about demand in other parts of the globe.

Prashant Rao, Analyst, Citi

And then, just a follow-up on that. Recently, we've been hearing in the headlines, there's been some in the financial community who have been advocating for a need for a higher carbon price in order to incentivize the move to emissions reduction. And obviously, California has had a higher per ton price than other parts of the developed world. But, do you think that gives the $200 per ton carbon price in California a little bit more legs to be sustainable as the rest of the world is going to come up, or do you see sort of the meeting in the middle? How do you see that evolving, given where the narrative and where the discussion is right now?

Martin Parrish, President, Renewable Fuels

Yes. I'd say, first thing, you have to be a little careful looking at the absolute price because it depends on whether it's a low-carbon fuel standard or a carbon tax; you get to a lot different carbon prices in those different regimes. But I think with California, they've obviously signaled they're okay with $200, and they're okay with that escalated by the CPI each year. If things happen where that price started going down, I would expect California to move the goalpost and make it harder. We're looking at a carbon reduction at 20% by 2030 now. But, if you start having the carbon price go down, a lot of credits, I think they're going to move the goalposts, because that's the objective, right?

Operator, Operator

Thank you. Our next question comes from the line of Manav Gupta with Credit Suisse. Please proceed with your question.

Manav Gupta, Analyst, Credit Suisse

In the energy industry, what you generally see is projects getting delayed by 6 months or 12 months, you're doing something unique, DGD is starting up 6 months before expectations. Just trying to understand from the perspective of engineering, feedstock securement, how are you able to achieve a start-up before time in this case?

Lane Riggs, President and COO

Manav, this is Lane. So, we obviously are very, very focused on this project, and we did accelerate because if you look at our spend, we spent more than we actually budgeted to try to keep—as we are executing that project to find every step we can optimize and accelerate the schedule and not do so by accelerating the cost of the project either. So, as you've mentioned, we have worked it really, really hard because it is such a good project, and it is a big cash flow generator for us. We have expertise in terms of project execution, we understand. And Diamond 3 is essentially a duplicate of Diamond 2 with a few revisions here and there, but it's largely the same—so we've been able to accelerate that project as well. Because of our focus, we put our best people on making sure that project moves along as fast as it can.

Manav Gupta, Analyst, Credit Suisse

A quick follow-up here is, obviously, RIN prices have moved up. I'm trying to understand how the start-up of DGD 2 and then following up DGD 3 actually cut your RVO obligation, which would give us some idea what the RVO obligation is right now? And then, how much lower does it go once both the DGD phases are on line?

Martin Parrish, President, Renewable Fuels

I think, what you have to think about there, Manav, is you've got the obligation but you've got a lot of factors right now. And RIN prices right now are probably more influenced by the SREs and the Supreme Court and what the EPA is going to do. And I don't know that it's really so much about the fundamentals as uncertainty at this point.

Joe Gorder, Chairman and CEO

That's right. It doesn't change our renewable volume obligation at all. And I agree with Martin, the uncertainty around SREs and just what will happen under the Biden administration is really what's causing the RIN prices to surge.

Operator, Operator

Thank you. Our next question comes from Theresa Chen with Barclays. Please proceed with your question.

Theresa Chen, Analyst, Barclays

Good morning. I wanted to follow-up on the renewable diesel side. So, in terms of feedstocks, in a quarter where feedstock costs seem to have risen sharply and with planned maintenance at the facility, your capture was still very high. Can you talk about how you were able to achieve that? Is that sustainable? If there were any one-time factors that might have benefited the quarter? And going forward, as you think over the long term about feedstock costs, just given the onslaught of projects that are under development, but to Manav's point now, even if not all of them will meet the time frame and capacity as originally planned, the absolute supply of renewable diesel will likely increase and thus increasing competition for feedstocks. And as such, do you see a shift in the type of feedstocks versus what you're currently using?

Martin Parrish, President, Renewable Fuels

Okay. Sure. Soybean oil was up 17% in the fourth quarter versus third quarter. But as you noted, our EBITDA per gallon margins were flat quarter-on-quarter. If you look back in the past three years on renewable diesel, we've experienced wide swings in feedstock costs, D4 RIN values, ULSD prices—obviously huge swings. However, our annual margins have been very consistent, ranging from $2.19 a gallon in 2018 as a low to a high of $2.37 a gallon in 2020. So, you can see that the earnings power is there and consistent over time regardless of some swings. That's because the market works to compensate—veg oil prices go up, the RIN goes up, ULSD prices move, and it all kind of works in concert. So, long term, in the next foreseeable future, we're not concerned with sourcing feedstocks. We believe our margin history is a good indicator of what to expect over time. Any one quarter can be plus or minus, but over time, we feel good about this margin indicator. Then, if you look to what happened with the soybean price, soybean price is driven by global supply and demand of veg oils. Palm oil prices were first to move up because production growth slowed in Indonesia and Malaysia, due to a drought and COVID-19, lack of labor to harvest the palm. Now you've got soybean production pretty tight this year. So, I worry about a lower crop down in Brazil. Soybean oil production is going to be impacted. You've got the whole agricultural commodity index moving up, so that's moving soybean oil too. And then finally, veg oil pricing was low as compared to ULSD in 2018 and 2019. So, we expected some upward movement relative to ULSD. In response to this, more vegetable oil will be produced in response to higher prices. We don't see a long-term sustainable shift in vegetable oil pricing relative to low sulfur diesel.

Theresa Chen, Analyst, Barclays

Thank you. And on the broader topic of energy transition, since the Biden Administration took office and made a series of very aggressive climate-related policy announcements, can you talk about how this plays out for the industry in general from the perspective of CAFE standards, emissions, EV penetration, renewable fuels, et cetera? And particularly what you think the next step will be?

Joe Gorder, Chairman and CEO

Yes, sure. We'll tag team this. Rich Walsh can cover the policy side. But we've seen—the headlines are focused on EVs—and everyone considers that when looking at long-term oil demand. We just need to continue to look at the facts and keep it in perspective. EV sales last year made up slightly less than 2% of domestic car sales, just around 4% globally. In developing countries, their focus is often less on climate change and EVs than on feeding their people and providing safe and affordable housing. So, there's a lot going on politically, but the reality is that cleaner fuels are going to be part of the future, EVs will be part of the future. But the internal combustion engine is far from being extinct. We're still selling a tremendous number of internal combustion engine vehicles that are more efficient. Our industry has worked on projects and adjustments to reduce the carbon intensity of the products we produce. Valero is doing a lot of that with renewable diesel projects and carbon sequestration around our ethanol business. We're looking at hydrogen and so on. There's a lot happening. I think we'll continue to see the carbon intensity of liquid fuels go down. From our IR deck, we're already very competitive from a renewable diesel perspective with EVs. I think you'll see that continue to increase.

Rich Walsh, Senior Vice President, Government Affairs and Public Policy

Yes. Joe's right. Of course, you see a lot of headlines on it. Yesterday, there was an announcement on moving the federal fleet to EVs. But that's very similar to the order President Obama issued in 2015, mandating that half of the fleet become EVs. We didn't see a lot of movement in the federal fleet to EVs under that order. It's a lot more difficult than you think to do that. The other thing I'd emphasize is our renewable diesel can drop in today, and on a life cycle basis outperforms an equivalent diesel-electric truck. So, we can help the administration address this climate issue straight away. The order did call for clean and zero-emission vehicles, and ours are certainly clean. The order requires that it be made in America and meet federal procurement standards. I'm not sure many electric vehicles meet those requirements, but our renewable diesel is 100% American made and ready to go now. So, we actually think that a lot of this will evolve toward products like ours. In the end, the economics are overwhelming for our products, and they're ready to go now. We think we can work with the administration. We think there is going to be demand and policy drivers for lower-carbon fuels, which is favorable for us.

Operator, Operator

Our next question comes from the line of Doug Leggate with Bank of America. Please proceed with your question.

Doug Leggate, Analyst, Bank of America

Thanks. Good morning, everybody. And Joe, Happy New Year. I think it's the first time you've spoken this year. When I heard Doug repositioning earlier, I thought I was overthinking someone hadn't told me something, but you may be a little nervous. Anyway, we've passed our congrats along to Doug. He is the oldest analyst in the sector, so I'm not sure I'm grateful for that, but so will be, anyway. So guys, two questions, please. Homer mentioned the $1 billion cash tax refund, not immaterial obviously. I just wanted to double check. Is that a one-off, or are there any other retrospective cash tax losses you can bring forward? My follow-up, Joe, is probably a little bit more high level. You've talked a lot about EVs. I love that slide in your latest deck about the math. I'm just curious, the carbon sequestration on your ethanol business, where does that sit on the potential carbon capture on the refining business? Is that something you're pursuing, will pursue? Is it part of the discussion? I'm just curious as to what we should expect next in that regard?

Mark Schmeltekopf, General Counsel

Doug, this is Mark Schmeltekopf; that is a one-off item. Obviously, it relates to our 2020 tax NOL that's being carried back to 2015, and that's the only significant item of that nature.

Doug Leggate, Analyst, Bank of America

Okay. I just wanted to double check. Thank you. My follow-up on carbon sequestration—where does that sit relative to refining business?

Lane Riggs, President and COO

Doug, this is Lane. The reason we chose some of these projects like the ethanol plants is that the gas coming off that plant is largely carbon dioxide, so we're not having to further treat it before we sequester it. We're trying to understand how that works, understand the technology and the policy and regulatory regimes around carbon sequestration. So, it's a good place for us to start and develop projects. Another way to do this is with blue and green hydrogen. We're gating projects there. That will also affect the carbon intensity of our transportation fuels. We've done some smaller ones, but we are gating some larger ones that will make our transportation fuels lower carbon. Depending on the market we can target, it will help our competitiveness from a carbon intensity perspective. Those are things we're looking at. From a carbon sequestration perspective, we're trying to hit streams that are higher in CO2 rather than streams with a lot of nitrogen and other components that make capture more difficult.

Operator, Operator

Our next question comes from the line of Roger Read with Wells Fargo. Please proceed with your question.

Roger Read, Analyst, Wells Fargo

I guess, two questions. I want to follow up on your introductory comments, Joe. And the second one is a follow-up to some of the questions Theresa was asking about renewable diesel feedstock. So, the first one on the global capacity kind of expectation of future shutdowns, just curious how you see that unfolding, maybe where you see that unfolding, any particular trigger points? And then, on the renewable diesel feedstock, specific to your Phase 2 and your Phase 3 plans here that will roll out in '21 and '23, how comfortable are you in terms of your line of sight to the necessary feedstocks in terms of the geographic Gulf Coast focus you have?

Lane Riggs, President and COO

I guess that will be me. Roger, it's Lane. So, we talked about this on prior earnings calls. First, we've seen about 3 million barrels a day of refining closures. I think we've been—pleasantly surprised but certainly surprised at the acceleration of some of these closures. Interestingly, a lot of it's occurred in the United States. I think that's a little bit of a surprise. But we've kind of done our share or at least— it doesn't mean that you won't have further closure potentially in the Atlantic basin on this side of the pond or maybe on the West Coast. But certainly, for now, the United States, I think about 800,000 to 900,000 barrels a day of announced closures. If you look at trade flow though, where the closures are, you could look for the closures going forward primarily in Europe, particularly Southern Europe. They don't really have access to an advantaged crude. They're more aggressive with respect to their transition away from transportation fossil fuel. So, I think that's where you'll see more closures going forward.

Martin Parrish, President, Renewable Fuels

Sure. On the feedstocks, Roger, right now, line of sight to 2023, we feel very good about procuring the waste feedstocks we need. In the United States, used cooking oil production and rendered animal fats production are large. The U.S. is the biggest around that, and that comes with GDP per capita and established rendering operations. So, we feel good about that into the future. The U.S. is the place to be— the installed base of renewable diesel is still pretty small, especially the operators running waste feedstock and pretreatment units. There's plenty of waste feedstock to procure. As you look farther down the road, past 2025 out to 2030, we expect to see quite a bit of growth in used cooking oil production and animal fats, much of which will come from Asia because of population growth. Historically, waste feedstock growth has been significant, and we expect that to continue. So, line of sight out to DGD 2 and DGD 3, we don't see a problem.

Joe Gorder, Chairman and CEO

Hey Roger, we just wanted to compliment you on your recent piece of work on the EV expansion and oil demand. It was well done, very thoughtful and well presented. I would encourage everybody, if you haven't seen it, to take a look at it.

Roger Read, Analyst, Wells Fargo

I appreciate that. And sometimes when people have referred to me as a piece of work, it wasn't a compliment. So, I like that.

Operator, Operator

Our next question is coming from the line of Paul Cheng with Scotiabank. Please proceed with your question.

Paul Cheng, Analyst, Scotiabank

I have two questions, maybe this is for Joe. Lane was earlier there talking about Europe maybe more facilities are going to get shut. How should we look at government policy and everything and put it into plan books, and how are we going to position on the longer term? That's the first question. The second question: at some point the pandemic will be over, you will generate free cash again. At that point, when we're looking at your financial strategy, you have added several billion-dollar debt through this pandemic. We assume that you're going to first try to pay it down. But, after the pandemic, if we're looking forward, will the Company take a more conservative approach and drive down the debt ratio much below the pre-pandemic level? Thank you.

Joe Gorder, Chairman and CEO

That's good, Paul. Okay. I'll let Jason take the second part. Relative to Pembroke—Lane, you can chime in too, and Rich Walsh. Pembroke supplies domestic demands within the UK, and it also supplies Ireland and other countries. We do export out of Pembroke. We bring fuels to Canada when we need them out of Pembroke and so on. It's one thing for politicians to come out and lay down a hard line and say they're going to do something. But people in that country who have purchased internal combustion engine vehicles have an opportunity to weigh in, and that influences decisions going forward. I think we all get concerned when we hear these things, but historically things don't always turn out exactly as feared. It's usually never as bad as you think and never as good as you think. We have a clear focus on Pembroke. Lane and his team are working on different options and projects to make that a more efficient operation.

Rich Walsh, Senior Vice President, Government Affairs and Public Policy

No, I think you said it really well. If you look at California, you saw early announcements that were aspirational about how they were going to drive down carbon. We'll see directional efforts to move this way, and you'll see increased electrification. But as you get closer to deadlines, the practicalities start to have an effect and they tend to move targets and reset goals. Right now there's a big drive on this. The cost and consequences will start to play out and influence policy going forward.

Lane Riggs, President and COO

Hi Paul, this is Lane. I'll just add one thing. When we're thinking about trade flow and where closures may occur, Southern Europe is more exposed to closures because of their location and access to crude. That's likely where you'll see more closures going forward.

Joe Gorder, Chairman and CEO

Okay. And Jason, do you want to take the financial piece?

Jason Fraser, Executive Vice President and CFO

Yes, sure. You're correct. One of our more immediate goals will be paying down some of the extra debt we've taken on during the pandemic. Our base assumption has been a debt-to-capitalization in the 20% to 30% range. But we recognize we're in a very dynamic time. We have energy transition occurring, we're growing renewable diesel, and we're looking at other technologies. Exactly how we end up participating and the capital needs of these new businesses may dictate a different capital structure. We're open to looking at things, and we recognize the environment is dynamic and exciting. We're not wed to a single solution; we'll keep our minds open as things evolve.

Operator, Operator

Our next question comes from the line of Ryan Todd with Simmons Energy. Please proceed with your question.

Ryan Todd, Analyst, Simmons Energy

Maybe one quick follow-up on the renewable side. Sustainable aviation fuel is clearly going to play a large role in this mix going forward over the longer term. It's very small at this point. Can you talk a little bit about what you see as the necessary steps to ramp up the sustainable aviation fuel market and how your renewable diesel facilities are positioned to be able to produce it?

Martin Parrish, President, Renewable Fuels

Sure. I think the necessary step to ramp it up is getting mandates to require the use of it across the globe. Right now it's out there; we feel confident it's coming, but timing is the big question. The modifications required at a plant producing renewable diesel to produce sustainable aviation fuel are significant but not huge. We could pivot when needed. We'll keep doing engineering on options. But it really comes down to getting mandated volume. When you have mandates, you'll see the investment and scale-up.

Ryan Todd, Analyst, Simmons Energy

And then, maybe just one— I mean, you touched on parts of this earlier, but maybe just an overall follow-up on refining capture. Headline margins have bounced recently. It feels like capture has stayed stubbornly low on the refining side for the entire industry. Can you talk how you see those trends playing out over the course of the year? It sounds like maybe you expect RIN pricing to soften and differentials to widen a little. Any thoughts on the timing of that recovery over the course of the year?

Gary Simmons, Executive Vice President and Chief Commercial Officer

So, Ryan, this is Gary. The key for us is our ability to optimize our refining system, especially on the feedstock side of the business. With very narrow crude quality differentials, it's been challenging to do that. If you get to the second half of the year and more OPEC production is on the market—potential easing of Venezuelan sanctions, potential easing of Iranian sanctions—those things will allow us to do more optimization on the feedstock side. As we do that, our capture rates would go up.

Operator, Operator

Our next question comes from the line of Benny Wong with Morgan Stanley. Please proceed with your question.

Benny Wong, Analyst, Morgan Stanley

Hey, Joe. In your prepared remarks, you highlighted your international strategy moving forward with the Veracruz terminal now started. Just curious if you can give us an update on the demand and margin outlook you're seeing in LatAm generally and maybe in Mexico specifically? I wanted to get a sense in terms of where they are in demand recovery and if there are any notable differences across regions that you're able to see?

Gary Simmons, Executive Vice President and Chief Commercial Officer

Yes. This is Gary. As Joe mentioned, we did put the Veracruz terminal online at the end of the year. We have both gasoline and diesel tankage in Veracruz today. We're still doing some commissioning activity. We expect to have the truck rack operational in the next couple of weeks. Overall, our volumes for the quarter in Mexico were a little over 40,000 barrels a day. That's an increase year-over-year of about 145%. So, good growth in the country. However, from the third quarter to the fourth quarter, we were down about 10%. Mobility data we see in Mexico showed mobility was down about 20%. So it still indicates we're continuing to gain market share, but we did see a big hit in mobility in Mexico, and we saw that reflected in our volumes. Moving forward, we anticipate that the inland terminals associated with the Veracruz marine terminal will come online early second quarter—one at Puebla and one in Mexico City. That's where you'll start to see our volumes ramp up as those inland terminals come on. Our goal is to get to about 80,000 barrels a day in that central system. The Veracruz terminal also takes a lot of cost out of our supply chain. So in addition to the ramp-up in volumes, we would also expect to see wider margins on the volume that we're selling in-country.

Operator, Operator

Our next question is coming from the line of Sam Margolin with Wolfe Research. Please proceed with your question.

Sam Margolin, Analyst, Wolfe Research

My question is on the operating side. Your first quarter throughputs are sort of flat quarter-over-quarter, at least in the Gulf Coast. As we enter this recovery phase and crack spreads start to pick up with demand, how do you balance what you see on the commercial side with your operating rates—how much you want to ramp utilization versus what your assessment is of what the market can tolerate and various commodity scenarios? I'm just curious how you work through that as you think about utilization?

Lane Riggs, President and COO

Hey Sam, this is Lane. We're certainly positioned in the Gulf Coast. If recovery happens quicker, our rates could be higher, but we're being careful and trying to not get our supply chain very extended. We have strategies around that to ensure we don't have a lot of pricing exposure and to position our assets conservatively, while remaining ready to raise rates as we see things improve.

Gary Simmons, Executive Vice President and Chief Commercial Officer

I would just add to that. I think the key for us is looking at margins, and especially if we're able to ramp up utilization and it results in higher exports and good margin, we feel comfortable raising utilization.

Sam Margolin, Analyst, Wolfe Research

Okay. And then one follow-up, if I might, just on energy transition and specifically EVs, there's a certain amount of petroleum products that are in EVs along with other materials and processes associated with the energy transition. You weren't necessarily focused on renewable diesel until you found the right way to build and structure that business. Looking out over the horizon, maybe not in the immediately investable horizon, how do you think about the potential to remix your product streams into things like specialty chemicals or other materials that are thematic to the transition, if not necessarily today, over your investment hurdles?

Lane Riggs, President and COO

So Sam, we've looked quite a bit at diversifying into petrochemicals. We continue to look at it, but it hasn't met our gating threshold yet. We would consider it, but so far, when we analyze these options, we haven't found them to be better than other projects—like renewable diesel. In a world where we're allocating capital, that's where we're putting money instead of the petrochemical path. It doesn't mean we're closed to the idea, but thus far we like our investments in lowering carbon intensity of transportation fuels.

Operator, Operator

Ladies and gentlemen, we have reached the end of our allotted time for the Q&A session. At this point, I would like to turn the floor back over to Mr. Bhullar for any additional concluding comments.

Homer Bhullar, Vice President, Investor Relations

Great. Thank you. I appreciate everyone joining us. For those that didn't get a chance to ask a question, please feel free to contact me and I'm happy to chat with you. Please everyone stay safe and healthy, and have a great day. Thank you.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation. You may disconnect your lines at this time.