Q3 2019 Earnings Call
At this time all participants are in the listen only mode. After the speakers presentation. There will be a question and answer session to ask question. During the session you will need to press bar was on your telephone. Please be advised that todays conference is being recorded if you require any further assistance.
Please press Star Zero I would like to have the conference over to your speaker today, Mr. Blake Fernandez Senior Vice President of Investor Relations market intelligence. Thank you. Please go ahead.
Thank you Jerome and good morning, I would like to thank everyone for joining us on todays conference call and webcast to discuss Delek US Holdings third quarter 2019 financial result, joining me on today's call is Uzi, you mean, our chairman President and CEO .
He Ginsburg executive Vice President and CFO .
Green MVP and COO as well as other members of our management team.
The presentation materials will be using during today's call can be found on the Investor Relations section of the Delek us website.
As a reminder, this conference call may contain forward looking statements as that term as defined under the federal Securities laws.
Please see slide two for the Safe Harbor statement. In addition to reporting financial result in accordance with in accordance with generally accepted accounting principles are gap, we were for certain non-GAAP financial result.
Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP result, which can be found in the press release, which is posted on the Investor Relations section of our website.
Our prepared remarks are being made assuming that earnings press release has been reviewed and we are covering less segment end market information that is incorporated into the third quarter press release.
On today's call Artsy will review financial performance and fit Fred will cover operations for the quarter, then Uzi will offer a few closing strategic comment with that I'll turn the call over to assay.
[noise] things Blake.
We had strong financial result, this quarter, despite lower Midland differential.
And blend maintenance.
Operator refinery.
As you can see on slide three on an adjusted basis for the third quarter 2019.
Delek us reported net income off $58.7 million.
[noise] or 78 cents per diluted share.
Compared to net income of $186.4 million.
For 2015 cents per diluted share in the prior year period.
Our adjusted EBITDA was $163.1 million into third quarter 219.
Compared to $325.5 million in the prior year period.
Adjusted them is all this quarter include 20.7 million pre tax benefit from Rina waivers granted for Krotz Springs, El Dorado entirely refineries.
However.
This was partially offset by a negative refinery inventory impact excluding LCM.
Of $13.5 million.
I would like to highlight that year to date, adjusted earnings and EBITDA or above year ago level.
Despite a compressing Midland differential.
On slide four we provide it gets the waterfall.
In the third quarter of 2019.
We generated significant cash flow of approximately $213 billion from continuing operation.
Which include and working capital benefit afraid you want to be on those.
The strong cash generation and allow us to fun cash capital expenditure off how does in $6 million, a long read $75.3 million contribution to week to websters.
We're on track to compete project financing buys as early as year end folding do Webster.
And the remaining contribution should be funded two data vehicle on a non recurring basis.
As a reminder, we expect total net investment four week to Webster of 342 or $318 billion.
Finally.
We returned approximately $65 million of cash to all shareholders between buybacks and dividend.
Slide five highlights our capitalization.
We ended the third quarter would over $1 billion of cash on a consolidated basis and.
$994 million of net debt.
Excluding the adopted then it will just takes of $834 million, we had net debt of approximately $159 million.
At September 30, 2019.
On slide six we provide fourth quarter guidance, we estimate based on the forward curve didn't realize Midland differential you know gross margin will be in a range of 15 cents to 35 cents per barrel premium to WT I.
With that I'll now turn the call over to Fred to discuss our operation.
Thanks Awesome.
During the third quarter, our total refining system crude oil throughput was approximately 274000 barrels per day, which reflects downtime at Eldorado.
As shown on slide six for the fourth quarter 29 team, we expect crude oil throughput the average between 275000 280000 barrels per day.
Separately I like to point out that in the first quarter 2020, we have a turnaround plan that are big spring refinery.
Total throughput for big spring in the first quarter should be in the range of 30 to 35000 barrels per day.
On slide seven what a highlight our capital spending.
Capital expenditures during third quarter, 2019 were $111 million compared to 86 million in the third quarter 2018.
Our full year 2019 capital expenditures are forecast to be $415 million.
This amount includes 247 million in our refining segment 10 million in our logistic segment 21 million in retail and 137 million at the corporate low.
The Big Spring gathering system is included at the corporate level and will comprise approximately $132 million this year.
As a reminder, capex excludes joint venture investments like Red River anyone to Webster.
While capex for 2019 is expected to come in about 5% above our prior forecast. This is mainly a function of pulling forward spending from 20 point as the timing of the Big Spring turnaround was moved from March to January .
We now expect Capex next year to be meaningfully lower on a year over year basis.
Next I'll turn the call over to using for closing comments.
Thanks, Fred and good morning, everybody cash generation was significant in decor and I'm pleased with the progress on our strategic ambition of building out our midstream business and increasing utilization of our own logistics assets versus third party.
Moving to slide eight big spring gathering acreage continue expanding and now we have more over 275000 dedicated acreage.
It goes on the system up from 250000 acres previously.
The ongoing progress at Big Spring gathering, we now expect $20 million to $25 million of EBITDA from Duck system. Next year is gathering continues to grow it places delek any unique position among refiners wood availability to equity accrued in access of our refining capacity.
This dynamic.
Underpin our decision to enter Wink to after JV. It all for full integration potential once the project is complete we would have often optionality to play both our own refinery.
Selling into local markets or accessing the premium Gulf coast market.
Moving to El Dorado.
Were excited about the vacuum tower.
Oh, great that was completed at the end of the third quarter.
Well now position to run it on increased utilization rates, which we just substantial improvement in product yield including increased distillate all.
These improvements should allow el Dorado to take advantage of potential ARYMO benefits, including strong distillate cracks and increased capacity to run West, Texas sour feedstock.
As shown on slide nine cash return to shareholders.
Remains a priority you to date, we've repurchased $147.8 million of our stock our share count has been reduced by 16% from the peak in the second quarter of last year, our capital allocation program balance of cash to shareholders with potential opportunity for growth.
We intend to repurchased 30 million a million dollars of Delek stocks.
In the fourth World 2019. In addition, our board of directors approved at 3.5% increase in our regular quarterly dividend for the figures worth 2019 level. This marks our fixed <unk> configured to be increased since the <unk> first quarter of 2018.
With that operator could you. Please open the call for questions.
Ladies and gentlemen at this time.
I would like to remind everyone in order to ask question simply press Star then to number one on your telephone keypad Pos for just a moment to compile that kidney roster.
Hey, they had a question from the line of what Roger read of Wells Fargo. Your line is open.
Hey, Thank you good morning, everybody and apologies for any background noise.
My way through airport right now.
Hi, easy I just wanted to I guess first ask or maybe this is for you all see cash flow in the quarter was pretty good, especially the recapture off the working capital.
And you gave pretty good idea, what your gathering and processing system should add it.
But as we think about it.
A.
Relatively modest or even maybe slightly negative.
First is tricky premium.
How should we think about cash flow generation is look at 20 and 21, if not an absolute number maybe sort about a rough contribution as we think about the three segments.
I think is first and good morning, I think it's too early to talk about the contribution for a 2020, we do know that they we have a meaningfully decreasing R 22, any capex plan. It below 2019 plan in order to make sure we have a.
Theyll available cash flow to continue our dividend growth in buyback program.
With that being said, Hey, we do think that our gathering business.
I do a aspects of it can generate much more money next year.
Then what we had one our base case and they also there was a good chance that solve the wind to websters wouldn't start producing cash as early as next year. So we're very confident that the in outperformance of our logistic segment, our retail segment and even our refining segment. When you look at that 20, a 19 numbers because remember.
That El Dorado ran it almost every quarter in the first three quarters of the L. below a 65000 barrels a day producing a distillate yield of 37%. When you look at the IMO environment, we're gonna be in a much better place because as we mentioned on our call earlier, we're looking at higher this in a deal so.
I think there is that you have to be seen but they then it will be a big beneficiary of the increase in distillate crack something we haven't seen as much in may two in an ideal, especially in El Dorado.
Yeah, I fully agree distillate market much tied pretty much everywhere I was just curious without getting too deep into that particular project you see other similar type tweaks into your system, whether at Tyler or Krotz Springs that you can you know effect sort of changes like this in short order.
Okay, and get a better product yield on your yields pretty pretty solid already but I was just curious as any other once you have there.
Well first we're very excited about El Dorado, increasing El Dorado distillate yield by at least.
4% is something that we're very excited.
We always war on other project.
Sometimes they do require downtime like it happened in the third floor with a with El Dorado.
So that's something that you need to balance between hey, how big is the benefit versus the the downtime but for sure.
Several projects that will will enhance our.
System I, just want to make sure or we just want to make sure that we bought the downtime and the ER and the returns obviously with El Dorado. It's no brainer. It was no brainer to a big via a vacuum tower down.
For 45 days because of the enormous benefit from that.
Great. Thank you.
Your next question comes from the line up one of.
Your line is open.
Hey.
Cladification Sylvania initially announced linked to that stuff the capex was pretty funky to see 18 they.
No what you're seeing is this spend 75 million, which has already done there is no more spend associated with things that stuff as you singular project finance am I understanding that right.
Let's start with effect, if you use 20% they need for the project and they use the midpoint of the project of $360 million, you'll end up would roughly equal the need for the project of 72 million.
Already in Q3, we invested 75 million.
We haven't secured a yet the project financing, but we believe that we are on track to close it as early as at the end of a 29 team and their fault. It meaningfully we shouldn't have made too much outlay of cash or when you look at the continuation of the project Oh, we say that there is.
Actually a situation that we will even had a cash inflow where do we completed the project because that's going to you. If we elect potentially we can reduce the equity in the business or India investment to 15%.
So right now we're on track to close the final thing, it's not secured yet we're going to launch into the next two weeks, but the market. So good and we have good a secure they yeah I wouldn't say commitment from something.
So the midstream so refining stand you said would be down next year, but if that is normally Daniel contribution. We should also assumed that the midstream spend DKI next.
It would be lower because amongst all that stuff would be hopefully project finance is that right there to think about it.
Correct now when we talk about Capex just to be clearly, we do absolutely. There's no capex its investment in a JV and but you are ranked first we don't have any board and are willing to EPS to next year. It maybe even generate free cash flow back to us on top of lead we do expect overall dk Capex to go down I mean.
Fully including DPG person would you the gathering system.
Okay. So next question is more on the line up.
Oh, you indicated its besides the high end do you you know we're also increasing utilization can you help us quantify in your I'm just trying to get the fall what crotch. The change you mean attended a needle I'd be looking at a 15 20 million EBITDA.
EBITDA uplift RV looking at from the change you mean.
Yes, quantifying the benefit.
Let's start with the facts you know when you look at this quarter just this quarter D. A those profit opportunity was $20 million to $25 million.
And then when you look year to date.
On average every quarter and that's what's the number anywhere from $15 million to $20 million every quarter year to date of basically impact or not.
That's a before we're using the new curve. So these can be a significant number when you just look at this year compared to next year.
And last question I seen or the every quarter, we're getting a 3.5% handling fees and dividends, which is a good I think given up from 9007 being ended up like 90% or so so I'm just trying on fine with us like how does this game gone a is it all about getting to a competitive yield or it's a <unk> you know balancing.
Dividends and buybacks.
Oh, well not that's a great question.
We continue to generate significant cash flow you see it even in this core.
The the cash that we generated and we told you not you personally, but we told the market that there will be a reversal of working capital.
A drain that happened in the first war and the second core.
And now we are we say a we see that this came in so even after we spend a 75 million that which we believe is diviya.
What we need to a positive equity for the linked with the project.
We see that we have continued to generate cash flow that we will not stop.
In hiking the dividend yield.
In the foreseeable future just because of the fact that we are we're committed to returning cash to shareholders and as I said the combination of bear.
Performance at El Dorado.
ER, which includes eliminating the fuel oil or eliminating almost completely dual fuel oil make.
To get would I am all together with the cash flow from the gathering.
We are committed to return the cash to a shareholder so I wouldn't it for modeling standpoint, just assume that did these dividends hikes will continue India for for the foreseeable future.
Thank you congrats busy on a quarter again.
Thank you. Thanks again bye now.
Your next question comes from the lineup anymore Morgan Stanley . Your line is open.
Hey, guys. Good morning, just had a quick question regarding your balance sheet, obviously important I have a billion cash.
Sounds that you guys can it be generating a higher level cash will answer your potentially.
Just how are you thinking about that strategically is there a target level cash it like.
And at the rest of more of kept dry powder to be opportunistic or are there more cushion to be defensive how are you thinking about that.
Good morning, Ben first they were very proud about their ability to continue and they produce cash flow. It every quarter, even when we invest in the capex like we did this quarter and a week to afterwards, we still able to generate and have cash of more than a billion dollar there's no and secret the amount of what is that number that we need to be up without being.
Said, we always like to have probably more cash flow as a percentage of our there over the balance sheet, though the equity value of the company compared to the other.
With that being said and.
The reason why we're doing it it's funny enough to and you also these one opportunity as we always like to look at other thing and we want to be able to EQT fact, when the opportunity showed up second cushion, we won't be able to use our balance sheet wouldn't needed to continue they buy backs to continue the dividends to continue investing in the company and that the that was.
The operating operating the company in a way that the you know with two or three fold headquarters doesn't need back our ability to continue in a basically it continue without capital location program hopefully I answered the question.
Oh, you did appreciate the color there.
Just just the second question is it really around your upgrading of Eldorado and you know I mean, 4% increase and distillate yield sounds pretty good and just wondering for you guys to do to upgrade should we read your view an idle has changed.
I remember previous you kind of how to view that it was going to be relatively short lived for you to guide when you guys to make a decision Gulfport is is that I'm old base, you seeing something different getting isn't that maybe a little long there how do I reconcile that.
Hey, then its blakemore.
I'll just address a broader Idaho question, and then tied in for one or two components. The IMO and as you know we have very little high sulfur fuel oil production and so we're not in a situation where were forced to recycle that system.
Moving to the distillate side, which is really where we have significant leverage as you know, we're actually seeing market dynamics drive the distillate crack right now and it's hard to say for sure, but we're not really there's no real evidence that IMO necessarily driving this there's some broader market factors.
One we've got heavy global maintenance.
You see the Saudi strike took a lot of the just let rich volumes off the market, we have P.S. off the market and now with cold weather, we're actually seeing a fairly wide arbitrage to send you a less the from the Gulf coast over to the East coast. So in our views the distillate margins very strong, but it's not necessarily reflecting all the IMO benefit.
And so some of these decisions that were taking to improve the distillate yield.
Partially driven just by fundamentals, but then also tying in potential uplift from from IMO going forward.
Great. Thanks, guys.
Your next question comes from the line of question Yeah Citigroup. Your line is open.
Hi, good morning, Thanks for taking my question.
Hi, good morning.
Well I mean I wanted to ask first on the gathering project sort of a broader question.
The weekend.
Well be hearing in the upstream ocean rig counts come down were there some.
Turns about production level sort of maybe bottoming out here and maybe changing called the next 12 months.
You know what supply will be in the overall U.S. shale.
Base.
I just wanted to get a sense of you know your gathering as it sits in the context about background and if we look forward to further gathering enhancements, maybe if you could talk a little bit to remind us about the nature of your gathering project in how they might be differentiated from maybe some of the production declines that most of us are expecting integrators.
Play in the U.S. upstream.
Well that's a great question first let me, let me give you our perspective a sense today.
We made years ago decision that our gathering will focus on the.
If you will the best counties.
In the Permian.
And only now people are starting to understand that there's a difference between different counties are counties are multi county, our marketing a Midland in Howard County.
These barrels that are coming from these counties are 30, 738, A.B. eyes, we watch it everyday we have a report come from every producer as you know we have a dozens of producers.
And we don't see any slowdown in these three.
Counties also we checked.
In light of or the last thought the political.
We see zero.
Slowdown from producers at any given moment as a metric the projections they give us for next year meet what they told US a year ago.
These are really good thereof.
And.
Was in we spoke about that.
That now we are basically.
The end of year, what will be longer.
Crude oil.
So delek will be in a unique situation that we will have quality barrels.
And we are longer both crude and end products. So for us for me or for US that's the best.
Positioned to be especially in these three counties that are so so good to produce.
And obviously, we just said that we increased the dedicated acreage this core too.
Two above into more than 275000 acres I'm just going to remain.
You and others that.
Similar gathering systems are being sold four hundreds and hundreds of millions of dollars. We just saw the last.
Deal. So we continue to believe that there will be.
More production coming from the if you will best counties.
And we don't hear anything from any producers. So our hope that was a long answer but to help us at every day every angle of your question.
No those very good thanks very helpful. Thanks, Uzi and just one quick.
Follow ups from cash flow statement.
So working capital benefit.
Just wanted to confirm that we should be thinking with a more sort of a reversal of the.
Working capital build in the first half and then a further confirmation sort of how to think about it for Fourq you that thats sort of.
You bet that that it's not that isn't it doesn't turn into headwinds going forward in last year, perhaps you know.
Depending upon crude purchases or something else that might that might change it.
Stance that doesn't reversion to mature the headwind in fourq.
Correct. When you look at the year to date numbers, you'll see there was basically no material change in working capital and in Q1 into when prices of all came up you know we had a favorable inventory gains basically that we reported that doesn't come with cash flow and then this year. This quarter when prices came down we actually collected the some of that case.
Basically to the working capital changes, we don't see right now any tailwind or headwind for Q4, like you said before going to run less or more barrels there maybe some change, but we we don't anticipate one.
Okay. Thanks, very much for the time guys appreciate it turn it over.
Your next question comes from the line Paul Sankey Mizuho Your line is Hilton.
Hi, everyone.
Reported you. So the short term question is the.
Keystone pipeline.
We're highlighting that you guys would be around taxes.
When or if we can say that for me because can you just talk a bit about what's happening from your perspective, and how to pursue markets. Thanks.
Yes, let the RV got Laura Chief commercial officer take that one of your purchases.
Hey, how are you Sir has the watches it very carefully.
So and.
We believe that cushion is still a long bill obviously when the market is a game.
But then the opportunity everyone wants to use the last logistics aspect that they can.
We are still there remain very optimistic about investments we made in the area and most of our investment labor is based on.
At the end days.
And this them as supply.
So all in our cushion is still long bills.
And that's obviously something that every midstream we would like to look how to utilize the last piece of pie.
Yeah, but they all know investment built into their finished.
Thank you you're going to suffer from teams done a longer is now is that is that misguided will.
How would we get to them because my understanding obviously as you will know.
A big good users Portland, no. We obviously are not use of that pipeline, but that's another pipeline that they can't take volume of cushion.
And then that's something that there.
Changed the balance of cushion, but it's not something thats not careful what we do because we are mostly midcontinent on that.
[noise] right.
If I could switch slightly to two another big big announcements this quarter, which is the worthy you've done on improving customer use that really kind of is surprising the skills, which should manage that can you just took a bit more about it because it's obviously going to be.
Very important in terms of profitability given current market conditions.
Well I'll, let a I want to introduce to everybody our president of refining the guy that actually are constructed on that dilution umbrella.
Nothing to market the venue, but a welcome to the cold So a good Louis Thank you easy.
So yes during.
Our IMO scenario planning, we recognize a potential opportunity to take advantage of the oversize design of the crude back unit they already refinery.
So in Q3, we plan to slow down other refinery to go after design change in upgrade to the vacuum tower.
Preliminary cash results have shown to be very effective.
The design change allow more lift in the vacuum tower to produce own spec asphalt straight off the tower.
As well as increasing gasoline.
And just went might yield a while we minimized our fuel oil production.
These results are will then provide us the flexibility of what type crude we like to run whether it's like medium or heavy crudes.
Depending on the LP model or how it predicts going in IMO.
And then as we look at it our current models and also our field cash run all indicate that we have a consistently showing a 4% above 4% just went yield increase.
Got it.
Finally easy on the market. This view that the keys done if it will be one can narrow that the Brent spreads I know you've always got a view on these things would be interested in.
I'll leave it there thanks.
Well obviously.
The some competing factors here first on the award needs to absorb all that could that is coming from United States. We're doing a a huge walked right now to understand what destinations for light crude is is existing toward so also the shipping.
Cost is going up in at the same time Keystone, obviously impacting into the other side, we believed that the market following that see around $6 I'm benchmark as as we stand.
It was still a I'm not smart enough or we're not smart enough to know what the impact of I tried to dump on another two or 3 million barrels.
On the award or like a buyer pool, but I I assume that there would be some impact to that we in our malls, we always a few five to $6 Midland Brent.
And that's what we see right now.
Thank you.
Your next question comes from the line up Brad Heffern RBC. Your line is open.
Yeah, Hey, everyone I'm, sorry to harp on the El Dorado questions, but just one further one on the yield so.
When I look at the yield structure of the refinery. It's like you know, 8% asphalt yield something like that and maybe 1% pet Chem and 1%. Other so where is that 4% yield coming from is that the overall.
Production of the refinery is going up some or is it taking some out of the asphalt category. Just any color you can give me as to how that's going to be accounted for going forward.
So a this is Louis again looking at the design the crude back units design for a 100000 barrels.
For a medium sour design so.
With the new upgrade the tower, we actually have the choice not to make fuel. So we drive everything into the gasoline yield as well as making spec product of asphalt. So it's really split that splitting the tower up to get to drive up the tire to get captured additional yield Oh straight off the tower.
Okay. Thanks for that and sorry, if I missed that actually did you give the exact working capital number for the quarter. That's all I have thanks.
Yeah, He was a benefit of the $80 million.
[noise].
Brad.
That's it for me thanks.
Thank you.
Okay and then that next question comes from the line up Neil Mehta of Goldman Sachs. Your line is open.
Hey, Ed. Thank you team and good morning, one of things that we've talked about what do you guys. Lately is is the transformation of your business and how how you're shifting away from being a heavily levered to to refining and switching a increasingly into non refining businesses can you just provide sort of that they picked.
Your perspective of what you're trying to accomplish over the next three to five years kind of quantify how big you want to get in non refining and what the path. There. So there's a lot there, but I think it's probably the most important strategic question for you guys.
As usual nearly all your are you youre a portion of our are spot on so Oh, we are in the middle of.
Creating yeah.
Expanding our integrated business more.
And are more and more we want to rely on our laws logistics assets versus third party.
We Oh right now if we look I Oh, we expect in the next three or four years to get to a midstream around 400, a dog. This quarter. Obviously, we had a DKL 50 to a million dollars.
In which it was a record the our core.
We need to see a we probably going to see different continued to a bull higher as more and more assets, we get out of a third party commitment and enjoy offsets.
And together with the gathering and Oh gathering is is picking up steam a very nicely we already have positive a a return of.
Oh on a monthly basis and as a Blake said next year, a we gave guidance of $22.5 million only from gathering so are the bolt the number that we having our head is around 400 million dogs in three years by the end of 2020 and.
That doesn't mean it take into account any other ideas that we have this is only the project that we are involved as we speak.
I Hope I answered your question Neil.
Now that that's helpful is there that they instead the focus right now is to focus on I'm sort of the core.
Midstream growth platform is there another area or adding new as diversification that the company would look like look at historically you guys have played in retail I think that's less of a focus now, but it just trying to understand and again, what what delek us going to look like in a couple of years well we had.
Dipping our toe into a renewable or even more we used to have two planes to biodiesel plants now we have a third one we just bought another one.
A month ago, obviously, none of the number there include any benefit from the from BTC, which Oh, who knows what's going on in Washington, but the prospects look pretty good. So we look at renewables and are the same time, we are we need to continue to.
Develop our integrated business model.
So oh, well not shy of making acquisitions as you know, but the multiples should be rights and right now what we look at a a wrong.
Is too expensive. So we would continue with the course of developing our organic or growth.
Alright, Thanks Uzi.
Your next question comes from the line of Phil Gresh JP Morgan Your line is open.
Hey, good morning, I guess sort of a follow up to it Neal is asking maybe slightly differently. There was there are a lot of refining assets on the market.
Many of which are outside of the the region in what you operate but but they are out there. Nonetheless, so I guess as you look at those opportunities in in your desire to grow midstream and other areas or are you ruling out the idea of refining M&A at this 0.2 to grow your footprint or.
Is it primarily just the other midstream gross.
Well I will not rolling out anything if there is the right opportunity in the right multiple we're not going I I read somewhere that Kenai is for sale.
I don't think that the of as much as I Love, Alaska, I don't think that that we're going to buy a kenai. So a and we were very loud and clear about a other putting just came to the market that we thought the prices were too high.
When you buy refining asset and we have done several acquisition as you know field you will start over the years.
Anybody can yeah, I'd like to be chicken and Bob refinery in order to buy a a good refining assets and that the last example is along with the two refunds. We bought you need to have the opportunity to improve the crude slate or the cost of the crude that's what we did in l. doing in both big spring and in ER.
Quotes when we lowered the.
Cost of crude would the gathering or other means building pipeline.
Second you need to be able to improve operation. That's what we did in in cross a in little bit in a in a big spring of course, we obviously with the running the refinery would bear and building. The alky that is now giving us $50 million on yearly basis and are you need to.
Do bear in selling your products other than that if you just why the big Jake and the multiples are all a or the medallion Heights, then you don't do it yourself a good favor so as long as these criteria are not being met we don't want to being disquisition.
Mode or however, if the opportunities that we think that there will be assets that are in reasonable price and.
We can improve the operation Dane the I'll then we'll look at it.
Sure Yeah, I was not thinking of Alaskan largest did there are several opportunities in PADD four and honestly don't operate a bad for today. So that was more the the line of questioning there I don't know if you have any any views on diversification footprint in that regard.
Oh, absolutely as we diversify the company that's a great question for you, but where you are more than one of them to come to me here with me to Alaska I feel like Alaska. We can just go and look at because we don't need to buy refinery but.
Oh and on a on the fifth note.
We do understand that the market perceive us as Midland or company and it was very good and tremendous benefit to our company as we growth, but there wouldn't be a point in the future that we will need to look at diversification both of our portfolio. We're doing it through the midstream right now but.
Maybe in the future, we'll look at diversifying our refining portfolio.
Yes sure Okay.
Make sense and then I guess on on the capital spending I know you don't it doesn't sound like you want to give a number for next year, but perhaps you could just remind us of what a normalized level of spending looks like in any given year as we try to frame out where you're starting later this year.
And then where it might go overtime.
So let's stop you know when you look at the Catholic as this year, we expect to spend roughly 450 million.
Including in that number 215, the refining segment and these are the big numbers and then they between retail and logistics roughly 30 million.
And then on either which is miss mostly the discussion any capex related to the gathering we're talking about 135 million. So when you ended up you'll see that it this year with a lot of spend at the refining.
Being spend on the gathering well over 400 million down.
No. Please remember that this year capex when we look at the finding side includes the pool just another way to that we mentioned earlier includes the completion of the hockey and also we bought back turnaround cost from 2020 associated related to the Big spring. So we don't think defining should be to 15.
Billion dollars more like it's somewhere around $200 million and when you include the turnaround and maintenance Capex.
Between retail and logistics I think our 30 million that we did this year is something that makes sense. So that put us at the 230 me.
And then the question is how much we want to spend on gathering and we mentioned that next year, we're going to spend less on gathering condition.
So that puts you in a much lower number compared to a deferral 15 that we spend this year.
And when I say much more significant in significant for me, it's not 5%.
And I will say foods is significant is not even a 10% decline. So we're looking at meaningful decline next year.
Okay very helpful last one.
Was not on the DKL call, but just wondering about your.
Desire to leverage do DKL as it grows vehicle here for the midstream grows and possible dropdowns not not just in.
In 2020, but maybe over the next couple of years. Thanks.
Well, because we all know dummy MLP market is not functioning the way we want.
Dan.
Dan will be a market to function.
We are still looking at what to do with DKL.
And because we want to continue to grow our midstream.
Segment.
But maybe we shouldn't do it.
Good day.
The dk level, we look at is as a combined situation still because it's still an option.
And with the one to eliminate that option at this point, but.
We look at our the midstream segment.
Between what is sitting a dk and DKL as a combined segment and not just DKL.
Georgia there by then.
Obviously, that's a a possibility of VLP, Oh, Valero I've done it.
It's I don't want to say that we're going to do it but it is a possibility.
Okay. Thank you.
Your next question comes from the line of poll Chang of Scotiabank. Your line is open.
Hey, guys good morning.
HM.
Usually on the M&A. If you just finding what will be to two or three most important valuation matrix that you're going to use.
Valuation well.
I wouldn't assume that were buying a refiner to more morning, So just let's.
We are not engage in any discussion with anybody to my knowledge by buying a refinery. So that's a question that.
Belongs to the best and maybe to the future, but doesn't belong to the present so ER.
Uh huh.
As I mentioned that we got quite disease that improving.
The crude slate or the cost of crude.
Improving the operation and improving the Netbacks.
These are the three criteria that we look at when we buy refinery.
Also we just need to make sure that.
We don't pay a high a two high multiple is this going to be dilutive to our to our shareholders.
Right and that's and so I guess my question is that when you're talking about you don't want to over pay hoping to high multiples what valuation metric what most people that you would be looking ahead.
Well I don't think that I can give you.
It's always difficult a deal what the multiple is without knowing if where Ah Ah if we can improve the operational not.
So that's not the just are the time, we paid a 10 times for cross to date look really cheap.
Okay for I think this is pharmacy for big spring gardening, let's assume next year that 2025 minutes and given that it's the spending is entry into see coughing organ damage Pete's, so that earning is that going to show up in that big spring refinery.
With that we should assume to earning going to show up.
So right now that not those numbers as you know not material and this quarter. Yeah. It's actually showed up in the corporate and other indicates abuse of margin from D. and.
So DPG, which is the Delaware Permian gathering was around that $3 million this quarter in corporate and other.
As it grows and next year is gonna be meaningful we will look into what person that used to being a big spring owing to logistics. So we haven't made that decision, but I want to show would you did this quarter. It was in the corporate and other and it was a benefit of $3 million.
When you look at 2018, when we just had a spend that number was a negative 1 million on corporate and other so we do see an improvement in there you know we were looking to these days is gonna be big spring cope with another or maybe even part of the logistics segment.
I see.
But you haven't that make up my weight that you're going to put you.
Correct, partly by you and what do we start having meaningful numbers, we'll have to make that decision as you know this point $3 million in the quarter, it's not material and that's why it's part of corporate demand.
And so threats in the way, though you talk about the dismissed you changes I know that's that's a how does it change in terms of cruise Lee and I think.
You guys several years ago that have we saw you get even though the crew unit is 100 that effectively I think you we saw like into an 80 into one nice suite.
How does that mean change under the new design and what that that the unit costs operating cost it's going to have any changes.
Okay. So.
That's a tricky question I'll I'll take the first part and then Lewis will will answer the technical part in regard to running more barrels in El Dorado, absolutely. We can run more than 75000, we actually all I can run more than 80000.
And and enjoy the same yields however, there is a game here between running 80000 and.
The remains Oh, a waivers aura.
For refinery exemptions.
You know if you if we're running more than 75, then there remains a waiver doesn't exist for us so that that's something that we need to watch both end as you know I know that.
You excluded that in orders from a from our earnings but are the same Tom This is a real cash flow.
That we get every year.
And that's something that we need to watch but to answer your question running a more than 75.
We can do it easily.
Any day running even more than 80, it's easy.
We just need to a understand the economics.
In regard to the ER crude slate and the products. They lose I'll, let you take that one so yes. So it really opens up our flexibility of the of the crude.
Then we can run and it all at all drives to minimizing fuel make so as we minimize the fuel make we can draw all the the diesel up the tower into the gas oil and actually we actually you'll diesel off the vacuum tower sales so it.
It just it off was up to two or two a wide range of of what the market would tell us which grew to run.
Signed a one for me a de that'll I'll see all the time for you see.
Gee I haven't deal as the company become become a annual cash flow position. Your upon she is stronger why we still have that deal I mean is it battle that for you don't have that deal or do you think that used to advantageous.
So great question first the weekend actually terminated boy all of the J Aron deal is nearly as a Q2 two any 20 with that being said a D capital costs that are being allocated for inventory you know just to put that out there a 450.
No I was a bit on the balance sheet. The net leverage is not something that you know when weve, knowing and therefore, it's all the question of course, we're targeting basically to move the J Aron deal to the same cost of our debt and from a cash flow perspective. It to me that overall, we wouldn't have had the benefit of.
Not having it as part of our debt on one hand, and on data and reduced materially I'm interest costs and we do hope that in the next renewal, including I cannot give that we have into markets to use such a deal we'll be able to reduce materially D. A those costs.
Thank you.
Okay. Thank you, ladies and gentlemen, and I would now like turn the call back over to your percentage today. Please go ahead.
Thank you.
I'd like to thank my friends around the table here for the hard work that they put together the board of directors for their.
Trust in us obviously, everybody that too.
That listen to the call this morning.
Our list investors for your your trust and I believe with us.
And mainly I'd like to think each one of the employees of this great company.
I appreciate everything everybody's bidding I think you'll have a great deal.
This concludes today's conference call. Thank you for participating you may now disconnect.