Valero Energy (NYSE:VLO) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Valero Energy’s Gulf Coast operations benefit from lower crude costs due to rising freight rates, positioning it as a low-cost refiner globally.
The company is maintaining a strong cash position to manage commodity price volatility and is committed to returning cash to shareholders through dividends and share buybacks.
Valero Energy is confident in the sustainability of current market conditions, with no signs of demand destruction and strong export demand, particularly for gasoline and diesel.
The company is strategically positioned to take advantage of heavy and sour crude supply from countries like Venezuela and Canada, enhancing its Gulf Coast system’s value.
Valero is focused on feedstock flexibility and is exploring small capacity expansions and carbon sequestration projects in ethanol to optimize production and export opportunities.
Full Transcript
Valero-Gary Simmons (Chief Operations Officer)
Global trade flows over the last several weeks, it does look like we are seeing sustained higher flows moving through the straits. We’ve seen media sources over the last couple days indicating that the volume over the last week has been actually higher than pre-war levels. In addition to that, we’ve had some recent SPR releases. So overall our indications from what we see in the market, both on spreads and trade flow, it looks like the market is pretty well supplied with oil.
And as you mentioned, I mean the main story right now in the market is freight rates. As the flow through the straits increase, the inefficient process of the ship-to-ship transferring that they’re doing of crude oil in the Gulf of Oman is really tying up global shipping. It’s requiring more tankers to move the same amount of oil. You know, this is in addition to, you know, insurance risk premiums, transshipment delays, higher bunker costs, they’re all kind of driving the freight higher.
As an example, this extreme run-up in freight, I mean the cost to move a VLCC from the Gulf Coast to Asia is now averaging around $30 to $35 per barrel. That compared with the 2025 average of around 5 bucks a barrel. We’re seeing this freight increase kind of play out in all markets around the globe and across all shipping classes, mainly on the dirty freight side. This is causing severe dislocations in our global crude pricing as refiners seek to keep find barrels that are closer to home and sellers are forced to discount barrels to account for the freight cost.
Fortunately for us, the bulk of our system is in the Gulf Coast, which has access to a wide range of crude and crude qualities, and is now a large exporter of crude. Since this crude must price to export, the sharp run-up in freight costs have forced the discounts to widen in all grades, giving the U.S. Gulf Coast some of the cheapest crude costs in the world, especially on the heavy sour. The Gulf Coast is also freight-advantaged for heavy barrels out of Latin America compared with the Asian alternative, and discounts for these foreign barrels are also having to compensate for the large freight increase.
As Lane mentioned before, the Gulf Coast remains one of the most advantaged crude markets globally, and this freight run-up only further supports that. Looking ahead, our long-term outlook on crude differentials remains very constructive as incremental supply looks to be dominated by heavier and more sour barrels, especially out of Canada, Venezuela and the Middle East, which further supports the value of our complex Gulf Coast system.
Sam (Analyst)
Okay, thanks. Yeah, I was going to ask a follow-up on freight, but it sounds like you characterized your position fairly completely there. And so maybe this follow-up is just for Homer. And on the cash balance, you know, you’re carrying a lot of cash. It’s an interesting position because you have a lot of optionality. I mean, even if you’re just earning a Treasury rate on the cash, it’s a massive number at this point. And so just your thoughts on how the balance sheet is structured today, whether it’s a point in time that is it necessarily meaningful over the long term, or if you kind of like having this optionality with an outsized cash position structurally.
Homer Bhullar (Chief Financial Officer)
Thanks. Yeah. Hey, Sam, I guess let me just start by kind of reiterating what we’ve said throughout this year, that our initial decision to start building cash earlier this year was really around prudently managing volatility in commodity prices. Right. The risk that we’ve talked about is when you have a rapid pullback in commodity prices, it’s generally accompanied by a draw on working capital and a draw on cash. And so in that event, you want to make sure, like we wanted to make sure that we’re not constrained on our ability to return cash to shareholders, even if there is a significant draw on cash.
In fact, I’d say we want to make sure we’re in a great position to lean into shareholder returns in that event. So, you know, in an environment that remains pretty constructive, we’re comfortable where we are with respect to a payout. We continue to pay out above 50% and continue to build cash. You know, you touched on it, but we don’t have a lot of other kind of commitments to cash. We don’t have a lot of maturities over the next year. Plus we have a little under 150 million that matures later this year and a little over 500 million next year. So we have plenty of flexibility, as you highlighted, and obviously we’ve talked about this before.
But we’re not going to change our approach to capital investments just because we have a lot of cash. In short, we don’t have a lot of other uses of cash. So while the volatility is probably not behind us at this point, we’re in a good position to be even more aggressive with shareholder returns, especially if volatility returns. And as we ultimately move back towards our long-term cash target balance of 4 to 5 billion, in any event, I think whether margins and cash flow profile of our business remains strong or not, our long-term targets on cash have really not changed. So over time, all the excess cash we’re accumulating will ultimately be directed towards our owners.
Sam (Analyst)
Thank you.
OPERATOR
Thank you. Our next question is coming from Anav Gupta of UBS. Please go ahead.
Manav Gupta (Analyst at UBS)
Good morning. I actually just wanted to follow up a little. U.S. margins look very good, but what we are hearing is when you take into account some of the freight cost backwardation, some of your Asian or European peers, they are not doing as well. And again, you are also the low-cost refiner in the world. So I am just trying to understand, are we seeing a bifurcated scenario where one region of the world is at a good margin and can run much harder versus other parts of the world which are struggling to source crude and even when it gets there, it’s very expensive?
So can you talk a little about those dynamics, please?
Valero-Gary Simmons (Chief Operations Officer)
Yeah, Manav, this is Gary. I think we see the exact same thing you’re staring at, which gives us high confidence that this current crack spread environment is very sustainable. When you look at some of the low-complexity refining capacity in the Far East, freight cost to get crude to that refiner, and freight costs to get back into the export markets, it looks like their margins are in the $2 to $3 a barrel range. You know, in addition to the margin squeeze they’re currently facing, we’re also seeing natural gas prices begin to take off in those regions, which puts even a higher floor on where crack spreads need to go in order to force those refineries to continue to run at high utilization rates. And I think the world needs that capacity to be running today.
Manav Gupta (Analyst at UBS)
Thank you. And my quick follow-up here is have you seen any signs of any kind of demand destruction or can you generally talk about what you’re seeing in both U.S. demand as well as export demand as Valero Energy sees is out there? Thank you.
Valero-Gary Simmons (Chief Operations Officer)
Yeah, Manav, I’ll go through some of what we’re seeing on the wholesale side. For the most part, I would say we’re not seeing any signs of demand destruction at all on the gasoline side. Our U.S. wholesale network seven-day average sales are actually up 4% year over year. In Canada, they’re flat year over year. In the UK, flat year over year. Second quarter call, I mentioned that we were seeing some demand destruction in the UK, but actually in the third quarter demand recovered nicely there.
So gasoline demand has been very resilient to the higher prices. And then the export demand also very, very strong. You could see in all of our export markets, we’re seeing a good pull from the U.S. Gulf Coast. Certainly we’ve seen gasoline cracks come off a little bit. Some of that is just seasonal as you’ve transitioned out of driving season and also get the swell from higher butane blending with the winter-grade gasoline specs. But the underlying gasoline fundamentals look very, very strong.
We don’t have a transatlantic arb to ship gasoline from Northwest Europe into PADD 1. We really don’t have storage economics to begin to make summer-grade gasoline and store it, you know, which is very constructive to the spring. But I think the biggest thing, you know, when I look at the gasoline market, here we are in October out of driving season into high RVP gasoline season and you still have backwardation in the gasoline market, which is really telling you that the pump market is very tight gasoline supply.
And I think all of that is very constructive to gasoline longer term. On the distillate side, similar trends, our wholesale network would indicate about 2% year over year growth in sales, seven-day average sales. Both the UK system and Canadian system are showing flat year over year sales. The only area where we’re actually seeing lower sales is home heating oil. In the UK it is off about 10%. When you visit with our commercial teams over there, they think that’s a combination of a couple of reasons. One, you’ve had unseasonably warm weather and two, you’ve also had customers that are really trying to delay filling their tanks as long as they can.
So what that actually could tell you is you could see a surge in demand in the UK when you actually have cold weather hit. Export demand for diesel also very, very strong both to Latin America and Europe. So for us, no indication of demand destruction and in fact some of the leading indicators, you know, both GDP remaining flat and also a lot of the trucking surveys actually ticking up, you know, which would tell you that diesel demand is hanging in there very nicely.
Manav Gupta (Analyst at UBS)
Thank you so much.
OPERATOR
Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.
Neil Mehta (Analyst at Goldman Sachs)
Yeah, thanks, guys. Maybe the first question is just on volumes. The volume guide you provided for 4Q probably a little bit higher than what we thought. And so just maybe you talk about you’re running the system hard in the fourth quarter. I guess the DHT is back up too. So that should be a help as you go into the fourth quarter and then maybe stepping back for the industry broadly because we did run so hard in 2026, you think 27 is going to be a decent-sized turnaround year for the industry.
Any thoughts around that?
Valero-Gary Simmons (Chief Operations Officer)
Yeah, Neil, so I’ll start with the DHT. We really don’t expect to have manifold mechanical completion of the DHT till the end of the quarter. So it won’t have a, you know, the DHT won’t really isn’t in the guidance. We are, you know, it is a light maintenance quarter for us and so we’ll run the assets hard with margins where they are. In terms of the rest of the industry and deferring of turnarounds, we’ve been public. We don’t really defer any of our maintenance.
We’ll continue on our schedule for turnarounds. What you do hear from consultants is that there was about a million and a half barrels a day of refinery turnarounds globally that was deferred, which means turnaround activity is currently a little lighter than normal and you would expect a heavier turnaround season next year.
Neil Mehta (Analyst at Goldman Sachs)
That’s helpful. And then just in terms of Q4 considerations, maybe this for you, Homer, or Gary, but just we have averaged to start the quarter. The Gulf Coast indicator is up. The Midcon indicator is up as well. And, you know, just any thoughts as we think about the fourth quarter? Seasonally, typically things tick down, but, you know, we started off the quarter pretty strong. So any advice for us as we model out the fourth quarter?
Valero-Gary Simmons (Chief Operations Officer)
So I think, you know, the big tailwinds for the fourth quarter: typically you get the uplift of blending butane into gasoline. In our North Atlantic system, you generally have a nice uplift after we start to make Arctic diesel that carries some premium there. Seeing some good tailwinds on the feedstock side with the heavy sours discounted and a lot of feedstock optimization opportunities. And then we’re starting to see jet regrades turn positive again, which is also a tailwind.
Outside of that, you know, when you look at secondary products, it’s kind of a bit of a mix. Propylene and naphtha are off a little bit, but aromatics are up. So overall, I would say mainly tailwinds when it comes to capture rates in the fourth quarter.
OPERATOR
Thank you. The next question is coming from Theresa Chen of Barclays. Please go ahead.
Theresa Chen (Analyst at Barclays)
Morning, Gary. As we look at the very recent volatility in cracks, keeping in mind your comments about demand resiliency across your footprint, plus the floor being incrementally higher for international refiners given high freight cost, natural gas and so on, how would you explain the recent downside?
Valero-Gary Simmons (Chief Operations Officer)
Volatility?
Theresa Chen (Analyst at Barclays)
Is that a result of incremental crude and products finding its way through the strait? What explains this and how to expect these factors to evolve over the near to medium term?
Valero-Gary Simmons (Chief Operations Officer)
Yeah, it looks like some of the downward pressure on cracks is really related to more headlines. You know, people announcing releases from strategic reserves, lifting of Russian sanctions, some of those types of things is what, you know, is actually driving some of the downward pressure on cracks. I think when you digest the data and you look at how much volume is actually coming out, and then lifting of sanctions is more just a change in trade flows.
I think we’ll see a recovery in cracks moving forward.
Theresa Chen (Analyst at Barclays)
Got it. And we’ve seen various headlines about the Trump administration potentially working with operators to reopen U.S. refining capacity that’s been idled in the last 10 years. How seriously should we take these efforts? And more broadly, how do you think the supply shortage of the market would be most effectively addressed?
Rich Walsh
Rich Walsh. I’ll try to answer that one. I really think you’re focusing in here on Benicia, and so I would just remind you that the status of that refinery is it’s safely idled and has been since April, and we have no plans to restart it. When we first announced, and even just before we announced the shutdown of that facility, we had lots of discussions with both the state and the federal government and private parties, and, you know, none of those efforts actually materialized anything.
You know, it’s just a tough environment to operate in the West Coast and, you know, we just don’t see the potential for that. And the last thing I would just remind you is that, you know, to restart that refinery, you would have to re-inventory it, you’d have to restaff it, you’d have to undertake a rather extensive turnaround. So it’s not a simple process to restart it.
Lane R. (Chairman of the Board)
Yeah. Hey, Theresa, this is Lane. I’ll add to that. I think, as you think more broadly speaking, almost any refinery that’s been shut down will take a while to start up. So it’d be very difficult for them to help the prompt situation. We haven’t had a lot of inbounds from the administration with respect to starting up other refineries, but we’ve heard the same things you guys have. So I’m not saying that that’s not occurring, but I think the idea that it’s going to, you know, there’s these refineries that you can just sort of walk in and flip the lights and they’re going to start running is not exactly the case.
But, you know, we’ll just see what’s happening with respect to, on a longer-term basis, how this all plays out.
Theresa Chen (Analyst at Barclays)
Thank you.
OPERATOR
Thank you. The next question is coming from Philip Jungwirth of BMO Capital Markets. Please go ahead.
Philip Jungwirth (Analyst at BMO Capital Markets)
Yeah, thanks. Good morning. Inter-quarter we saw a lot of Venezuela upstream investment plans announced and pretty ambitious production growth targets set. So just wondering where you are now on Venezuela throughput versus capacity and just what would it take to have enough confidence to invest in increasing the ability to run more heavy crude?
Randy
Yeah, Philip, this is Randy. We continue to see pretty good availability of VIN crude in the Gulf Coast system. And as you mentioned, we’re pretty encouraged by some of the new investments that’s going on in the country to grow production moving forward. We’ve been, for a long time and we continue to be, the largest consumer of Venezuelan crude, and in the U.S. Gulf Coast we’re the largest by far. In fact, in the third quarter we saw the Venezuelan crude compete very favorably compared to other heavy sour alternatives, and as a result we set a new processing record for Venezuelan barrels in the Valero system during the quarter.
As we moved into the fourth quarter, we’ve seen the economics shift some. The higher freight market has especially impacted the heavy crude market. We’ve seen discounts for Canadian crude in the Gulf Coast widen to as well high as $27 to $30 under Brent, making the Canadian barrel much more competitive versus the Latin barrel. As we kind of touched on before, our system is very flexible, so our ability to flex between different grades is a big competitive advantage.
And as we move forward we’re going to continue to look at opportunities where we can further increase consumption of those barrels.
Lane R. (Chairman of the Board)
I’ll add to that. I mean, definitely one of the buckets that we look at in terms of our projects or even acquisitions with respect to this sort of heavy sour position. We feel like this is an area to help us with our feedstock optimization, and we’re looking for debottlenecking opportunities and other opportunities in that space to increase our exposure to be able to run heavy.
Philip Jungwirth (Analyst at BMO Capital Markets)
Okay, great. And then can you hit on the outlook for DGD margins and some of the, just the noise in 3Q/2Q around capture? Anything one-off to keep in mind there and how you see that metric trending into the fourth quarter?
Eric
Yeah. Philip, this is Eric. I think, you know, just as a quick refresher, 2Q had a lot of one-off, one-time benefits like IPA recovery as well as a lot of modeling updates and year-to-date true-ups. And so you had kind of an unusually high second quarter because of some of the one-time benefits. You also had the benefit—and we’ve talked about this on previous calls—there’s a lag on how feedstocks price when they come into DGD, and you combine that with the volatility that we’re all seeing, it creates a lot of noise in margin capture.
So if you look at 2Q, you had feedstocks that we had bought in 1Q that were still much cheaper than the margin indicator, so you had that advantage. And then you had, if you recall, a lot of the comments about the conflict were kind of waning. And so as ULSD fell, even though that’s the base commodity price for DGD, it did help with some of the volatility in the positions of how cargo was specifically pricing in that quarter. 3Q, you had the exact opposite. We had the impact—obviously we had the outage, we had the storm in DG3—which forced us to run a higher percentage of foreign feedstocks that were on the water. So, you know, foreign feedstocks don’t capture PTC. So we had a lower PTC capture than the margin indicator. And then you also had a lot of noise around the D4. And so with the conversation about SREs and whether or not they’re going to be reallocated, we saw a pretty significant drop in the D4.
And as those product cargoes were pricing, we saw a lot of volatility impact hit that lag as well. So it’s really all tied up in lag and the volatility of both ULSD and the D4. If I think about 4Q, I mean, you still have a structurally high D4 RIN. So we continue to see DGD very positive from a margin standpoint. We see positive cash flow, and I think the real strength of kind of like the refining segment where Gulf Coast is the most advantaged from a feedstock availability standpoint, combined with Darling being the largest producer of domestic feedstock—PTC benefits domestic feedstock—so we are pivoting into, as always, maximizing the feedstock from Darling.
Now maximizing vegetable oil runs, really going into this D4 short that is going to continue into ’27. Capture is a very difficult thing to prevent.
OPERATOR
Thank you. The next question is coming from John Royal of Piper Sandler. Please go ahead.
John Royal (Analyst at Piper Sandler)
Hi, good morning. Thanks for taking my question. So my first question is a follow-up on the demand side. And I think you’ve mentioned that it’s been relatively stable despite significantly higher prices on both gasoline and diesel. I was wondering, if you guys are in this market every day, are you surprised that we haven’t seen more demand response, and maybe do you have a view on if there is a price level where maybe we’d start to see a little more elasticity?
Valero-Gary Simmons (Chief Operations Officer)
Yeah. So I would say, especially with all the headlines about pricing, we have been surprised that you don’t really see any demand response so far. In terms of price level where you would expect some kind of demand destruction, I don’t really know where that is because most people would have predicted we would have already seen it.
John Royal (Analyst at Piper Sandler)
Fair enough. Thank you. And then I guess Homer mentioned in his opener that you might be looking at some capacity growth in ethanol. I was hoping you could dig in a little on that in terms of timing and magnitude and any other color you could give there.
Homer Bhullar (Chief Financial Officer)
Sure. With the new PTC benefit with the 45Z, it’s encouraging really all ethanol producers to take a look at higher volumes. And so we are looking at mostly capacity creep. So it’s not— I mean, on a refinery scale this is not significant capital, and it’s very quick-hitting capital. But, you know, it’s small capacity creep. We’re continuing to pursue our carbon sequestration projects at a couple of our sites. We are hoping, you know, those are hitting somewhere between late ’27 to mid-’28.
All of that will grow both ethanol volume as well as lower ethanol CI, which makes it more attractive for exports. So we continue to see pretty strong export demand for ethanol, and our capacity is all pointed at growing exports.
John Royal (Analyst at Piper Sandler)
Thank you.
OPERATOR
Thank you. The next question is coming from William Blair of Tudor, Pickering Holt. Please go ahead.
William Blair (Analyst at Tudor, Pickering Holt)
Hey, good morning. Thanks for the question on the freight rate. You mentioned the benefits on the crude side in your Gulf Coast system. We have two follow-ups here. So one, are these higher freight rates a headwind to your North Atlantic and West Coast refineries, or are you able to use, like, substitute crudes? And then two, what kind of impact are the freight rates having on your netback for your Gulf Coast product exports? Is the rate just pass through, or is it pulling down the economics for U.S. product exports?
Valero-Gary Simmons (Chief Operations Officer)
Yes, this is Gary. For the most part, you know, the higher freight rates actually give us an advantage into the typical export markets into Latin America. You’re largely competing with European barrels into those markets, and so we have a freight advantage there. The only place that it does tend to hurt us is the exports—the diesel exports going to Europe. And I would tell you what it causes is just a lot of volatility with the arbs going open and closed.
Basically, Europe is short diesel and needs it. And so when the freight rates spike, their prices have to adjust to keep those arbs open and keep the barrels flowing.
Randy
Yeah, on the crude side, this is Randy. We do have some exposure to the higher freight at our Pembroke refinery, into the West Coast, and to a smaller extent into Quebec City, even though that refinery is mostly supplied via pipeline. However, the benefit of the Gulf Coast impact far outweighs that. In addition, we do have a large fleet of time-charter vessels which tends to buffer some of the impact of the higher spot freight rates.
Valero-Gary Simmons (Chief Operations Officer)
Yeah, this is Gary. I think that the data we see shows that on a three-month average basis compared to a 2024 equivalent period of time, there was about 1.4 million barrels a day of refining capacity offline in Russia. So still significant. Most consultants estimate that it will take quite a long time to get that capacity back. I can’t really give you a duration on the diesel exports. I think if you look at the volume that was announced, it kind of puts it at July levels of where Russian diesel exports would be, which is still 6 to 700,000 barrels a day below where Russia was last year at this time.
So it’s not a significant volume. And as we’ve always stated, really sanctions or lifting of sanctions just result in change of trade flows, not really incremental supply coming onto or off of the market.
OPERATOR
Thank you. Our next question is coming from Joe Latch of Morgan Stanley. Please go ahead.
Joe Latch (Analyst at Morgan Stanley)
Great, thanks. Good morning, team, and thanks for taking my questions. So I wanted to just ask on St. Charles, so following the completion of the FCC work during the third quarter, could you just talk about how that unit is performing relative to expectations and then maybe what kind of improvement should we expect in product yields or capture rates as we move into the fourth quarter and beyond? And then maybe more broadly beyond St. Charles, can you talk about where you’re seeing the greatest signals and opportunities to deploy future growth CapEx?
Valero-Gary Simmons (Chief Operations Officer)
I’ll start with the St. Charles project. Yeah, the project came online and despite the fact that it wasn’t fully operational during the third quarter, the EBITDA generated in the third quarter actually exceeded our FID for the project. So it’s performing very well. As Lane mentioned, you know, a lot of the project is really to fully utilize the alkylation capacity that we have there. And so typically you would see the greatest benefits from that during gasoline season.
So we would expect more of a benefit in the second and third quarter than what you would see in the fourth quarter and first quarter.
Lane R. (Chairman of the Board)
Yeah, and I’ll add to it, this is Lane, I mean, in terms of projects that we like, it really is feedstock flexibility. If you think pre—I’m going to say Ukraine invasion—a lot of the to shore up the barrels required to fill out U.S. refining capacity was VGO and other intermediates coming from that part of the world. And so consequently, as we went through the summer, even though we had wide margins, there were times when you had to go out and buy spot in VGO.
Actually your SDFC margins were low. So one of the buckets that we see opportunity in is to be a little more, make our system a little more resilient as to not be quite so dependent on the VGO out there. So find ways to increase VGO production. And I said earlier we’re optimistic about Venezuela and the Canadian sort of buildout for heavy sour. So we’ll look at ways to debottleneck our heavy sour capability.
Joe Latch (Analyst at Morgan Stanley)
Great, thank you, that’s helpful. And then just given the significant cash generation that we’ve seen and excess cash building on the balance sheet, can you just talk about how you’re thinking about potential M&A opportunities here across refining, renewable fuels and ethanol?
Lane R. (Chairman of the Board)
I’ll start. We always look at, you know, like every earnings call, we look at everything that comes on the market. You know, we in particular like our Gulf Coast system. We’ve been unapologetic about that. We think it has the most flexibility and we add the most value when we can actually optimize in our system. So we continue to look for opportunities in terms of that. And we also like the ethanol business. We’ll continue to look at the ethanol business.
But again, we’re going to be very, very—we’re going to adhere to our disciplined approach to capital. You’re not going to see us, even though we’re sitting on a lot of cash, we’re not going to change our approach in terms of our hurdle rates and our return metrics and how we think about the capital allocation framework that we use that we’ve been using for the last 10 years.
Joe Latch (Analyst at Morgan Stanley)
Yep, that all makes sense. Thank you very much.
OPERATOR
Thank you. Our next question is coming from Doug Leggett of BofA Securities. Please go ahead.
Doug Leggett (Analyst at BofA Securities)
Hey, good morning, guys. Hopefully you can hear me okay. Hey guys, I got a couple of questions on reliability and the elevated refinery runs you guys have been able to deliver, not just for Valero, but I guess for the industry. Clearly maximizing exposure to the current environment is, you know, is your—I guess you’re showing the market, leading by example. What does this mean for the maintenance cycle, the reliability of your system and more importantly the reliability of the industry’s capacity to run at these elevated levels?
Do you see any risk of unplanned downtime? I guess as we think about 2027 going forward. I know it’s a generic question, but I’m just curious on your views.
Valero-Gary Simmons (Chief Operations Officer)
Yeah, so as I mentioned, you know, we haven’t really changed anything in terms of our philosophy on maintenance and taking our turnarounds. They’re going as planned and so I don’t think you would expect to see anything different in terms of our reliability. If you do believe the consultant data that says 1.5 million barrels of refinery turnarounds were deferred, it does lead you to believe that there could be some unreliability there and a heavier maintenance season next year.
Doug Leggett (Analyst at BofA Securities)
I guess we’re hearing a couple of worries emerging from Europe in particular, which is why I asked the question. But I appreciate your perspective. I guess my follow-up is we’ve obviously got a massive reset in market expectations of mid-cycle. I’m curious if you can offer any thoughts on how this might impact your view on how you return cash to investors and thinking specifically about if we really are in a higher mid-cycle environment, how would your dividend policy shift relative to, let’s say, your share buyback policy?
And I’ll leave it there. Thanks, Doug.
Homer Bhullar (Chief Financial Officer)
It’s Homer. I mean, I think we look at both the dividend and share repurchases as a component of our total shareholder return. We do have a higher mid-cycle view for all the reasons that Gary, Randy and Lane mentioned. But we still operate in a cyclical industry. You’re asking about dividend. I think I’ll add, like in theory, a higher mid-cycle increases your debt capacity too. But we’re not obviously levering up—much like our balance sheet. We want to make sure our dividend is durable both in good times and bads.
And the dividend is obviously a permanent commitment we’ve made which we will use and have used the balance sheet to defend, as we did during the pandemic that wasn’t too long ago where our ability and willingness to pay the dividend was challenged. So the dividend is a one-way ratchet. We want to make sure we have some ratable element to dividend, dividend growth through cycle. And then also we look at dividend yield in the context of our closest peers and we’re kind of right in between both.
So with all this in mind, we’re going to be more ratable on dividend growth, but obviously ensuring a predictable and attractive total return is a key aspect of our value proposition to our owners. And we’ll continue to round out that total payout with share repurchases as a more efficient and flexible means on delivering on that promise over the long term.
Doug Leggett (Analyst at BofA Securities)
Very clear. Homer. Thanks, guys. I appreciate it.
OPERATOR
Thank you. Our next question is coming from Jason Gableman of TD Cowen. Please go ahead.
Jason Gableman (Analyst at TD Cowen)
Yeah, hey, I just wanted to go back and revisit the demand destruction discussion for a second because we have seen diesel prices in New York Harbor having a tough time really sustain over $5 a gallon or around $200 a barrel as crude continues to trend. So it does seem like maybe at that level there is some destruction or for whatever reason, it’s difficult for diesel prices to move higher. And so as crude moves higher, there’s potential for some compression in the diesel margin.
Is that a risk you see going forward relative to where cracks are right now on the diesel side?
Valero-Gary Simmons (Chief Operations Officer)
Yeah, I think that’s a fair characterization. We’ve always felt like one of the things that’s benefited refiners during this conflict is the fact that crude really hasn’t gotten very, you know, as expensive as what it could have gone. And so if for some reason crude runs up, you know, I do think that, you know, it could cause some compression of refinery cracks.
Jason Gableman (Analyst at TD Cowen)
Yeah, thanks. My follow up is just quickly on the M&A comment. You obviously mentioned you’d want to grow in the Gulf Coast if an asset became available, which makes sense. But you know, the North Atlantic, that Quebec market, there’s a couple of private assets up there. Those refining margins have been strong. There’s probably some synergies within the business. Is that another region you would look to consolidate if there were assets that became available and made sense to you?
Lane R. (Chairman of the Board)
Yeah, this is Lane. So as long, you know, it’s another region that we like. So if something came available and again it met our investment criteria, which again, we want to be disciplined and we want to make sure the thing makes sense for the entire economic cycle and not just sort of get romanced by the prompt situation, but it’s a region that we feel like we have a really good position in. And if we could add to it and increase our flexibility and our ability to trade around it and create shareholder value, we’d certainly be interested in it.
Jason Gableman (Analyst at TD Cowen)
Great. Thanks for the answers, guys.
OPERATOR
Thank you. This brings us to the end of today’s question and answer session. I would like to turn the floor back over to Mr. Donovan for closing comments.
Donovan
Yeah. We appreciate everyone joining us today, and as always, feel free to contact the investor relations team if you have any additional questions. Have a great day.
OPERATOR
Ladies and gentlemen, this concludes today’s event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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