Q2 2020 HollyFrontier Corp Earnings Call
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[laughter].
Welcome to the Hollyfrontier Corporation's second quarter, 2020 conference call and webcast [laughter] hosting the call today from Hollyfrontier, It's Mike Jennings, President and Chief Executive Officer.
He is joined by Rich Balibar Executive Vice President and Chief Financial Officer.
Tim go Executive Vice President and Chief operating Officer, and Tom Cleary, President refining and marketing.
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It is now my pleasure to turn the floor open to Craig Biery director in bit of <unk> Investor Relations Craig you may begin.
Thank you Glen Huh.
Everyone and welcome to Hollyfrontier Corporation's second quarter 2020 earnings call.
Morning, We issued a press release announcing results for the quarter in June Thirtyth 20 Twond.
If you would like a copy of the press release, you may find went on our website Hollyfrontier dot com.
Before we proceed with remarks, we know the safe Harbor disclosure statement in today's press release.
In summary, the statements made regarding management's expectations judgments or predictions are forward looking statement.
These statements are intended to be covered under the safe Harbor provisions of federal security laws.
Any factors that can cause results to differ from expectations, including those noted in our SEC filings.
I'll also may include discussion of non-GAAP measures.
Please see the press release for reconciliations to GAAP financial measures.
Also please note any time sensitive information provided in today's call may no longer be accurate at the time of any webcast replay or re reading the transcript.
With that I'll turn the call over to Mike Gerry. Thanks, Greg Good morning, everyone before we discuss quarter's results and updates I'd like to briefly address the coping 19 them epic or pandemic, along with the rest of the Hollyfrontier team I want to wish each of you and your families and loved ones, good health and well birth being during these trying times.
Companies across the country are adapting to this new normal to ensure the sustainability and continuity of business.
And this is that it's no different for us here at Holly Frontier.
With the health and safety of our employees as a top priority. We've continued several initiatives, including limiting onsite staff at our facilities two essential operational personnel only.
While using the work from home policy for certain employees and restricting travel.
These actions along with the hard work and dedication of our employees have enabled safe and really not reliable operations across all of our business segments.
We will continue to monitor covered 19 developments to properly address these policies going forward.
Turning to our second quarter results today, we reported a net loss attributable to hollyfrontier shareholders of 177 million or a loss of one dollar nine per diluted share.
These results reflect special items that collectively decreased net income by $136 million.
Excluding these items net income for the second quarter was a negative $40 million or loss of 25 cents per diluted share versus adjusted net income of 372 million or $2.18 per diluted share for the same period in 2019.
Adjusted EBITDA for the period was $100 million, a decrease of $547 million compared to the second quarter of 29 team.
The weakness in earnings was driven by the decline in global economic activity caused by the cobot, 19, pandemic, which reduced both volumes and unit margins across our business segments.
The refining segment posted adjusted EBITDA of $25 million compared to 556 million for the second quarter of 29 team.
Weak demand for refined products resulted in lower utilization rates and product margins across our refining system.
Consolidated refining gross margin was $8.44 per produced barrel, a 57% decrease compared to the same period last year.
Our lubricants and specialty products business reported adjusted EBITDA of $15 million compared to 29 million in the second quarter of 2019.
Rack forward adjusted EBITDA was 23 million, representing a 7% EBITDA margin.
Here, we saw demand improved over the course of the second quarter as compared to the depressed levels at the end of the first quarter.
<unk> RAC forward volumes were down 40% year over year in April and May but showed significant improvement in June and were only down 7% year on year during that month.
This volatility was driven by demand in our industrial and automotive end markets and demand continues to run slightly below normal in our personal care end markets.
And in our industrial end markets, we expect demand to rebound with the broader economy.
Within the rack back portion, we did see small improvement in base oil markers versus this time last year and we continue to expect base oil demand to rebound with the reopening of its primary transportation related end markets.
Similar to our refining segment, we intend to match production to market demand.
In June we welcomed Bruce learner to the Hollyfrontier team as President Hollyfrontier lubricants and specialties.
Bruce has spent almost 30 years of his career in the materials science and specialty chemicals sectors.
His experience and leadership will help us improve the profitability of our lubricants and specialties business.
Holly Energy partners reported EBITDA of $113 million for the second quarter compared to 89 million in the second quarter of last year.
The second quarter of 2020 includes a noncash gain on sales type leases of 33 million.
At AHGP, we have seen an improvement in demand for transportation and terminals services during the second quarter of 2020, consistent with trends in refined products.
During the quarter, we announced plans to further expand our renewables business through the construction of a pretreatment unit located at the Navajo refinery and conversion of the Cheyenne refinery to a renewable diesel plant.
Along with the previously announced renewable diesel unit at Navajo. These projects will have the capacity to produce over 200 million gallons of renewable diesel per year.
And generate 165 million in free cash flow, excluding the blenders tax credit.
We're excited about the opportunity to enhance both the profitability and the environmental footprint of Hollyfrontier through these investments in our renewables business.
Our focus remains on the safety of our employees contractors and communities as we continue to face the cobot 19 pandemic.
Despite this challenging environment Hollyfrontier continues to demonstrate its financial strength by maintaining a disciplined approach to capital allocation.
Our strong balance sheet and superior quality of assets provides us with a competitive advantage through the cycle.
And it's now my pleasure to introduce you to our new Chief operating Officer, Tim go.
Tim brings with him more than 30 years of experience in the refining segment.
Having served in various leadership roles in our industry.
Tim's initial focus will be on operational excellence within our refining system.
He has a strong track record of business improvement and value creation, and we're really excited for his contributions across our company.
Welcome Tim.
Thanks for the warm welcome Mike.
For the second quarter, our crude throughput was approximately 350000 barrels per day.
Slightly above our guidance of 300 to 340000 barrels per day.
Utilization rates were most impacted when product demand bottomed in April and saw modest recovery in the back half of the quarter.
Our focus remains on running safely and reliably and into second quarter, we had no employee injuries or tier one process safety events.
We are an essential business and these unprecedented times.
And I'm proud of our employees focus and execution to operate safely and reliably.
Our refinery operating expenses per throughput barrel were $6.97 in the second quarter versus $5.73. We recorded in the same period of last year.
On an absolute basis refining operating expenses of $239 million declined $13 million versus the same period last year due to reduced utilization rate for the period and the deferral of certain maintenance projects.
Variable cost savings related to throughput productions included electricity natural gas catalyst and chemicals.
In terms of maintenance, we have one planned turnaround on our wide oils unit and the saga, which is scheduled to begin in late September and last through the end of October.
Additionally, as Mike previously mentioned, we will begin the decommissioning of the Cheyenne refinery during the third quarter of this year.
We ran the last barrels of crude on August Threerd and expect to run off final intermediate and product inventories in August.
We will then begin the conversion of certain units for renewable diesel production and continue to anticipate Cheyenne refinery conversion to be completed in the first quarter of 2022.
While we have seen a recent stabilization and demand and expect a strong recovery for all of our products in the long run.
The remains little visibility on the timing or extent of recovery in the near term.
We will continue to focus on what we can do internally to ensure safe reliable and efficient operations as market conditions evolve.
For the third quarter, we expect to run between 340, and 370000 barrels per day of crude oil and we expect to adjust refinery production levels with market demand.
I will now turn the call over to Tom.
For an update on our commercial operations.
Thanks, Tim.
For the second quarter 2020, our crude oil slate consisted of 31% Permian and 20% WCS and black wax crude oil.
Our average laid in crude costs was under WT.
Five dollar 72 in the mid Con $2 on 46 cents in the southwest and $1.39 in the Rockies.
Our exposure to crude market contango benefited our laid in crude discount and all of our regions.
And the second quarter.
We ended the second quarter of 2020 with gasoline and diesel cracks trading at under $10 in the group.
In the Magellan system, we ended the quarter at 8.2 million barrels and gasoline.
2.4 million barrels lower than at the end of the first quarter, but still above five year average levels.
Diesel inventories ended the quarter at 8.9 million barrels roughly 2.3 million barrels higher than the end of the first quarter and well above five year average levels.
Second quarter three to one cracks averaged $7 of 91 cents in the mid con $14 and 66 in the southwest and $18 in 15 in the Rockies.
Second quarter differentials for WCS or hardisty averaged a discount of $11.47 under wtvr.
The differential compressed significantly in the back half of the quarter with the June discount averaging $4.34 recently, we've seen this differential widened back though do over $10.
Midland differentials average this second quarter at 61 cents under crushing.
Midland barrel strengthened $2 on 25 cents over Wi.
At the end of June, but have recently traded closer to parity with Cushing.
Canadian heavy sour runs average 64000 barrels per day at our plants in the mid con and Rockies regions.
Refined approximately 110000 barrels per day Permian crude in our refining system composed of 79000 barrels per day of the Navajo complex and 31000 barrels per day by the Centurion pipeline out our El Dorado refinery.
Rins expense in the quarter was $33 million compared to $31 million and the second quarter of 2019.
Despite current market being more than doubles the levels at this time last year total cost of remained relatively static due to lower volumes being blended due to lower utilization rates and the purchasing of Rins early in the calendar year, one of the flat price was lower.
Crude oil runs at our various refineries were set to match refine product demand. This resulted in average run rate of 70% for the quarter and with June levels approaching 80% to coincide with the increases in the market demand.
As always we adjust yields to maximize volumes into higher netback markets and with that let me turn the call over to rich.
Thank you Tom as Mike mentioned in the second quarter included a few unusual items pre tax earnings were negatively impacted by long lived asset impairments at the Cheyenne refinery and the PCL I ask that group totaling $430 million along with other charges for corporate restructuring.
In refinery severance.
On a more integration, which totaled $5 million.
These items were partially offset by a lower cost or market inventory revaluation gain of $270 million.
And Hollyfrontiers pro rata share of Holly energy partners gain on a sales type lease of $19 million.
A table these items can be found in our press release.
Cash flow from operations was $119 million in the second quarter, which included turnaround spending of $11 million $30 million, a working capital costs.
Hollyfrontier Standalone capital expenditures totaled $34 million for the quarter.
As of June Thirtyth, our total liquidity stood at over $2.2 billion comprised of Standalone cash balance of 884 million.
Along with our Undrawn 1.35 billion dollar unsecured credit facility.
We have a billion dollars so standalone debt outstanding for the debt to cap ratio of 16% and a net debt to cap ratio of 2%.
Our early debt maturity.
It's a $1 billion of senior notes due in 2026, which are rated investment grade by S&P, Moody's and Fitch.
In order to fund the planned expansion of our renewables business, while preserving liquidity, we may raise additional capital in the next six to 12 months.
During the second quarter, we declared and paid a dividend of 35 cents per share totaling $57 million.
We did not repurchase any shares in the second quarter and do not intend to repurchase shares until market conditions and visibility improve.
Each GP distributions received by Hollyfrontier during the second quarter totaled $18 million.
HFC owns 59.6 million EGP limited partner units, representing 57% of Ahgps.
LP units with a market value over $850 million as of last night's close.
We still expect to spend between 525 and $625 million of consolidated capital and turnaround expenses in 2020.
Which is approximately 15% below our initial 2020 guidance is inclusive of our recently announced renewables projects Cheyenne and our TJ.
During the quarter, we implemented a restructuring program focused on our corporate shared services and we expect to save approximately $30 million per year of ongoing cash expenses from this effort.
These savings will be split across the income statement with roughly two thirds NSG and <unk> and one third in operating expenses.
We continue evaluating additional ways to reduce the cost structure in each of our businesses in order to preserve our strong balance sheet and liquidity position.
And with that Calandra, we're ready to take questions.
The floor is now open for questions. At this time, if you have questions or comments. Please press star one on your Touchtone phone.
We ask that you. Please limit to one question and one follow up if you have additional questions. We welcome you to rejoin the queue.
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And our first question comes from the line of Hawaiian Todd from Simmons energy.
Thanks, Good morning, and congrats on a great result, guys.
Maybe if I could started out on.
On Capex and then some of your your comments you made there obviously you talk some on the last update on other renewables about the rising capex into 2021 that we can you talk about.
Any any potential range of where that Capex number might fall next year, what are some of the moving pieces and how much flexibility outside of the of the renewable spend you have for that.
And then maybe the follow up.
You just mentioned the potential to.
For the need to raise capital what sort of can you talk to the thought process in terms of.
Scaled capital, maybe you know debt versus equity how you view the possibility there. Thanks.
Morning, Renault three which its on capital for 2021, Theres not a whole lot of update from what we discussed the weeks ago with our renewables announcements if you're looking at 21, we're expecting a spend between 450 $500 million and the renewable segment.
And I think as we've discussed we've got a fairly heavy turnaround year next year. So our normal sort of sustaining in turn around mid cycle guidance of 375 will probably be north of that.
We're still evaluating a turnaround scheduled see what we can push out we're optimistic we're going to be able to get some of that workout, but certainly not the majority of it.
Well give detailed guidance as normal I'm in the winter.
So then to your question on capital raise Gore in an excellent position here.
We're going to do this while maintaining the investment grade rating and frankly, all the options are open to us so our expectation would be to access the debt markets.
We'd expect to do this in the next six to 12 months in our logic here is the bulk of that renewable spending is when we first half of 21. So that's the.
The bogey, we're looking at and we have turnaround in capital spending at Tulsa in the spring of 21.
Order of magnitude still to be determined I think but again, if we've got to renewables.
Spend in aggregate of $650 million to $750 million over the next 18 months. That's that's really what we looking at funding here.
Thanks, I appreciate the color.
And your next question comes from the line of Brad Heffern of RBC capital.
Hey, good morning, everyone. Thank you for a for taking my questions I'll just start up at the demand question can you talk about in your various operating regions. How demand has trended since the end of the second quarter.
Sure Good morning, Brad It's Tom Curry I'm.
Putting it out we've seen pretty good demand.
Through the second quarter.
Especially in the southwest the Phoenix market has been strong partly because of some are finding problems on the west coast, but its maintained higher margins and allowed us to put incremental volumes into that market.
The Rockies.
But probably okay better toward the ended the quarter than it was at the first of the quarter in terms of demand and going over to the group. The distillate demand has has been pretty constant throughout the quarter, maybe rising a little bit as we get back into the back half of the quarter.
And gasoline really hasn't been that bad but.
When you compare to last years, it's definitely lower so we have adjusted runs, especially in the mid con to take advantage of that or or compensate for that so we don't get too far on star building inventories.
So.
Going forward.
I think in terms of demand gasoline.
We still are in the driving season right now so that's adding some some additional volume and we're probably seeing as as the stay at home is we send that we're starting to see higher total miles.
Across the country.
Distillate, it's a little harder to read with the understanding that probably a third of the distillate demand comes from industrial and off road use.
But we've seen that fairly steady inventories in Magellan have been fairly steady in the group, which is our big market and we're getting geared up for the harvest region, sorry harvest season.
So we expect to have perk up in inventory as we get into the ball there and jets the wildcard.
The international travel restrictions and the Corona is very difficult to ascertain one jet demand is really going to start to come back we don't expect that to happen probably until 2021. So.
We're minimizing Jeff production across the across the fleet.
Okay. Thanks for the detailed answer maybe for rich you know hauling hasn't really had a change in that that overall since the end of 2019.
You know in contrast to basically everyone else. So I was curious if there any I'm working capital or tax impacts. A then we need to think about going forward. The maybe Mike distort that number one way or the other thanks.
Hi, Brad No I don't really think so we've had.
Pretty good business performance, considering the environment and excellent operating performance, which has really helped here Tom's team has done an excellent job of managing inventory within our refining business. So we're not expecting any changes there.
So no I don't looking forward.
I don't have a crystal ball and the crude price but.
I have nothing to call out for you going forward here.
Okay. Thank you.
And your next question comes from the line of Manav Gupta from Credit Suisse.
Hey, guys had a median improvement in dead rack back there's lots of below 10 million loss that does not.
Not indicates the like some quarters can you talk about what drove this danskin drop that that market relative to the practical optics.
You mean rvs rich.
Look we had demand pick up as Mike noted.
If you think about rack back really be end markets. They are primarily automotive and industrial but we had some more pull their margins are better year over year. There is some discounting off to the indexes that we post, but they're still improved year over year.
So generally speaking I think it's it's heel to based on markets are healing, they're not 100%, but they're getting better until we saw some improvement there and then the third thing I know for has made good cost management.
Across loops, so that helps as well.
[laughter] monetary policy question nature.
Democratic Presidential again, DHL bite and doesn't have renewables it kinda yet any screening and she program, but it's Dan are you hearing any check out of that is that it hooked on me, which would mean that the BPC could be extended and they see it as it becomes right.
Mastering standard any call me so like that.
And now this is Mike.
I think it's probably a little premature.
As you likely know the RFS in particular doesn't really fallen partisan lines.
But clearly a biden administration would be more progressive in terms of a green initiatives.
Havent, yet rolled out l., CFS, but I think BTC.
Is probably directionally more likely in the future under both administrations frankly.
It's one of those things that we believe will gain support.
Yeah. So I'm just quick follow up here, you mentioned BTC guarding estimate for already knew where do you think project, which is the 20% to 20% I had our that assumes sneaky see anything twentyk legal right.
That's correct.
So if it gets extended that it does go up.
Yes, we're talking about another $200 million per year of cash flow based upon a one dollar BTC extension.
Thank you so much were taking my questions. Thank you.
Your next question comes from the line of Paul Cheng from Scotiabank.
Hi, good morning.
Paul.
Limbo quick question, which on the impairment how much is related to the consulting and what's the rationale behind.
Oh, I know lubricants side it was about.
With me one second Paul you to fund a number.
$205 million.
The rationale is pretty simple at the end of the day.
While we are very positive on that business outlook. The impacts of Koby 19 on 2020, and then going into 2021 are undeniable.
And particularly with respect to PC allies business, because it's heavily industrially lever.
I'd point out to keep in mind like this is a recent acquisition say in contrast to our refineries.
So it's got a higher book value.
And the points for the plants for example are fully depreciated. So if a higher hurdle if you will cross as well.
And from that standpoint, you said you in any shape or form changed at all.
And then they I will note related this fits that I mean that before that it thing.
As has been looking good and Thats, a one off the later pocket area.
Obviously that get you think impairment if that changing your view.
Well I think that we've been pretty clear about probably not further investing in.
So as manufacturing in a market that that's reasonably well supplied but that the rack forward business in terms of formulating blending selling.
Yes, that's an area that we would continue to look to extend our footprint.
Not not a lot of activity right now, but I, we we do different things, which between rack forward and rack back in terms of relative attractiveness.
So my you still interest that you and third they expand on the last fall, but even though that the last couple of course I have nothing that glut.
Yes, Paul.
And then can you help to maybe looking at cycle with their shuts Doug on the pro form that they used to that I would say.
Yeah pack on the unit cost me Dan.
Margin may look like.
Hey policies right.
Then they pull from a number.
From the previous quarter with allows one to two years.
No. So let me give you some color here Paul hopefully help as Tim mentioned, we ran the last barrel of crude at Cheyenne a couple of days ago August Threerd.
So on the revenue side.
We're going to continue to run down intermediates through August and we will have sales into the month of September.
To your point on the cost Paul we're not expecting to eliminate any real fixed costs at Cheyenne third quarter, So I'm not expecting the Rockies.
Cost number to change a whole lot and total.
So look third quarter is going to be about messy from a modeling perspective at urge you to keep talk keep in communication with Craig.
Going forward.
We'll expect to provide guidance I'd say late September early October.
On how we're going to set up reporting for the fourth quarter and beyond.
With respect to refining and renewables.
And that format will go into effect for the fourth quarter of 2020, which we report obviously in February 21.
And which is just too is that.
Sorry, Paul and I missed that.
Okay can I think we will probably go to the next question.
Your next question comes from the line of Roger read of Wells Fargo.
Hi, Thank you good morning.
All right Roger you all hear me okay.
After that want to make sure I I'm here [laughter] fair enough.
[laughter].
Really just one question on the renewable diesel construction can you give us an idea of how the management of the construction process will go and what I'm coming out here is this is a fairly I mean as you've laid out it's a large amount of capex needs to some extent of the bid.
As news to you.
And I just want to make sure that you know for a company that hasn't.
Built something this large in a while how you are set up from a project management construction management side, maybe the nature of the contract is the company. That's building this for you.
Lump sum do they have penalties or bonuses for getting it done sooner you know kind of understand the risk factors to you beyond the 18 months and beyond the budget of kind of.
Plus or minus maybe $700 million.
Yeah, Roger let me start with this first off there really are three projects here and the execution strategy for the three different.
But if we can start with Cheyenne that as a refinery conversion.
We consider it similar in nature to a turnaround, though with a highly engineered new process.
We have.
And outside engineering firm that we have great faith in and we're pulling in.
Construction management resources, but the Cheyenne project, we think will be executed well within the time and budget.
And not dissimilar to a refinery turnaround the the our teacher projects.
Our little bit different in nature and as you suggest these are large projects.
That will require very active management, we've not yet bid the construction yet.
But we're working with a variety of different vendors right now we're in engineering phase and so what I would tell you is more to come but our company we have a very disciplined stage gate process.
Through which we're going to take this project and expect to bring it in on time and on budget.
With a whole lot of focus.
With both inside and outside resources. So I guess, that's another way of saying we agree with you. This is a very high priority for us and there'll be more to come in terms of the specifics around project management.
Okay and so.
I guess just to be clear here, we won't see any sort of construction starting it artesian until all the engineering is.
Absolutely set in stone right.
Roger This is Tom actually we've started to break dirt.
Artesian now in preparation.
Our change is probably a little further ahead of the other two.
Projects. So thats why were so we're starting construction there or at least moving some dirt and.
And the other thing I wanted to make clear is that on a lot of if not most if not all of the long lead items.
We have either put in our orders for those items or very close to putting in our orders are well well into the queuing process. So as a with effects of coal with we still expect to be on schedule and.
Ask budget.
Okay, and all right appreciate or this is yep yeah. Roger This is Tim one one more thing to mention as you guys probably know you really can't start construction until you have the permit.
For your facilities, we do have that permit for artesian R&D you and that's why Thomas saying, we are able to start construction on that and we don't anticipate any issues with the permitting on the other projects as well.
That's great Thanks, and congrats Jim on your new World It.
Thanks Roger.
Your next question comes from the line of Matthew Blair of Tudor, Pickering and health.
Hey, Good morning, Mike came in rich I wanted to just touch on your refining throughput guidance I think it implies about 74% to 81% utilization in Q3, which if you take the mid Twentys pretty similar to Q2 levels. Despite just overall recovery and absolute demand and then.
Higher overall U.S. utilization. So could you just talk through that you know why.
Why you ran above us averages in in Q2, but potentially below us average utilization in Q3 here.
Yeah. This is Ken let me try to take a shot at that.
We do thing.
Our throughput guidance and the demand that we've seen here a bit tail end of the second quarter has improved and we'll continue to improve into the third quarter. The guidance that I mentioned in my prepared remarks of 340 to 370000 barrels a day is actually about 10% higher than the guidance we provided.
For the second quarter don't forget that Cheyenne is coming out of the picture as unlocked as of August Threerd. So we do see improving throughput from second quarter to third quarter to the tune of about 10%.
Makes sense. Thanks, and then I was wondering if you could quantify how much contango benefit rolled through your system in Q2, either either in terms of just like absolute millions or.
Maybe this is like a percentage of of just the contango that we saw on on the screen there.
Yeah, Matthew its contrary, yes, the contango benefit we're looking at it somewhere around $3 for the quarter.
Of course that level isn't in the market today, but.
But we'll take it for the second quarters that's for sure.
Sounds good thank you very much.
Your next question comes from the line up Theresa Chen from Barclays.
Good morning, and wanted to first first ask about your I think noble diesel planned so since.
The major at announcement in June we had an additional announcements a competitor tighter wanting to entering that space or further developing their plans to build out their footprint into space.
Can you give us a sense of what is your framework in the near and medium term as far I see supply and demand dynamics go fight this end markets.
Sure traces property.
Thank you we've seen that you know a flurry of announcements coming out on renewable diesel of late.
And as we go on the supply of feedstock you know.
For bean oil and beds, we see probably.
Two pinch points one is the crush capacity.
In the second one is the refining capacity as we go forward.
It's interesting to note, though that we only crush 44% of the soybeans in the United States and the other 56% is export it. So there is capacity to increase that.
Yes, as more projects come on and the demand side.
We still see fairly.
Robust demand.
California is there, but we also see.
Colorado, Washington, other state moving towards LCFS adoption and as that goes along with Canada, We think theres going to be sufficient market.
The other thing that we do see us there's increasing demand in Europe and even today. There is some renewable diesel, leaving the United States in going to Europe.
So that will always be an option going forward and on the supply side in Europe, we don't see the expansion the announcements that we're seeing in the us today currently.
Understood and then just from the RAC fourth question at the group business can you provide us any live data points of what you're seeing on demand. It economics that we are almost halfway through the third quarter.
Hey, curious as rich so I'd say June as Mike mentioned right or June sales volume was down about 7% year over year, we saw a big rebound in the auto and industrial end markets July look very similar.
And the order book for August is along the same line. So we'd expect big improvement sequentially third quarter to second quarter, but probably at least on a volume side still down a little bit urea.
Margins have held in pretty well base oil prices, obviously are compressed with crude prices in general.
So we're feeling considering the environment, we're feeling pretty good.
Thank you.
Your next question comes from the line of Phil Gresh from JP Morgan.
Yes, Hey, good morning.
First question, but through Tim's way I was curious about your early observations about opportunities.
To to improve operations.
We do reduce operating costs, there's obviously been a target out there at Holly frontier for long time around operating costs and.
Ah, yes, clearly with.
If you take Cheyenne how the picture then that would have they per barrel reduction impact you got any any thoughts you might add about the opportunity set moving forward.
Yeah. This is Dan thanks for the question kind of feels like a non deal roadshow kind of question, but.
I'd love to provide you some early thoughts.
Mike said on the last call the last quarterly call that.
Focusing on improving reliability and really overall operations excellence was a priority.
Here at Holly Frontier and.
My early observations are yeah, I'm I'm I'm I'm thinking we should double down on that.
We really do believe that they're building structural competitive advantages at our assets are critical for our business, especially as the market factors come and go.
And from a safe clean and reliable operation standpoint, I do believe there's a lot of opportunities you know our operating costs are.
Little bit higher.
In the Rockies.
And we believe that focusing on reliability.
And efficient operations will help us do that.
My early observations are there are opportunities out there we're developing long range plans right now.
To try to address how we want to go about strategically to do that and I, just say more to come on that it's probably a little early to go into any kind of details or any kind of.
Specifics around that but I do think the reason that the reason I came here was I do think there are great opportunities for us to pursue and I'm looking forward to those.
Okay. Thanks for that.
The second question I know, there's already an M&A question about lose it was thrown out there.
He will.
Several refining assets on the market right now is this an area of interest.
For the company or is the focus more on the organic renewable diesel and any I guess I, probably bolt on lose opportunities more so than done that's fine.
More so than done that's fine.
Currently and through time, we buy.
Believes that this industry will consolidate and most likely would want to participate in that.
But it's not a large area of emphasis for us right now.
Okay got it.
And last quick question just on loose.
I know in capacity you have today.
Right in saying that already began recognizing it's volatile Mary.
Do you feel like as you move through the second half a year to date I guess, maybe pantelleria catching.
Higher levels that you back me it sounds like volumes.
Great place.
Down single digits, but is there anything else, we should be thinking about there hey, Phil. This is rich no I mean like were as of what we know today, we'd expect sequential improvement third quarter versus second quarter, but the reality of the Covance situation as we just don't have that kind of visibility right now Unfortunately.
Understood. Okay. Thank you.
Your next question comes about from the line of Neil Mehta from Goldman Sachs.
I just want to add my congratulations here, Tim it's great to connect again here. My first question is is related to some of these outages and idling of capacity, we saw gallop in new Mexico, and then obviously Martinez on the West Coast and as you think about.
Your footprint, particularly the western part of your footprint, how do you think of thieves. The impacts at these are these closures on now on margin.
Neil It's Tom Curry.
You know with the announcement of galloping.
Idled or shut down.
It's kind of helping us move incremental barrels into the northern part of Arizona. So we have two main locations there Bloomfield and Moriarty. So we've seen an increase of products going there, which is basically just pulling them away from.
Other markets as we optimize our product flows.
The West Coast does have an impact on Phoenix as you well no.
And as barrels get tighter on the West coast. It makes for better Phoenix margins. So I think those are both tailwinds for us at this point in time, which over time, you with things that would would improve our profitability.
Great and then Tom the follow up just a couple of macro questions are in get your prognostication on three things in particular.
Little bit into one question one views on the Brent W.P.I. in the past year to WCS, recognizing your you know, whereas type period, right now with maintenance how to evolves and three just views on de CIX Rins and other great parts to that question.
And any thoughts on each would be valuable.
Okay, well, we'll start with Rafi I, what we think going forward is that the transport quality.
You know impacts will set the differential on on the Brent Ti. So we're looking at somewhere between 250 in $3. Both for the remainder of this year and through 21 absence of any other.
Big market movers in the international side.
WCS.
You probably saw.
Well over a million barrels being shut in in April which accounted for low differentials as I mentioned before going into $4. We're seeing some of that production come back on stream.
And as a result, we're seeing higher differentials at hardisty as well as a portion and Enbridge, which in the early part of the second quarter was at zero for the first time going along.
Has now come back out to 7% apportionment, we think that's going to continue through the fourth quarter.
So we're seeing higher differentials.
Probably if you're looking at through next year probably.
Compared to the curve probably on the on a dollar basis 13 to $14 differential off WT Guy.
And Tom RIN.
These six Randy.
Yeah, that's the million dollar question.
Okay.
We think that they're probably okay wow.
And we expect.
We think that they should be going trending lower through next year a lot of it is going to have to come down to what's going to happen with small refinery exemptions.
The RV show, which we have yet to scene and other developments and includes the from the governments as well to set the pattern for Vuzix is as we go forward.
But directionally, we think they should be trending lower.
Alright, great. Thanks, Tom.
Okay.
Your next question comes from the line of Doug Leggate from Bank of America.
Hey, guys. Good morning. This is Calais on for Doug.
Couple quick follow up questions here.
As it relates to the renewable diesel economics.
Does this supply outlook, that's kind of changed over last couple of months or so I guess with you now its main seven new projects does it affect your view of the sustainability at the LCFS credits.
No I would think I think it would not have an impact on now.
Credit it may have.
With all these announcements coming on stream if they have an impact on feedstock availability, but thats one of the main reasons why we invested in and afraid treatment unit was to give us feedstock flexibility. So that we work beholden to anyone products or feedstock. So that we could pick the best products. So as.
We look forward in terms of Lcs fast, we see that is fairly static.
The big drivers being able to get the lowest price or highest CDAI feedstock into the plant and turned into renewable diesel.
Thanks, and my quick follow up is it just on just on the Gallup refinery Irene's Hi, our understanding is that MPC was running a sale process on this and it's located in a market that you know very well I'm wondering if you guys took a look at that asset and I'll leave it there. Thanks.
Well I, we never saw sale process.
Okay. Thank you.
There are the more questions.
Jason.
Okay very good.
We're in wrap it up at this point. Thank you for your questions. Thank you for participating with us on this morning's call.
We always enjoyed sharing our business results with investors and analysts.
In both good times and more challenging times and quite right quite frankly, we're very on a custom to printing a loss in the second calendar quarter of the year.
But on the flip side of that I want to give a particular shout out to our employees business partners, who have done an outstanding job in creating what we are looking for which is excellence in our operations everyday very steady operations very strong cost management and I think that's reflected in the capture rate for the quarter and the operator.
And cost for the quarter.
And given the business environment quite frankly, I'm proud of that and I'm proud of them. So.
That's that's the first piece the second is really with respect to renewable diesel and where we're going with that.
It is as I said, a huge priority for us we're very excited about it it's a large capital deployment for this company in the 650 $750 million range.
But in terms of the earnings accretion of these projects and the change in our business profile.
I see a lot of value in it and I see it as a really strong platform.
To continue to advance Hollyfrontier and the earnings capacity cash generation capacity of this company. So that's a real bright spot as to the cobot related.
Refining environment, we find ourselves in.
We're going to work hard through it and we're going to try to deliver that operational excellence that is so important to us as we go forward. So thanks again for your participation and we look forward to talking next quarter.
Thank you. This does conclude todays teleconference. Please disconnect your lines at this time and have a wonderful day.