Greetings, and welcome to Valero Energy Corp. Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Investor Relations and Finance. Thank you. You may begin.

Good morning, everyone, and welcome to Valero Energy Corporation's fourth quarter 2023 earnings conference call. With me today are Lane Riggs, our CEO and President; Jason Fraser, our Executive Vice President and CFO; Gary Simmons, our Executive Vice President and COO; 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 and reconciliations and disclosures for adjusted financial metrics mentioned on this call. 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 earnings release and filings with the SEC. Now, I'll turn the call over to Lane for opening remarks.

Thank you, Homer, and good morning, everyone. We are pleased to report strong financial results for the fourth quarter and the full year. With the exception of our 2022 results, we delivered the highest fourth quarter and full year adjusted earnings in company's history in 2023, demonstrating the earnings capability of our portfolio. Our refining system achieved 97.4% mechanical availability in 2023, which is our best ever. We also set a record for environmental performance and matched our previous record for process safety, illustrating the benefits from our longstanding commitment to safe, reliable and environmentally responsible operations. Now through organic growth of our wholesale system, we set an annual record for sales volume in 2023 at approximately 1 million barrels per day, demonstrating the strength of our branded and wholesale marketing network. We continue to pursue strategic projects that enhance the earnings capability of our business and expand our long-term competitive advantage. The DGD Sustainable Aviation Fuel, or SAF project at Port Arthur remains on schedule to completion expected in the first quarter of 2025 for a total of $315 million. Half of that attributable to Valero. With the completion of this project, DGD is expected to become one of the largest manufacturers of SAF in the world. In addition, we are pursuing shorter cash cycle projects that optimize and capitalize on opportunities to improve margins around our existing refining assets. On the financial side, we continue to honor our commitment to shareholders. We returned 73% of adjusted net cash provided by operating activities to shareholders through dividends and share repurchases in the fourth quarter, resulting a 60% payout ratio for 2023, and last week, our Board approved a 5% increase in the quarterly cash dividend. Looking ahead, we expect refining margins to remain supported by tight product supply and demand balances. In the near term, product inventories ahead of the summer driving season are expected to be constrained with heavy industry-wide turnaround activity in the first quarter, providing support to refining margins. Long term, we expect global demand growth to exceed products applied despite new refinery startups. In closing, our team's simple strategy of pursuing excellence in operations, return-driven discipline on growth projects and a demonstrated commitment to shareholder returns has driven our success and positions us well for the future. So with that, Homer, I'll hand the call back to you.

Thanks, Lane. For the fourth quarter of 2023, net income attributable to Valero stockholders was $1.2 billion or $3.55 per share compared to $3.1 billion or $8.15 per share for the fourth quarter of 2022. Fourth quarter 2022 adjusted net income attributable to Valero stockholders was $3.2 billion or $8.45 per share. For 2023, net income attributable to Valero stockholders was $8.8 billion or $24.92 per share compared to $11.5 billion or $29.04 per share in 2022. 2023 adjusted net income attributable to Valero stockholders was $8.8 billion or $24.90 per share compared to $11.6 billion or $29.16 per share in 2022. The refining segment reported $1.6 billion of operating income for the fourth quarter of 2023 compared to $4.3 billion for the fourth quarter of 2022. Refining throughput volumes in the fourth quarter of 2023 averaged 3 million barrels per day. Throughput capacity utilization was 94% in the fourth quarter of 2023. Refining cash operating expenses were $4.99 per barrel in the fourth quarter of 2023, higher than guidance of $4.60 primarily due to an environmental regulatory reserve adjustment in the West Coast. Renewable Diesel segment operating income was $84 million for the fourth quarter of 2023 compared to $261 million for the fourth quarter of 2022. Renewable Diesel sales volumes averaged 3.8 million gallons per day in the fourth quarter of 2023, which was 1.3 million gallons per day higher than the fourth quarter of 2022. The higher sales volumes in the fourth quarter of 2023 were due to the impact of additional volumes from the DGD Port Arthur plant, which started up in the fourth quarter of 2022. Operating income was lower than the fourth quarter of 2022 due to lower renewable diesel margin in the fourth quarter of 2023. The Ethanol segment reported $190 million of…

[Operator Instructions]. Our first question today is coming from John Royall of JPMorgan. Please go ahead.

Hey, good morning. Thanks for taking my question. Good morning. So my first question is on the macro side, just on light heavies. LLS-Maya has risen all the way to around $10 from about 6 beginning in the quarter, yet we still have OPEC being restrictive in terms of production. Can you talk about the drivers of the widening of coastal heavy diffs and how you see them progressing from here?

Sure. This is Gary. I think a number of factors contributed to that. You did see production in Western Canada tick up a little bit in the fourth quarter. We're seeing a few more Venezuelan barrels make their way into the U.S. Gulf Coast. So a little more supply on the market. But probably the biggest factor is as you got late in the fourth quarter and early this quarter, you're starting to see the impact of turnarounds decreasing demand for some of those, especially the heavy sour barrels. In addition to those factors, you had the typical seasonality in high sulfur fuel oil, but lower high sulfur fuel demand for power generation kind of weighing on the heavy sour discounts as well. So our view is that through the first quarter, through refinery maintenance season, you'll continue to see a little bit wider heavy sour discounts, but then you'll start to see those come in and really for any meaningful impact to sustainable impact for the quality diffs we need more OPEC production on the market. If you look at the consultant forecast, it looks like that could happen probably third quarter this year.

Great. Thanks, Gary. And then my second question is on return of capital. So your number for the quarter was very strong, and you finished the year at 60% of CFO. I know you've talked about how you tend to come in above the range when cracks are strong. If '24 ends up being kind of more of a mid-cycle type year or even below, how should we think about where you might fall in that 40% to 50% range this year?

Good morning. This is Jason. And I've got a bit of a cold. And if I talk too much, I'll go into a coughing fits. So I'm going to ask Homer to respond.

Thanks, Jason. Yes, John, I mean our approach to shareholder returns is driven by our annual target of 40% to 50% of adjusted net cash from operations. And obviously, that includes the dividend, which we consider non-discretionary and buybacks, which are considered the flywheel supplementing our dividend to hit our target. And given the strength in our balance sheet in the fourth quarter, as we highlighted, we had a 73% payout which resulted in a 60% payout for the year. And as you touched on, since 2014, we've regularly paid above our target. And in fact, the average payout for the 5 years leading into COVID was around 57%. So I think in short and periods when the balance sheet is strong as it is now and sustaining CapEx, the dividend and strategic CapEx is covered. You can reasonably think of our 40% to 50% target as a floor and expect any excess cash to go towards buybacks.

Thank you.

Thank you. The next question is coming from Theresa Chen of Barclays. Please go ahead.

Good morning. Would you mind giving us an update on your clean products supply and demand outlook from here? Taking into account the recent inventory moves as well as the additional refining capacity ramping up internationally, some utilization even is not fully running and what you're also seeing in terms of demand across your footprint, please?

Sure, Theresa. This is Gary. It's always difficult to assess the markets this early, kind of the holidays and weather tend to have a big impact on-road transportation fuel demand and then fog in the Gulf kind of tends to limit exports. But domestically, I can tell you, demand for gasoline appears to be following typical seasonal patterns. It looks normal for this time of year and in line with where we were last year, I will tell you, gasoline volumes through our wholesale channel of trade are down, a few percent year-over-year. We're not really concerned about that because you can see it's in regions that were really impacted by weather. And as the weather we're starting to see the volumes recover nicely. European gasoline markets are relatively strong. That's kept the transatlantic arb closed, and then market structure doesn't really incentivize making summer great gasoline and putting it into storage. Gasoline exports into Mexico and Latin America have remained steady. So all of this really has us pretty optimistic on gasoline cracks once we move into spring and gasoline demand improves with driving season. On the diesel side, demand in our system is up about 7% compared to last year. Probably seeing more heating oil demand with a little bit colder weather. Diesel inventory remains at the bottom of the 5-year average range. So good demand combined with low inventory continues to support the diesel cracks. Diesel exports in our system were down a little in the fourth quarter. The Russian barrels making their way into South America have caused some changes in trade flow with more of our barrels going to Europe. In Europe, warm weather tended to keep their demand down a little bit. But I can tell you thus far in the first quarter, we're…

Thank you for that detailed answer. And then maybe just looking within the U.S., what are your views on the divergence in product margins across regions? What do you think is causing the weakness in benchmark cracks in the Mid-Con particular just suppose with the strength in the Gulf Coast?

Yes. So historically, we've seen that the Mid-Con is short product in the summer and long product in the winter. And I think we're seeing that this year. The market is just long and especially the weathers tended to hit that region more and so we see demand off in that region. But I think once you start to see the weather clear and you get back into driving season, the Mid-Continental recover. Seeing the same thing kind of on the West Coast, weathers tended to impact demand on the West Coast. And so we've seen that market a little bit softer than maybe you would typically see for this time of year.

Thank you.

The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.

Yes. Congrats on great results. And one of the things that stood out to us was the capture rates continue to be very good. And I recognize some of that is operational performance, but some of that's commercial and Lane guaranteed, I know there's some sensitivities around that, but a lot of your competitors spend a lot of time talking about what they're doing on the commercial side. So just be curious, if anything you can share about how you're optimizing what continues to be a very dynamic environment.

Hey, Neil, it's Lane. So I'm not going to, you know, I'll start by saying thank you. And I will say that, you know, I wouldn't trade our commercial team for any other team in the industry. I sort of spoke about this in the past. You know, everyone in our company understands the position they play. I think sometimes some, I've been in organizations where that's not really clear and you can get a lot of interference running between the supply chain. That's not true at Valero. Everybody has a position they play and they understand how to do it well. Refining focuses on reliability and operating. Envelopes and expenses, our P&E coordinates between the groups that make the signals, and our refining commercial groups execute the signals. And it's pretty clear on how all that's supposed to work. And so I would tell you that that's really the key to our execution. And, of course, finally, everybody in the corporation is incentivized with the same goals. We don't have different groups having their own sort of incentives. So that's how we get alignment all the way through. So glad to have them.

Yeah, no, it shows up. So thank you. Then the follow-up just on North Atlantic, it was particularly strong this quarter relative to the benchmark. You know, the benchmark, I think, was $16, and the realized gross margin was well above that. So just curious if there's anything you'd call out in Montreal or UK that drove the strength there.

Hey, Neil, this is Greg. So we saw accrued costs improve in that region, primarily in Cannes, where you saw that occur more than you did in Pembroke. And then you brought up commercial margins. They were very strong for the quarter as well for that region. And then some of the compliance costs for the programs over there, costs were lower than we've seen in prior periods. And all those things combined to drive up that capture rate in the North Atlantic.

Yeah, and I'll just add, you know, Syncrude trading at $7 below Brent, you know, and a discount to that to Brent with a high distillate yield crude is a real benefit to our system.

Yeah, that makes sense. Thanks, guys. Thanks.

Thank you. The next question is coming from Doug Leggate of Bank of America. Please go ahead.

Hey, guys. Good morning. Thanks for taking my questions. I'm not sure who wants to take this one, Lane, but I want to ask perhaps an obvious question about shipping disruptions and what it means for perhaps not Valero specifically, but just in a more macro sense. How do, you know, the situation with the Red Sea bidding up clean tanker rates and so on, what does that do to the movement of product and the implications for a system which is perhaps more dependent on imports than it has been at any time, at least since I've covered this sector?

Yeah, so, you know, we're not really running crude from that region, so it hasn't really had an impact to us in terms of supply of crude. But the big impact, especially on the crude side of the business, has just been freight rates. You know, we had a period of time where you could export from the U.S. Gulf Coast to Northwest Europe crude, you know, in the low $2 a barrel range. That spiked to $6 a barrel. And you could see that in Brent TI. So, you know, I would tell you probably for our system, net is an advantage because it gives us a crude cost advantage versus our global competitors.

Okay. I realize it's kind of hard to quantify, so we'll continue to watch, but thanks for that answer. Lane, my follow-up is for you or maybe for Jason, given it's cold, but 40% to 50% payout, it seems that, at least on our numbers, you are easily able to sustain the payout at the higher level, especially now that you've restated your $2 billion CapEx plan. So I'm just curious, what's the reficient [ph] to kind of reset that range that your system clearly is capable of supporting in terms of the payout?

I'm going to let Homer answer that.

Hey, Doug. I mean, I think obviously our target is set on a long-term range, right? And so the 40% to 50% think of it as like a long-term target. But to your point, and as I mentioned earlier, we've consistently come in above that. And, again, I think when you have a strong balance sheet as it is right now, we're not going to build cash. So I think you should reasonably expect shareholder returns to come in above that target.

That's what we expect. Thanks so much. I appreciate you taking my questions, guys.

Thank you. The next question is coming from Manav Gupta of UBS. Please go ahead.

So I wanted to ask about the renewable diesel side of the business. The capture on the DJD dropped to about 49%. And now Homer has done a very good job of explaining to the market how the lag works. So if we add back that lag effect and that 64%, the actual capture would have hit something like 93%. So when we look past 4Q, the margin is up materially. And if we assume an 80%, 90% capture, ignoring the lag, would that imply that first quarter in terms of renewable diesel margin would be much stronger than the earnings that came for the fourth quarter?

Hey, Manav. This is Eric, and I would just say yes. Yeah, that's a very good – yeah, we see a lot of the same curve that you described. And really the change for renewable diesel for Valero is with the first full year of DJD3 in operation, we run a lot higher percentage of foreign feedstocks, and that supply chain is just naturally longer. So the most attractive, lowest CIA feedstocks are coming from foreign imports, and I think that's creating this longer lag than we've seen in DJD historically. So your analysis, I think, is correct.

Perfect. Thank you. Just a quick follow-up here is last year we had an abnormally warm winter. Now when we look at this first quarter, as you guys have mentioned, industry is taking a heavier turnaround versus last year, and then you could have a much colder weather out, as we are all seeing there. So year-on-year comp for the first quarter, again, could be better than even last year. I'm just trying to understand the dynamics versus last year versus this as it relates to the heating oil demand.

Yeah, that's kind of the way we see it. The big difference between last year and this year is we had the winter storm early in the quarter last year, which took refining capacity offline and kind of created the big inventory reset. You didn't have that this year, but then in our mind you'll see more of a draw as we get into February and March with the turnaround activity and a little colder weather.

And it's January. So we still have the possibility of cold weather hitting the Gulf Coast.

Thanks, guys.

Thank you. The next question is coming from Sam Margolin of Wolf Research. Please go ahead.

Hi. Morning, everybody. Thanks for taking the question.

Good morning.

I had a question on the gasoline market. You know, I think capture rate in 4Q may have benefited from butane economics, and so correspondingly if there was a high incentive to blend as much winter grade as possible, there may have been a low incentive to make and store summer grade, and there's just a lot of NGL supply that is kind of making its way into stockpiles across a number of categories. And so I want to know if it makes sense to think about, you know, as we enter into driving season, if total gasoline inventories are maybe overstated, just given the quantity of, you know, maybe butane in that number.

Yeah, certainly in our system when you look at the cost to produce of a summer grade of gasoline, there's no economics at all to be making summer grade gasoline and putting it into storage. You know, I think the only people that could be storing barrels at all, it would be high octane components, and they're really just, you know, speculating that octane is going to get stronger. But we certainly see it that way, that the barrels that are in storage today are largely winter grade.

Great. And thanks. My non-follow-up second question is about SAF. And, you know, I'm just wondering how that market is developing for you commercially, you know, as we get closer to the SAF unit coming on. I think there's a view that, you know, the SAF market could take on some, you know, contracted, you know, longer term kind of cost plus characteristics because airlines have levers to pass it through that are sort of outside of the policy regime. But would love your thoughts on how commercially SAF is developing as you get closer to production.

Yeah, Sam, I think you've said it well. We continue to talk to all the airlines and cargo carriers. A lot of their models are going to be based on more of a voluntary approach in sort of a jet plus basis that goes into a pass through to customers that want to offset their carbon footprint through their travel, you know, through their travel budgets. And so we continue to have a lot of those conversations. I think we're very close on having several contracts done with airlines going into our early production from our project. So that continues to be progressing very, very well. So we don't see that we're going to have a problem moving all of the volume out of this project.

Awesome. Thank you so much.

Thank you. The next question is coming from Paul Sansky of Sansky Research. Please go ahead.

Morning all. I was going to ask about international shipping, but you've dealt with the Red Sea. So could you just talk a bit about Russia? There was big headlines about a port explosion there. I was wondering how much distillate and other product you're seeing coming out of Russia as we start the year. Secondly, I think you've benefited a lot from Venezuelan, incremental Venezuelan crude. What's your outlook there? And then finally, what are you seeing from Mexico with the new big refinery starting and Nigeria maybe with the refinery starting? Thanks.

Okay. Yeah, I'll start with Russia. I think, you know, the drone attack that occurred last night, you know, probably the biggest market impact we're seeing so far is you've seen a reaction in the naphtha market. That refinery supplied a lot of naphtha to the Far East, and so there's concern that that flow may be gone, and so the naphtha market's tightened up. I think you do see distillates starting to fall, you know, and some of what we're seeing is that, you know, as the refineries experience some issues, they're having trouble getting support from the West that they typically would, even for things like, you know, spare parts and those types of things. So, you know, we do see that maybe distillate starts to trend off a little bit due to those issues. The middle part of the question was?

Venezuela. Venezuela.

Okay, yeah. So we continue to ramp up our volume of Venezuelan crude. I think, you know, the lifting of sanctions more than additional volume into our system probably had more of a price impact, you know, so we did see a little bit more value in the fourth quarter on the Venezuelan barrels that were running as a result of, you know, further reducing some of the sanctions that they have on Venezuela.

Mexico refineries, though.

Yeah, so we're not seeing any impact as of yet from the Mexico refineries. You know, when we talk about crude supply, there's always the discussion that, you know, we may see some fall off in our supply of Maya, but that really hasn't impacted us yet. And we don't see any delta on the product side of the business yet either.

And I guess that would then apply to Nigeria as well, right?

Yes, same thing. We think in our mind, it's going to take a while for that refinery to ramp up. It's just a big refinery that's not going to be easy to bring online.

Great. And then just a follow-up second question here, Homer. Lane, you said that you don't anticipate the asset base changing greatly with the change that we saw last year in CEO with you taking the leadership. Can you just update us, given the number of assets that are on the market? And perhaps if you want to add anything on California where results look weak for the quarter, and you've expressed dismay policies there? Thanks, I'll leave it there. Thanks.

Yes. I mean Joe has been pretty consistent as a leadership team, we've been pretty consistent. We look at everything that comes on to the market. I think structurally, our view really is whether it's policies in Europe and Canada and the United States in terms of the desire to try to move away from fossil fuels, the difficulty of -- and the difficulty is to make investments, we sort of see transportation fuels being structurally short. So we do look through that lens when we look at assets that come on. We also start during the 2000s, we were the biggest consolidator in the industry. So we know what it takes to do this, and we're very good at it. And so we -- our eyes are wide open when we look at all these assets and they come on and we understand the full cost and we compare that with organic growth and we compare that to buying back shares. And so it's all in that same framework. We do like our asset base. Clearly, California is a tough place to operate and probably getting tougher. So that's really all I want to say about that part. But what I also want to say is, we're not -- again, we look at everything and we look at -- we continue to look at refineries as well.

The next question is coming from Roger Read of Wells Fargo. Please go ahead.

Yes. Good morning. I'd like to follow up, Gary, with you on the summer grade gasoline? Like I know you said what's in the inventories isn't that much. But what are the incentives look like at this point? Or are we so close to the conversion in March that the seasonality of gasoline is already set up that way? I'm just trying to understand what -- how the market is going to thread the needle between heavy maintenance and the current conditions in the market?

Yes. So our view, Roger, you look and there's about $0.10 a carry to the March/April screen. We would tell you the cost to produce with butane being cheap is closer to $0.20, so certainly, no economic incentive at all the store gasoline. A lot of what we think happened in terms of the inventory build is that, you had a lot of things happened in December, especially in the Gulf Coast. Colonial was allocated the economics to ship on Explorer into the Mid-Continent, that arb was closed due to the Mid-Continent being weak. You had some Jones Act freight off the market in dry dock that limited some movements there. And then a lot of volatility in the freight markets really impacted exports late. And so what you saw is Gulf Coast inventories draw and in our mind, the Gulf Coast basis got weak enough that although there wasn't carry on the screen to keep gasoline inventory, I think we saw a lot of refiners choosing to hold inventory just because the U.S. Gulf Coast basis was so weak and they choose to store barrels that they would go ahead and then consume during their own maintenance periods rather than going out and covering and saw better value to do that. So if that's the case, then you should see this inventory work off over the next couple of months.

Great. That's helpful. And then the other thing, obviously, in renewable diesel, dealing with some feedstock issues this quarter, but also there's a lot of new capacity coming in. Just curious how you look at or how you would ask us to think about margin potential in this business, sort of assuming either forward curve at this point or just where we are today in terms of market structure, if it holds, how we should think about the moving pieces here because it's -- it's a little more opaque to us, the feedstocks coming in and the timing of that relative to just matching in the market on a daily basis?

Yes. I would say the outlook for renewable diesel, it is difficult to predict exactly how it will play out because you do have additional capacity coming online and into fixed credit banks for both RINs and LCFS that would naturally say that those credit value should come down with additional capacity, which would narrow RD margins. That being said, we also see that feedstock prices continue to come down, both waste oil and veg oil. So then you get into the waste oils will always structurally have a lower CI advantage over veg oil. So where veg oils will be long, they still won't be competitive to waste oils into compliance markets. So it goes back to the core of the DGD business, which is a low-cost producer waste oils, access to markets besides California. And so, we still see that we'll be competitively advantaged, both from an OpEx and feedstock standpoint. But overall, the outlook, I would say, is we expect that credit prices will continue to narrow. And it's a question of how feedstock prices we'll keep up with that. And so -- and then the last thing, besides diversifying sales away from California is obviously with our project, we'll be diversifying into SAF, which takes some of our product out of this RD market. So we think both of those things make us still the most competitive and advantaged platform in R&D, even in a tightening market.

So is it fair to summarize that as there's probably a lot more clarity on, let's call it, the supply side of R&D this year and a lot less clarity on the feedstock side? In other words, where we should look for relative opportunity is probably on your feedstock rather than, say, the sales price of R&D?

Yes, I think that would be fair to say that most of that is still being a CI advantage in waste oils over vegetable oils.

Right, okay. Appreciate it. Thank you.

Thank you. The next question is coming from Ryan Todd of Piper Sandler. Please go ahead.

Thanks. Maybe a question on turnaround activity and your looks relatively heavy in the first quarter, is that indicative of what we should expect to be a higher level of overall maintenance for you in 2024, just front-end loaded? And then maybe any thoughts in terms of what you're seeing for overall industry maintenance activity this year. Is this -- should we expect this to be another relatively heavy year?

Ryan, this is Greg. Normally, we don't talk about our overall turnaround plans. You can tell from the guidance, a fair amount of activity for us in the first quarter. I think when we get out through the rest of the year, we'll talk about those periods as we come up to the I think from an industry perspective, we are seeing a fair amount of turnaround activity across the industry in the first quarter. So in kind of to Gary's point, it looks like it's going to be a heavy season for the industry in general, a lot of it in the Gulf Coast to a lot of focus there. .

The only other thing we may add is although you can see the throughput guidance, we don't really expect it to impact our capture rates. That's right.

Great. Thank you. And then maybe just a follow-up question on capital spend and growth capital spend. I appreciate it, Homer, you gave a little bit of detail there in terms of some of the things that are competing for the wedge of growth capital within your budget. I mean most of your larger project-driven work is either finished recently or you've got the SAF project, which isn't really all that large. But as you look forward on the horizon, are there any other meaningful environmental or regulatory-driven capital things that we should be keeping our eyes on over the next couple of years that could draw some more capital that way? Or what types of things make -- or should we expect just more of these kind of small little netback-driven projects across the refining side over the next few years?

Hey Ryan, it's Lane. The way I would think about this is if you go back when we -- historically, we used to sort of spend, I would say, we said $1.5 billion sustainable capital. That would actually include regulatory capital. I mean that's how we frame it. It sort of maintain our assets to generate the earnings we're supposed to and try to work your sustain of your regulatory capital in that, albeit it would be lumpy. And so you're going to average around that number. So that's how we think about the regulatory side of it. I don't really foresee at least right now that we have a large regulatory spend. Clearly, that could always change. In terms of our strategic capital, historically, we were around $1 billion. As an organization, we felt like -- we feel like we can execute $1 billion pretty well. We have some experience over 10, 11 years ago where we spent more on strategic capital and then and it was sort of difficult to manage. And so we, as an organization, we decided that we're going to live within a sort of $1 billion on the upside of strategic capital. Since COVID, we've been at about $0.5 billion, and that's our guidance right now. And we feel like that's a pretty good number year-in and year-out that we're going to steward around that we'll that there'll be enough projects, whether they're in refining or transportation or our renewable platforms that all meet and work through our gated process to meet our return thresholds.

Okay. Thanks.

Thank you. The next question is coming from Paul Cheng of Scotiabank. Please go ahead,

Hey guys, good morning. I just don't know whether this will be Lane or Gary. If we're looking at octane last year that was very strong. If this year that I think a lot of people expect because after last year, the global gasoline demand growth rate probably will slow down China is definitely slowing down. And I think U.S. may even go into a structural because if that will be the case, how you expect the octane lending is going to look like? And what -- how that impact or what kind of impact is on your financial result will be? That's the first question.

Okay. Yeah. So I would say a couple of things on octane. Certainly, the incremental crude barrel that's been coming on to the market has been a light sweet barrel, which has created more naphta yield coming on to the market. And with pet-chem demand being somewhat down, that incremental barrel of naphta that's being produced is trying to find its way into the gasoline pool. And so what that does is it really causes octanes and naphthas to trade at an inverse when naphtha gets long, naphtha gets weak and then octane starts to trade at a premium. So you can try to blend that naphtha barrel into the gasoline pool. I don't know that we see that being significantly different this year. The one thing I would tell that I've already mentioned, if there's a prolonged -- if there's a prolonged outage in Russia at the refinery that was hit by the drone attack and there's less naphtha out on the market. That could tell you that octanes tend to be a little bit weaker this year. But absent that, I don't see any fundamental differences in the naphtha where octane markets. Greg, I don't know if you have anything?

I agree.

And Gary, are you guys net long or balanced on octane?

It varies. I would say we're fairly balanced on octane. We're long naphtha, so you can always soak up octane that way. But overall, in octane, I'd say fairly balanced.

All right. And Gary, Greg, that you guys have a marketing operation in Mexico and in the Caribbean. In Mexico. Any insight how does the local demand look like?

Yeah. So our business there continues to grow very, very nicely. Year-over-year, our volumes were up 16% in Mexico. We now have 250 branded sites, which was the largest growing brand in Mexico. I think the big change for this year is in the second quarter of this year, we anticipate the terminal that we'll use in Northern Mexico and Altamira will start up, it will allow us to be more competitive in that region, which we would expect us to then be able to continue the growth that we've seen.

How about outside your operation, but that the market as a whole, do you see the gasoline market in Mexico is growing or that is maybe a little bit pullback?

Yeah. So our view is Mexico basically recovered last year to pre-COVID levels. And our expectation is you'll see -- continue to see good growth in the gasoline market in Mexico.

Okay. Thank you.

The next question is coming from Joe Laetsch of Morgan Stanley. Please go ahead.

Hey, team. Good morning. And thanks for my questions. So I wanted to start off going back to an earlier point, you mentioned some of the cold weather on the Gulf Coast in the past couple of weeks. Were there any material impacts to operations or crude and product price dislocations that we should be mindful of for the first quarter?

No. I would tell you, we had some small operational issues, boiler trips, heater trips, but nothing that's going to materially impact the quarter and we still feel like the throughput guidance that we've given holds.

Great, thanks. And, then shifting to renewable diesel. So volumes averaged above nameplate capacity for the year, which is good to see. It seems like a consistent theme about performance there. Any reason why we shouldn't expect a similar level of outperformance in 2024, such as turnarounds or anything?

Yeah. I think we kept the guidance at the $1.2 billion. We've got a couple of catch changes this year. And obviously, when we convert to staff, there's -- there could be a change in capacity because we do have to run the unit a little harder in that mode. So we're not sure what capacity will look like to that until we get the project on the ground and start it up. So I think this time next year, we'll have an outlook of what our capacity guidance will be whether it's up or down.

Got it. That makes sense. Thank you.

Thank you. The next question is coming from Jason Gabelman of TD Cowen. Please go ahead.

Yeah. Hi, good morning. Thanks for taking my questions. The first one is on refining OpEx. And I think the market has been less focused on that metric in recent years, just given all of the strength in the margins but perhaps it becomes a bit more of a focus as margins may be normalized here to some extent. And looking at your system, I think historically, you were at $3.50 per barrel refining OpEx. This year, you were -- I think, around $450 million a barrel at a similar Henry Hub price to historical levels. So just wondering what has been driving that higher OpEx this year versus kind of the pre-COVID level and if you expect it to stay at this higher rate or to come back down?

Hey, Jason, this is Greg. So one of the things that's probably most notable when you think over that period has been electricity prices that not so much natural gas, but on the power side, A lot of the places where we operate have seen power costs, particularly in the summer, be quite a bit higher than we'd seen historically. So that's a part of it. The other part that thinking back over that time frame would also be more recently, some cost inflation pressure, and we've talked about that a few times before. That seems to be easing. So that's something we're working on to rein back in with our suppliers and folks that we worked with.

Is there Jason, this is Lane. I will say still the lowest cost guide, and we work on this like you cannot imagine you should know that as an organization, we're committed to making sure that we are the best in class with expenses.

Yeah. No, we carefully said that is there any expectation to get back down below $4 or is this kind of $4.50 range we should think about moving forward? Yeah, I'm on cue.

We'll have a look at the numbers. I mean part of the other thing that really drives this in our throughput through even though we have what we would characterize as a variable and fixed cost, we run in through our expenses, most refining expenses are in large part six. So the more barrels we run, the better that metric work. And so you really got to -- the best time of the year to look at that and to really understand that as sort of third quarter, essentially. That's really when you're seeing the system. Normally, we have the signal to run the highest, both things are online and the cost structures are where they are. So it's the best time to get an understanding of where the base OpEx is for the system.

Got it. My other question is on the refining growth CapEx, and you rattled off a bunch of what seems like quick-hit projects that clear your return hurdles is what -- is there a way you could kind of frame these projects together in terms of potential improvement to capture and kind of whatever stable margin environment, you would evaluate that on or any type of way you could frame the potential upside from these projects? Or is it alternatively just keeping capture maybe stable and enabling flexibility to keep capture stable? Thanks.

Yeah. So the way I would think about this is we're going to try to do a little more delineation in our IR pack deck to try to maybe demonstrate the success of a lot of our projects in our gaining process. But we're still disciplined in that we don't want to have all this forward-looking conversation around projects, whether they're small or big or whatever. What we do is we -- we have demonstrated hopefully, to everyone that our process does generate returns and then we had that we've -- like I said earlier, we nominally lease today, I think we have $0.5 billion a year of spend that will generate the returns we think will make its way through the gated process.

Understood. Thanks, Jas.

Thank you. The next question is coming from Matthew Blair of Tudor, Pickering, Holt. Please go ahead.

Hey thanks for the commentary on light-heavy earlier. I believe Valero runs about 200 a day of WCS at Houston in your Gulf Coast system. Is that correct? And is there any risk to that availability with TMX starting up soon?

Yeah. So our Canadian volumes vary -- it depends on total heavies -- we're probably 600,000 barrels a day, Greg, right? 500,000 to 600,000 barrels a day, and we have the ability to optimize between Mexican supply, it's live for Venezuela and Canada. Our view of TMX is that you'll still have the Gulf Coast barrels coming from Western Canada. And what it will really do is decrease exports from the U.S. Gulf Coast, and we don't really think that our Gulf Coast system will be materially impacted by TMX.

Great, thank you. And then I had another question on capital returns. So, keeping in mind that the Q4 buybacks were quite strong, payout ratio of 73% clearly impressive. We just found intriguing that your cash balance actually showed a build year-over-year in 2023. And I would say you started the year with maybe $2 billion of excess cash, ended the year with maybe $3 billion of excess cash. So could you talk about why that happened? Were there any mechanical limits on buybacks or where you locked out of the market? And then of that $3 billion in excess cash that you have now, do you have any sort of internal targets on -- you look to pay down maybe $1 billion or $2 billion of that in 2024?

Yeah. Hey Matthew, it's Homer. I mean I think, first of all, we're comfortable with where we are from a cash balance perspective. But we've discussed in the past, we like to stay above $4 billion. We had a very, very strong payout, right, particularly for the quarter, but then also for the year. In terms of paying down, like, for example, we look at debt right on the debt side, we proactively look at our portfolio. Through liability management lens. And so given the strength of our balance sheet, we don't really currently have any pressing need to pay down debt with a net debt-to-cap ratio of 18%. But it's an ongoing evaluation, and it's something that we look at.

And just to clarify, you said your minimum cash balance is now $4 billion.

We like to stay above $4 billion.

Yeah. And so we changed that. I don't know, it's a couple of years. We're really coming out of COVID. Going into COVID, we'd taken the strategy trying to push it all the way down to two. And found going into COVID our experience was that was probably too low. So we've decided to bring on go ahead and look at our minimum closer to four. Good thing about being a four now versus two before we actually do earn a return on that cash before it was zero. So -- but that's really due to our experience as we went through COVID.

Okay. That’s helpful. Thank you.

Thank you. This brings us to the end of the question-and-answer session. I would like to turn it back over to Mr. Bhullar for closing comments.

Thanks, Donna. So that concludes our opening remarks. I'm sorry, that's -- if you guys have any follow-up questions, obviously, feel free to ping us being the IR team. Thanks again for joining us, and have a wonderful week.

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