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Eric Fisher; Senior Vice President, Product Sourcing, Trading & Wholesale; Valero Energy Company
Gary K. Simmons; Executive Vice President and Director of Operations; Valero Energy Company
Greg Bram; Senior Vice President, Supply Chain Optimization; Valero Energy Company
Homero Bhullar; Vice President of International Relations and Finance; Valero Energy Company
Jason W. Fraser; executive vice president and chief financial officer; Valero Energy Company
R. Lane Riggs; CEO, President and Director; Valero Energy Company
Douglas George Blyth Leggate; MD and Head of U. S. Oil & Gas Stock ResearchU. S. Citizenship and Drug BofA Securities, Research Division
Jason Daniel Gabelman; Director & Analyst; T. D. Cowen, Research Division
John Macalister Royall; Analyst; JPMorgan Chase
José Gregorio Laetsch; Research Associate; Morgan Stanley, Research Division
Manav Gupta; Analyst; UBS Investment Bank, Research Division
Matthew Robert Lovseth Blair; MD Research in Refineries, Chemicals and Renewable Fuels; Tudor, Pickering, Holt
Neil Singhvi Mehta; Vice President and Integrated Analyst of Petroleum and Refining; Goldman Sachs Group, Inc. , Research Division
Paul Cheng; Analyst; Scotiabank, Global Banking & Markets, Research Division
Paul Benedict Sankey; Senior Analyst; Sankey Research LLC
Roger David Leer; MD and Senior Equity Research Analyst; Wells Fargo Securities, LLC, Research Division
Ryan M. Todd; MD and Senior Research Analyst; Piper Sandler
Sam Jeffrey Margolin; MD of Equity Research & Senior Analyst; Wolfe Research, LLC
Teresa Chen; Research Analyst; Barclays Bank PLC, Research Division
Operator
Greetings and welcome to Valero Energy Corp. ‘s fourth-quarter 2023 earnings conference call. (Operator Instructions) As a reminder, this convention is being taped lately. Now I’m excited to introduce you to your host, Homer Bhullar, Vice President of Investor Relations. and Finance. Thank you. You can get started.
Homero Bhullar
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.
R. Lane Riggs
Thanks Homer and hello everyone. We are pleased to report strong monetary effects for the fourth quarter and the full year. Excluding our 2022 effects, in 2023 we posted the highest fourth-quarter and full-year adjusted earnings in corporate history, demonstrating the earnings strength of our portfolio. Our refining formula achieved 97. 4% mechanical availability in 2023, which is the most productive to date. We also set a record for environmental compliance and matched our previous record for procedural safety, illustrating the benefits of our long-standing commitment to safe, reliable and environmentally friendly compliance. Now, through the biological expansion of our wholesale formula, we have set an annual sales volume record in 2023 at approximately 1 million barrels per day, demonstrating the strength of our wholesale and brand marketing network. We continue to pursue strategic assignments that enhance the profitability of our business and expand our long-term competitive advantage. The DGD, Sustainable Aviation Fuel, or SAF, assignment at Port Arthur is on schedule and is expected to be completed in the first quarter of 2025 with a total cost of $315 million, part of which is attributable to Valero . With the final touch of this assignment, DGD is expected to become one of the largest SAF brands in the world. Additionally, we seek shorter monetary cycle allocations that optimize and capitalize on margin opportunities around our existing refining assets. Financially, we continue to meet our commitments to our consistent shareholders. We returned 73% of adjusted net cash provided through consistent liquidation activities to shareholders in the form of dividends and percentage buybacks in the fourth quarter, resulting in a 60% payout ratio for 2023, and last week , our board of directors approved a 5% accumulation in the quarterly monetary dividend. Looking ahead, we expect refining margins to continue to be supported by close balances between product source and demand. In the near term, product inventories ahead of the summer season are expected to be limited by strong recovery activity across the industry in the first quarter, which will help refinery margins. In the long term, we will be waiting for a global call for expansion that exceeds the products provided despite the commissioning of new refineries. In conclusion, our team’s undeniable strategy of pursuing excellence in consistent operations, form-driven field in expansion allocations and a demonstrated commitment to achieving consistent shareholder returns have fueled our fortunes and smart positions. We are smart for the future. With that said, Homer, I’ll call you again.
Homero Bhullar
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 operating income for the fourth quarter of 2023 compared to $7 million for the fourth quarter of 2022. Adjusted operating income was $205 million for the fourth quarter of 2023 compared to $69 million for the fourth quarter of 2022. Ethanol production volumes averaged 4.5 million gallons per day in the fourth quarter of 2023, which was 448,000 gallons per day higher than the fourth quarter of 2022. Adjusted operating income was higher than the fourth quarter of 2022, primarily as a result of higher production volumes and lower corn prices in the fourth quarter of 2023. For the fourth quarter of 2023, G&A expenses were $295 million, and net interest expense was $149 million.G&A expenses were $998 million in 2023. Depreciation and amortization expense was $690 million and income tax expense was $331 million for the fourth quarter of 2023. The effective tax rate was 22% for 2023. Net cash provided by operating activities was $1.2 billion in the fourth quarter of 2023. Included in this amount was a $631 million unfavorable impact from working capital and $65 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD. Excluding these items, adjusted net cash provided by operating activities was $1.8 billion in the fourth quarter of 2023.Net cash provided by operating activities in 2023 was $9.2 billion. Included in this amount was a $2.3 billion unfavorable impact from working capital and $512 million of adjusted net cash provided by operating activities associated with the other joint venture members share of DGD. Excluding these items, adjusted net cash provided by operating activities in 2023 was $11 billion. Regarding investing activities, we made $540 million of capital investments in the fourth quarter of 2023, of which $460 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance and the balance was for growing the business.Excluding capital investments attributable to the other joint venture member share of DGD, capital investments attributable to Valero were $506 million in the fourth quarter of 2023 and $1.8 billion for 2023.Moving to financing activities. We returned $1.3 billion to our stockholders in the fourth quarter of 2023 of which $346 million was paid as dividends and $966 million was for the purchase of approximately 7.5 million shares of common stock, resulting in a payout ratio of 73% for the quarter. As Lane mentioned, this results in a payout ratio of 60% for the year. Through share repurchases, we reduced our share count by approximately 11% in 2023 and by 19% since year-end 2021. With respect to our balance sheet, we ended the quarter with $9.2 billion of total debt, $2.3 billion of finance lease obligations and $5.4 billion of cash and cash equivalents.The debt-to-capitalization ratio, net of cash and cash equivalents was 18% as of December 31, 2023. And we ended the quarter well capitalized with $5.3 billion of available liquidity, excluding cash.Turning to guidance. We expect capital investments attributable to Valero for 2024 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance and joint venture investments. About $1.6 billion of that is allocated to sustaining the business and the balance to growth with approximately half of the growth capital towards our low carbon fuel businesses and half towards refining projects.Our low carbon fuels growth capital is primarily for the SAF project. Our refining growth projects aim to increase our crude flexibility in the Gulf Coast extract more value out of some of our conversion unit capacity, improve our access to some key product markets and improve our logistics into or out of our refineries. All of these projects meet or exceed our minimum return threshold of 25% after-tax IRR.For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.52 million to 1.57 million barrels per day which includes turnaround work on the legacy coker at our Port Arthur refinery, Mid-Continent at 415,000 to 435,000 barrels per day, west Coast at 235,000 to 255,000 barrels per day, and North Atlantic at 435,000 to 455,000 barrels per day.We expect refining cash operating expenses in the first quarter to be approximately $5.10 per barrel, reflecting lower throughput due to turnaround activity across our system. With respect to the renewable diesel segment, we expect sales volumes to be approximately 1.2 billion gallons in 2024. Operating expenses in 2024 should be $0.45 per gallon, which includes $0.18 per gallon for noncash costs such as depreciation and amortization.Our ethanol segment is expected to produce 4.5 million gallons per day in the first quarter. Operating expenses should average $0.37 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization. For the first quarter, net interest expense should be about $150 million, and total depreciation and amortization expense should be approximately $700 million. For 2024, we expect G&A expenses to be approximately $975 million.That concludes our opening remarks. Before we open the call to questions, please 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 to ensure other callers have time to ask their questions.
Operator
(Operator Instructions) Our first query comes from John Royall of JPMorgan.
John Macalister Royall
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?
Gary Simmons
Of course. This is Gary. I think several things contributed to this. A slight increase in production was seen in Western Canada in the fourth quarter. We are seeing some more Venezuelan barrels arrive on the US Gulf Coast. So a little more source on the market. But probably the most important thing is that at the end of the fourth quarter and at the beginning of this quarter, the effect of the changes in the decrease in demand for some of them, specifically barrels, will begin to be seen. heavy and acidic. In addition to those things, there was the typical seasonality of high-sulfur fuel oil, but the decline in demand for high-sulfur fuel oil for power generation also affected the deep discounts on acidic Array products. So we believe that in the first quarter, thanks to the refiners During the maintenance season, you’ll still see a little bit deeper discounts on the fatty acids, but then you’ll start to see them coming in and really, for any significant effect, on the lasting effect. Due to quality differences, we want more OPEC production on the market. Array If you look at the consultants’ forecasts, it seems that this will probably occur in the third quarter of this year.
John Macalister Royall
And then my current question has to do with repayment of the principal. So, their figure for the quarter was very strong and they ended the year with 60% of the CFO. I know you talked about how you have a tendency to overlook the diversity when the cracks are strong. If ’24 ends up being more of a mid-cycle year or even less, how do we think about where you might be in that 40-50% diversity this year?
Jason Fraser
This is Jason. And I’ve got a bit of a cold. And if I talk too much, I’ll go into a coughing fit, so I’m going to ask Homer to respond.
Homero Bhullar
Yes, John, I mean, our strategy for shareholder return is based on our annual target of 40% to 50% of adjusted net operating money. And obviously, that includes the dividend, which we’re not discretionary for, and buybacks, which are noted as the flywheel that complements our dividend to achieve our goal. And given the strength of our balance sheet in the fourth quarter, as we noted, we received a 73% payout, resulting in a 60% payout for the year. . And as you mentioned, since 2014, we’ve been paying above our target in a normal way. And in fact, the average payment over the five years before COVID was around 57%. So I think in short periods and where the balance sheet is strong like it is now and maintaining CapEx, dividends and strategic CapEx are hedged. Preferably, you can consider our 40-50% target as a baseline and expect the excess money to be spent on refunds.
Operator
Next up is Theresa Chen from Barclays.
Teresa Chen
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 if not fully running and what you’re also seeing in terms of demand across your footprint, please?
Gary K. Simmons
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 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 some of the 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 seeing much stronger European demand with the colder weather hitting there.We believe the diesel cracks continue to get support from increased jet demand. As kerosene gets pulled out of the diesel pool as we continue to recover from COVID. Jet demand last year was still down about 10.5% from pre-COVID levels. Most forecasts show us closing about half that gap this year. And then expectations for a little better for diesel demand with slightly colder weather and freight picking back up as well.So overall, back to your question on new capacity, it looks like to us somewhere about 1.5 million barrels a day of new capacity coming online, year-over-year growth in demand looks to be slightly over 1 million barrels a day. So supply/demand balances are really fairly close to what we saw last year. The question really becomes timing of when that new capacity comes on. Our view is that it will take longer for those new refineries to start up and you don’t really see an impact on supply until later in the year. And if that holds, then you have relatively tight supply-demand balances was really the only difference being we’re starting from a different inventory position, as you’ve already mentioned.In our mind on that, we do expect to see inventory draws over the next several weeks. The cold weather had some impact on refinery operations, and then you’ll start to get into turnaround season, which we would expect total light product inventory to begin to draw.
Teresa Chen
Thank you for the detailed reply. And then, maybe in the U. S. , what’s your take on the divergence of product margins between regions?What do you think is causing the faint fissures in the Mid-Con references, especially assuming it’s the Gulf Coast fortress?
Gary Simmons
So, historically, we’ve noticed that Mid-Con is a short product in the summer and a long product in the winter. And I think we’re seeing that this year the market is just long and, in particular, the weather has a tendency to affect this region more, so we’re seeing a drop in demand in that region. But I believe that once the weather starts to improve and the driving season resumes, the Middle Continent will recover. The same is true on the West Coast, weather patterns have tended to affect demand on the West Coast. Therefore, we have noticed that this market is a bit weaker than what is normally seen at this time of year.
Operator
The next one comes from Neil Mehta of Goldman Sachs.
Neil Singhvi Mehta
Yes. Congratulations on the perfect results. And one of the things that caught our attention is that the catch rates are still very good. And I recognize that component has to do with operational performance, but part of that is advertising and Lane. I know there are sensitivities about that, but a lot of your competition spends a lot of time talking about what they’re doing on the business side. So be curious if you can express anything about how you’re optimizing what is still a very dynamic environment.
R. Lane Riggs
Neil, that’s Lane. So I’m not going. . . I’m going to start by saying thank you. And I will say that I wouldn’t include our sales team in any other team in the industry. We’ve talked about this in the past. Everyone in our company perceives the position they occupy. I think some. . . I’ve been an organization where it’s not really clear and there can be a lot of interference, probably between the source chain. Not so with Valero. Everyone has a role to play and knows how to do it well. Fine-tuning, focusing on reliability and on operating envelopes and expenses, our P
Neil Singhvi Mehta
Sí. No, it shows. Then, the follow-up over the North Atlantic. It’s strong this quarter relative to the benchmark. The benchmark, I think, $16, and the learned gross margin well above that. So I’m just curious if there’s anything I’d say in Montreal or the UK that motivated the force there?
Greg Bram
I noticed an improvement in rough diamond prices in this region, mainly in Canada, where you noticed it more than in Pembroke. And then he talked about the margins of the industry. They were also very strong during the quarter in this region. And then, some of the compliance prices for the systems there were lower than those seen in previous periods. And all of those things have combined to increase the catch rate in the North Atlantic. .
Gary Simmons
Well, I’ll just upload that Syncrude is trading at $7 below Brent. And a relief for Brent with a highly distilled crude oil is a real credit to our systems.
Operator
Next up is Doug Leggate of Bank of America.
Douglas George Blyth Leggate
I don’t know who needs to answer that question, Lane, but I’d like to ask an apparent question about the disruption of shipments and what that means, maybe not for Valero in particular, but from a more macro point of view, what does the evolving scenario look like with the Red Sea raising rates for blank tankers, etc. What effect does this have on the movement of products and the implications for a formula that is more reliant on imports than ever before, at least since I’ve covered?this sector?
Gary Simmons
Yes, we don’t actually produce rough diamonds in that region, so it hasn’t really had any effect on us in terms of rough supply, but the biggest effect, specifically in the crude oil sector, has been freight rates. We had an era when crude oil could be exported from the US Gulf Coast to northwest Europe in the low $2 per barrel range, which rose to $6 per barrel. And that is shown in Brent-WTI. Probably for our system, it is a merit because it gives us a raw merit over our global competitors.
Douglas George Blyth Leggate
It is ok. I realize it’s a little hard to quantify, so we’ll keep watching, but thank you for that answer. Lane, my follow-up is for you or maybe Jason, given that it’s cold, still 40% to 50%. % payout, it looks like at least based on our numbers, you can keep payout at a higher level, especially now that you’ve reformulated your $2 billion CapEx plan. So I’m just curious what the resistance is. To some sort of reboot of that fork that your formula is obviously capable of supporting in terms of payout?
R. Lane Riggs
I’ll leave it to Homer.
Homer Bhullar
Doug, I mean, I think our — 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.
Operator
Next up is Manav Gupta of UBS.
Manav Gupta
So I wanted to ask about the renewable diesel side. DGD capture has fallen to around 49%. And now Homer has done a smart job of explaining to the market how the delay works. So if we add that lag effect and that $0. 64, the actual capture would have reached something like 93%, so when we look beyond Q4, the margin has increased significantly. And if we assume 80-90% capture, not taking into account the delay, would that mean that the first quarter in terms of margin on renewable diesel would be much higher than the fourth quarter earnings?
Eric Fisher
It’s Eric, and I would just say yes. Yes, he’s very smart. Yes, we see much of the same curve that you described. And indeed, the shift to renewable diesel for Valero is as follows: with the first full year of operation of DGD3, we are a much larger percentage of foreign raw materials and this supply chain is naturally longer. Thus, raw materials with higher heat content and lower IC come from foreign imports. And I think that creates this longer delay than we’ve traditionally noticed at DGD. So I think your analysis is correct.
Manav Gupta
Just a little follow up, last year we had an unusually warm winter. Now, when we look at this first quarter, as you mentioned, the industry is experiencing a bigger recovery than last year, and so you may have much colder weather, as we’re all seeing. So the year-over-year comparison for the first quarter, again, may be higher than last year. I’m just looking to see the dynamics compared to last year compared to this year in terms of heating oil demand.
Gary K. Simmons
Yes, that’s how we see it. The big difference between last year and this year is that we had the winter typhoon at the beginning of last year’s quarter, which destroyed refining capacity, which in a way led to a significant restart of stocks. That wasn’t the case this year, but in our view we’ll see a more unconvincing scenario as we head into February and March with recovery activity and slightly cooler weather.
R. Lane Riggs
It’s January. He doesn’t have blood yet. That leaves the cold weather plaguing the Gulf Coast.
Operator
Next up is Sam Margolin of Wolfe Research.
Sam Jeffrey Margolin
I had a query about the gas market. I think the catch rate in the fourth quarter would have possibly benefited from the butane economy. And that, as a result, if there was a strong incentive to combine the highest possible quality of winter, there would arguably have been little incentive to manufacture and buy summer varieties. And there’s a giant amount of NGL source that ends up in the stocks of other categories. So I need to know if it makes sense to think about this, as we enter the driving season, if overall gas inventories are perhaps overestimated, given the amount of butane in that number.
Gary Simmons
Yes. Certainly, in our system, if we look at the cost of generating summer gas, it is surely not successful to produce summer gas and store it. I think the only other people who could just buy barrels would be the high octane ones and are just speculating that the octane is going to go up. But in fact we believe that the barrels that are in the garage today are largely winter grade.
Sam Jeffrey Margolin
My current non-follow-up query is about SAF. I’m just wondering how this market will fare commercially as we get closer to the SAF unit. I think some other people think that the SAF market could just take on long-term contractual and additional cost characteristics because airlines have levers to achieve that are somewhat outside the political regime, however, I would like you to think about how SAF develops commercially as it gets closer to production. .
Eric Fisher
Yes, Sam, I think you said it right. We continue to engage with all airlines and carriers. Many of its models will be based more on a voluntary approach, on a kind of jet-plus, which will reach consumers who need to offset their carbon footprint through their budgets. . So we continue to have a lot of those conversations. I think we’re about to sign several contracts with airlines before the first production of our project, so it’s progressing very, very well. So, we don’t think we’re going to have any challenges in cutting the entire volume of this project.
Operator
The following is from Paul Sankey of Sankey Research.
Pablo Benoit Sankey
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 that 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 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?
Gary Simmons
It is ok. I think the drone attack that took place last night probably had the biggest effect on the market so far, because you’ve noticed a reaction in the naphtha market that refineries supply a lot of naphtha to the Far East, so there’s a concern that this flow will go away. As a result, the market position for naphtha has hardened. I think distillates are starting to pass on. And what we’re seeing is that as refineries have run into problems, they’re struggling to get the help from the West that they used to get, even for things like spare portions and that sort of thing. So we’re seeing that the distillate is possibly starting to decline a little bit because of those issues. The central component of the consultation was?
Pablo Benoit Sankey
Venezuela is reaping benefits from this.
Gary Simmons
Venezuela agreed. Yes, we continue to increase our volume of Venezuelan crude. I think the lifting of sanctions, rather than the increase in volume in our system, has probably had a greater effect on prices. So we saw a little bit more price in the fourth quarter of the Venezuelan barrels that we’re extracting as a result of additional relief in some of the sanctions that they’re applying to Venezuela.
Paul Benedict Sankey
Is Mexico’s refinery working?
Gary Simmons
Yes, so we don’t see any effect right now from Mexican refiners. When we talk about the source of crude oil, we say that we might see some reduction in our source of Maya, but that hasn’t affected us yet. . And we still don’t see any delta on the product side of the company.
Pablo Benoit Sankey
And I guess that would affect Nigeria as well, right?
Gary Simmons
Yes, same thing. We believe it will take some time for this refinery to get up and running. It’s just a giant refinery that will be simple to get up and running.
Pablo Benoit Sankey
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 dismayed policies there, I’ll leave it there.
R. Lane Riggs
Yeah. I mean, Joe’s been pretty consistent as a control team, we’ve been pretty consistent. We take a look at everything that hits the market. I think structurally our view is whether it’s the policies in Europe, Canada and the United States in terms of the preference to retreat away from fossil fuels, the difficulty of that and the difficulty of making investments, we kind of see the fuels for the transportation are structurally scarce. So we look at that angle when we look at the assets that are presented. We also started in the 2000s, we were the largest consolidator in the sector. We know what it takes to get there and we are very smart at it. And so our eyes widen when we look at all those assets and they come up and we see the overhead charge and we compare it to biological expansion and we compare it to inventory buyback. And so everything goes along the same line. frame. We love our asset base. Obviously, California is a difficult position to operate in and most likely will become even more so. That’s all I need to say about this part. But what I must also say is that we do not look at everything and we continue to look at the refineries as well.
Operator
Next up is from Wells Fargo’s Roger Read.
Roger David Read
Sí. Me would you like to move on, Gary, with you on summer gas?I know you said there’s not much in stock. But what do incentives look like right now?Or are we so close to conversion in March that gas seasonality is already set that way?I’m just looking to perceive what: how the market is going to differentiate between heavy maintenance and existing road situations. walk?
Gary Simmons
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 experts. 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.
Roger David Read
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 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.
Eric Fisher
Yes. I would say that when it comes to the prospects for renewable diesel, it is difficult to expect exactly how it will evolve, because there is more capacity online and in constant credit banks for RIN and LCFS, which would naturally imply that the price of those credits deserve to decrease. additional capacity, which would reduce R&D margins. That said, we also see raw curtain costs continuing to decline, whether for waste oils or vegetable oils. So we end up with the fact that used oils will always have, structurally, a lower IQ merit compared to vegetable oil. Therefore, even if vegetable oils last a long time, they still will not be competitive with used oils in fulfillment markets. So this gets back to the core of DGD’s business: being a manufacturer of cheap used oil with access to markets outside of California. Therefore, we continue to think that we will have competitive merit, both from an OpEx and a commodity perspective. But overall, I would say we expect credit costs to continue to decline. And it’s a question of how commodity prices will hold up. And then, and the last thing, in addition to diversifying sales outside of California, is clearly related to our project, we are going to diversify into SAF, which is part of our products. outdoors in this DR market. Hence, these two elements make us the most competitive and worthy platform in terms of R&D, even in a tight market.
Roger David Read
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?
Eric Fisher
Yes, it would be fair to say that the maximum of this is still a merit of CI in used oils over vegetable oils.
Operator
The next question is coming from Ryan Todd of Piper Sandler.
Ryan Todd
Maybe a query on recovery activity. It seems heavy in the first quarter. Does this imply what we should expect, which is a higher overall maintenance point for you in 2024, just upstream? And then maybe you have some insights into what you’re looking at for the industry. general maintenance activity this year. Should we expect it to be another difficult year?
Greg Bram
Ryan, I’m Greg. Normally, we don’t communicate our overall recovery plans. According to the forecast, you can see smart activity for us in the first quarter. I think as we move through the rest of the year, we’re going through being communicating about the times as we get closer. I think from an industry perspective, we’re seeing a number of recovery activities across the industry in the first quarter. Going back to Gary’s point, it looks like it’s going to be a tough season for the industry in general, largely on the Gulf Coast and especially there.
Gary K. Simmons
The only other thing we can upload is that while you can see the flow indications, we don’t really expect it to have an effect on our catch rates.
Ryan Todd
And then maybe just a follow-up inquiry on capital expenditures and expansion capital expenditures. I appreciate, Homer, that you’ve given some main points about some of the things that compete for the percentage of expansion capital in your budget. I mean, most of his large-scale paintings are recently finished or he has the SAF project, which is rarely that big. But as we look at the horizon, are there any other significant environmental or regulatory projects. . . Do we deserve to be on the lookout for over the next few years that could attract more capital?Or what kinds of things are going on? Or we deserve to expect more from those kinds of small, net-revenue-driven projects in the refining sector. In the next few years?
R. Lane Riggs
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 spend $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 — 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 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.
Operator
The next question is coming from Paul Cheng of Scotiabank.
Pablo Cheng
I just don’t know if it will be Lane or Gary. If we take a look at last year’s octane score, it was very strong. If this year, I think many other people expect it, because after last year, the expansion rate of global gas demand will probably slow down, China is definitely slowing down. And I think the United States might even revel in a structural decline. If that’s the case, what do you think landing at the octane point will mean? What if – what will that do or what kind of effect will there be on your bottom line? That’s the first question.
Gary Simmons
Okay. Yes. 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 naphtha yield coming on to the market. And with pet chem demand being somewhat down, that incremental barrel of naphtha 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 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?
Greg Bram
Yes, I agree.
Paul Cheng
And Gary, are you on loan or on octane equilibrium?
Gary Simmons
I’d say we’re pretty balanced in terms of octane. We’ve been in naphtha for a long time, so you can still octate that way. But overall, octane, I’d say pretty balanced.
Paul Cheng
And Gary and Greg, they have a marketing operation in Mexico and the Caribbean. In Mexico, do you have an idea of the demand?
Gary Simmons
So our business there continues to grow very, very well. Year-over-year, our volumes increased 16% in Mexico. We now have 250 logo locations, which is the fastest growing logo in Mexico. I think that the big replacement for this year is in the second quarter of this year, we anticipate that the terminal that we will use in the north of Mexico and that Altamira will start operating, this will allow us to be more competitive in this region, which is what we expect. Then we will be ready to continue the expansion we have experienced.
Paul Cheng
What happens outside of your business, but the market as a whole?Do you see that the gas market in Mexico is growing or maybe it’s a slight decline?
Gary K. Simmons
So we think Mexico pretty much went back to pre-COVID-19 degrees last year. And we expect you to see a smart expansion in the gas market in Mexico.
Operator
The next question is coming from Joe Laetsch of Morgan Stanley.
Joseph Grégory Laetsch
So I wanted to start by going back to a point from the past: you talked about the cold weather on the Gulf Coast over the last few weeks. Have there been any significant effects on operations or disruptions to production and production costs that we are seeing? In the first quarter?
Gary K. Simmons
No, I would say we’ve had some small operational issues, boiler failures, heating failures, but nothing that can have a significant effect on the quarter and we still feel that the flow indications that we’ve given hold up. .
Joseph Gregory Laetsch
Great. 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?
Eric Fisher
I think we kept the target at $1. 2 billion. We have some cap adjustments this year. And obviously, when we switch to SAF, there’s going to be an upgrade in capacity because we want the unit to run a little bit harder in that mode. So we don’t know exactly what that capacity will look like until we get the Assignment in the room and get started. So I think during this time next year, we’re going to get an idea of what our capacity forecast is going to be, whether it’s up or down.
Operator
Next up comes from TD Cowen’s Jason Gabelman.
Jason Daniel Gabelman
I think the market has become less focused on that metric in the last few years, given the strength of margins, but maybe it’s becoming a little more vital because margins can be normalized here to some extent. . And in their system, I think in ancient times, refining operating expenses were $3. 50 per barrel. This year, I think, they were at around $4. 50 million a barrel in a Henry Hub with a similar value to the old grades. I’m just wondering what drove those higher operating expenses this year compared to pre-COVID levels and do you expect them to stay at that higher rate or come back down?
Greg Bram
Jason, I’m Greg. So, one of the things that’s probably most notable when you think about this era is the costs of electric power, so not so much natural gas, but on the electric side of things. In operation, electricity costs, especially in summer, are much higher than in the past. That’s part of the problem. The other facet of thinking about this era would also be more recent: some inflationary stress on costs, and we’ve talked about this several times before. This turns out to be a relaxation. So, it’s anything that we’re running to take care of our suppliers and the other people that we’ve worked with.
R. Lane Riggs
Hi Jason, here’s Lane. I’ll tell you the guide to lower charges and we’re applying it like you can’t imagine. You want to know that as an organization, we are committed to ensuring that we are best-in-class. when it comes to spending.
Jason Daniel Gabelman
Sí. No, we’re sure for sure. Do we expect to get back below $4 or is it this kind of $4. 50 diversity that we’re thinking about in the future?
R. Lane Riggs
Let’s take a look at the numbers. I’m referring to the component of the other thing that drives that in your viaput, viaput, even though we have what we would call variable and constant charges, we run through our expenses, the maximum of the refining expenses are in the large component 6. So, the more barrels we mine, the higher the metric operation. So, it should be the most productive time of the year to look at this and perceive that it’s the third quarter, essentially. That’s when you see the system. Normally, if we get the signal to perform at its best, the online stuff and charging structures are where they are. So, this is the peak productive time to perceive where the system’s core operating expenses are.
Jason Daniel Gabelman
My other query has to do with capital expenditures in terms of refining growth, and you discussed a number of projects that appear to be quick-impact projects that remove their functionality barriers. Is there a way to frame those projects in combination in terms of perspectives?”Improvement to capture and regardless of the solid margin environment, would you compare that or any kind of way that you can frame the potential advantages of those projects?Or is it just a matter of keeping the catch solid and allowing the flexibility to keep the catch solid?
R. Lane Riggs
Yes. 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 and our gating 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 — and that we’ve — like I said earlier, we nominally, at least 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.
Operator
The next question is coming from Matthew Blair of Tudor, Pickering, Holt.
Matthew Robert Lovseth Blair
Thanks for the previous comment about the light and heavy. Valero manages about two hundred WCS per day in Houston on its Gulf Coast system. And is there a threat to this availability with the upcoming release of TMX?
Gary Simmons
So, our Canadian volume range depends on the total of heavy products, we’re probably 600,000 barrels per day, Greg, right?500,000 to 600,000 barrels per day, and we have the ability to optimize between the Mexican supply, that is, the direct supply. Our take on TMX is that the Gulf Coast barrels will come from Western Canada. It’s actually going to have the effect of reducing exports from the U. S. Gulf Coast, and we don’t really think our Gulf Coast network will be particularly impacted through TMX.
Matthew Robert Lovseth Blair
And then I had another question about returns on capital. So, considering that Q4 refunds were quite large, the 73% payout rate is obviously impressive. We found that it was desirable for their money balance to increase year-over-year in 2023. And I would say you started the year with maybe $2 billion of excess money and ended the year with maybe $3 billion of excess money. Are you talking about why this happened? Were there mechanical limits on acquisitions or were you excluded from the market?And then, of the $3 billion in excess money that you have right now, do you have any internal goals that you plan to pay, maybe $1 billion or $2?billion by 2024?
Homero Bhullar
I mean, I think, first of all, we’re comfortable with our position from the point of view of monetary equilibrium. But we’ve discussed this in the past, we like to stay above $4 billion. He got a very, very gigantic payout, both for the quarter and for the year. In terms of repayment, for example, we look at debt directly from the debt side, we proactively look at our portfolio from a liability control perspective. And that’s why, given the strength of our balance sheet, we don’t currently have a real pressing need to repay our debt with an 18% net debt-to-capitalization ratio. But it’s an ongoing evaluation, and it’s anything we can do. they’re in.
Matthew Robert Lovseth Blair
And just to clarify, you said your minimum cash balance is now $4 billion?
Homero Bhullar
We’d like to be above $4 billion.
R. Lane Riggs
Yes. 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 $2 billion. And found going into COVID that our experience was that was probably too low. So we’ve decided to bring it on and go ahead and look at our minimum closer to $4 billion. Good thing about being a $4 billion now versus $2 billion before is 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.
Operator
THANK YOU. This brings us to the end of the answering session. I would like to give way to Mr. Bhullar to make his closing remarks.
Homero Bhullar
Thank you, Donna. That concludes our opening remarks. Sorry, it is: if you have any follow-up questions, please feel free to send us a contact message, reach out to the IR team. Thank you again for joining us and have a glorious week.
Operator
Ladies and gentlemen, thank you for your participation and interest in Valero. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.