Jul 30, 2008
Operator
Good morning. My name is Christy and I will be your conference operator today.
At this time I would like to welcome everyone to the Valero Energy to announce Second Quarter 2008 Results Conference Call. All lines have been placed on mute to prevent background noise.
After the speakers' remarks there will be a question-and-answer session. [Operator Instructions].
Thank you Mr. Smith, you may begin you call.
Ashley Smith
Thank you, Christy. Good morning and welcome to Valero Energy Corporation's second quarter 2008 earnings conference call.
With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski our CFO and other members of executive 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.
There are also tables attached to the earnings release which provide additional financial information on our business segments. If you have any questions after reviewing these tables please feel free to contact Investor Relations 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. Now I will turn the call over to Mike.
Michael S. Ciskowski
Thanks Ashley and thank you for joining us today. As noted in the release, our second quarter 2008 earnings came in at $1.37 per share.
Second quarter 2008 operating income was $1.2 billion compared to $3.2 billion reported in the same period last year. The decrease in operating income was obviously due to the company's lower throughput margin per barrel of $10.82 which was down $7.32 per barrel or 40% versus the second quarter of 2007.
The key river of the decline was lower margins for gasoline and secondary products, such as asphalt, fuel oils, petroleum, coke and petrochemical feedstocks. Similar to the first quarter of 2008, these margins remained compressed in the second quarter as the prices for those products did not increase proportionately with the increase in feedstock costs.
However, throughput margins benefited from strong margins on distillates and from wide differentials for the heavy and sour crude feedstocks. Second quarter 2008 operating income was also affected by $148 million increase in refinery operating expenses from the second quarter of 2007.
This increase was mainly due to higher energy costs from the increase in the cost of natural gas and electricity. Second quarter throughput volumes averaged around 2.7 million barrels per day, which was 48,000 barrels per day lower than the second quarter of 2007 but, nearly 140,000 barrels per day above the first quarter of 2008.
The increase in volume from the previous quarter was primarily due to higher operating rates at Port Arthur where we completed the coke drum repairs and also at Aruba where the vacuum tire repairs were completed. General and administrative expenses, excluding corporate depreciation, were $117 million.
The $18 million decrease from the first quarter was mainly due to decreases in expenses for environmental and legal reserves and incentive based comp expense. For the second quarter, total depreciation and amortization was $369 million and interest expense net of capitalized interest was $83 million both in line with our guidance.
Our effective cash rate on continued operations was 33%. Regarding cash flows for the quarter, capital spending was $741 million, which includes $100 million of turnaround expenditures.
In the second quarter, we continued our stock buyback program by spending $182 million to purchase 3.8 million shares of our stock. We have also purchased 2 million shares in July, which takes our total purchases to nearly 15 million shares for the year.
We currently have approximately $3.6 billion of re-purchased authorization in addition to our ongoing anti-dilution program. With respect to our balance sheet at the end of June, our total debt was $6.5 billion.
We ended the quarter with a cash balance of about $1.6 billion and our debt to capitalization ratio net of cash was 20.5%, an improvement from the first quarter ratio of 21.7%. As to third quarter operations, the following guidance assumes that except for the closing of Krotz Springs transactions, which I will discuss in a moment, no other divestitures are expected to close in the third quarter.
So for modeling purposes, you should expect Gulf Coast refinery throughput of approximately 1.45 million to 1.5 million barrels per day; Mid-Continent throughput should be about 430,000 barrels per day. West Coast throughput should average between 280,000 and 290,000 barrels per day.
And the Northeast system should average in the range of 540,000 to 550,000 barrels per day. On refining cash operating costs, they're expected to be about $4.60 per barrel.
For some of the other items for the third quarter, we anticipate G&A expense to be around $135 million. Net interest expense should be around $75 million.
Total depreciation and amortization expense should be around $370 million. And for the third quarter we estimate a 34% tax rate, which excludes the effects of the gain on the sale of Krotz Springs.
After reviewing our capital plans, we are reducing guidance for our 2008 and 2009 expenditures on capital and turnaround costs. We estimate 2008 expenditures will come in around at $3.8 billion, down $400 million versus our previous guidance of $ 4.2 billion and down $700 million from our original estimate of $4.5 billion.
And although we're still developing our 2009 numbers, an early estimate is that next year's capital spending and turnarounds will be in the $4.5 billion range. This estimate includes work associated with the Hydrocracker projects at our St Charles and Port Arthur refineries.
The sale of the Krotz Springs refinery was effective July 1, and due to the long-term product supply agreement between Valero and Elan, the disposition does not constitute discontinued operations. In our prior period results for the Krotz Springs operations we will not be re-classified as such.
Now, I'm going to turn the call over to Bill.
William R. Klesse
Thank you, Mike. As Mike said, we ended the quarter with a balance sheet in excellent shape and an excellent cash position.
Our operations continued to improve. At Port Arthur we had repaired the cracks in the coke drum and are pleased with the results.
This should allow us to defer replacing these drums until late 2009, or early 2010. Repairs to the Aruba Vacuum Tower were also completed and we completed the turnaround of the Delaware city coker.
With strong distillate margins and reasonable discounts for heavy sour crude and feedstocks, the return of our complex coking refineries is helping our earnings. Also, as crude oil prices have been falling recently, the differentials or losses we incur on other products of these secondary products, about 20% of our output are also narrowed.
There is no question that gasoline margins continue very weak. Clearly, gasoline demand in the United States has slowed reflecting the weak economy, the general feeling of less wealth, the high prices and the impact of ethanol.
Interestingly, ethanol is having very little impact on crude oil prices, but it's having a significant impact on refiners and a huge impact on food prices. Distillate demand is lower in the United States as well, but world demand primarily in Europe, South America, and Asia is more than offsetting the weak domestic demand.
Lower refining operating rates, especially in cat crackers will continue. With an economic recovery, lower pump prices and the stabilization of the housing and financial industries, we expect gasoline and diesel demand domestically to recover.
Concerning our strategic review process for our modeling [ph] methods, we have not received an acceptable proposal that will justify a sale. We will not undertake a transaction that is not in the best interest of our shareholders and employees.
We continue to evaluate our options. For Aruba we continue to pursue a potential transaction.
Clearly, we have not met our own schedule, as the asset strategic alternative effort is going slowly for a number of reasons, some of which are the general economic situation, the availability of debt financing and the current financial situation of some of the other independent refiners. We have already sold two refineries at values that are in our shareholders' interest and we'll continue to review our asset portfolio to maximize long-term shareholder value.
Given our healthy balance sheet, improving earnings power in a tough margin environment, we, as you, are disciplined that our Valero stock is trading at an equity market cap of about $17 billion, about our inventory and cash values. Adding our debt, we estimate our assets are being valued for less than 20% of replacement costs.
If our refineries had the same complexity adjusted value that we received for Krotz Springs, our stock price would be twice as high. Our current valuation appears very low.
Also, the world oil demand continues to grow. With expected growth of around 1 million barrels per day this year, which requires additional refining capacity.
As always, location, configuration and the commitment to excellence are key to success. Our products add value to society; they improve the standard of living of all people around the globe.
We will now open the call for questions.
Ashley Smith
Christine? Question And Answer
Operator
Thank you. [Operator Instructions] And our first question comes from Paul Cheng from Lehman Brothers.
Your line is open sir.
Paul Cheng
Hi. Good morning gentlemen.
Mike, can you give me some of quick balance sheet number, what is the working capital, long term debt and market value of your inventory in excess of the book value?
Michael S. Ciskowski
Okay, okay, right, our current assets are about a little over $15 billion. And if you exclude the cash of about $1.6 billion that would be about 13.6 in current assets.
Current liabilities 12, a little under 12.8... little under $13 billion.
And we have current maturities of $200 million. Net working capital is 24 but if you exclude cash and current debt, it's right at $1 billion net working capital.
Paul Cheng
And what is the equity excluding the intangible value, intangible goodwill?
Michael S. Ciskowski
Goodwill is what about... 4.
$4 billion is our goodwill, $14.7 would be our equity without the goodwill.
Paul Cheng
14.7.
Michael S. Ciskowski
Yes. You asked about the debt, or total debt is $6.5 billion.
Paul Cheng
And you say that 200 is in the short-term, right?
Michael S. Ciskowski
That's correct, we only have 200 in....
Paul Cheng
So long term is 6.3.
Michael S. Ciskowski
That's correct.
Paul Cheng
How about the market value of your inventory in excess of the book value?
Michael S. Ciskowski
Okay, it's about 10 at June 30, it's about $10 billion in excess of our book value.
Paul Cheng
Great, Thank you. I think it's also going from my...
is there any meaningful inventory gain or loss or trading or hedging gain or loss that in the quarter we should be aware?
Michael S. Ciskowski
No, Paul there's not.
Paul Cheng
Okay. And Bill or Mike you said for next year that the purchase is about $4.5 billion, I think that is in line with what you guys have been saying.
Let's assume under the worst case scenario, the market condition doesn't really improve much from here, what is the minimum capital spending that we may be talking about? I mean what is already committed and what can be cut?
William R. Klesse
Well, we are in the middle of our strategic planning process right now. And so $4.5 billion is where we would call our guidance going into 2009.
And it has been what we have been saying. Our stay in business, our maintenance capital is somewhere between $2 billion and $2.5 billion a year.
Next year is a little higher turnaround year for us, and then you get into a question we have to do a scrubber at the Venetia refinery which is a large project, that's half-through regulatory project. So we get up around $3 billion.
After that their projects that have economics and if it's as you said we are going to look at everything we are doing. The most important thing that we will do is we will maintain our credit rating with the agencies.
Paul Cheng
Bill, what... how much is the remaining spending in 2009 related to Port Arthur Hydrocracker?
William R. Klesse
The spending this year on hydro-cracker?
Paul Cheng
No, for 2009.
William R. Klesse
2009.
Michael S. Ciskowski
Can you do that?
Michael S. Ciskowski
For Port Arthur hydro-cracker that total project is $2.4 billion and I am going to guesstimate something like $600 million.
Paul Cheng
600. So that means in that theory if we just look at what needs to be spent for the hydro-cracker in your maintenance and the scrubber that you are talking about 3.6, 3.7 that's probably the minimum that you need to spend?
Michael S. Ciskowski
Well, we are also doing a hydro-cracker St. Charles and so to finish through your question, but it depends on the economics to our cash flow next year.
Paul Cheng
Okay.
Michael S. Ciskowski
We will look at everything. The most important thing to us is that we'll maintain this credit rating.
Paul Cheng
And
William R. Klesse
And just see, Paul, we still are running our balanced approach here. We have bought so far this year as Mike said 15 million shares.
And we intend to keep the balanced approach going forward.
Paul Cheng
Sure. Yes I mean that's certainly the right thing to do.
Bill, you talked about the Aruba, I think previously you were hoping that to post a billion the second quarter. And can you give us maybe a little bit more insight or color in terms of what is holding up?
Is there any major issue between you and the seller... and the buyer, that it still needs to be negotiated or that is just...?
Michael S. Ciskowski
Well we did hope to close it in the second quarter and we've been unable to do that. We are still in discussion with the potential buyer that's gotten so much write up and everybody's pressed.
And we are discussing the transaction.
Paul Cheng
Is there anything that sticks out, is that... is the major hurdle at this point, or that is just in general?
William R. Klesse
I think many of the articles that have been written that have looked at the potential buyers, domestic refining versus foreign refining, future oil production, where it gets consumed have been issues that had been... for them to decide.
Paul Cheng
Okay. All right, so it is not because of the price or anything that, you guys are negotiating?
William R. Klesse
Well, I don't know, we haven't closed it.
Paul Cheng
Okay, very good. Thank you.
Operator
Your next question comes from the line of Paul Sankey with Deutsche Bank. Your line is open sir
Paul Sankey
Hi, good morning guys. You mentioned maintaining your credit rating at the same time, it's got $1.6 billion in cash at the end of quarter.
Are you going to continue to run that kind of cash balance or do you expect to work that down a little bit? And could you roll that...
the answer to that question forward into an expectation for buyback, let's say, all things being equal in the second half given that you started Q3 quite strongly on that front? Thanks.
Michael S. Ciskowski
We've been running a cash balance that's been in this range. And so to be specific to you we will maintain cash, it's in this $1 billion to $1.5 billion range.
Paul Sankey
And then further to that the buyback expectations?
Michael S. Ciskowski
We intend to continue do the balance. We are also funding our projects because we believe these projects generate long-term shareholder value.
And so we're going to do just what we've been doing, first quarter we paid off $375 million of debt. We're going to keep this effort going forward paying off some debt returning cash to the shareholders, maintaining some cash on our balance sheet and funding if long term projects that really have a lot of value.
So, I know that you're asking us but we're going to just keep going... doing what we've been doing.
Paul Sankey
Is it fair to say that the step-up in July in the buyback was the function of Krotz Springs completing so that we could expect any... if you like about a larger buyback amount in the second-half to be related to transaction as opposed to just redeploying free cash flow?
Michael S. Ciskowski
Krotz Springs did close and so we deployed the proceeds for the uses, I just got we're saying [ph]. We also had our stock price fall in the early part of July and our window here from legal was still open.
So we stepped into the market.
Paul Sankey
Okay, so basically you are saying you are going to try and complete the program by the end of the year?
Michael S. Ciskowski
Well, I'm going to continue to do a balanced approach. The program, I'm not sure what program we're talking about.
We have $3.6 billion of authorization from our Board; we do not intend to buy that much stock this year.
Paul Sankey
I got you. A second one if I could, it's notable that the heavy life spread is narrowed significantly as we start Q3.
But at the same time you had an announcement about obtaining Canadian heavy crude longer-term, Bill, could you just talk about the dynamics that caused the heavy lights get so wide in Q2 the extent which that helped your earnings and where... how you see that continuing whether or not you think the tightness that we are now seeing in that spread is going to continue and how it's going to behave over the interim between where we are now and the first Canadian crude coming, which I guess is beyond 2010, isn't it?
William R. Klesse
As the heavy sour differential has narrowed, what has happened is that, Mexico has stepped into fuel oil market to buy fuel oil for its electric utility business, that has strengthened fuel oil markets in the Gulf Coast significantly. They've been in that market in July and they're in that market again in August.
So we see it more as a spot short term situation with that differential narrowing and also narrow seasonally with the asphalt business. As we get later in the year we would expect that differential to open back up.
Now long term, piece to your question, clearly the Maya production over say five... next five years appears to be declining quite rapidly.
You can get that from any consultant that publishes on Maya. And thus when we look strategically long term, we believe that Canadian crude oil, heavy Canadian crude needs to come to the US Gulf Coast and that is why Joe Gorder and Gene Edwards and group have worked on our project here to bring Canadian crude with a couple other companies to the US Gulf Coast and why our Port Arthur refinery will be configured to run, heavy Canadian sour.
And that is like five year out, four year out project. Are you still there Paul?
Paul Sankey
Yes sir, I was on the mute. So just to sum it up very quickly, you expect the current tightening that we've seen in the spread to widen out towards the end of the year, perhaps start re-tightening as we go into 2010 and then open up wider when get move Canadian crude coming down in the future.
William R. Klesse
Yes.
Paul Sankey
I'll leave it at that. Thanks a lot guys.
Operator
Your next question comes from the line of Roger Read with Natixis, your line is open sir.
Roger Read
Yes good morning gentlemen. Going after the commentary that was in the press release regarding, and I think an evaluation of the futures market can see the weaker gasoline margins in the back half for the year run cuts, is that something more of a comment about what the industry has to do, what Valero would do, maybe something of a leader on this?
Do you see it as a geographic or as a across the nation kind of cut on the run side?
William R. Klesse
Well, clearly the crack spreads in the markets are very weak going forward for the rest of the year. For conventional there is a premium, remember for RBOB, CBOB and all the rest of it.
But you are exactly right. And so, Europe is very low on gasoline.
You can see that looking at the East Coast cracks. So quite frankly there is a lot of gasoline around.
As we move into the Fall, vapor pressure restrictions lessen. And so there is more supply as butane gets back into the gasoline pool.
So I think it's fair to say that cat crackers as I said will continue to have reduced operating rates. And also, you can make your own judgment as to the industry.
Roger Read
Okay. And what would that mean in terms of distillate production given especially that's been the...
the one true bright spot in the industry in terms of how much can you improve the yield there if you're overall, having to make cuts on the gasoline, so I'd ...
Michael S. Ciskowski
Sure I think, I can make some comments about that. So if you look at our performance second quarter versus first quarter, we increased distillate production by about 110,000 barrels a day and some of that is throughput related because we had higher volumes in the second quarter.
But we can readily identify a distillate yield shift of about 3% on input, It would represent about 75,000 barrels a day. We think that we can expand that in the near term to about 100,000 barrels a day of increased distillates.
Full potential may be as high as 200,000 barrels a day. But getting that second 100,000 will require some capital retrofits which will take time to implement and take some economic evaluation.
But we're pretty well positioned particularly with some of the casual assets we've brought on stream last year that increased producibility.
Roger Read
Okay. And the say capturing the additional 25,000 barrels a day will be more of a say 2010 event or something like that?
William R. Klesse
To take it from the 75 to 100, I think that's capturable in the near term within the next six months let's say.
Roger Read
Okay. But there is the additional 25 beyond that would be more of a 2010...
I mean I'm trying to think about maximum ability to take advantage of current market conditions we can see it go to 100 and then 125 is more of 2010 event or something like that?
Michael S. Ciskowski
No, I don't think that, it's going to extend into 2009, some of what we have planned is we have some of our refineries that actually are configured hardware wise to make large volume of gasoline, this would pertain to Corpus Christi and to Venetia. There are retrofits that we have under consideration for 2009 turnarounds that can give us another boost in distillate producibility.
So I think the way to look at this is we are going to ship away this total potential of around 200,000 barrels a day. And so we are going to just continue to make progress.
When you get out to late 2010 is when we expect to bring on these new large hydro crackers at Port Arthur and St. Charles and that will be another large boost in our distillate producibility.
Roger Read
Okay, thank you.
Operator
Your next question comes from the line of Jeff Dietert from Simmons. Your line is open sir.
Jeff Dietert
Good morning. I was hoping you could talk a little bit about the expansions of St.
Charles and Port Arthur. I think if you look at these expansions on a dollar per barrel a day capacity or dollar per complexity barrel they were more expensive than your stock 9 months ago, and they are much more expensive than your stock at this point trading as Bill talked about at 20% of replacement costs.
Obviously, your current portfolio and the feedstock and yield associated with St. Charles and Port Arthur refineries are not the same.
Could you talk about how those economics have evolved over the last 6 to 9 months and why it's a better alternative to invest in the expansions at St. Charles and Port Arthur than buy back your own stock?
Richard J. Marcogliese
Let me speak to the economics on these projects. And what I would say is reflecting back on the last year, we feel even better about these projects than we did when we requested approval for them now.
Just bear in mind when we look at these projects we were in $65 a barrel crude environment, now we are much higher. These projects since they are hydro-cracker based they result in significant volume gains.
So as a result they are far more attractive from the return on investment point of view than we even considered about a year ago. So we continue to view these as key projects to support earnings for open position as we go into the future.
William R. Klesse
I think if you would add to what... or adding to what Rich says, if you think about our hydro cracker you take natural gas and you make hydrogen.
The hydrogen then becomes liquid in the hydro cracker. So that is volume gain.
If you look at the relative pricing of everything and the way to think about it, it really becomes the gas to liquid project. Also, we're configuring these refineries which are key flagship refineries of ours, along with a couple of others so that to be configured to make products to the marketplace, we think we're dealing with.
And because our hydro crackers and of course the coker at Port Arthur running the Canadian crude oil, will have 150,000 barrels a day of coke and capacity at Port Arthur, combined with this new hydro cracker in the same as St. Charles, we'll have 80,000 barrels a day coke and capacity combined with the new hydro cracker that will increase our distillate yields.
So, the economics to these projects are very good, the lead time is huge. I think some of know that we ordered these reactors, hydro crackers each of these 10.2, 11 inch wall reactors, they've been ordered now for, say 18 months at least, and because the delivery is so long, and they are going to add tremendously to the future of our company.
So when you stack this up with $32 stock price, I understand the issue very clearly. We've done a balanced approach here.
We've already spent on those $800,000 million this year buying our stock. We continue to do what I mentioned in the question earlier from Paul.
But we think these are key projects to the future of Valero and to add tremendous value for our shareholder.
Jeff Dietert
And now if I am sorry. Am sorry, were you finished Bill?
William R. Klesse
Yes, I am, and the other things I would add is we are eliminating a lot of things and delaying a lot of things in our budgets to manage this capital spending with our cash flow if at all it demands on it and to maintain a buyback program. So I am done Jeff.
Jeff Dietert
Okay. And so these two projects are two of your highest priority projects and you would...
you are pushing other projects out of the mix in order to maintain positive cash flow or cash flow... positive free cash flow for this year of '09 and 2010 factoring in the potential for asset divestitures and the margin environment over time.
William R. Klesse
That's correct and we, as I said very clearly, we still are looking at strategic options or alternatives for some of our refineries. And if the environment improves and some asset action is clearly in our shareholders 'interest we are interested.
If it is not we do not have to do it. Our refineries are improving everyday in the liability safety and their performance.
Jeff Dietert
You've issued some maintenance activity for the second half of the year, were all these projects, planned maintenance or is there some unplanned maintenance or accelerated maintenance incorporated here? With specific interest on the hydro crackers looked like there a fair number of those and those are your main distillates units?
Richard J. Marcogliese
Yes Jeff, we are really executing our base plans on turnarounds so there really isn't anything due... there aren't any new issues that have crept us.
So we are implementing the programs that we anticipate in turnarounds in 2008. Our turnarounds activity will ramp up in 2009 but we have been projecting that quite sometime.
Jeff Dietert
Thank you for your comments.
Operator
Your next question comes from the line of Neil McMohan with Bernstein. Your line is open sir.
Neil McMohan
Hello, just a few questions, first of all, maybe you commented on this, it took me a while to get on the line. What part of the capital program are you declining this year and is there any follow on into the 2009 budget?
William R. Klesse
Well we haven't declined so much this year, except we're just... things are a little bit behind, it takes longer to get equipment now from permitting equipment to labor, productivity continues to be a problem.
So we are... that's why we are issuing lower guidance because we are not going...
we are going to spend somewhere in this $3.8 billion that we set. But more importantly we're not starting projects at some of our facilities.
For instance we had a project in Quebec to upgrade our bombs [ph], we are now pushing that project off. We have a pipeline project in Canada that we're re-assessing when that should be done.
We have a paraxylene project at St. Charles that as we are developing our strategic plan here, we are going to do certain extraction aspects of it, but we may not directly enter the paraxyline business here, we are just deferring it.
So we are in the middle of strategic planning and also looking at obviously the real world of the current cracks and maintaining and are looking at our cash flows and we are... and maintaining our strategic efforts here.
So we are going through it project by project and in this particular case, Rich Marcogliese, Mike Ciskowski and I are directly involved in going through our capital budget line by line. And then our strategy meeting is in October with our Board.
Neil McMohan
Great. Just a second question is, I'd like to be honest, I know we've talked about, you shared in details around operating performance and what could be going on.
But I think frankly and I don't know if you would agree, it pretty much needs an uptick in the refining environment for a tight up where less all [ph] boats can get the stock price moving again. What do you think is going to differentiate you over let's say if go through a sustained reasonably weak period going forward, in particular I am looking at your diesel strategy which seems to be totally differentiated versus all the other independent refineries, and frankly versus most of the integrated refineries in the U.S.
Is that something you think is going to really make you stand out versus others as well as your exposure to make the light heavy and things like that?
William R. Klesse
Well that is very good question. I think that we differentiate ourselves right now Shawn [ph], we are still making money.
We have earnings power in our assets. If you actually look at our well...
I will call our reliability starting from January through to today, once we got past this coker from we had at Port Arthur here in that major repair we did that stretch out for almost four months, our reliability has improve tremendously. So I do believe that we are excellent operators.
We've had a lot of refineries that were under invested, under maintained for years. And you can see us constantly improving our performance but clearly we had some refineries that can compete on the world market.
If you look at some of the actions that I just mentioned we're taking we also have export capability. People don't like to talk about exports but the facts are it's a world market.
This is a global business; we've been sending distillate all over the place to Europe, to South America. Our facilities along the US Gulf Coast are gearing up to do that...
So being a good operator, spending our money wisely, we've maintained a balanced program here. We've increased our dividend, we've been buying shares, we are trying very hard to only spend money on projects that clearly hedge your all the value.
And we continue to look at our portfolio. Some people criticized us three years ago, when we got out there looking disposing of some of our refineries.
There I don't think too many people are second guessing that action today. So, I think we are demonstrating that we can be profitable in this business and we will be going forward.
And to your diesel question, we see the growth in the world on diesel fuel. And so, thus our efforts as Rich just articulated to make more diesel, to export diesel and also to add to our facilities to make more in 2010.
Neil McMohan
Great. Thanks for that and maybe just a comment, Bill thanks for your comments in that press release today on what the...
what Congress should do in terms of Energy Policy in the US, as there actually isn't an energy policy in the US. I think it's about time somebody stood up and talked about it.
William R. Klesse
Well I appreciate your comment but all of us are tax payers, why they don't let, and we do not drill. So we feel very like we are not compromising here.
All we want to lower oil prices. We think it's good for our company, good for the shareholders, good for the consumer.
The government gets money selling leases, people go to work drilling, steel mills go to work making more pipe. This whole thing is unbelievable.
Operator
Your next question comes from the line of Michael LaMotte with JP Morgan. Your line is open sir.
Michael LaMotte
Thanks. Good morning guys.
I was hoping you could provide some comments on the flow patterns that you're seeing in distillates exports today and how that's changed over the last few months, particularly as we start to come out of the winter season in the Southern Hemisphere?
Joseph W. Gorder
Well this is Joe Gorder. We have seen significant distillate exports here over the last several months in fact, really throughout all this year.
But right now we are averaging over 25 cargos and a month. So we do have significant export activity.
We knew that the Chile was the original recipient of a lot of that and that was true for exporting now on a consistent basis also in Northwest Europe, France is taking distillates, Italy is taking distillates. So we got a lot moving out, we've exported some to Turkey.
So we are seeing continued strong demand abroad not only in South America and also in Northwest Europe and the Med.
Michael LaMotte
With Reliance fully up and running year end and couple of refineries coming online in China do you... are you fearful at all that we could see some backing out of some of that demand around the world satisfied by this more local capacity and some of those flows backing up into the US potentially next year?
William R. Klesse
I don't know if they will back up into the US but your observation is correct. You're bringing on more refining capacity assuming it all starts up is planned and for instance Reliance puts 200,000 barrels a day of diesel low sulfur diesel on the market it will clearly have an impact.
But the world continues to grow and it is very important to remember that whether it is a million barrels this year 900,000 barrels a day this year remains to be seen but the world is still growing. And also in the United States we shouldn't forget the diesel demand is down over 2% this year and gasoline is down depending on how you calculate, ethanol is down somewhere between 3% and 4% that with a better economy so you might say yes well you guys are hoping for an improved world economy.
But clearly our products do, diesel fuel, economic growth, things like that we need a better economy. It always comes down to the end of the day about the demand, because refineries typically can put on our products.
So it's always about demand. But your observation is correct, as supply comes in we need demand to keep growing or we'll do what you said.
We are optimistic though that demand is going to keep growing.
Michael LaMotte
Is that, which raises a question, Bill, on sort of whole notion of creative destruction that demands declining here domestically but overseas growth still looking good and the need for capacity particularly complex capacity overseas. I'm wondering if you've taken a look at some of the greenfield projects that have cropped up in the Middle East or parts of Latin America where you can invest and maybe shed some light on you're thoughts on expansion overseas potentially.
William R. Klesse
Well, we're still interested, I mean this is our business, when you buy our stock you buy our refiners. And so we're interested in those kinds of transactions.
But we also understand risk and these projects in the Middle East, the capital cost has gotten very, very high. And so it boils down to at the end of the day where do the economics really look like, or is it just going to be a straight standalone refining project in the Middle East.
If it's that, it's probably not a play for Valero. If there is something else that comes with it, Valero would be interested in the right transaction.
As the world grows and the Middle East is resourced advantage, just like the Far East, is consumer advantaged.
Michael LaMotte
Petrobras in Brazil in particular, are stepping up their CapEx on the downstream considerably over the next few years, and have looked to do, I guess joint ventures or projects or partnering of some kind outside of Brazil, and I know reboot that aside, I'm wondering if there isn't something to be done with them, either in Brazil or outside... aside from Aruba?
William R. Klesse
I think your observation on that then is right, they appeared to have a lot of oil production is going to come on over the years. And they are dynamic, well managed company.
So I think it just remains to be same.
Michael LaMotte
Okay, thank you.
Operator
[Operator Instructions] Your next question comes from the line of Chi Chow from Tristone Capital Inc. Your line is open.
Chi Chow
Hi, thank you. Bill you talked a little bit about 2008, but could you give us your outlook for the gasoline market in the US for 2009?
William R. Klesse
You tell me where the price of oil is?
Chi Chow
Well, let's assume oil stays kind of where at that and we seem demand destruction here in '08, do you expect that to continue on gasoline side in '09?
William R. Klesse
If you say price oil is going to say $125 a barrel, I would say the gasoline demand is going to be declining. I also have to throw in there though ethanol is in this mix.
Ethanol this year is going to average 590,000 barrels a day under the RFS. And that is taking market share from refiners, at a huge cost to the works and to the US tax payers.
I think we'll see what the new administration does when they get in there. If they have the will at all to look at a totally concede policy.
But what happens when ethanol remains to be seen but this has taken significant market share from refiners, because as you know Chi, the US is still importing over a million barrels a day gasoline.
Chi Chow
Right. At what oil price do you think we avoid demand destruction going forward?
William R. Klesse
I don't know for sure. Why don't you let me philosophize and say that, as we started the year at a much lower price, what was it?
Wherever we started the year,
Richard J. Marcogliese
$100 in January 1.
William R. Klesse
$100 January, if you start thinking back when gasoline was $3 or less than $3 we lost the front page effect that was no longer an issue. But don't lose track of the fact that people are out of work.
They don't feel as well there [ph]. Gasoline as for...
gasoline as a percentage of disposable income is still not at the same level it was in 1981. And so our products really do give you tremendous mobility.
So I think we need prices to come down, I am the first person to admit it. It is good for the consumer and be good for refiners.
Chi Chow
Okay, back on your answer to the question on the Port Arthur and St. Charles projects, how sensitive are the project economics to the availability of Canadian heavy crudes?
William R. Klesse
They are not.
Chi Chow
Okay. Because that seems like.
William R. Klesse
Because we clear... I can answer you this way.
So you get, we are basically looking at a Gulf Coast heavy sour crude price any way.
Chi Chow
Okay.
William R. Klesse
So as you look at your economics we are basically doing that and remember the coking today has good economics as we all know. And hydro-cracking as we've already gone through the economics are terrific.
Chi Chow
On those projects in the Gulf Coast, if you totaled up all your competitors their expansion projects as well, we are probably talking about what 800,000 of million barrels a day of new expansion capacity down there by say between 2010 and 2012. Is that a concern on placing all that product into the market?
William R. Klesse
I don't think it will all be placed in the United States and I'm not sure about the number. Clearly multi [ph] is 300,000 and Gary builds [ph] is 200 rounding off.
But remember our projects are increasing crude charge, a tremendous amount. We are really working much harder on that whole product range.
They go up but they don't go up with tremendous amount. So get adding those three projects together about 600 to 650, so there must be some other ones that you were referring to.
Chi Chow
All right. Got you.
It remains to be seen how much of that comes online but...
William R. Klesse
I'll touch... it's right okay.
Chi Chow
Regardless it's a big number.
William R. Klesse
And so when you look at us strategically, we are making sure because we are on the US Gulf Coast and you don't think of US refining as being in a sense of an export center. But we...
this business is global, and we will have excellent capability to put our market... our products on the market for the best snapbacks and that's part of our projects also.
Chi Chow
Okay I got one more, quick one maybe this is for Mike. Any further thoughts on repatriating proceeds in the event of Aruba's divestiture?
Michael S. Ciskowski
Yes we are in the process of I guess implementing a plan to return that money in the event that the divestiture goes ahead and happen. So we're in the process of putting that mechanism in place.
Chi Chow
Okay. Any guidance on what sort of tax that you may take there?
William R. Klesse
I would say that we'll probably be able to bring that amount of money back at o about 25% tax rate. So we would say it's roughly 10%.
Chi Chow
Okay, great. Thanks for your comments.
William R. Klesse
Yup.
Operator
Your next question comes from the line of Faisal Khan with Citigroup. Your line is open.
Faisal Khan
Good afternoon. There is a follow-up question on Aruba, while you continue to wait for the possible sales of that plant can you comment on the level of profitability in Aruba right now?
Richard J. Marcogliese
Well, I don't think we get specific refinery details on profitability but since we repaired the vacuum tower in late May of last year the plant went very profitably in the month of June. That has narrowed some of the narrowing of the light heavy differentials but we are profitably operating the plant currently.
Faisal Khan
Thank you.
Operator
Your next question comes from the line of Ann Kohler with Caris. Your line is open.
Ann Kohler
Yes good morning gentlemen. My question is kind of tied in a number of the previous caller's questions.
And that's kind of pertaining to one, the additional product that Chi alluded to with some of expansions occurring and then certainly Bill, from the press release, you certainly indicated that the passage of CO2 legislation would likely negatively impact the industry, from both the gasoline and I would assume from the diesel demand as well. When you put all that together, how do you look at your business and how do you look at capital spending, and I just feel the overall refining environment and fundamentals as we move in to the next decade, if that legislation comes to pass?.
William R. Klesse
Well, Ann on the CO2 legislation, I guess, I don't think we know what it looks like, if it's a cap and trade program, it's just basically a tax. And long term, the reason I flag these climate change issues when I speak is because long term, it's just going to export refining jobs and these are good jobs for people that want to work in our plants.
But it just raises our costs depending on what the legislation looks like. We have a lot of opportunity in refineries to reduce CO2 emissions.
There's no question that we have all the ethers, boilers, furnaces that as we go through we can improve upon. We'll look at extend our operations office, some of our cap.
So we have opportunities to reduce CO2 and that's why we've mentioned earlier in the year that if we use some incentives for all industry, and that could be refineries if CO2 drop significantly as opposed to just tax and stuff. Now, as far as the business, the business is growing in the world.
Chi's question was, give me the forecast, I think it has to do with pricing. Our products just unlike anybody, any other products and people's monthly budget, if our prices get down a lower percentage of disposable income, people are working, you got to get to work, we get choose to work the most sufficient way so that you can leave on when you want to leave.
I am optimistic about our business but I also, as you've heard from the management here, we are preparing ourselves at our key refineries to make sure that we can also try in the export business because the refinery has sunk and yet at the same time it is very, very efficient. So that's how we're doing this.
We see total oil consumptions are still increasing but I have already answered and said we are not... we wouldn't be roaring bolts here on gasoline demand.
We are optimistic about the business but you have to be lean, mean tough competitive as the business that I've really known my whole career except for the last four, five years.
Ann Kohler
So basically I mean I guess that it is sort of summarizing, I mean you are basically looking than at Hungarian down an environment, if CO2 legislation comes to pass and that would have certainly a negative demand impact on gasoline demand and an environment where you are basically prepared to position yourself with expert refineries that are capable of moving product to the best available margin environment in the world?
William R. Klesse
That is right, the only thing I will tell you is we don't know what the CO2 legislation looks like and the other thing is it takes a long time to pass and if people are out of work and the housing business is still in the dumps and people start talking about this. They better make sure they understand what it is going to do to the economy.
Ann Kohler
Okay, thank you very much.
Operator
Your next question comes from the line of Eric Milky [ph] from Merrill Lynch. Your line is open sir.
Unidentified Analyst
Hi good morning. I'm trying to be brief, I don't want you to have to belabor this point.
In your statement you talked about the impact on industry utilization for the second half of the year and into 2009 and most of the focus on the call has been on demand. I'm trying to get a sense from you, what do you think can happen to supply or what needs to having to supply in the US over the next 18 months, if nothing happens to demand, if demand doesn't recover?
Do you expect competitors to be forced to take capacity off-line or on the semi-permanent or as on a seasonal basis. And is there scope for the industry to improve distillate yields along the lines of what you have done and continue to do it?
William R. Klesse
Well, I don't know what others will do and that's up to them. I will tell you that no one pays us to lose money.
And there is no law that says we have to lose money. And so refiners, some of the other guys, integrators are reporting big earnings.
Refiners, obviously with our earnings today are depressed. We manage our business here to make money; we are a business that purposes to make money for our shareholders.
And so as the cracks are out there, we'll make our own determinations as to maximize our profit. But the key point would be, we...
there is a law or regulation that says we have to make our product at a loss.
Unidentified Analyst
Okay, thanks.
William R. Klesse
Right.
Operator
[Operator Instructions]. Your next question comes from the line of Mark Gilman with Benchmark Company.
Your line is open sir.
Mark Gilman
Guys good morning. Hey I had a couple of things, Bill what would determine whether or not you take an equity position in the Keystone pipeline?
William R. Klesse
Probably if we get a look at it long term but one is the rate of return at the end of the day what we really think equity return's going to be and then secondly if we have structure here that takes advantage of the tax benefits for owning that type of asset, and Mark I would like to leave it there. If you want to talk about this, if you call to guys they'll talk some more about it.
Mark Gilman
Okay. Bill what were the Maya volumes that you ran in the second quarter and what specific crudes have you identified for the system as being satisfactory alternates.
William R. Klesse
Joe Gorder will answer you.
Joseph W. Gorder
Yes, we were in around 450,000, 460,000 barrels a day in Maya. As far as alternate crudes, Mark you know there's a lot of heavy sour crudes are available in the Gulf.
We've got a lot of Venezuelan crudes that we've run and added to the system, we've got some Colombian crudes and then Brazilian. So, we really haven't had any problem at all as far as securing heavy sour crudes and frankly as prices that are superior to the discounts we are getting on Maya today.
We also increased the volume of Canadian crudes that we ran during the quarter. So we run some 25,000 barrels a day of Canadian heavy, sour crude now.
William R. Klesse
As oil refiners we run our LP on all these plants and so we obviously by a lot of the M-100s besides Moray out of Venezuela. We've got some Napa, but we run our LPs, and we work the whole thing, combined with a couple of our contracts.
Mark Gilman
Bill, on the West Coast, it seems to me that Alaskan and San Joaquin heavy have gotten to be comparatively expensive crudes. How much of that are you running out there, and have you done anything about trying to change that crude slate over?
Joseph W. Gorder
Well, we're running more foreign crudes out there Mark as we go. I'd tell you what, I need to look and see what the exact volumes of those crudes are though, then we'll get that back to you.
William R. Klesse
But we've been... I can give you some flavor there Mark.
We have been reducing our A&F volumes and we'll continue to do that, because you're exactly right, A&F is, have the time it's selling at a premium to WTI. So, we have that effort under way.
Are they long term? Our long term strategy if you look at it today it's Middle East crude or maybe some of the Venezuelan, Arabian, Brazilian crudes are going to wind up on the West Coast.
And that's what we've been doing to get our crude cost down at both Venetia and Wilmington. We no longer run Maya crude on the West Coast at Wilmington as that crude's been...
it's not on the West Coast anymore, it's all in the Gulf Coast. So your point is correct.
We... those are high priced crudes and we are strategically continuing to go to alternates.
We have a contract on A&F and there's another date that comes up later in the year here; adds to the volume. But based on my comments you can figure out what we are going to do.
We are also building two crude tanks at our Venetia refinery that will be operational --
Joseph W. Gorder
December, January.
William R. Klesse
At the end of this year or 1st of January. These are large tanks, 650,000 each which will give us 1.3 million barrels of additional crude storage at the Venetian refinery so that we can execute the strategy I just was articulating.
Unidentified Analyst
Does that still apply to San Joaquin, also?
William R. Klesse
Yes, we're not as familiar, we don't run that much there. Is it 25?
Joseph W. Gorder
25,000 to 40,000 barrels a day.
William R. Klesse
25,000 to 40,000 at that plant. But the A&S has been a high price crude.
Joseph W. Gorder
Yes, I mean that's still an attractive crude relative to A&S. So we typically maximize as SJV.
Mark Gilman
Okay, how do you... how is your Arabian crude priced?
You price it FOB, is it price delivered? When...
where there any timing effects in this quarter that might have impacted the North East margins in particular? Or was the North East margin effect that we saw almost exclusively the impact of the coke return at Del city?
William R. Klesse
I would say... we're going to say, yes, there is no impact, and the coke return at the Delaware City was an extremely long turnover.
We had... you had the proper, you can criticize us for execution here.
The turnaround itself lasted about 35, 40 days. But then, we had a waste deep boiler problem and it took us basically 60 days to get that coker up and that negatively impacted us tremendously.
Now in defense of our people who work diligently to get it up, this is a fluid coker and when these... when you do this, it's complicated.
So, we couldn't run without getting the waste deep water up and so it took us... we had one leak after another on the tubes, but it did take us 2 months to get the coker turned around and back up.
Mark Gilman
So on the pricing in Arabian, is it FOB or delivered?
Joseph W. Gorder
Delivered, we bought delivered.
Mark Gilman
And do you hedge it at all?
Michael S. Ciskowski
Only above our LIFO.
Mark Gilman
And there was no adverse impact on results associated with the procedure in that regard?
Michael S. Ciskowski
No that I would know. And the only...
I'm going to correct one thing. Don't we buy when it comes in to San Astasia?
Mark Gilman
When it comes in to San --
Michael S. Ciskowski
When it comes in to San Astasia, and then we do ship it up to the East cost where we use Arabian crude on the East coast.
Unidentified Company Representative
Only a few day [ph].
Michael S. Ciskowski
But it's only a couple of days and we have not changed our policies on how we manage our price risk.
Richard J. Marcogliese
Mark if you're also looking for another element in looking at the North East profitability, the other factor associated with Delaware city is when the coker's down you don't own the coke gasifier and the coke gasifier has a major impact on energy pricing at the refinery. So in a sense the Delaware city profitability has a double whammy, it's not only the coker that you lose but you cannot run the coke gasifier when the coker's in turnaround.
Mark Gilman
Okay Rich thanks. I just have one more.
It seems to me that to achieve the increase in the distillate yield what I did principally was lower Brazilian and heavy sour in favor of Arabian light medium. Is that accurate?
Maybe some cut point changes as well, I don't know?
Richard J. Marcogliese
Well, yes let me, Mark, I could talk about our general approach about how are we increasing distillate yield across all of our plants and we actually look at it this way. Some of this relates to cut point maximization.
Put as much front end naptha into the distillate pool as you can and pull as much heavy material off the cat crackers as you can and you generally do that to a cetane limit in 2-way sulfurization limit. So we've done that.
Additionally your cat crackers are usually fine tuned to make gasoline. We have detuned them largely through catalyst formulation changes to have them favor just to what yields over cat naptha yields; we have done that.
Thirdly a new higher treating capacity that we put in place to meet the original overall sulfur diesel regulations. We've already de-bottlenecked the new hardware much of which was installed last year.
So we have done a number of things to increase distillate yields. We always tried to maximize our margins by running the heaviest most discounted slates.
So we have not appreciably lightened up in order to maximize distillates. This is distillation cat cracking operations and distillate hydrotreater debottlenecks.
We are going to further look at whether certain of our hydro cracker operations such as Corpus and Venetia, whether we can change the conversion levels of those to continue to increase distillate yields.
William R. Klesse
And the hydro... the two main hydrocrackers Rich mentioned where we...
hydrotreaters, which we call mild hydrocrackers, at Houston and St. Charles have had a major profit impact on us that's favorable.
Mark Gilman
Okay guys, thanks an awful lot.
Operator
We have no more questions in queue.
Ashley Smith
Thank you Christine, and to everyone who listened to our call, thank you for listening. Please contact our Investor Relations department if you have any other questions, Thank you.
Operator
This concludes your Valero Energy Corporation conference call for today. You may now disconnect your line.