Q4 2023 Valero Energy Corp Earnings Call
Participants
Eric Fisher; SVP of Product Supply, Trading & Wholesale; Valero Energy Corporation
Gary K. Simmons; Executive VP & COO; Valero Energy Corporation
Greg Bram; SVP, Supply Chain Optimization; Valero Energy Corporation
Homer Bhullar; VP of IR & Finance; Valero Energy Corporation
Jason W. Fraser; Executive VP & CFO; Valero Energy Corporation
R. Lane Riggs; CEO, President & Director; Valero Energy Corporation
Douglas George Blyth Leggate; MD and Head of US Oil & Gas Equity Research; BofA Securities, Research Division
Jason Daniel Gabelman; Director & Analyst; TD Cowen, Research Division
John Macalister Royall; Analyst; JPMorgan Chase & Co, Research Division
Joseph Gregory Laetsch; Research Associate; Morgan Stanley, Research Division
Manav Gupta; Analyst; UBS Investment Bank, Research Division
Matthew Robert Lovseth Blair; MD of Refiners, Chemicals & Renewable Fuels Research; Tudor, Pickering, Holt & Co. Securities, LLC, Research Division
Neil Singhvi Mehta; VP and Integrated Oil & Refining Analyst; Goldman Sachs Group, Inc., Research Division
Paul Cheng; Analyst; Scotiabank Global Banking and Markets, Research Division
Paul Benedict Sankey; Lead Analyst; Sankey Research LLC
Roger David Read; MD & Senior Equity Research Analyst; Wells Fargo Securities, LLC, Research Division
Ryan M. Todd; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Sam Jeffrey Margolin; MD of Equity Research & Senior Analyst; Wolfe Research, LLC
Theresa Chen; Research Analyst; Barclays Bank PLC, Research Division
Presentation
Operator
Greetings, and welcome to Valero Energy Corp. Fourth Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Homer Bhullar, Vice President, Investor Relations and Finance. Thank you. You may begin.
Homer Bhullar
Good morning, everyone, and welcome to Valero Energy Corporation's Fourth Quarter 2023 Earnings Conference Call. With me today are Lane Riggs, our CEO and President; Jason Fraser, our Executive Vice President and CFO, Gary Simmons, our Executive Vice President and COO; and several other members of Valero's senior management team.
If you have not received the earnings release and would like a copy, you can find one on our website at investorvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments and reconciliations and disclosures for adjusted financial metrics mentioned on this call. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call.
I would now like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our earnings release and filings with the SEC.
Now I'll turn the call over to Lane for opening remarks.
R. Lane Riggs
Thank you, Homer, and good morning, everyone. We are pleased to report strong financial results for the fourth quarter and the full year. With the exception of our 2022 results, we delivered the highest fourth quarter and full year adjusted earnings in company's history in 2023, demonstrating the earnings capability of our portfolio.
Our refining system achieved 97.4% mechanical availability in 2023, which is our best ever. We also set a record for environmental performance and matched our previous record for process safety, illustrating the benefits from our long-standing commitment to safe, reliable and environmentally responsible operations. Now through organic growth of our wholesale system, we set an annual record for sales volume in 2023 at approximately 1 million barrels per day, demonstrating the strength of our branded and wholesale marketing network.
We continue to pursue strategic projects that enhance the earnings capability of our business and expand our long-term competitive advantage. The DGD, sustainable aviation fuel, or SAF project at Port Arthur remains on schedule to completion expected in the first quarter of 2025 for a total of $315 million.
Half of that attributable to Valero. With the completion of this project, DGD is expected to become one of the largest manufacturers of SAF in the world. In addition, we are pursuing shorter cash cycle projects that optimize and capitalize on opportunities to improve margins around our existing refining assets. On the financial side, we continue to honor our commitment to shareholders. We returned 73% of adjusted net cash provided by operating activities to shareholders through dividends and share repurchases in the fourth quarter, resulting a 60% payout ratio for 2023, and last week, our Board approved a 5% increase in the quarterly cash dividend.
Looking ahead, we expect refining margins to remain supported by tight product supply and demand balances. In the near term, product inventories ahead of the summer driving season are expected to be constrained with heavy industry-wide turnaround activity in the first quarter, providing support to refining margins. Long term, we expect global demand growth to exceed products supplied despite new refinery startups.
In closing, our team's simple strategy of pursuing excellence in operations, return-driven discipline on growth projects and a demonstrated commitment to shareholder returns has driven our success and positions us well for the future. So with that, Homer, I'll hand the call back to you.
Homer Bhullar
Thanks, Lane. For the fourth quarter of 2023, net income attributable to Valero stockholders was $1.2 billion or $3.55 per share compared to $3.1 billion or $8.15 per share for the fourth quarter of 2022. Fourth quarter 2022 adjusted net income attributable to Valero stockholders was $3.2 billion or $8.45 per share. For 2023, net income attributable to Valero stockholders was $8.8 billion or $24.92 per share compared to $11.5 billion or $29.04 per share in 2022. 2023 adjusted net income attributable to Valero stockholders was $8.8 billion or $24.90 per share compared to $11.6 billion or $29.16 per share in 2022.
The Refining segment reported $1.6 billion of operating income for the fourth quarter of 2023 compared to $4.3 billion for the fourth quarter of 2022. Refining throughput volumes in the fourth quarter of 2023 averaged 3 million barrels per day. Throughput capacity utilization was 94% in the fourth quarter of 2023. Refining cash operating expenses were $4.99 per barrel in the fourth quarter of 2023 higher than guidance of $4.60 primarily due to an environmental regulatory reserve adjustment in the West Coast. Renewable Diesel segment operating income was $84 million for the fourth quarter of 2023 compared to $261 million for the fourth quarter of 2022.
Renewable diesel sales volumes averaged 3.8 million gallons per day in the fourth quarter of 2023, which was 1.3 million gallons per day higher than the fourth quarter of 2022. The higher sales volumes in the fourth quarter of 2023 were due to the impact of additional volumes from the DGD Port Arthur plant, which started up in the fourth quarter of 2022. Operating income was lower than the fourth quarter of 2022 due to lower renewable diesel margin in the fourth quarter of 2023.
The Ethanol segment reported $190 million of operating income for the fourth quarter of 2023 compared to $7 million for the fourth quarter of 2022. Adjusted operating income was $205 million for the fourth quarter of 2023 compared to $69 million for the fourth quarter of 2022. Ethanol production volumes averaged 4.5 million gallons per day in the fourth quarter of 2023, which was 448,000 gallons per day higher than the fourth quarter of 2022. Adjusted operating income was higher than the fourth quarter of 2022, primarily as a result of higher production volumes and lower corn prices in the fourth quarter of 2023. For the fourth quarter of 2023, G&A expenses were $295 million, and net interest expense was $149 million.
G&A expenses were $998 million in 2023. Depreciation and amortization expense was $690 million and income tax expense was $331 million for the fourth quarter of 2023. The effective tax rate was 22% for 2023. Net cash provided by operating activities was $1.2 billion in the fourth quarter of 2023. Included in this amount was a $631 million unfavorable impact from working capital and $65 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD. Excluding these items, adjusted net cash provided by operating activities was $1.8 billion in the fourth quarter of 2023.
Net cash provided by operating activities in 2023 was $9.2 billion. Included in this amount was a $2.3 billion unfavorable impact from working capital and $512 million of adjusted net cash provided by operating activities associated with the other joint venture members share of DGD. Excluding these items, adjusted net cash provided by operating activities in 2023 was $11 billion. Regarding investing activities, we made $540 million of capital investments in the fourth quarter of 2023, of which $460 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance and the balance was for growing the business.
Excluding capital investments attributable to the other joint venture member share of DGD, capital investments attributable to Valero were $506 million in the fourth quarter of 2023 and $1.8 billion for 2023.
Moving to financing activities. We returned $1.3 billion to our stockholders in the fourth quarter of 2023 of which $346 million was paid as dividends and $966 million was for the purchase of approximately 7.5 million shares of common stock, resulting in a payout ratio of 73% for the quarter. As Lane mentioned, this results in a payout ratio of 60% for the year. Through share repurchases, we reduced our share count by approximately 11% in 2023 and by 19% since year-end 2021. With respect to our balance sheet, we ended the quarter with $9.2 billion of total debt, $2.3 billion of finance lease obligations and $5.4 billion of cash and cash equivalents.
The debt-to-capitalization ratio, net of cash and cash equivalents was 18% as of December 31, 2023. And we ended the quarter well capitalized with $5.3 billion of available liquidity, excluding cash.
Turning to guidance. We expect capital investments attributable to Valero for 2024 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance and joint venture investments. About $1.6 billion of that is allocated to sustaining the business and the balance to growth with approximately half of the growth capital towards our low carbon fuel businesses and half towards refining projects.
Our low carbon fuels growth capital is primarily for the SAF project. Our refining growth projects aim to increase our crude flexibility in the Gulf Coast extract more value out of some of our conversion unit capacity, improve our access to some key product markets and improve our logistics into or out of our refineries. All of these projects meet or exceed our minimum return threshold of 25% after-tax IRR.
For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.52 million to 1.57 million barrels per day which includes turnaround work on the legacy coker at our Port Arthur refinery, Mid-Continent at 415,000 to 435,000 barrels per day, west Coast at 235,000 to 255,000 barrels per day, and North Atlantic at 435,000 to 455,000 barrels per day.
We expect refining cash operating expenses in the first quarter to be approximately $5.10 per barrel, reflecting lower throughput due to turnaround activity across our system. With respect to the renewable diesel segment, we expect sales volumes to be approximately 1.2 billion gallons in 2024. Operating expenses in 2024 should be $0.45 per gallon, which includes $0.18 per gallon for noncash costs such as depreciation and amortization.
Our ethanol segment is expected to produce 4.5 million gallons per day in the first quarter. Operating expenses should average $0.37 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization. For the first quarter, net interest expense should be about $150 million, and total depreciation and amortization expense should be approximately $700 million. For 2024, we expect G&A expenses to be approximately $975 million.
That concludes our opening remarks. Before we open the call to questions, please adhere to our protocol of limiting each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question today is coming from John Royall of JPMorgan.
John Macalister Royall
So my first question is on the macro side, just on light heavies. LLS Maya has risen all the way to around $10 from about $6 beginning in the quarter, yet we still have OPEC being restrictive in terms of production. Can you talk about the drivers of the widening of coastal heavy diffs and how you see them progressing from here?
Gary K. Simmons
Sure. This is Gary. I think a number of factors contributed to that. You did see production in Western Canada tick up a little bit in the fourth quarter. We're seeing a few more Venezuelan barrels make their way into the U.S. Gulf Coast. So a little more supply on the market. But probably the biggest factor is as you got late in the fourth quarter and early this quarter, you're starting to see the impact of turnarounds decreasing demand for some of those, especially the heavy sour barrels. In addition to those factors, you had the typical seasonality in high sulfur fuel oil, but lower high sulfur fuel oil demand for power generation kind of weighing on the heavy sour discounts as well.
So our view is that through the first quarter, through refinery maintenance season, you'll continue to see a little bit wider heavy sour discounts, but then you'll start to see those come in and really for any meaningful impact to sustainable impact for the quality diffs, we need more OPEC production on the market. If you look at the consultant forecast, it looks like that could happen probably third quarter this year.
John Macalister Royall
And then my second question is on return of capital. So your number for the quarter was very strong, and you finished the year at 60% of CFO. I know you've talked about how you tend to come in above the range when cracks are strong. If '24 ends up being kind of more of a mid-cycle type year or even below, how should we think about where you might fall in that 40% to 50% range this year?
Jason W. Fraser
This is Jason. And I've got a bit of a cold. And if I talk too much, I'll go into a coughing fit, so I'm going to ask Homer to respond.
Homer Bhullar
Yes, John, I mean our approach to shareholder returns is driven by our annual target of 40% to 50% of adjusted net cash from operations. And obviously, that includes the dividend, which we consider nondiscretionary and buybacks, which are considered the flywheel supplementing our dividend to hit our target. And given the strength in our balance sheet in the fourth quarter, as we highlighted, we had a 73% payout which resulted in a 60% payout for the year. And as you touched on, since 2014, we've regularly paid above our target. And in fact, the average payout for the 5 years leading into COVID was around 57%.
So I think in short and periods when the balance sheet is strong as it is now and sustaining CapEx, the dividend and strategic CapEx is covered. You can reasonably think of our 40% to 50% target as a floor and expect any excess cash to go towards buybacks.
Operator
The next question is coming from Theresa Chen of Barclays.
Theresa Chen
Would you mind giving us an update on your clean products supply and demand outlook from here? Taking into account the recent inventory moves as well as the additional refining capacity ramping up internationally, some utilization even if not fully running and what you're also seeing in terms of demand across your footprint, please?
Gary K. Simmons
Sure, Theresa. This is Gary. It's always difficult to assess the markets this early, kind of the holidays and weather tend to have a big impact on on-road transportation fuel demand and then fog in the Gulf kind of tends to limit exports. But domestically, I can tell you, demand for gasoline appears to be following typical seasonal patterns. It looks normal for this time of year and in line with where we were last year, I will tell you, gasoline volumes through our wholesale channel of trade are down, a few percent year-over-year. We're not really concerned about that because you can see it's in regions that were really impacted by weather. And as the weather we're starting to see the volumes recover nicely.
European gasoline markets are relatively strong. That's kept the transatlantic arb closed, and then market structure doesn't really incentivize making some of the great gasoline and putting it into storage. Gasoline exports into Mexico and Latin America have remained steady. So all of this really has us pretty optimistic on gasoline cracks once we move into spring and gasoline demand improves with driving season. On the diesel side, demand in our system is up about 7% compared to last year. Probably seeing more heating oil demand with a little bit colder weather.
Diesel inventory remains at the bottom of the 5-year average range. So good demand combined with low inventory continues to support the diesel cracks. Diesel exports in our system were down a little in the fourth quarter. The Russian barrels making their way into South America have caused some changes in trade flow with more of our barrels going to Europe. In Europe, warm weather tended to keep their demand down a little bit. But I can tell you thus far in the first quarter, we're seeing much stronger European demand with the colder weather hitting there.
We believe the diesel cracks continue to get support from increased jet demand. As kerosene gets pulled out of the diesel pool as we continue to recover from COVID. Jet demand last year was still down about 10.5% from pre-COVID levels. Most forecasts show us closing about half that gap this year. And then expectations for a little better for diesel demand with slightly colder weather and freight picking back up as well.
So overall, back to your question on new capacity, it looks like to us somewhere about 1.5 million barrels a day of new capacity coming online, year-over-year growth in demand looks to be slightly over 1 million barrels a day. So supply/demand balances are really fairly close to what we saw last year. The question really becomes timing of when that new capacity comes on. Our view is that it will take longer for those new refineries to start up and you don't really see an impact on supply until later in the year. And if that holds, then you have relatively tight supply-demand balances was really the only difference being we're starting from a different inventory position, as you've already mentioned.
In our mind on that, we do expect to see inventory draws over the next several weeks. The cold weather had some impact on refinery operations, and then you'll start to get into turnaround season, which we would expect total light product inventory to begin to draw.
Theresa Chen
Thank you for that detailed answer. And then maybe just looking within the U.S., what are your views on the divergence in product margins across regions? What do you think is causing the weakness in benchmark cracks in the Mid-Con in particular just suppose with the strength in the Gulf Coast?
Gary K. Simmons
Yes. So historically, we've seen that the Mid-Con is short product in the summer and long product in the winter. And I think we're seeing that this year, the market is just long and especially the weathers tended to hit that region more and so we see demand off in that region. But I think once you start to see the weather clear and you get back into driving season, the Mid-Continent will recover. Seeing the same thing kind of on the West Coast, weathers tended to impact demand on the West Coast. And so we've seen that market a little bit softer than maybe you would typically see for this time of year.
Operator
The next question is coming from Neil Mehta of Goldman Sachs.
Neil Singhvi Mehta
Yes. Congrats on great results. And one of the things that stood out to us was the capture rates continue to be very good. And I recognize some of that is operational performance, but some of that's commercial and Lane -- I know there's some sensitivities around that, but a lot of your competitors spend a lot of time talking about what they're doing on the commercial side. So just be curious, if anything you can share about how you're optimizing what continues to be a very dynamic environment.
R. Lane Riggs
Neil, it's Lane. So I'm not going to -- I'll start by saying thank you. And I will say that I wouldn't trade our commercial team for any other team in the industry. I sort of spoke about this in the past. Everyone in our company understands the position they play. I think sometimes some -- I've been an organization where that's not really clear, and you can get a lot of interference, probably between the supply chain. That's not true of Valero. Everybody has a position they play and they understand how to do it well.
Refining, focused on reliability and operating envelopes and expenses, our P&E coordinate between the groups that make the signals and our refining commercial groups execute the signals, and it's pretty clear on how all that's supposed to work.
And so I would tell you that, that's really the key to our execution. And of course, finally, everybody in the corporation is incentivized with the same goals. We don't have different groups having their own sort of incentives. So that's how we get alignment all the way through. So glad to have them.
Neil Singhvi Mehta
Yes. No, it shows up. Then the follow-up just on North Atlantic. It was particularly strong this quarter relative to the benchmark. The benchmark, I think, was $16, and the realized gross margin was well above that. So just curious if there's anything you'd call out in Montreal or U.K. that drove the strength there?
Greg Bram
Neil, this is Greg. So we saw crude costs improve in that region primarily in Canada is where you saw that more than you did in the -- in Pembroke. And then you brought up commercial margins. They were very strong for the quarter as well for that region. And then some of the compliance costs for the programs over there, costs were lower than we've seen in prior periods. And all those things combined to drive up that capture rate in the North Atlantic.
Gary K. Simmons
Yes. And I'll just add, Syncrude is trading at $7 below Brent. And a discount to that to Brent with a high distillate yield crude is a real benefit to our systems.
Operator
The next question is coming from Doug Leggate of Bank of America.
Douglas George Blyth Leggate
I'm not sure who wants to take this one, Lane, but I want to ask perhaps an obvious question about shipping disruptions and what it means for perhaps not Valero specifically, but just on a more macro sense, how do the situation with the Red Sea bidding up clean tanker rates and so on. What does that do to the movement of product and the implications for a system which is perhaps more dependent on imports than it has been at any time, at least since I've covered this sector?
Gary K. Simmons
Yes. So we're not really running crude from that region. So it hasn't really had an impact to us in terms of supply of crude. But the big impact, especially on the crude side of the business has just been freight rates. We had a period of time where you could export from the U.S. Gulf Coast to Northwest Europe crude in the low $2 a barrel range that spiked to $6 a barrel. And you could see that in Brent-WTI. So I would tell you, probably for our system, that is an advantage because it gives us a crude cost advantage versus our global competitors.
Douglas George Blyth Leggate
Okay. I realize it's kind of hard to quantify, so we'll continue to watch, but thanks for that answer. Lane, my follow-up is for you or maybe for Jason, given it's cold, but 40% to 50% payout, it seems that, at least on our numbers, you are easily able to sustain the payout at a higher level, especially now that you've restated your $2 billion CapEx plan. So I'm just curious, what's the resistance to kind of reset that range that your system clearly is capable of supporting in terms of the payout?
R. Lane Riggs
I'm going to let Homer answer that.
Homer Bhullar
Doug, I mean, I think our -- obviously, our target is set on a long-term range, right? And so the 40% to 50% think of it as like a long-term target. But to your point, and as I mentioned earlier, we've consistently come in above that. And again, I think when you have a strong balance sheet as it is right now, we're not going to build cash. So I think you should reasonably expect shareholder returns to come in above that target.
Operator
The next question is coming from Manav Gupta of UBS.
Manav Gupta
So I wanted to ask about the renewable diesel side of the business. The capture on the DGD dropped to about 49%. And now Homer has done a very good job of explaining to the market how the lag works. So if we add back that lag effect and that $0.64, the actual capture would have hit something like 93%, so when we look past 4Q, the margin is up materially. And if we assume an 80%, 90% capture ignoring the lag, would that imply that first quarter in terms of renewable diesel margin would be much stronger than the earnings that came in for the fourth quarter?
Eric Fisher
This is Eric, and I would just say yes. Yes, it's a very good -- yes, we see a lot of the same curve that you described. And really, the change for renewable diesel for Valero is -- with the first full year of DGD3 in operation, we run a lot higher percentage of foreign feedstocks and that supply chain is just naturally longer. So the most attractive, lowest CI feedstocks are coming from foreign imports. And I think that's creating this longer lag than we've seen in DGD historically. So your analysis, I think, is correct.
Manav Gupta
Perfect. Just a quick follow-up here is, last year, we had an abnormally warm winter. Now when we look at this first quarter, as you guys have mentioned, industry is taking a heavier turnaround versus last year, and then you could have a much colder weather out as we are all seeing there. So year-on-year comp for the first quarter, again, could be better than even last year. I'm just trying to understand the dynamics versus last year versus this as it relates to the heating oil demand.
Gary K. Simmons
Yes. That's kind of the way we see it. The big difference between last year and this year is we had the winter storm early in the quarter last year, which took refining capacity off-line kind of created the big inventory reset. You didn't have that this year, but then in our mind, you'll see more of a draw as we get into February and March with the turnaround activity and a little colder weather.
R. Lane Riggs
It's January. Still have the cold weather. Still the possibility of cold weather hitting the Gulf Coast, so.
Operator
The next question is coming from Sam Margolin of Wolfe Research.
Sam Jeffrey Margolin
I had a question on the gasoline market. I think capture rate in 4Q may have benefited from butane economics. And so correspondingly, if there was a high incentive to blend as much winter grade as possible. There may have been a low incentive to make and store summer grade. And there's just a lot of NGL supply that is kind of making its way into stockpiles across a different -- across a number of categories.
And so I want to know if it makes sense to think about as we enter into driving season, if total gasoline inventories are maybe overstated just given the quantity of maybe butane in that number.
Gary K. Simmons
Yes. Certainly, in our system, when you look at the cost to produce of a summer graded gasoline, there's no economics at all to be making summer grade gasoline and putting it into storage. I think the only people that could be storing barrels at all, it would be high octane components and they're really just speculating that octane is going to get stronger. But we certainly see it that way that the barrels that are in storage today are largely winter grade.
Sam Jeffrey Margolin
My non follow-up second question is about SAF. And I'm just wondering how that market is developing for you commercially as we get closer to the SAF unit coming on. I think there's a view that the SAF market could take on some contracted longer-term kind of cost-plus characteristics because airlines have levers to pass it through that are sort of outside of the policy regime, but I would love your thoughts on how commercially SAF is developing as you get closer to production.
Eric Fisher
Yes, Sam, I think you've said it well. We are -- we continue to talk to all the airlines and cargo carriers. A lot of their models are going to be based on more of a voluntary approach in sort of a jet plus basis that goes into a pass-through to customers that want to offset their carbon footprint through their travel budgets.
And so we continue to have a lot of those conversations. I think we're very close on having several contracts done with airlines going into our early production from our project. So that continues to be progressing very, very well. So we don't see that we're going to have a problem moving all of the volume out of this project.
Operator
The next question is coming from Paul Sankey of Sankey Research.
Paul Benedict Sankey
I was going to ask about international shipping, but you've dealt with the Red Sea. So could you just talk a bit about Russia that was big headlines about a port explosion there. I was wondering how much distillate and other product you're seeing coming out of Russia as we start the year.
Secondly, I think you benefited a lot from Venezuelan, incremental Venezuelan crude? What's your outlook there? And then finally, what are you seeing from Mexico with the new big refinery starting and Nigeria maybe with the refinery starting?
Gary K. Simmons
Okay. Yes, I'll start with Russia. I think the drone attack that occurred last night, probably the biggest market impact we're seeing so far is you've seen a reaction in the naphtha market that refinery supplied a lot of naphtha to the Far East. And so there's a concern that, that flow may be gone. And so the naphtha market has tightened up. I think you do see distillates starting to fall. And some of what we're seeing is that as the refineries experienced some issues, they're having trouble getting support from the West that they typically would even for things like spare parts and those types of things. So we do see that maybe distillate starts to trend off a little bit due to those issues. The middle part of the question was?
Paul Benedict Sankey
Venezuela benefit.
Gary K. Simmons
Venezuela, okay. Yes, so we continue to ramp up our volume of Venezuelan crude. I think the lifting of sanctions more than additional volume into our system probably had more of a price impact, so we did see a little bit more value in the fourth quarter on the Venezuelan barrels that we're running as a result of further reducing some of the sanctions that they have on Venezuela.
Paul Benedict Sankey
Mexico refinery starting?
Gary K. Simmons
Yes. So we're not seeing any impact as of yet from the Mexico refineries. When we talk about crude supply, there's always the discussion that we may see some falloff in our supply of Maya, but that really hasn't impacted us yet. And we don't see any delta on the product side of the business yet either.
Paul Benedict Sankey
And I guess that would then apply to Nigeria as well, right?
Gary K. Simmons
Yes, same thing. We think in our mind, it's going to take a while for that refinery to ramp up. It's just a big refinery that's not going to be easy to bring online.
Paul Benedict Sankey
Great. And then just a follow-up second question here, Homer. Lane, you said that you don't anticipate the asset base changing greatly with the change that we saw last year in CEO with you taking the leadership. Can you just update us given the number of assets that are on the market? And perhaps if you want to add anything on California where results look weak for the quarter, and you've expressed dismayed policies there, I'll leave it there.
R. Lane Riggs
Yes. I mean Joe has been pretty consistent as a leadership team, we've been pretty consistent. We look at everything that comes on to the market. I think structurally, our view really is whether it's policies in Europe and Canada and the United States in terms of the desire to try to move away from fossil fuels, the difficulty of it and the difficulty is to make investments, we sort of see transportation fuels being structurally short.
So we do look through that lens when we look at assets that come on. We also started during the 2000s, we were the biggest consolidator in the industry. So we know what it takes to do this, and we're very good at it. And so we -- our eyes are wide open when we look at all these assets and they come on and we understand the full cost and we compare that with organic growth and we compare that to buying back shares.
And so it's all in that same framework. We do like our asset base. Clearly, California is a tough place to operate and probably getting tougher. So that's really all I want to say about that part. But what I also want to say is we're not -- again, we look at everything and we look at -- we continue to look at refineries as well.
Operator
The next question is coming from Roger Read of Wells Fargo.
Roger David Read
Yes. I'd like to follow up, Gary, with you on the summer grade gasoline? Like I know you said what's in the inventories isn't that much. But what are the incentives look like at this point? Or are we so close to the conversion in March that the seasonality of gasoline is already set up that way, I'm just trying to understand what -- how the market is going to thread the needle between heavy maintenance and the current conditions in the market?
Gary K. Simmons
Yes. So our view, Roger, you look and there's about $0.10 a carry to the March-April screen. We would tell you the cost to produce with butane being cheap is closer to $0.20. So certainly, no economic incentive at all the store gasoline. A lot of what we think happened in terms of the inventory build is that you had a lot of things happened in December, especially in the Gulf Coast. Colonial was allocated the economics to ship on Explorer into the Mid-Continent, that arb was closed due to the Mid-Continent being weak. You had some Jones Act freight off the market in dry dock that limited some movements there.
And then a lot of volatility in the freight markets really impacted experts. And so what you saw is Gulf Coast inventories draw. And in our mind, the Gulf Coast basis got weak enough that although there wasn't carry on the screen to keep gasoline inventory, I think we saw a lot of refiners choosing to hold inventory just because the U.S. Gulf Coast basis was so weak and they choose to store barrels that they would go ahead and then consume during their own maintenance periods rather than going out and covering and saw better value to do that. So if that's the case, then you should see this inventory work off over the next couple of months.
Roger David Read
Great. That's helpful. And then the other thing, obviously, in renewable diesel, dealing with some feedstock issues this quarter, but also there's a lot of new capacity coming in. Just curious how you look at or how you would ask us to think about margin potential in this business, sort of assuming either forward curve at this point or just where we are today in terms of market structure, if it holds, how we should think about the moving pieces here because it's a little more opaque to us, the feedstocks coming in and the timing of that relative to just matching in the market on a daily basis.
Eric Fisher
Yes. I would say the outlook for renewable diesel, it is difficult to predict exactly how it will play out because you do have additional capacity coming online and into fixed credit banks for both RINs and LCFS that would naturally say that those credit value should come down with additional capacity, which would narrow RD margins. That being said, we also see that feedstock prices continue to come down, both waste oil and veg oil. So then you get into the waste oils will always structurally have a lower CI advantage over veg oil.
So where veg oils will be long, they still won't be competitive to waste oils into compliance markets. So it goes back to the core of the DGD business, which is a low-cost producer waste oils, access to markets besides California. And so we still see that we'll be competitively advantaged, both from an OpEx and feedstock standpoint. But overall, the outlook, I would say, is we expect that credit prices will continue to narrow. And it's a question of how feedstock prices will keep up with that.
And so -- and then the last thing, besides diversifying sales away from California is obviously with our project, we'll be diversifying into SAF, which takes some of our product out of this RD market. So we think both of those things make us still the most competitive and advantaged platform in R&D, even in a tightening market.
Roger David Read
So is it fair to summarize that as there's probably a lot more clarity on, let's call it, the supply side of R&D this year and a lot less clarity on the feedstock side? In other words, where we should look for relative opportunity is probably on your feedstock rather than, say, the sales price of R&D?
Eric Fisher
Yes, I think that would be fair to say that most of that is still being a CI advantage in waste oils over vegetable oils.
Operator
The next question is coming from Ryan Todd of Piper Sandler.
Ryan M. Todd
Maybe a question on turnaround activity. Your looks relatively heavy in the first quarter. Is that indicative of what we should expect to be a higher level of overall maintenance for you in 2024, just front-end loaded? And then maybe any thoughts in terms of what you're seeing for overall industry maintenance activity this year. Is this -- should we expect this to be another relatively heavy year?
Greg Bram
Ryan, this is Greg. Normally, we don't talk about our overall turnaround plans. You can tell from the guidance, a fair amount of activity for us in the first quarter. I think when we get out through the rest of the year, we'll talk about those periods as we come up to, I think from an industry perspective, we are seeing a fair amount of turnaround activity across the industry in the first quarter. So getting kind of to Gary's point, it looks like it's going to be a heavy season for the industry in general, a lot of it in the Gulf Coast to a lot of focus there.
Gary K. Simmons
The only other thing we may add is although you can see the throughput guidance, we don't really expect it to impact our capture rates.
Ryan M. Todd
And then maybe just a follow-up question on capital spend and growth capital spend. I appreciate it, Homer, you gave a little bit of detail there in terms of some of the things that are competing for the wedge of growth capital within your budget. I mean most of your larger project-driven work is either finished recently or you've got the SAF project, which isn't really all that large.
But as you look forward on the horizon, are there any other meaningful environmental or regulatory-driven capital things that we should be keeping our eyes on over the next couple of years that could draw some more capital that way? Or what types of things make -- or should we expect just more of these kind of small little netback-driven projects across the refining side over the next few years?
R. Lane Riggs
Ryan, it's Lane. The way I would think about this is if you go back when we -- historically, we used to sort of spend, I would say, we spend $1.5 billion sustainable capital. That would actually include regulatory capital. I mean that's how we frame it. It sort of maintain our assets to generate the earnings we're supposed to and try to work your sustain -- your regulatory capital in that, albeit it would be lumpy. And so you're going to average around that number. So that's how we think about the regulatory side of it. I don't really foresee at least right now that we have a large regulatory spend. Clearly, that could always change.
In terms of our strategic capital, historically, we were around $1 billion. As an organization, we felt like -- we feel like we can execute $1 billion pretty well. We have some experience over 10, 11 years ago where we spent more on strategic capital and then and it was sort of difficult to manage. And so we, as an organization, we decided that we're going to live within a sort of $1 billion on the upside of strategic capital.
Since COVID, we've been at about $0.5 billion, and that's our guidance right now. And we feel like that's a pretty good number year in and year out that we're going to steward around that there'll be enough projects, whether they're in refining or transportation or our renewable platforms that all meet and work through our gated process to meet our return thresholds.
Operator
The next question is coming from Paul Cheng of Scotiabank.
Paul Cheng
I just don't know whether this will be Lane or Gary. If we're looking at octane last year that was very strong. If this year that I think a lot of people expect because after last year, the global gasoline demand growth rate probably will slow down, China is definitely slowing down. And I think U.S. may even go into a structural decline, if that will be the case, how you expect the octane landing is going to look like? And whether -- how that impact or what kind of impact is on your financial result will be? That's the first question.
Gary K. Simmons
Okay. Yes. So I would say a couple of things on Octane. Certainly, the incremental crude barrel that's been coming on to the market has been a light sweet barrel, which has created more naphtha yield coming on to the market. And with pet chem demand being somewhat down, that incremental barrel of naphtha that's being produced is trying to find its way into the gasoline pool. And so what that does is it really causes octanes and naphthas to trade at an inverse when naphtha gets long -- naphtha gets weak and then octane starts to trade at a premium.
So you can try to blend that naphtha barrel into the gasoline pool. I don't know that we see that being significantly different this year. The one thing I would tell that I've already mentioned, if there's a prolonged outage in Russia at the refinery that was hit by the drone attack and there's less naphtha out on the market. that could tell you that octanes tend to be a little bit weaker this year. But absent that, I don't see any fundamental differences in the naphtha where octane markets. Greg, I don't know if you have anything?
Greg Bram
Yes, I agree.
Paul Cheng
And Gary, are you guys net loan or balance on octane?
Gary K. Simmons
It varies. I would say we're fairly balanced on octane. We're long naphtha, so you can always soak up octane that way. But overall, in octane, I'd say fairly balanced.
Paul Cheng
And Gary and Greg, that you guys have a marketing operation in Mexico and in the Caribbean. In Mexico, any insight how's the local demand look like?
Gary K. Simmons
Yes. So our business there continues to grow very, very nicely. Year-over-year, our volumes were up 16% in Mexico. We now have 250 branded sites, which was the largest growing brand in Mexico. I think the big change for this year is in the second quarter of this year, we anticipate the terminal that we'll use in Northern Mexico and Altamira will start up it will allow us to be more competitive in that region, which we would expect us to then be able to continue the growth that we've seen.
Paul Cheng
How about outside your operation, but that the market as a whole, do you see the gasoline market in Mexico is growing or that is maybe a little bit pullback?
Gary K. Simmons
Yes. So our view is Mexico basically recovered last year to pre-COVID levels. And our expectation is you'll see -- continue to see good growth in the gasoline market in Mexico.
Operator
The next question is coming from Joe Laetsch of Morgan Stanley.
Joseph Gregory Laetsch
So I wanted to start off going back to an earlier point, you mentioned some of the cold weather on the Gulf Coast in the past couple of weeks. Were there any material impacts to operations or crude and product price dislocations that we should be mindful of for the first quarter?
Gary K. Simmons
No. I would tell you, we had some small operational issues, boiler trips, heater trips, but nothing that's going to materially impact the quarter and we still feel like the throughput guidance that we've given holds.
Joseph Gregory Laetsch
Great. And then shifting to renewable diesel. So volumes averaged above nameplate capacity for the year, which is good to see. It seems like a consistent theme about performance there. Any reason why we shouldn't expect a similar level of outperformance in 2024, such as turnarounds or anything?
Eric Fisher
Yes. I think we kept the guidance at the $1.2 billion. We've got a couple of cap changes this year. And obviously, when we convert to SAF, there could be a change in capacity because we do have to run the unit a little harder in that mode. So we're not sure what capacity will look like to that until we get the project on the ground and start it up. So I think this time next year, we'll have an outlook of what our capacity guidance will be whether it's up or down.
Operator
The next question is coming from Jason Gabelman of TD Cowen.
Jason Daniel Gabelman
The first one is on refining OpEx. And I think the market has been less focused on that metric in recent years, just given all of the strength in the margins but perhaps it becomes a bit more of a focus as margins may be normalized here to some extent.
And looking at your system, I think historically, you were at $3.50 per barrel refining OpEx. This year, you were, I think, around $4.50 million a barrel at a similar Henry Hub price to historical levels. So just wondering what has been driving that higher OpEx this year versus kind of the pre-COVID level and if you expect it to stay at this higher rate or to come back down?
Greg Bram
Jason, this is Greg. So one of the things that's probably most notable when you think over that period has been electricity prices, so not so much natural gas, but on the power side. A lot of the places where we operate have seen power costs, particularly in the summer, be quite a bit higher than we had seen historically. So that's a part of it.
The other part that thinking back over that time frame would also be more recently, some cost inflation pressure, and we've talked about that a few times before. That seems to be easing. So that's something we're working on to rein back in with our suppliers and folks that we worked with.
R. Lane Riggs
Hey, Jason, this is Lane. I will say still the lowest cost guide, and we work on this like you cannot imagine, you should know that as an organization, we're committed to making sure that we are the best in class with expenses.
Jason Daniel Gabelman
Yes. No, we're definitely sure. Is there any expectation to get back down below $4 or is this kind of $4.50 the range we should think about moving forward?
R. Lane Riggs
We'll have a look at the numbers. I mean part of the other thing that really drives this in your throughput, throughput even though we have what we would characterize as a variable and fixed cost, we run in through our expenses, most refining expenses are in large part 6. So the more barrels we run, the better that metric work.
And so you really got to -- the best time of the year to look at that and to really understand that is sort of third quarter, essentially. That's really when you're seeing the system. Normally, if we have the signal to run the highest, both things that are online and the cost structures are where they are. So it's the best time to get an understanding of where the base OpEx is for the system.
Jason Daniel Gabelman
My other question is on the refining growth CapEx, and you rattled off a bunch of what seems like quick-hit projects that clear your return hurdles, is what -- is there a way you could kind of frame these projects together in terms of potential improvement to capture and kind of whatever stable margin environment, you would evaluate that on or any type of way you could frame the potential upside from these projects? Or is it alternatively just keeping capture maybe stable and enabling flexibility to keep capture stable?
R. Lane Riggs
Yes. So the way I would think about this is we're going to try to do a little more delineation in our IR pack deck to try to maybe demonstrate the success of a lot of our projects and our gating process. But we're still disciplined in that we don't want to have all this forward-looking conversation around projects, whether they're small or big or whatever. What we do is we -- we have demonstrated, hopefully, to everyone that our process does generate returns and then we had -- and that we've -- like I said earlier, we nominally, at least today, I think we have $0.5 billion a year of spend that will generate the returns we think will make its way through the gated process.
Operator
The next question is coming from Matthew Blair of Tudor, Pickering, Holt.
Matthew Robert Lovseth Blair
Thanks for the commentary on light heavy earlier. I believe Valero runs about 200 a day of WCS at Houston in your Gulf Coast system. Is that correct? And is there any risk to that availability with TMX starting up soon?
Gary K. Simmons
Yes. So our Canadian volumes vary -- it depends on total heavies, we're probably 600,000 barrels a day, Greg, right? 500,000 to 600,000 barrels a day, and we have the ability to optimize between Mexican supply, it's live for Venezuela and Canada. Our view of TMX is that you'll still have the Gulf Coast barrels coming from Western Canada. And what it will really do is decrease exports from the U.S. Gulf Coast, and we don't really think that our Gulf Coast system will be materially impacted by TMX.
Matthew Robert Lovseth Blair
And then I had another question on capital returns. So keeping in mind that the Q4 buybacks were quite strong, payout ratio of 73% clearly impressive. We just found it intriguing that your cash balance actually showed a build year-over-year in 2023. And I would say you started the year with maybe $2 billion of excess cash, ended the year with maybe $3 billion of excess cash.
So could you talk about why that happened? Were there any mechanical limits on buybacks or were you locked out of the market? And then of that $3 billion in excess cash that you have now, do you have any sort of internal targets on -- you look to pay down maybe $1 billion or $2 billion of that in 2024?
Homer Bhullar
Yes. Matthew, it's Homer. I mean I think, first of all, we're comfortable with where we are from a cash balance perspective. But we've discussed in the past, we like to stay above $4 billion. We had a very, very strong payout, right, particularly for the quarter, but then also for the year. In terms of paying down, like, for example, we look at debt right on the debt side, we proactively look at our portfolio through a liability management lens. And so given the strength of our balance sheet, we don't really currently have any pressing need to pay down debt with a net debt-to-cap ratio of 18%. But it's an ongoing evaluation, and it's something that we look at.
Matthew Robert Lovseth Blair
And just to clarify, you said your minimum cash balance is now $4 billion?
Homer Bhullar
We like to stay above $4 billion.
R. Lane Riggs
Yes. And so we changed that. I don't know, it's a couple of years. We're really coming out of COVID. Going into COVID, we'd taken the strategy, trying to push it all the way down to $2 billion. And found going into COVID that our experience was that was probably too low. So we've decided to bring it on and go ahead and look at our minimum closer to $4 billion. Good thing about being a $4 billion now versus $2 billion before is we actually do earn a return on that cash before it was zero. So -- but that's really due to our experience as we went through COVID.
Operator
Thank you. This brings us to the end of the question-and-answer session. I would like to turn it back over to Mr. Bhullar for closing comments.
Homer Bhullar
Thanks, Donna. So that concludes our opening remarks. I'm sorry, that's -- if you guys have any follow-up questions, obviously, feel free to ping us, ping the IR team. Thanks again for joining us, and have a wonderful week.
Operator
Ladies and gentlemen, thank you for your participation and interest in Valero. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.
