Q2 2020 PBF Energy Inc Earnings Call
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This time, all participants have been placed and it listen only mode and the floor will be open for your questions. Following management's prepared remarks.
My pleasure to turn the floor over the call in Murray of Investor Relations, Sir you may begin.
Thank you Liz good morning, and welcome to today's call with me today or Tom Nimbley, Our CEO, Matt Lucey, our president Erik Young our CFO and several other members of our management team a copy of today's earnings release, including supplemental information is available on our website.
We're getting started I'd like to direct your attention to the Safe Harbor statement contained in today's press release.
In summary, it outlines that statements contained in the press release and on this call, which express a companies are management's expectations or predictions of the future are forward looking statements intended to be covered by the safe Harbor provisions under federal Securities laws.
There are many factors, which could cause actual results to differ from our expectations, including those we describe in our filings with the FCC.
Consistent with our prior quarters will discuss our results excluding special items.
Actual items included in the second quarter 2020 results, which increased net income by a net after tax benefit of 777 million or 642 poor per share.
Consisted of a lower of cost or market LCM inventory adjustment.
Change in the fair value of the Earnout provision included primarily in connection with the Martinez acquisition and a gain on sale of hydrogen plants slightly offset by severance costs related to a reduction in workforce.
As noted in our press release will be using certain non-GAAP measures, while describing PBS operating performance and financial results for reconciliations of non-GAAP measures to the appropriate GAAP figure. Please refer to the supplemental tables provided in today's press release I'll now turn the call over to Tom Nimbley.
Thanks, Caitlyn good morning, everyone and thank you for joining our call today.
He's trying times in many respects and we also finding ways to cope with our current circumstances as individuals.
<unk> and businesses.
Like many others PBS focus has been on safety operational and person.
We have established a pandemic response team that is establishing and overseeing safety procedures and were paid placed protocols for our sites.
We continue to ask employees and contractors to book on a daily health screenings at all about locations.
And our restricting access to our facility for those that had been exposed to covert in order to prevent community spray [noise].
Oh, I think the CDC recommended 14 bake wonky buried all exposed employees, including those that have traveled to regions, where there has been a resurgence.
For those of US any office is on a daily basis.
We require match, where social doesn't thing it's not possible.
We have guidelines for the overall number of people, we're allowing in our office environments.
We are able to safely bring all of our employees back to the office.
I am proud of all of our employees and especially those that had been dedicated to keeping all of our facilities operating safely.
I'm just trying.
Circumstances and conditions.
In addition to maintaining safe operations.
Okay. Since Q2 was the balance sheet and increasing liquidity.
Steps, we took operationally and financially we're taking with the goal in mind, our provision preserving cash cash within our system.
The entire energy landscape was watts body unprecedented demand losses due to Japan downtick.
Refinery utilization dropped the levels, usually only seen during major hurricanes on the U.S. Gulf Coast.
And yields we shifted in accordance with gasoline demand dropping much more than just what.
Crude oil production continued unabated.
Culminating with the lowest price ever recorded for crude oil in late April.
Since then the market has done a lot of work towards cleaning up inventory balances, but we still have a lot of work to do.
You don't really utilization rates will likely stay on the low end of the range until the product surplus can be absorbed.
Gasoline balances look far better than just lit.
But just as the crude market had a miraculous recovery over the past few months.
So what oil products.
During the quarter, we significantly reduced expenditures, we were very measured in deploying cash into the opportunities presented by the disruption in the marketplace.
In hindsight, we had they may have been too conservative.
However, deploying incremental cash into working capital given the uncertainty, we and society, we're facing and industry demand destruction, we were witnessing would have reduced our overall liquidity.
We have moved past the low point the demand for most products, but the market is still rebalancing.
It was a significant amount of privacy and inventory and it will take time for the man to work through that.
The market is currently given fewer signals to material increase materially increase utilization rates.
The term structure.
The values, we are watching oh, saying that product inventories or more importantly, distillate inventories need to draw more before utilized utilization rates well have incentives to materially increase.
This rebalancing has happened quite quickly for gasoline and for crude.
This will take a bit more time.
With that I will turn call over the Matt to provide an update on our operations during the quarter and the steps we are taking moving forward. Thanks, Tom as Tom mentioned, we have taken aggressive steps to manage our refining system in response to market conditions.
Overall, we ran a or fired refining system at approximately 70% of capacity with east coast Midcon seeing the lowest utilization.
Our utilization going forward simply be determined by demand.
And inventory levels.
And this unprecedented time way of complete focus on those items that are within our control.
As such we've assembled a dedicated project team to not only take the necessary steps to reduce expenses in capital the immediate term.
But also focus on initiatives to sustainably improved free cash flow on a go forward basis.
So in addition to immediate reductions to operating expenses in capital. The team is also focus on initiatives to generate incremental cash flow through your level improvements inventory in risk management.
As well as regional level optimizations on the east West coasts.
In regards to operating expenses reduced throughput.
Obvious result of increasing expenses on a per barrel basis.
The denominator is reduced.
As a rule of thumb variable costs generally only represent 30 or 40% of total operating expenses.
Importantly in the second quarter, we were able to reduce our fixed expenses by approximately $65 million or 20%.
The company has been effective at streamlining and getting more efficiency of our own workforce, which has allowed us to reduce headcount.
Reduced overtime and the total number of contractors surface facilities.
By taking these steps we believe we have effectively reduce our total operating expenses by approximately 30 or $35 million per quarter across our system on a go forward basis.
We certainly expect us to extend into 21 and beyond.
On a normalized throughput basis, we expect these savings to equate to approximately 40 to 50 cents per barrel.
Our first quarter call, we announce expected operating expense savings goal of $140 million in 2020.
Which included $110 million of non energy related savings.
We now expect or non energy related savings to reach $145 million for the year.
On the West Coast, we initiate our integration optimization efforts beginning in February.
All the areas for synergy we expected prior to acquisition commercial operational we'll just go remain valid.
We have taken advantage of our increased scale to improve our crude slate at Martinez.
We have shifted Martinez reference a towards for blending.
Our marketing team has increased rack sales of gasoline and distillate, which decreases logistics costs, an increase is refinery level margin.
Well my name these benefits are being masked in the current environment.
We had been able to continue with our plans to integrate and optimize our west coast operations.
Anticipation of marketing conditions improving.
With that I'll turn it over to air to discuss liquidity in our financial position [noise].
Thank you Matt today, PBF reported an adjusted loss of $3, a 19 cents per share for the second quarter and adjusted EBITDA of negative $298.4 million.
Consolidated Capex for the quarter was approximately $148 million.
Consolidated Capex includes 146 million for refining and corporate Capex and 1.8 million for PBF logistics.
As a result, so the reductions to our 2020 capital budget, we expect to incur roughly 15 million of Capex per month from July onwards, and our full year refining capex should be approximately $360 million.
We have incurred 75% of our refining capital expenditures during the first half of the year.
We took aggressive steps in the second quarter to reduce our cost structure and shore up our balance sheet. We completed the sale of five hydrogen plants. The air products for 530 million and issued 1 billion of senior secured notes.
Our current liquidity is approximately 1.9 billion based on a cash balance of 1.2 billion in more than 700 million of available borrowing capacity under our asset backed revolving credit facility.
Since may we repaid approximately 300 million on our revolving credit facility and have seen our borrowing base increase as commodity prices rebounded since the April lows.
We have experienced significant working capital swings since the beginning of the year, primarily as a result of unprecedented volatility in the crude markets.
During the second quarter, we saw a benefit from normalized working capital versus the headwind we experienced in the first quarter of the year.
This benefit was outweighed as we source more economic waterborne barrels, but typically carry shorter payment terms. This in conjunction with a slight build in inventory resulted in an overall use of working capital of approximately $35 million for the quarter.
Operator, we've completed our opening remarks, and we'd be pleased to take any questions.
In a moment, we will open the call to questions. The company requests that all callers limit each turn to one question and one follow up.
They rejoin the queue with additional questions.
At this time, if you would like to ask your question. Please press star one touched on telephone to withdraw yourself from the Q you May press the pound Turkey.
Your first question comes from Manav Gupta of credit Suisse.
Hey, guys can you hear me.
Yes no.
[laughter] Tom the we keep hearing is news items. They you know Google is saying probably being back employees second half of next year or Facebook is saying, they're not meaning that implies there's no timeline I'm trying to.
Well, what the demand for California, I mean, what sort of gasoline outcome for California that all of these thanks don't actually want to bring that employees and is this a problem is can we saw <unk> did not operating rates for the time being or do you actually thing that does it need for capacity rationalization in Dallas.
Tony I still being bad margins on a normalized level.
Great question, a multi fold it but let me just say yet.
We certainly saw googles announcement, the California is loved to drive and they're going to continue to drive when this a pandemic passes.
If you actually look and I'm sure you do look at PADD five.
In California, we absolutely terrible we had negative cracks in April which is severely impacted earnings on the west coast.
But as of Wednesday E report.
Inventory in PADD five was a sub 20, some 30 million barrels 29.7 million barrel.
Frankly, the refineries have done a very very good job across the country in many ways, but also mainly in PADD five where utilization has been around 70% and it has helped clean up the inventories and the cracks have responded physical crack so I don't know what they close out yesterday, but do they before we're about $13 Bolton.
San Francisco and in Los Angeles, So up my personal opinion is we passed the laws.
Obviously, it's all going to be a function or whether or not there is a second wave or a third way, but assuming nothing extraordinary happens I believe that will your past pillows and demand will continue to creep up not only in PADD five but across the country.
Typically people say, California is long Oh, PADD five is long one and half refineries that is very seasonal in a normal market.
It's not long at all and that a gasoline seasons and I actually nine months here, perhaps so I think we're going to be fine in California over the long haul.
Thanks, Tom and a quick follow up on the mid going on region I understand that wasn't downtime at the refinery, but as a trend what we see Tom Harris, joining the when you look at screen.
In mid Con, we're pretty much Nick but as it is also coming out what you're seeing is that adoption on the mic on site is because unexpected I've never seen PSS reporting negative ebix from there Nick on but today that didnt, even in golf case, the gross margin at shall make look much better than the one at any dose I'm just trying to.
Well I understand what's driving this need against their golf courses coming in a little stronger than expected and Nick on gross margin capture that caused the ball just coming in a little weaker than expected.
Okay, I think I couldn't help on that.
Take the mid Con first we obviously had a a the cat cracker and miscellaneous other units down into first quarter and given the marketplace environment. We consciously chose not to start that unit up for a period of time, because we really didn't know what the demand is going to be so there is.
Significant amount of downtime in Toledo, or we did not a jump and because of our concerns about cash and liquidity and by a bunch of cheap crude which that was the hindsight comment that I kinda reference that if we if we had a crystal ball, we probably would have done that and I would have been proof of our margins in the mid continent.
Now when you shift to Chalmette.
Frankly, it's the crude chalmette did have a reasonably good crude differential in fact, it's a really the only refinery they had a good crude differential and that helped us.
On the margin side as we look today or the margins in the Midwest have improved they're not where they need to be we still have work to do that but oh Toledo system is much more competitive than it was when we had the units down.
Thank you so much in my questions.
Your next question is from Roger read of Wells Fargo.
Hey, Thank you good morning, guys Warner Roger.
And since my dogs are run around if you hear any barking in a minute that's probably why.
Quick question for you on the Opex side. So we've got the guidance to say 250 million 2020, a lot of moving parts it sounds like here.
And I was wondering if you could kind of work the reconciliation for some of what makes up to 250 from what you talked about earlier, and then where do we think about I assume some costs coming back to you from the sale of the hydrogen plants meeting you now having to pay something for the hydrogen.
Is that in Opex or is that built into the crack spread and how we should think about that.
Go in cost as part of this transaction.
Okay, Roger I'm not sure the.
Precisely what you're referring to it in regards to 50, we guided last quarter $240 million of operating expense savings in 2020 and won't see that way said in the comments was that 140 was.
Consisted of about $110 million of non energy related savings that we've increased that from one tend to 145, we've had significant cap capex reductions in this year, which would get us well above $250 that that [noise].
Those are the numbers for 20 Twond in regard to expenses going forward.
Oh, what I said the comments was our expenses, we expect will be.
Down $35 million on a per quarter basis going forward, so call. It 140 $145 million on annual basis.
In regards to.
Incremental cost from the hydrogen plants to go hand in hand.
We entered this pandemic.
We took immediate steps on the increasing our liquidity and and that came with the cost and we need to make sure coming out of the spending that we are as competitive as we can.
Beyond that we're actually in a better positions. So we're working very hard.
Not only offset those incremental costs, our business has because of accessing that capital, but actually to improve beyond that so the steps we're taking.
I think will position the company to not only absorbed increased cost.
From some of the hydrogen plants or they are the the bond offering that we did.
But certainly position us.
To generate more free cash flow, even with those costs embed in our company.
Okay, well I guess the reason I was asking about the 250, it's in the press release. It said made progress expense reductions goal remains to achieve the savings operating expense reduction of 250 million. So that's what I was trying to reconcile that cheap 50 back to the numbers.
We're talking about maybe it's a different timeframe for the 250, but that's.
I don't know if you can help us there that's what I'm trying to get to theirs.
The 145 up from the 110 versus the 215 it doesn't sound like that includes Capex. So I was just trying to make sure I understood 0.8, a point be here.
Roger Hey, this is Collins sorry. The 250 is is a kind of total expense savings, which also includes the salary reductions that we put in in Q1 that we talked about on our first quarter call as well as the a reduction in dividends.
So that's it that's kind of a combined cash savings, including the op ex numbers that Matt was talking about of now more than 250 with our increased expectations for operating expenses.
Okay. So the 110 was embedded into 250, if that's now 145, we add that to the team.
Correct.
Okay Awesome, and then just to get back to do something maybe more operational.
What have you seen in the last I guess, let's call. It exit rate of Q2, two what is now the last day of July in terms of as you look across your various regions. You know things just look better as we think about gasoline diesel and jet fuel. If you could give us any sort of regional breakdown that'd be great as well.
Well, certainly I alluded to it got it first question Oh.
From where we are the.
Frankly pads one.
You are four for that matter and five.
I have all improvement in terms of the a inventory levels, they're getting pretty close on even distillate, but everything but yet to where we started to get within the band of the five year average you only one that remain.
Above that band is a is pad three.
We have seen improvements in all of the other pads.
Demand has increased the a four week moving average.
After last Wednesday is report was it's about 8.7 billion barrels a day on gasoline threesix on distillate and that's that's a fair amount obviously, it's up a huge amount from the the lows that were seen at the trough.
Jet demand remains I'm, obviously very much impaired, but it is actually incrementally moving up as well what we've seen a we have started up.
A number of units that we had shut down in idled completely during the the trough the bulk or cat cracker has been as starting back up the Toledo Cat Cracker has been started back up.
We continue to watching very closely but we do have we do have the ability to and have slightly increased utilization utilization itself into countries now and the industry's almost 80% were below that we're going to be very disciplined and make sure that is light at the end of the tunnel is not a train and we continue to see to creep.
But we think creep upward and demand and that will help us correct.
So regionally.
Pad three is the one that I look at my worry the most about because frankly that is as we all know.
Oh would be the abundance of cash capacity that exists.
And in the Gulf Coast, we need a good export market declared a barrel.
Huh.
We don't have that on gasoline right now where you are still a net importer on gasoline into the country.
We have pretty good. Additionally, <unk> exports and the forecast going forward leased lines as I read some of the Prognosticators is that and exports into Latin America, both on gasoline and distillate in the third quarter will increase and that's your Doug should help further improve the situation.
Ted three you all see the distillate inventories at very high and they're very high and Patrick.
Great appreciate it thank you.
Your next question is from Prashant Rao of Citigroup.
Hi, Good morning, Thanks for taking my question, maybe I can I can segue from those comments on the Gulf Coast. There a broader question on utilization levels and also sort of asset closures for sort of intermediate term.
Where do we where do we need to from crude runs kind of go back to in the system to start to see capture a become more normalized margins come or normalized I think we all sort of think if we get into the eightys that should start to we should start to see demand can support that that makes sense to start to think that like margins move within sort of a normal range.
Historically, even although there will be below and how much.
The second part of that is dependent upon.
Asset closures or idling and if you get any commentary on what you've been seeing both globally and in the U.S. that would be helpful too, particularly in the Gulf Coast. We've seen there's been some surprises there some of the some of them. Some major assets that are either being marketed or.
Or you know how crude units down so any color there given your experience going through cycles would be helpful. [noise].
Yeah, absolutely in terms in the margin Yeah, I would I would agree that.
Yes, well I backup a little bit when you say, what utilization or would be necessary or would be good. Good bend to a the capture eight that allows you to say break even or makes I'm, making and making money well obviously.
It is gonna be a function of the utilization rate.
The crack spread and the crude differential.
But assuming that those things kind of equilibrate, then I think yes.
Yeah to certainly where you're not threat draining cash.
If you're you've gotta utilization by and large over over 80%, where the industry is getting close.
We're not quite there yet, but the where he not so I think that's a good way to look at it but again, it's it's you can't have high utilization and still have a $3 cracks on place. That's just that's <unk> insane and the industry has to be very disciplined here.
On in terms of I am personally convinced that there will be rationalization permanent rationalization.
And the this business as to what level I don't know.
I.
Speaking to where we are today, if you take a look at.
The United States.
There's been about almost.
850000 barrels a day capacity that has been shuttered completely.
Some of that may be temporary some of that may be permanent I, including that a P.S. So we know that one's permanent and that's 335000 340000 barrels a day.
As you know.
I can't say, there so I apologize in advance constitute to talk issue count confusion as announced that they're going to shut down.
On August Onest temporarily they'll watch the mountains revised Hollyfrontier has indicated that they're going to.
Chain turn nearby Cheyenne plan from a from a fuels plant operation a into a biofuels and we have a marathon has a couple of refineries down we don't know what the long term lunge everybody is but there is called you be continued rationalization. Similarly, as there's probably a six or 700000 barrels a day.
Capacity, that's been shouted temporarily at least.
In Europe.
And I think there's more to come on that over the next year too.
If you just back up for a moment.
The margins in Singapore.
Had been negative for the last two three months.
The margins over the pandemic period, when it really got bad in Europe are effectively zero.
And the margins in the United States on <unk> Gulf Coast, T.I. basis have been $6 or $7 better than Singapore four to $5 better then.
Sure. So I think there is a competitive advantage that show. Unfortunately, it just means that we're losing less money than other parts of the globe, but maybe Bonnie kidney United States you still advantage.
All right and then just a quick follow up on.
The west coast on Martinez.
Now that you've had the asset.
In house for several months any update on.
Where are you seeing through cycle or soon to quote unquote normalized cash flow generation could be from the asset you know once you've got to integrate into system and I think sort of related to that.
You know there was some integration costs in the quarter.
Utilization dip down some of that I'm, assuming might be opportunistic because you were you know integrating the asset you know that those crude runs might not all be yeah, and and when the difficult environment. It's sort of might have made sense. So it's kinda just trying to get a sense of both one you know what looking under the hood a bit more closely now.
What kind of cash flow through cycle cash flow generation do you see from that asset and then too you know how can we think about maybe a utilization or cash generations are the cadence of improvement you know versus the rest of the west coast as we look out in the back half of this year more short term.
Now on the plant for six months.
Oral.
And everything we know about the plant.
Has reconfirmed are we thought about the plan in terms of strength.
This flexibility is coordination and combination with the Torrance refinery. So what we said when we bought the place we've we thought mid cycle.
Was $275 million.
Certainly our view has not declined from there and the.
Incremental cash generation that that we can generate as a result of running a system on the west coast.
Still believe we'll be in excess of.
Hundred $25 million, we would expect next year to be able to generate at least $75 million about hundred 25 million.
On a run rate basis for a 21, so everything we've known about the people about the steel the capabilities of the refinery.
Is as strong as we thought and we've been impressed.
Tremendously by by the asset and by the people that we just haven't been able to demonstrate it [noise].
[laughter]. Thank you very much for the time this morning, gentlemen, I'll turn it over.
And once again to ask a question that is star one when Youre Touchtone telephone well move next to Doug Leggate Bank of America.
Hi, good morning, everyone.
I will make the same apologies for those barking if that happens in the background I hope everybody soon.
Well up there.
John I suppose community over the balance sheet little bit on just what do you see is your route to on de leveraging and life of everything has been pulled that so far and I guess the logical question would be where do you want the balance sheet to be I'm coming out of this.
How do you think about resetting the ballance, yes, you do get a recovery on a go forward level.
Doug I think quite frankly, the path right now is seeing incremental demand coming across the board.
Increasing the path to free cash flow and then we have always viewed this most recent billion dollar bond deal on the secured side as an insurance policy and so the plan would be it's a five year piece of paper with the no call provision for two years.
Think assuming a regular way demand recovery glide path gets us to the point, where ultimately that's off the balance sheet in less than two years that that's ultimately our goal I think we've been de levering at the PBF logistics level, which is clearly consolidated at the PBF energy inc. level as well.
But it ultimately comes down to incremental throughput increased utilization and a goal of generating incremental cash flow.
Okay.
You're right on the trajectory, but let me let me just probably one other one if I mean you guys in the question I asked the lateral the other day.
When somebody wants their price for the obvious has the right to the an enormous amount of volume towards the U.S., one series or at least part without was relatively heavy barrels with on knock on effects on on spreads. So I'm. Just wondering if you can walk us through how you see the dynamics on.
Heavy oil differentials and perhaps confirm whether you believe outflow to let us know dumb and chunks of the I'm confident of course the U.S.
Yes, Doug it's Tom I mean from a high level, we're sitting here today with roughly about 10 million barrels a year on year for crude oil production, which is not on the market.
Yeah, we're sitting there with roughly two to three about is coming out of the U.S. them. The all the remainder of that would be from OPEC and OPEC plus so leaving in the range 70 million barrels, which is primarily a medium and heavy and as the market recovers that is gonna be the incremental barrel that comes back to the market.
We shouldn't same guys. Thanks, so much.
Your next question is from Benny Wong of Morgan Stanley.
Hey, good morning, everyone. Thanks for taking my question just wanted to get and updating your perspective on what you're seeing in export market in demand there seems like from the public data at the levels have been trending up just wanted to get your sense in terms of where that the man strengthen is coming from how resilient it could be.
And if there's any kind of seasonal.
Inventory building factors kind of embedded in there.
Oh from where we see I think.
The demand is Oh I export demand is held up nicely on on distillate has been a little less on gasoline, but as I mentioned earlier.
Okay, Yes.
Is that we will see an improvement in both gasoline exports and dozens of exports over the third quarter.
The demand is indicated to be up a third quarter versus second quarter in Latin America by 255000 Boes a day. It does appear as though other countries in Latin America, not locking down at the the extent that they were before.
Whether that's appropriate or not but my pay grade, but we do expect to see improvement over the third quarter and it's important because as I said earlier, particularly for the Gulf Coast.
That's the clearing mechanism.
We saw I'll just leave it at leave it that for the Gulf Coast.
There's not much activity in other parts of the country certainly on an export basis. So what I think we'll see strengthening.
Both distillate and importantly, gasoline and get back and having the country be a net exporter of gasoline as we work for most of last year.
Right. Thanks, Thanks for those thoughts it really appreciate it my second question is really just months, we've obviously seen a barrage of headlines around risk of lines five and doubtful just just wanted to.
Kind of get your your perspective in terms of the potential impact and extended shut down a lot of those lines what would bring to your operations and maybe speak to the flexibility and mitigating a options you guys have around them.
Well first of all we say that we owe we hope Oh from everything we've heard from <unk> and bridge and energy transfer is the pipelines they believe or.
Operating and we'll be continuing to be operating safely. So we see no reason for shutting down infrastructure that is vital to their country that is in good operating condition.
Understand a enbridge earlier this week indicated that they they were making further progress in trying to get the other half of a.
Well I five up and operating now.
If indeed, though.
There was some.
Significant or moves too.
Shut those pipelines down there would be an impact obviously for I'm buying five Oh, Toledo refinery isn't that pad to Quebec isn't that that a lot of refineries in high Pat.
I don't believe that pipeline is going to get shut down but got their enbridges also looking at ways to source barrels a day indicated as much in the earnings call, we haven't heard much of that but.
Well have to watch that closely as regards dapple if indeed.
That online would it be shut down and again I don't think it's going to be shut down, but it's obviously going before and appeals court and a that malls bleed decision and be made by by the judges, but then we would likely see obviously.
The Bakken differentials, a weakened significantly and we probably create a buck and by rail opportunity to the to east coast in other parts of the country.
Thanks, Tom appreciate it.
Your next question is from Phil Gresh of JP Morgan.
Hey, good morning, I wanted to follow up on the commentary around you know the sour barrels coming back to the market and just to get your view on actually the shale side of things [noise].
We've seen return of curtailments, but not an increase in overall U.S. crude production. So how do you see that side of things playing out and what do you think it means for a U.S. light sweet crude differentials moving toward is this what we're seeing now is this a new normal on your view or could things widen back out.
[noise], Phil it's Tom.
In terms of those question I think there a couple of important things looked at.
You know as we're talking about the markets are coming back in terms of its effect on the demand side of the equation and more sour coming back onto the market.
Well I think we can sit here today instead of we're past the narrow point of what we've seen on the light heavy differentials right. When it got in almost flat and we're starting to see some trajectory, but moving out you know the opac changes for August will probably be more felt come September which will then correspond in terms of demand.
As it relates to the specifically to shale oil one in the U.S. you know, there's clearly a lot of discussion in terms of up you know decline rates versus docs versus a you know the overall rig count and ultimately it probably translates into a you know I I think probably the surprise ultimately could be in them.
Marketplace, which I I don't think I can say with strong conviction. Today is is that you could have a wider light heavy differential which is also being driven by light strength as opposed to being driven by heavy weakness.
Right, Okay interesting.
And then Tommy's given a lot of commentary on product markets.
I guess, a one follow up would just be as we flip into September and we start moving into winter grade gasoline.
How do you think that that feeds into this whole dynamic of current crack spreads in the summer being fairly soft and trying to get the utilization back up but also needing to reduce inventories you know it sounds like you're a little bit more optimistic on gasoline, but then we do have that seasonal dot com.
That's good question, we've debated internally.
My guess is.
There will be a economic considerations as to whether or not you fully put all the light ends the butanes into gasoline pool.
You have to put a certain amount and just to make turned the engines over in it that the went in Uh huh.
During the winter, but.
In fact, we're looking at real Hot if you if all of sudden everybody starts improving or increasing.
Gasoline yield and the gasoline crack was down my guess is you're gonna have economics, and I'm going to say either don't put all of the light ends into the or you're gonna have to make some [laughter] elsewhere.
I also have the suspicion and this is just my own opinion that like everything else that's going on in the world.
We're not going to see the new normal be okay. It's maybe days past everybody's going to go back to hunkering down because people didn't go on vacation people, then travel and you're not going to get on a plane for some period of time, so I actually think that there maybe some more strength.
In the post summer season in gasoline not to the same level. It is in the summer don't get me wrong.
But that in combination with the fact that you may not have the same economics that you had a before for an upgrade on on some may not see all of the light ends go back into the gasoline pool.
Okay got it Eric very quickly just on this working capital dynamic that you are referencing.
How do you expect that to play out for the second half of the or is that going to continue to be.
The approach.
And what might we see some reversal on from a cash flow perspective.
We could potentially see a reversal what I would guide to is the only way we really can't say there would be a reversal is it's roughly about 3 million barrels shifted in terms of having extended payment terms that now have shorter dated payment terms.
And the easy way to think about it is if crude by rail comes back then we will see a onetime shift back in terms of positive working capital back in but I think we felt very comfortable that excluding that phenomenon.
Overall, the normalized level of working capital coming out of April increased in May and June it just happened to be offset by 3 million barrels of shorter dated payment terms.
Okay, great. Thanks, a lot.
Your next question is from Neil Mehta of Goldman Sachs.
Oh.
Adding team there thanks for a thanks for taking the time I guess first question is around 2021 capital spending well as you think about where that level will shake out any early guidance would be helpful. Recognizing there is it kind of uncertainty there.
Yeah.
What we said.
We expect.
21, capex to actually be a significantly below what we expected 2000 wanting to be.
And so.
But we have to remain agile to react to the market. So I would expect capex and 21 to be in the five to 600 million dollar range.
Which is.
$200 million below what we thought.
20 was going to be let's extends the pandemic continues and gets worse that will be adjusted down.
To the extent the that are the world becomes normalized there may be.
Creep to it where it would grow so we're continuously.
You know risk managing our business for the marketplace, where it but we think the 2021 capital plan.
Oh.
Like I said significantly below where we thought 20 was originally going to be.
Well, we'll react to what the the market is at that time.
Thanks, Matt So the two two part follow up to that so to the extent that you are lower than the five to 600 million dollar base case, what are the levers that you had you can pull on ER and debt. The follow up there is around further asset sales monetization to air products.
Helped.
Well some cash into the business are there any other levers that you have to strike the balance sheet. Thank you.
The answer to the second questions yes.
There is certainly things we can do I don't know that makes sense to get into that now, but just in terms of running a refinery your continuously.
Managing and.
Hi, grading a different risks in terms of.
Where you're going to allocate capital and what equipment, you're going to address one and utilization will clearly play a part of that.
And so it's something that we actively manage we didn't anticipate going into 20 that our capital plan would be where it is today, but we successfully done it that's what we pay a lot of engineers to figure out on a on a daily basis.
XT.
Your next question is from Jason Goldman of Cowen Your line is open.
Morning, I'm wondering I wanted to ask about <unk>, an environment that we could get into operationally were gasoline and diesel continue to rebound and jet doesn't it seems like that alone could limit.
Refinery utilization are you exploring.
Ways to increase utilization back up to 90% above to kind of match a potential new demand profile for the country or do you see unnatural limit to how high utilization could go.
Even if diesel and gasoline fully returned to normal demand.
That's great question.
I mean, let me just give a little backdrop on it though you saw what does the industry was able to do and frankly, what we were able to do we got a jet production down somewhere between which typically runs you know.
10, 11, 12% of a yield you gotta down too as low as 2%.
Oh, we did that by taking all of the normal stats that you take to either convert.
This led to gasoline jet distillate <unk> got to Eatingwell as well as they get the gasoline, but we were able to do a lot more.
During the pandemic and we'll continue continued to have that capability in response to the precipitous drop in jet demand because the utilization in the industry was very low.
So this leads in to your question, we're actually able to put jet fuel into the cat crackers.
Of course, we had spare cat cracking capacity, we expect hydrocracking capacity did not only was the crude utilization load all the downstream units will always so what you wind up we wind up having additional flexibility.
Two.
Predominantly target first it was gasoline, but then get and and turn jet into both gasoline and distillate.
And we continue to learn from that and we continue to find ways that we think we're going to be able to do that going forward. So we do believe we'll be able to get even in a depressed demand a jet demand environment.
At utilization up.
From where it is today and then significantly up from where it is today.
However, I'm not convinced that we could get your full utilization in this industry. If jet demand is where it is today because sooner or later when you're running a cat crackers with gas oil or when you're running a hydrocrackers, where which feedstocks that are coming off the crude unit.
Don't have that flexibility that I just referenced because those units is fair. If there's good margins those units, they're going to be relatively fall and then you're going to run out of the ability to contain jet at some point and it would be a good chance it that we put a ceiling.
On utilization, but it'll be much higher than where it is today.
Great. Thanks, I appreciate that color, that's really helpful and then.
Kind of 10 tangentially to that it seems like the pandemic is creating.
Clearly differing views on where the world is going and I'm wondering if you're exploring any investments outside of kind of your core refining business or maybe.
[noise] changing.
Kind of how you process, you're intermediates right now maybe into new demand verticals that you think of a better chance of growing in the future.
Yes.
First of all lesson, let me just be clear and I think we told you everybody before our strategy is very much focused on.
Obviously getting through the pandemic, hoping to get back to some level of normalcy, and then generating cash and Delevering. The company that is goal number one and Eric laid that out is on target is to be in dollars of that that we just did however after that.
We do have plans and all I had been looking at and we've actually talked I think you on previous calls.
There's an opportunity for us to do something which Alan Martinez into renewables area. There's some other opportunities that we were looking at prior to the pandemic.
In Delaware City, along the same thing we do feel the need in terms of that prioritization I gave you get get back demand demand Qs everything utilization goes up crashed go up gifts go up a wider.
Generated cash de lever the company and then diversify the portfolio in summer.
Great very clear thank you.
Your final question is from Matthew Blair of Tudor Pickering Holt.
Hey, good morning, Tom I'm, just looking at the West Coast and looking at that five cents gross margin in Q2 do you think it's fair to say that you face an extra headwinds.
In the slow demand environment from your merchant position and lack of retailer or is that not accurate.
Oh, I think that's clearly accurate or.
You know I'm I've never necessarily been a fan of retail going back to my Tasco days, when when Tasco own circle K a is it but candidly obviously some of our competitors had benefited a massively.
In a period of time, when they spot prices were crashing and the retail lags both down in up.
And that certainly was a factor as I mentioned.
When we got to the.
The immediate trough, we actually had.
I think it was negative almost double digit negative gasoline cracks in California for a period of a seven to 10 day and a month of April gasoline the.
You think you want to a fourth we won depended upon which region you're looking at was about two bucks. So.
That type of merging crack that we were dealing with being a merchant refiner and not having a.
A tailwind from retail certainly was a negative factor for us versus.
Save a lateral.
He said.
Got it I'll leave it there thank you.
Thank you.
That concludes our question and answer session for today I'd be happy to return the call over to Tom Nimbley for closing remarks. Thank.
Thank you very much thanks for joining the call. We look forward to hopefully having a much better call well better news for you on a third quarter everybody be safe stay healthy. Thank you.
This does conclude the PBF energy second quarter 2020 earnings conference call them webcast. You may now disconnect everyone have a good day.
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