Valero Energy Corporation (VLO) Q4 2012 Earnings Report, Transcript and Summary

Welcome to the Valero Energy Corporation Reports 2012 Fourth Quarter and Annual Earnings Conference Call. My name is Trish, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Ashley Smith. Please go ahead.

Thank you, Trish, and good morning and welcome to our earnings conference call today. With me are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Joe Gorder, President and COO; Gene Edwards, our Chief Development Officer; Kim Bowers, President of Retail and several other members of our senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at valero.com. Also, attached to the earnings release are tables that provide additional financial information on our business segments. If you have any questions after reviewing these tables, please feel free to contact me after the call. Before we get started, I would like to direct your attention to the forward-looking statements disclaimer contained in the press release. In summary it says that statements in the press release and on this conference call that state the Company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC. Okay, so as noted in the release, we reported fourth quarter 2012 earnings up $1 billion, or $1.82 per share. This includes a non-cash asset impairment loss of $37 million after taxes, or $0.06 per share, which is primarily related to permanently canceled capital projects at certain of our refineries. This is our highest forward curve quarter earnings per share since 2005. For the full-year 2012, net income attributable to Valero stockholders was $2.1 billion, or $3.75 per share. Included in these results were non-cash asset impairment losses of $983 million after taxes, or $1.77 per share, and severance expense of $41 million…

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Jeff Dietert from Simmons. Please go ahead. Jeff Dietert – Simmons & Co: Good morning.

Good morning, Jeff. Jeff Dietert – Simmons & Co: You guys had a strong quarter throughputs for better than expected cash operating costs lower, but I wanted to focus on gross margin in the Gulf Coast. I assume that feedstock advantages probably flow through and contributed to a very strong margin capture. Could you talk about, any one-time events, or talk about how feedstock changes could be sustainable in continuing strong margin capture. Any step function change in U.S. crude, or Canadian crude influence in the fourth quarter?

Jeff, this is Joe, good morning to you too. Yeah, we did well in the Gulf Coast. I mean, if you look at the slate that we ran, we ran more of heavy sour and medium sours in the fourth quarter than we did in the third quarter. So and you actually mentioned during his comments what those discounts look like and they were very strong. We also rail lot more reserves, and while we ran a bit more reserves in the quarter, but we ran reserves with better pricing than we had in the third quarter. A lot of that had to do with the fact that the alluvial production was back on stream. So basically the guys did a just a very good job of optimizing the crude and feedstocks late into the plants. You know, actually in the quarter, we continue to push run more domestic light sweet crude which we were up over, I think 700,000 barrels a day. So all in, if you look at the crude slate, we had discounted crudes coming in really every form. Jeff Dietert – Simmons & Co: How do you see your feedstock changing with the addition of seaway having started up, I think for middle 250 and the Permian pipes coming on late March or April, an incremental rail coming into the market? How do you see those benefiting you in the first quarter and second quarter going forward?

Well, I think clearly we are getting access to more crews, right? And we mentioned I think in the notes that we were a 100% domestic light sweet crude, where we are running sweet crudes in the Gulf, so we back off all of our foreign dollars. And seaway has had an impact Jeff as you know, but they are not running at the rates that have been anticipated, and I think that’s why we see that LLS is still trading at a bit of a premium to brand. I think as you get seaway up to speed and then we’ve got significant additional projects that are going to bring more crude into the Gulf through 2013, you will end up seeing Brent trading at that discount that we are all expecting to LLS going forward, okay. As we run light sweet crudes in lane and Bill can speak to the projects that we are looking at, I think he knows some of those to allow us to run more light sweet crudes, we are going to be in beneficiaries of that. Jeff Dietert – Simmons & Co: Thank you, Joe.

Our next question comes from Doug Leggate from Bank of America. Please go ahead. Doug, your line is open.

Doug, whenever you are ready.

All right. You might have to hop in next. Trish, can you move to our next caller?

Yes. Our next question comes from Evan Calio from Morgan Stanley. Please go ahead. Evan Calio – Morgan Stanley: Hi, good morning, guys, great quarter of today.

Good morning, Evan. Evan Calio – Morgan Stanley: Yeah, just maybe a follow-up on some of those projects, I mean you mentioned fourth quarter placed the important lights with domestics and the Gulf Coast in Memphis, and pursuing several options. So I think I believe you are considering condensate splitter, clearly at Gulf Coast we will see more condensate moving out of the Eagle Ford, Rail was mentioned as an option that would – I think increase in viability if Keystone is delayed or blocked. I mean could you comment just generally on what those projects are because of cost magnitude to mention maybe the logistics spending that will be important as well as that could be put into different structure? And whether any expenses are currently included in that $960 million of strategic 2013 CapEx?

All right. Well, Evan, good morning. We are looking at a lot of real projects. And in the logistics capital, if I look at the logistics capital that we have in the 2013 budget is a lot of it has to do with dock capacity, logistics, sure that we have the ability to export the volumes that we’ve got. We think today, we can put 225,000 barrels a day gasoline on the water and we’re looking at ways to increase that at St. Charles at Port Arthur These all we think we can move to 80 a day and we’re looking at projects to take that up to over 400 barrels a day. So a lot of the capital that we have and the capital forecast is for that. In addition, we announced that we bought the railcars and we’re working projects to figure out where we want to take this crude with these railcars. I mean we certainly have somethings in mind, but we are looking at projects, for example, at St. Charles to rail crude in. We’ve got a project that rail crude into Quebec. We’ve got the two West Coast refinery that we’re looking at rail options for. And then Memphis we think we can rail a significant amount of crude in domestic. So we’re working all those options and the guys are going through the overall logistics strategy for that including potentially additional railcars. So as far as the capital attributed to it, right now we don’t have anything identified above the plan.

Yeah.

So all those things just to clarify, all those things Joe was talking about, I mean those are included in our strategic growth category which is just under $1 billion for 2013. Evan Calio – Morgan Stanley: That's great. And in terms of Memphis, you say that you were, you back at all foreign imports there. So I presume used kind of Capline. What are you running there and what is – how is it getting there and is there any yield pickup from the slight change at Memphis that's improved its profitability?

I'll speak to the crude supply piece and maybe Lane want to talk to the yield improvements. But we are running Bakken, it’s – really still coming up Capline, and so we haven't changed the method of delivery into that refinery right now. We are looking at waterborne deliveries into Memphis going forward. Right now, the economics have supported continue to use Capline.

So this is Lane Riggs. In terms of the quality of Bakken, it’s really normally around LLS, but I would say because LLS historically have been a blended barrel made from a number of different components, Bakken is a neat barrel and it's been much in terms of its ratability and our ability to steady our operations around running it. We are certainly getting the benefit of a more steady crude diet, it’s lighter so it's really its value versus the LLS directly function of what the gas frac is, but normally it's slightly – just today its slightly just kind of a quality basis to LLS. For us though we are getting quite a bit of value just out of the steady operation running Bakken need to our refinery standout to Memphis. Evan Calio – Morgan Stanley: Okay. I'll be there guys. Thank you. Appreciate it.

We have Doug Leggate from Bank of America. Please go ahead. Doug Leggate – Bank of America Merrill Lynch: Hi, can you hear me now guys.

We can. Doug Leggate – Bank of America Merrill Lynch: I apologize. Technical problem. I hope I didn’t get my course of questions taking here. I wanted to follow-up on Jeff’s, if I may real quick and then I’ll got a follow-up. I guess this question is really for Joe, but as you see the light sweet bar increase in terms of volume in the Gulf Coast, what’s happening to the relationship as you see it for heavy crude particularly as it relates to this historical discount to LLS and what I’m really trying to get out is, if you eventually see LLS move to discount to Brent, do you expect the heavy medium sour oils could maintain their relationship with LLS or not with the discount. I’m just curious as to how you see that playing out and then I’ll got a follow-up please.

Well, that’s a good question, Bill and…

So I’ll answer it. The way we actually look at it, we would agree that if LLS goes to a discount of Brent, which we expect to happen, the world crude is still Brent. So heavy crude will sell at a discount, but the discount against LLS will narrow but you’ll still have an acceptable discount against Brent. So going into a sunk coker we think that you’ll have economics to do that but not to build the grass roots coker. Doug Leggate – Bank of America Merrill Lynch: So what’s the logic now of expanding your ability to process light crude if the heavy crude is going to move to the same discount as the light if you would I mean?

Just because of the availability, we’ll see at Keystone actually gets filled. But as you can see in the press today, enterprises having trouble moving the oil, once it gets to Houston. so we have a lot of availability and personally, we’ve said that the discount and I know its different today, okay? The discount LLS against Brent will move to several dollars at least tariffs, but it could move more. And those will be attractive to run that, but it’s read, it’s just so available where the heavy barrels are having to be imported. So now you start to look around and as I said it depends on what have to a Keystone. But as you begin to look around, the Mexican volumes are moving in different directions, you have the Venezuelan volumes moving different directions, you do have increases in Columbia. So we just manage the supply function here and think the light crude is going to be readily available. Doug Leggate – Bank of America Merrill Lynch: Great, nice for the full answer, Bill. My follow-up is probably something that you’ve been asked a lot about recently, but your free cash flow obviously steps up this year. You had made this comment again in your rounding statement about having the competitively highest yield in the sector. Can you just help us understand what was framing that, the scale of ultimately what you think between your dividend policy and buybacks? And I guess you could bring into the answer perhaps shares that you issued in the middle of the crisis in terms of whether or not but I don’t know that would prioritize buybacks over dividend increases and I’ll leave it there. Thanks.

Well, Doug, I think we clearly have demonstrated the management team that we return cash to the shareholders. You go back to 2006, 2007, when we did not have better opportunities, we bought a lot of shares which we did get some criticism for, but actually we didn’t have better projects, so we returned cash to the shareholders. So we’ve demonstrated our ability to return cash to the shareholder. In the last two years, we purchased 27 million shares. We’ve increased our dividend several times. We continue to buy our shares, because we think our shares are undervalued. We do not think the market is giving us credit for this distribution of our retail businesses. But on the other hand, we’re going to maintain our investment grade rating, we think it’s very important for a company of our size. I actually mentioned, we’re paying off about $500 million of debt here in the first half. And with this volatility that we have in the marketplace today, we are going to hold more cash. So a couple of our projects are slightly behind, obviously as we said, we’re a $100 million over from our previous guidance at St. Charles hydrocracker. So we’re going to make sure we finish all that. Then what we tend to do is look at our balanced approach to everything. In our business, this is a very capital intensive long lead time of business. And if we believe that we can add more shareholder value than we can looking at our stock price today, then we make these investments. So we tend to have balance in our approach. You ask about the approximate 50 million shares that we issued in, I guess the second quarter of 2009. And sure, we would like to take those out. And everybody that supported us at that time sure, have a nice return as well. And but it’s not a goal for say, it’s more of our, the stock is undervalued, and we’ll have a balanced approach. Doug Leggate – Bank of America Merrill Lynch: We appreciate the answer Bill, thanks.

Thanks.

Our next question comes from Robert Kessler from Tudor Pickering. Please go ahead. Robert Kessler – Tudor Pickering Holt & Co.: Good morning, guys. I wanted to ask you a little bit more about the dynamics you are seeing along the Gulf Coast and that is, are you getting a widening spread in the East versus West costal price of light, I mean you’re getting a deeper price for light crude to say, Corpus than Houston, and now at seaway a discount – a deeper discount at Houston versus Louisiana. And what do you expect to happen with that East West spread going forward? And then are there any limits to exploiting a lighter spread should want to emerge?

Rob, you’re wrong. I mean your description of the market is what we’re seeing. I mean Corpus crude is trading less than Houston crude, and Houston crude is less than St. James. So where we expect going forward, I think if St. James is going to be Bakken based, it’s always going to price more than Eagle Ford into Corpus or the Mid-Continent crude to Permian crude into Houston.

So I would add to that that as long as these areas are long, so for instance, I’d like to say Corpus Christi is long, Eagle Ford crude thus it has to move, and it’s going to move with the tariff and some timing deltas. So the clearing places St. James now for LLS, so you’re going to have differentials toward Houston and differentials towards St. James. What you have to have the supply demand imbalance in those markets, the minute the market flips to short than the tariff turns around. Robert Kessler – Tudor Pickering Holt & Co.: And then theoretically barge capacity to exploit the spread if one persistent for long enough to want to put money to work in inventory on the water to take advantage of that?

Yeah, I would say, I don’t know if there is enough barge capacity truly.

Well, I think your question is, when you store all along the barge to take advantage or you start make them shipping it. Robert Kessler – Tudor Pickering Holt & Co.: Yeah, I just – to me when you have a spread like that potentially emerge in that, you guys would seem to be as best places anyone to be able to take advantage of it and I just don’t know, is there some limiting factor, I am not thinking of whether it’s loading, unloading along the coast that kind of circumvent would might be in place already in the pipeline side, is there some kind of storage bottleneck. I just want, what could be a limiting factor that I will be thinking of and your ability to displace that dislocation and offset it in your system?

Well, I would assume others are doing what we are doing. We are fixing docks, we are increasing our capability, so if Corpus Christi come, the second quarter we will be able to load a lot more onto water. Lead time for railcars is a year to 18 months, lead time on barges is a year.

Yes.

A year, so I think it just tells you by those lead times that those type of assets are short or tight. Robert Kessler – Tudor Pickering Holt & Co.: Second question from me, when you look at Western Canada Select or bitumen in Canada in general in the spread versus say, Maya in the Gulf, it seems like rail is in no [brainier]? And so you guys ordered a couple of thousand more railcars, some of those will be bit forward moving that crude down. Was about a year turnaround time I think on a new railcar. Why would could that not just accelerate to an exponential degree and where do you see that developing and say, in just overall market, rail lot of Alberta say down in the Gulf Coast and a year or two years time and how much will Valero participate in that?

Well, I think Joe answered you earlier said, we are looking at rail at St. James, St. Charles, so that’s the Louisiana. Robert Kessler – Tudor Pickering Holt & Co.: Yeah.

And so we are doing it. Clearly, we are looking at rail in the Southern California just like all our competitors are as well. So as far as exponential, there is no question rail is growing very rapidly by every single company and part of it is because of the uncertainty surrounding some of the pipelines and a long lead time that seems to be developing. But the supply is there and the market demand is in these refining centers and you would not get any argument from us, or I think any of our competitors since all of us are buying railcars that this is the big part of our future and this business is your logistics capability to move to stress crude oils through your refineries. Robert Kessler – Tudor Pickering Holt & Co.: So if you are in 12 to 18 months time if the market was moving 200,000 to 400,000 barrels a day out of Alberta by rail that wouldn’t surprise you?

I don’t know the numbers I think as well as you do, but it does not surprise me to be a lot of railcars, I just don’t know those kind of numbers. Robert Kessler – Tudor Pickering Holt & Co.: Sure, okay.

Okay, but… Robert Kessler – Tudor Pickering Holt & Co.: Well, thanks for your comment.

But we’re looking at the same thing that I’m sure you here from the other people. Robert Kessler – Tudor Pickering Holt & Co.: Gotcha. Thank you, guys.

Sure, Robert.

Our next question comes from Cory Garcia from Raymond James. Please go ahead. Cory Garcia – Raymond James: Good morning, Klesse.

Good morning, Cory. Cory Garcia – Raymond James: Just kind of one quick question, you guys alluded to in your slide deck regarding your Port Arthur hydrocracker that you’ve been seeing from higher quality diesel and actually some better distilled yields overall. Just wondering how we should kind of think about that today as it normalize back towards your expectations of, I think I want to say, closer to 60%, or have you maintained the high level and really how we sort of get that around in terms of modeling?

Hi, Cory, this is Lane Riggs. Right now what we are doing this test run as Ashley alluded to in his opening remarks. We’re at about 80% distillate yield, that take care of what distillate. Our diesel index, our CT index going off the units about 62 on the diesel, which is much better than we had anticipated, the properties on the (inaudible) grade. So certainly these are great distillate yield and a great product for our products if I figure out where this is safe to market.

So we’ve got new catalyst, so we’ve got high activity...

Right, (inaudible) business.

And we think that this unit will run till we have to replace catalysts.

3 years.

Three years. So there will be some degradation over that period.

That’s right. Cory Garcia – Raymond James: Okay, great. Thank you, guys.

Our next question comes from Roger Read from Wells Fargo. Please go ahead. Roger Read – Wells Fargo Securities: Yeah. Good morning, and again, congratulations on the quarter. You’ve talked a little bit about, just specifically in the quarter, sourcing more heavy oil, can you talk a little bit about where are those mediums and heavies are coming from? I mean, is this incremental Canadian barrels, is it kind of, let’s call it Western Hemisphere, is it some out of Middle East, is it a mix of the above? And then as you’re looking forward, we clearly are going to have more heavy sour capacity coming on globally. I was just curious, is it ultimately we need keystone, we need rail, or is there something else you’re looking at in terms of sourcing those mediums and those heavies?

Okay. The heavy barrels, I mean we’ve got them out of South America and Mexico, okay. And our normal suppliers, we increased our volumes from Venezuela and from Mexico both. I would say that, I would say there was nothing unusual about the sources of supply of these barrels other than the economics associated with running them versus not running them. We are bringing some heavy sour Canadian crudes into Port Arthur, and we’re running that. But we didn’t have any material change in the volumes there. So and then if I step forward to what you’re talking about going forward. we want heavy sour crude in the Gulf Coast. Keystone pipeline is the most economical way for us to do that. We are still fully supportive of the pipeline and we want to see it happen. Second to that, then you look at other alternatives to get heavy sours up and we continue to look at those, as their capacity on Enbridge, their ability to take the crude into Hartford and then barge it down to St. Charles, which we tend to be doing somehow, can we do more of that. And then rail, of course, we don't know exactly what those numbers might be today, but we're looking it. We have – needed railcars and we're looking at the ability to move heavy sour Canadian's to be a rail. So we're looking at all the options there Roger. Roger Read – Wells Fargo Securities: Okay. And the follow-up question looking at the hydrocrackers, obviously we now look at the price of the various products, if I was understood it correctly there is really sensitivity to natural gas as feedstock and power source. Can you walk us through what we should really think about the full quarter contribution in Port Arthur and obviously as we see the ramp up at St. Charles as well. What are the big things we should watch here on the price side to really determine the economics of these.

Yeah, Roger there are several key drivers, natural gas is one of them, diesel is one of them, overall crude is one of them. We've got sensitivities for barrel and the appendix to our standard IR slide deck. To give you a feel for how it’s been running, it's been running at these planned test rates around 50,000 barrels a day. And so far in January where the market has been with low gasoline cracks, but good diesel cracks and pretty cheap natural gas, EBITDA has been up around between $20 and $25 a barrel and we've been running it about 50,000 barrels a day. So it’s been pretty much what we expected. And this is kind of a depressed environment – assume January as full year commodity price debt, but in this environment, it’s been pretty darn good. Roger Read – Wells Fargo Securities: Definitely sounds like it. And then, as we think about moving into the spring time, the gasoline crack typically would react a lot better.

That’s correct. You would have to assume – you would hope you could assume a higher average gasoline crack. As Lane said, it’s nearly 80% distillate right now. The remainder is primarily gasoline or gasoline related components. So as that crack picks up, then you should see overall margins. Roger Read – Wells Fargo Securities: Okay. The original calculations we looked at was more like two thirds, distilling one third kind of gasoline another. So the 80% reflects, again the comments about catalyst overtime, maybe we think two thirds or one third?

Yeah, we’ll see where it shapes out, because as Bill mentioned, the catalyst is highly selective right now which is advantageous, we’ll where it shapes out, but I’m not ready to change the base model for it. Roger Read – Wells Fargo Securities: Okay, great. Thank you.

Our next question comes from Sam Margolin from Dahlman Rose. Please go ahead. Sam Margolin – Dahlman Rose: Good morning, everybody. Thanks for taking the question. I guess a lot of conversation has been around crude, I was a little more curious about product. In general, how have exports looked, is that kind of plateauing obviously there’s been some pretty healthy inventory building in past month or so on the gasoline side. And I was just wondering if there is any trends that stand out to you on the export front, if it’s decelerating or if you anticipate the same kind of growth that we’ve had over the past two years?

Okay. Well, hey Sam, it’s Joe. Sam Margolin – Dahlman Rose: Hey, how are you?

I’m good. You? Sam Margolin – Dahlman Rose: I’m good. Thanks.

Good. Well, in the fourth quarter, we moved out almost 110,000 barrels a day of gasoline with primarily in Latin America and Mexico. And those are pretty high numbers, because typically we are doing 60,000 barrels to 70,000 barrels range. So demand was still very good. Latin America is growing and they continue to have supply issues. Mexico’s demand is growing and they have some supply limitations. So from sustainability perspective, we still think that these export markets are going to be very good. In the first quarter of 2013, from a gasoline perspective, we will probably export less than we did in the fourth quarter and a lot of that has to do with the turnaround activity we got going on in Corpus Christi. If we talk about diesel, diesel inventories unlike gasoline inventories, diesel inventories are low. They are at the low end of the five year range and although U.S. demand for distillate continues to be weak, distillate demand abroad is strong and it continues to grow. In the U.S., I think we exported over 1 million barrels a day. Diesel fuel, that’s up significantly from where it was last year. Valero exported 157,000 barrels a day of diesel fuel in the fourth quarter and we will increase that volume in the first quarter as we’ve got the throughputs of the new hydrocracker. From our perspective, I think everybody else is always a market driven phenomenon and is the yard open or not and if the yard is open to move the barrels to South America or Europe, we will move them and if not we will keep them here at home. Sam Margolin – Dahlman Rose: Okay, thank you. That data was really helpful. And then secondly, on the East Coast, I am sure you saw that was officially announced a plant that came up for sale. Historically, it hasn’t been particularly competitive, but I was just wondering how you guys think of the East Coast as a derivative of your LLS thesis, barge activity might accelerate from the Gulf up to the North Atlanta and if you think that timing wise, it couldn’t make sense to position into that theme a little early.

Well, as far as Valero’s opinion on the East Coast, we exited the East Coast. Sam Margolin – Dahlman Rose: Right.

And so I think as far as a refiner goes, we’re still a supplier, marketer into those markets. So our action speak for themselves. Sam Margolin – Dahlman Rose: Okay. Fair enough. Thanks so much. Have a good one.

Our next question comes from Blake Fernandez from Howard Weil. Please go ahead. Blake Fernandez – Howard Weil: Guys, good morning. Congratulations on the results.

Thanks, Blake. Blake Fernandez – Howard Weil: Have a question for you on the retail spend, presumably the $1.1 billion of cash coming to the parent company, I assume that’s a result of the retail company taking on leverage. just trying to confirm, can you give us an idea of capital structure for the parent company post spin-off?

Well, for the parent for Valero, I mean we’ve just got $7 million worth of debt. We’ll be receiving as we put into release $1.1 billion in cash from the separation. we’ll have about $300 million of tax leakage associated with the separation. And then of course, we are retaining 20% of CST Brands and at some point in the future, I think within 18 months, we’ll dispose. Blake Fernandez – Howard Weil: And Mike, to be clear that 18 months, should that be thought it was slow kind of bleed into the market or is that holded for 18 months and then all at once sell those shares.

We have not determined how we will divest that. We’ll be doing that in the next few months. Blake Fernandez – Howard Weil: Okay, fair enough. The second question was on MLP. I know in the past, you’ve talked about considering that after the retail spin, it sounds like you’ve got a decent amount of capital investment going into the logistics and midstream side of things. Presumably it would make sense to move sooner rather than later just that you have some incremental revenue opportunity and sell that to the market. I’m just curious if you have any thoughts on your appetite of moving forward with an MLP?

It has not changed at all. We have said that we will look at this seriously. We watch what’s happening in the marketplace, and I’m really talking about logistics and [turmoil] here. But really for our organization, the retail spin is occupying many of our people and we need to execute to get this done first. So I haven’t changed what we’re seeing on this subject at all. Blake Fernandez – Howard Weil: Okay. Thanks, Bill.

Our next question comes from Faisel Khan from Citi. Please go ahead. Faisel Khan – Citigroup Inc.: Good morning. It’s Faisel from Citi.

Hey, Faisel. Faisel Khan – Citigroup Inc.: Hey, wondering if you could go back to the crude oil import to the Gulf Coast, particularly the sweet crudes. You talked about how you backed out the foreign imports of sweet crude into the Gulf Coast I believe in the Memphis? In the fourth quarter, what was the impact of backing out those foreign crudes, and what kind of uplift did you get from consuming domestic sweets versus buying foreign born sweets in the fourth quarter?

In Memphis, I mean that was really where this happened right. Lane, you have a good idea on the…

I’m not sure, are we trying to dollar raises…

Yeah, I think he is looking for so…

I guess well, actually the numbers are – we were paying LLS plus $0.50 and now it’s like LLS line of $0.50 – it’s a ballpark of (inaudible). Faisel Khan – Citigroup Inc.: Okay. So…

Okay. The landed cost versus and it depends on when and which because it’s moving all over the place and we have been making this switch over the past year. Faisel Khan – Citigroup Inc.: Okay.

I mean, we were working in foreign industry rivers, we used to bring foreign in the Houston, with foreign in the Memphis, so we have been back in those based on economics, but it could a dollar or a few dollars per barrel economics versus the landed cost of the foreign.

: We are also starting to see where we are reigning in some of the domestic suites into the Houston area and backing up, in terms of dollar, I think I have to check it, but that’s of course, not just more on suite at this point, particularly in that Houston market, we are seeing where we may be displacing some of our crude assets. Faisel Khan – Citigroup Inc.: Right. I guess about looking at the sequential improvement in margin from the third quarter to the fourth quarter, I mean I get that the heavy crude discounts widened out, I get the more discounts widened out, but I am just trying to figure out, did you have purchases of Light Sweet crude, did they beat the benchmarks in the fourth quarter versus the third quarter? Did you purchase them under the benchmark into the Gulf Coast, and Memphis in the fourth quarter versus the third quarter, how was it relatively similar?

: I don’t think there is any change relative to the purchase price of these crudes, and I think you got it right. I think it was heavy sour, medium sour change in the improvement in those discounts, and then the discounts on the residue that really drove the economics. Faisel Khan – Citigroup Inc.: Okay, got you. And was there any…

However, we will be always acting our economics self interest on this. So we switch to a domestic crude, because it was more economic. Faisel Khan – Citigroup Inc.: Okay. And what about the impact of the big Permian discounts we saw in the fourth quarter, would you able to purchase those crudes at discount into the Gulf Coast or were they mostly trapped in that area.

They are mostly trapped. Faisel Khan – Citigroup Inc.: Okay.

Yeah, we do move Permian basin, Midland area crudes up to McKee and Ardmore but we've always done that. Faisel Khan – Citigroup Inc.: Okay, okay. And last question from me. Where there any sort of derivative movements in the quarter, any gains or losses at non-cash directive gains or losses in the quarter?

No.

No. Faisel Khan – Citigroup Inc.: Okay, fair enough, thanks guys. Appreciate it.

Our next question comes from Ed Westlake from Credit Suisse. Please go ahead. Edward G. Westlake – Credit Suisse Securities: Hey, congrats on the numbers, I wish I had the number out there, so you could beat it. Just on a follow-up to a question earlier. You spoke about Corpus trading at discounts to Houston, and then Bakken trading in St. James at a premium. Maybe I appreciate, it’s a moving target, but if it's possible to be a bit specific about say what is the Eagle Ford discount into Corpus, what is the Permian discounts or the seaway blends down into Houston and what is the Bakken discount into St. James say relative in 4Q, say relative to LLS that would be helpful.

Okay. It's relative to LLS and if we keep it just as simple as we can and we have transportation right, okay. There are so many good reports out there now that are addressing this issue then we look at those to, but you've got a couple of dollars of transportation to get the Eagle Ford over to Houston. All right, and then you've got another couple of dollars to get from Houston over to St. James. So theoretically you could argue this Eagle Ford auto trade as an LLS minus $4 over in Corpus and LLS minus $2 in Houston. And then if you look at it relative to WTI and you said what WTI is $3 or so $3.50 to the cost –WTI is going to be, if you took it into the Houston markets, you’re going to – you get it there for $3.5, so it would be a $1.5 over the Eagle Ford and to Houston, and as you took it all the over to St. James you’re $3.50, and so this is the kind of the math we’re working up, we’re doing just kind of the same way, your guys are for saying, okay, what is it going to be if LLS. Bill mentioned it before that St. James will be the clearing point for LLS, and everything is going to trade and it move west to a discount, LLS, and then what next with (inaudible), while you’re going to have it for rent ultimately into the east coast, near the LLS plus $4.50 to $5 a barrel, which is U.S. flag transportation cost to get it up here. Edward G. Westlake – Credit Suisse Securities: Yeah, so that makes a little sense and that’s very helpful, thanks very much. And then I’ve got a chart of LLS, Maya in front of me for what it’s worth, I mean obviously there was a bump up in Q4, and clearly your earning have been benefited from that. Maybe just talk a little bit about market conditions as we come into Q1 in terms of particularly the surprise, but I guess we feel in terms of Mars and Maya benefiting your results more than expected.

Well Maya discounts we’re very good in the fourth quarter, a lot of that has to do with the weakness that we saw in WTS there, despite that discount a bit, and then also we mentioned that the residual fuel markets were weak and so that helped it all. So those residue is still weak today, the WTS discount has come in a bit so those margins have compressed a little bit, but Len and I were talking about it earlier today, I guess we’re seeing medium sours pricing to the Gulf now, basically at a flat price to Light Sweet domestic crudes. Edward G. Westlake – Credit Suisse Securities: Right.

So anyway, we’re still seeing decent discounts on these and you’re seeing pressure on light sweet as more if it gets there. Edward G. Westlake – Credit Suisse Securities: Okay, thanks very much.

Our next question comes from Ann Kohler from Imperial. Please go ahead. Ann Kohler – Imperial Capital: Great. Good morning gentlemen. Just a question certainly regarding some of the projects that you’re working on, and how you’re viewing the permitting issue and being able to move forward with some of those particularly when thinking about the Houston expansion?

So we are very, I think you’re alluding to the greenhouse gas permitting in? Ann Kohler – Imperial Capital: Yes.

Our Houston and our Corpus Christi refinery due to some units that we have shutdown in the last few years, we’re able to support a project that allows to be underneath the greenhouse gas permitting. The fiscal affect the industry I’m sure everybody is looking at this in terms of investment, it may ultimately limit how big some of these investments can be, if they can make an decent investment, that keeps you below the greenhouse gas permit. So in both our crude expansion project at Corpus and at Houston are spud pretty much at that level. Ann Kohler – Imperial Capital: Great, thank you very much.

Our next question comes from Paul Sankey from Deutsche Bank. Please go ahead. Paul Sankey – Deutsche Bank: Hi guys.

Good morning, Paul. Paul Sankey – Deutsche Bank: Congratulations to Joe on making President as well. If I could ask you, first about the export story, you’ve talked about it, but could you just clarify, I think you said, you’re exposing about 100,000 of gasoline. And I think it was 200 of distillate, is that at export capacity now?

No. I would say no. The gasoline, that was a good quarter, 100,000 barrels a day gasoline is a good quarter for gasoline exports but we have the ability probably fall and take out 225. Paul Sankey – Deutsche Bank: Okay. So I got the 225 number and then I think your 280 at diesel is…

Yeah. 280 is where we would say we’re today and then we got logistics projects as we mentioned that improved docks and just really takeaway capacity. We expect to take us up to about 425,000 barrels a day of capacity. Paul Sankey – Deutsche Bank: And when – I think did you say the timeframe on that is 2Q?

No, no, we’re working on projects right now, some of them will come on in the second quarter, but really I think these projects that we’re taking about will have in place by the end of the year or early next year. Paul Sankey – Deutsche Bank: And…

2Q was – we able to load crude out of Corpus Christi. Paul Sankey – Deutsche Bank: Got you. And then you’ve mentioned this, there is an expansion of gasoline capacity above the 225?

Yeah. Some of these projects and really primarily the stuff we’re doing in St. Charles and Port Arthur take us up to about 250. Paul Sankey – Deutsche Bank: Okay, that’s great. And then I know we’re running out of time, so just the follow-up is, one of the issues that we’ve seen with all these crude differential moves has been times right now heavy light spreads, but wee had a pretty good number in Q4. How is that dynamic working now this quarter and how do you expect that to play out? And I’m thinking particularly one of the hardest things when we think about this is the fact that essentially a lot of that heavy crude is priced on a formula with a k factor. But we naturally expect that to be a narrower number going forward, because of how wide it got in Q4? Thanks.

As I mentioned its coming a bit Paul and a lot of it had to do with the fact that WTS was dislocated for a period there when there was some turnaround activity in midcontinent. So that and then the fact that residuals have been priced at a significant discount, both of those contributed to the mine discount. It has come in a bit and then the Mexicans have adjusted to K to try to get it back relating to market should we see us. I think we still have decent discounts that they have come in. Paul Sankey – Deutsche Bank: Right. And could you clarify where the Mexican think it should be?

Well, what do we say Bill, on discounts.

Well, into a sunk coker I have said to all of you that we need in this 10% range, so that we would have economics to go through the coker, but if you – to have good economics in the coker you need 15%, so but I… Paul Sankey – Deutsche Bank: I get it, Bill, that’s what you say, that’s it’s kind of clear as long as I guess on the contractual side that’s there for you two I hadn’t heard you kind of – we haven’t split that circle previously. And then the residual fuel aspects of the discount, I guess I’ve heard you say in the past is it kind of a secular issue to do with lower demand for residue? Could you just – in the one minute specific on that – talk a little bit about how you see that playing out?

Well, China is not running residue anymore. They’re running crude, okay. So that’s back resilient in the marketplace and then with Libya production back on line, we just found ourselves in longer-supply that we have been in the past. So that would help. Paul Sankey – Deutsche Bank: And I think the demand side is weak as well right?

Yeah. Paul Sankey – Deutsche Bank: Great, thanks a lot.

Our next question comes from Chi Chow from Macquarie Capital. Please go ahead. Chi Chow – Macquarie Capital: Great, thank you. Just one more question is light and heavy discussion. Are all your barrels, the heavy barrels in the Gulf Coast priced off Maya or the barrels from Venezuela and Colombia, does the price side kind done a different metric?

They all look at Maya cheap, but they’re not all priced off from Maya. Chi Chow – Macquarie Capital: So the (inaudible) barrels, do you expect the differential to stay wider on those barrels and what’s happening with the formula based on Maya?

I would think so. Chi Chow – Macquarie Capital: Okay, great. And then just in first quarter in general, we talked a little bit about this, but how is the environment looking for you now in the different regions, 1Q versus what you realize in the fourth quarter?

See, it’s really kind of too soon to say, too soon to get any guidance for the first quarter, particularly in the margin. However we did say that the heavy differentials or discounts did narrow, so. Chi Chow – Macquarie Capital: Right, okay. And then Bill, you mentioned a couple of times here on Keystone XL, do you have any thoughts on how this might go?

I don’t, you mean to the answer of what the administration is going to be? Chi Chow – Macquarie Capital: Yeah, exactly, exactly.

My thought would be no better than yours. Chi Chow – Macquarie Capital: Okay.

However I think it’s just ridiculous. There is pipelines everywhere, there is a pipeline in front of your home, have in the streets. Canada there is an LOI and the refineries in the U.S. Gulf Coast need the Canadian order and the jobs and the assets and the tax payers are here in the United States. But my opinion is not better than yours. Chi Chow – Macquarie Capital: Yeah. It’s pretty absurd that it doesn’t get on. Thanks, well, I appreciate it.

Our next question comes from Doug Leggate from Bank of America. Please go ahead. Doug Leggate – Bank of America Merrill Lynch: Well, hi guys. Sorry for the follow-up. I just have a couple of quick ones and I want to queue up again. Can you talk about the cash burn in the quarter woven on there in terms of working capital just like, there is a big move there, and finally any comments on what you are hearing in terms of potential LIFO accounting changes on inventory and how that might effect you guys? I will leave it there, thanks.

Okay. In the fourth quarter, we did have an increase in our receivables quite a bit, it’s about $700,000 to $1 million, but that is really a timing issue as our cash received task picked up quite a bit here in January. And part of the differentials that are the reduction in cash as we had our federal or tax payment in the fourth quarter too a large one. So that was part of the reason cash going down.

I will note that this business is a taxpayer of nearly $500 million in the quarter. Doug Leggate – Bank of America Merrill Lynch: Okay, thanks.

And then you asked the question on LIFO. Doug Leggate – Bank of America Merrill Lynch: Yeah, I’m just curious about when you guys are hearing about potential changes and what would happen if we did see International Accounting Standards and employees across the U.S.?

Okay, so our LIFO reserve is….

$6.7 billion.

Is the value not on the books, $6.7 billion. We had $6.7 billion of value that is not represented on our books, so if they get away with LIFO and nothing change, we would owe tax on $6.7 million and again we would be a taxpayer. Doug Leggate – Bank of America Merrill Lynch: Okay, how much of that would be cash, and how much would be non-cash, can you quantify that?

The cash we pay 35%, I guess 35% of $6.7 billion. Doug Leggate – Bank of America Merrill Lynch: Okay. Always that scary number guys, can you put some framework around how likely or what progress you think has been made to not issue on the – I leaver it at that?

Well, I'm going to say it's not going to happen. And obviously LIFO used in many, many industries, it's not unique to the oil business, but I don't say it would happen, and if it did happen, let's say it did, and we would obviously lobby for a payment schedule. But I mean obviously. Doug Leggate – Bank of America Merrill Lynch: Great, thanks guys. Appreciate it.

Okay, thanks, Doug.

Our next question comes from Robert Kessler from Tudor, Pickering. Please go ahead. Robert Kessler – Tudor, Pickering, Holt, & Co.: Hi, guys, sorry for the double up, I think you want to wrap up the call. But since you opened Pandora’s box, it’s kind of Brent versus LLS and how you calculate that spread? You referenced to $4 to $5 cost of moving LLS up to the East Coast. I guess my question will be at the limited market and with the rate of growth in U.S. supply, you saturate that market in maybe a quarter or so worth of time. How do you price the spread post that event?

Okay. So you’re saying what you’ve got...

Maybe, I’d just answer, that’s way out in the future, but I will say to you that the marginal cost of transportation is going to be, why it’s going to be the debt. So if Bakken lays into the East Coast at $15 to $17 by rail, and you can lay it into the U.S. Gulf Coast that $12 by rail, it’s going to have an inherent differential there. I think that’s why you saw one of our competitors lock up some transportation – water transportation from the Gulf coast up to the East Coast. So we would think then those differentials – when the markets are imbalance, we’ll all equate close to the tariffs of the marginal source, water from the Gulf Coast to the East coast or rail from the Bakken or somewhere out there to the East Coast versus getting it all down to the Gulf coast. Robert Kessler – Tudor, Pickering, Holt, & Co.: Yeah. I guess, I’ll get you on that, once you’re imbalanced, but the moment you flipped to a net long position on the crude and you feel that all the coast. I guess, this is what I’m trying to get to.

But then it’s looking for a home. Robert Kessler – Tudor, Pickering, Holt, & Co.: Yeah.

And who can take it and it will drive. So if you can’t export crude, then it’s going to be pushing to another refinery, some other place. The other stand we’ll keep doing is discounting and keep backing out some of these other types of crudes, exactly what Valero is looking at here at our Houston refinery where we are a feedstock buyer, we’re looking at crudes units produce our own feedstock. Robert Kessler – Tudor, Pickering, Holt, & Co.: Yeah.

So you have projects like that, that we and I’m sure others will look at the key to (inaudible) this up. Robert Kessler – Tudor, Pickering, Holt, & Co.: And I could be wrong, but let’s just say, it comes quicker than that project comes online, you’ve already sort of matched on it quite 530,000 barrels a day in your Gulf Coast system. You’ve already got a scenario where some that you are light sweet and that your delivery is equal to your medium sour grades. Is there a scenario where you could force feed more into Gulf Coast system, while you wait on those projects?

It’s not to a great extent. We would need the projects and it’s because you would overload your light and handling capability. Robert Kessler – Tudor, Pickering, Holt, & Co.: Yeah.

However, we are very smart people and our people are happy and trying to figure out how to handle the light in. But the increment would be, if the delta gets wide enough, we’re going to take it to Quebec. Robert Kessler – Tudor, Pickering, Holt, & Co.: Yeah. And so that one a pretty quick too I imagine.

Well, it’s a 200 and some thousand barrel a day refinery, but yeah, we’ll say it will be, because we like those numbers and they were also involved in line nine, so you will be feeding Quebec from a lot of different ways. And that will be another refinery that today is a – so it’s Canada, but today we’re on four and sweet for Canada, and instead of may grow in U.S. and Western Canadian. Robert Kessler – Tudor, Pickering, Holt, & Co.: Thanks for the color. I appreciate it.

Okay, thanks, Robert.

Now, with our last question I’ll now turn it back to the speakers for any closing remarks.

Okay, thank you, Trish. And I just wanted to thank investors for listening to the call. If you have further questions, please contact Investor Relations. Thank you.

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.