Q1 2021 HollyFrontier Corp Earnings Call
In today's press release.
In summary, it says statements made regarding management expectations judgments or predictions are forward looking statements.
These statements are intended to be covered under the safe Harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings.
On the call also may include discussion of non-GAAP measures. Please see the earnings press release and acquisition Investor presentation for reconciliations to GAAP financial measures.
Also please note any time sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript and with that I'll turn the call over to Mike Jennings Alright. Thanks, Craig.
Good morning, everyone. Today, we reported first quarter net income attributable to Holly frontier shareholders of $148 million or <unk> 90 per diluted share.
These results reflect special items that collectively increased net income by $234 million.
Excluding these items adjusted net loss for the first quarter was a negative $85 million or negative <unk> 53 per diluted share versus adjusted net income of $87 million were <unk> 53 per diluted share for the same period in 2020.
Adjusted EBITDA for the period was $47 million, a decrease of $221 million compared to the first quarter of 2020.
The refining segment reported adjusted EBITDA of negative $66 million compared to 176 for the first quarter of 2020 and consolidated refinery gross margin was $8 per produced barrel, a 28% decrease compared to the same period last year.
This decrease was primarily due to lower realized product margins covered coupled with compressed crude differentials.
First quarter margins were also impacted by winter storm here, which increased natural gas cost by approximately $65 million across our refining system.
First quarter crude throughput was approximately 348000 barrels per day slightly below our guidance of 350 to 380000.
We recently completed planned turnaround work at our Tulsa and Woods Cross refinery and have no scheduled maintenance until the fall.
Strong finished product and base oil margins drove our record financial quarter for our lubricants and specialty products business.
<unk> EBITDA was $87 million compared to $32 million in the first quarter of last year and included $8 million per restructuring charges.
Excluding the $8 million of restructuring charges in lubricants and specialties.
Adjusted EBITDA was $95 million.
Rack forward adjusted EBITDA was $88 million, representing an 18% adjusted EBITDA EBITDA margin.
For the full year of 2021, we expect to earn between $230 million to $270 million of adjusted EBITDA in the rack forward portion of this business within the <unk> segment, we expect base oil margins to temper from current spot market levels, but expect they will continue to be higher than the past three years.
Holly Energy partners.
EBITDA from $96 million per the first quarter.
$64 million in the first quarter of last year.
During the quarter refined product volumes improved and we are optimistic for continued improvement in refined product demand in our markets as we head into the summer driving season.
We are excited to announce that yesterday Holly frontier entered into an agreement to acquire Shell's Puget sound refinery for a purchase price of $350 million plus hydrocarbon inventory to be valued at closing with an estimated current value of $150 million to $180 million.
This purchase price represents an attractive acquisition multiple of one five to two times EBITDA net of inventory based on the refinery historical financial performance.
The Puget sound refinery as a high conversion 149000 barrels per day capacity plant located in Anacortes, Washington.
It is well positioned in the premium Pacific northwest product market and has advantaged access to both to both Canadian crude via the Trans mountain pipeline as well as Alaska North slope supply Puget.
<unk> has an outstanding environmental health and safety track record and has been well capitalized in the past 10 years, we are committed to continuing the site's track record of responsible operations and we look forward to welcoming Puget sound highly skilled workforce to the Holly frontier family.
Financially Puget Sound refinery has a history of consistent earnings and free cash flow, averaging $235 million of annual EBITDA and $75 million of free cash flow between 2015, 2019 again, an attractive one five to two times EBITDA multiple net of inventory.
Sorry for this well capitalized and very well operated refinery.
We expect the acquisition will be immediately accretive to earnings per share and free cash flow.
Financing for the acquisition will come from a combination of one year suspension of our regular dividend as well as cash on hand.
Additionally, we are operating we are evaluating opportunities for an asset dropdown Holly energy partners.
This transaction is currently subject to regulatory clearance and other customary closing conditions and is expected to close.
In the fourth quarter of 2021.
A copy of the acquisition press release and accompanying slide deck can be accessed on our website under the investor relations events and presentations tab.
So with that let me turn the call over to rich.
Thank you Mike as previously mentioned the first quarter included a few unusual items.
Pretax earnings were positively impacted by a lower of cost per market adjustment of $200 million.
And a $52 million gain on a tariff settlement.
Which were partially offset by severance costs of $8 million related to restructuring in our lubricants specialties segment.
As well as charges related to the Cheyenne refinery conversion to renewable diesel production.
Includes decommissioning charges of $8 million LIFO inventory liquidation costs of $1 million in.
And severance charges totaling approximately $500000.
Table of these items can be found in our earnings press release.
Cash flow from operations was $62 million on the first quarter, which included $25 million of turnaround spending and $14 million of working capital gains.
Holly Frontier's Standalone capital expenditures totaled $117 million for the quarter.
As of March 31, 2021, our total liquidity stood at approximately $2 5 billion.
Comprised of a standalone cash balance of over $1 1 billion, along with our Undrawn $1 $35 billion on.
Unsecured credit facility.
As of March 31.
$175 billion of stand alone debt outstanding.
Debt to cap ratio of 25% and our net debt to cap ratio of eight per cent.
Last week, we successfully completed an extension of our $1 35 billion revolving credit facility, which now matures in April 2026.
We anticipate recovering between $50 million to $60 million in cash tax benefit in 2021 under the cares Act.
And in the first quarter, we recovered $21 million of estimated tax payments made during 2020.
During the first quarter, we declared and paid a dividend of <unk> 35 per share totaling $58 million.
As Mike mentioned as part of the acquisition financing of the Puget Sound refinery the Holly Frontier Board of directors approved a one year suspension of the regular quarterly dividend.
With the dividend declared for the first quarter of 2021.
Because it is expected to resume the dividend after such time.
AGP distributions received by HFC during the first quarter totaled $22 million.
While the frontier owns 59 6 million limited partner units.
Representing 57% of Hep's LP units with a market value of over $1 2 billion as of last night's close.
Turning to forward looking guidance.
Within our refining segment from the second quarter of 2021, and we expect to run between 400 and 420000 barrels of crude per day.
With respect.
Back to capital spending.
We are increasing our capital guidance, specifically on our renewables segment based on updated project cost estimates.
Our total renewables project spend is now expected between 800 $900 million in.
And importantly, these projects remain on schedule.
Specific to calendar 2021.
We now expect to spend between $625 million to $675 million on renewables.
Versus our prior guidance of $520 million to $550 million.
The rest of our 2021 capital budget is unchanged, we still expect to spend between $190 million to $220 million per capital at Holly frontier refining and marketing.
$40 million to $50 million.
Lubricants and specialty products.
And $320 million to $350 million per turnarounds and catalysts.
At ETP, we expect to spend $14 million to $18 million from maintenance capital.
30% to $35 million for expansion capital, which includes our investments from the Cushing connect joint venture.
And $5 million to $8 million on refinery processing unit turnarounds.
As a reminder, beginning in the fourth quarter of 2020 Act.
Activities associated with the conversion of Holly Frontier's, Cheyenne refinery to renewable diesel production.
Along with the construction of renewable diesel and pretreatment unit and our teacher in New Mexico.
Our reported on Holly frontier corporate and other segment.
For fiscal year 2021.
We continue to expect corporate segment operating expenses to be in the range of $100 million to $120 million, which.
Which includes decommissioning and severance costs related to the Cheyenne refinery conversion in the range of $20 million to $30 million.
With that Julian 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 test telephone we ask that you. Please limit to one question and I will follow up.
You have additional questions. We welcome you to rejoin the queue.
Is there any point. Your question has been answered you may remove yourself from the queue that price in the pound key.
Thank you your first question.
Comes from Manav Gupta with credit Suisse.
Hey, guys. So.
This obviously doesn't look a problem on that side of the refinery is concerned.
One of the key questions. We've been getting since last night is the last Guy who bought the refinery on the West Coast from Shell was also hoping to make $350 million and it did not go down debt. Please so I'm just trying to understand what due diligence have you done to make sure that this EBIT.
It's realizable and what would you like to state the dubious so they're basically out there, saying buying less gross assets from shell doesn't really what southwest.
Okay.
Now thank you for your questions and as a starting point.
The current owner and operator of that facility has run it really very well and capitalized as well, it's a premium asset in a premium on market and we're feeling feeling that we're getting a very good price on it.
We're not going to comment as to other buyers and other transactions and this particular, one we're paying less than $3000 of capacity barrel for a high complexity refinery and a great market going past that it creates big opportunities for our company and I'll, just kind of bang through them and we will certainly elaborate on.
Moving to spend some time on this call discussing it first we're going to benefit from relative advantage of operations in Washington versus California, with not with a refinery that has heavily gas heavy gasoline yield.
We bring additional feedstock benefit to this refinery versus our existing relationships.
With crude suppliers and a trans mountain expansion third we're on gain on commercial foothold and another <unk> state, which adds opportunity for our renewables business.
We're adding diversification to our portfolio, which at present is fairly heavily dependent on regional crude differentials and finally as I've said, we're adding assets it has scale great.
Great operations, well capitalized at an attractive purchase price.
Thank you and a follow up question here.
That followed.
Higher than your guidance clearly you have done this business on island I think last quarter on so you were indicating that there was a price lag because of the coupon can realize the full benefits so a little bit.
The outlook on the rack follow up because at the <unk> rate you could actually even BT on annual guidance, which.
Earlier in the year, but clearly things have really strong on the rack forward from so if you could comment on debt market.
Yes.
So for the short term, which involves probably the balance of this year, we see conditions continuing to be similar.
As the first quarter, maybe as COVID-19 relief comes along with vaccinations and people come on of turnarounds on refineries pick up steam on fuel side there'll be a little more supply in the market, but overall dynamics right now look to be.
Similar in going forward as they were on the first quarter.
Thank you so much for taking my questions debt.
Your next question comes from Matthew Blair with Tudor Pickering Holt.
Hey, good morning, everyone. Thanks for taking my question here in regards to the acquisition.
Do you see this as a shift in your overall strategy where gas.
On the royalty back to acquire even more pad type assets are to come.
We view this as like a one time opportunistic deal that you just couldn't pass up.
So.
In terms of our strategy.
I don't see us in California, if that is your question and hand. Following this acquisition I think we will have enough concentration within Puget sound that this would be a one time opportunity for us.
With that said, we see pad five is attractive and particularly the Pacific northwest as being attractive and there are a few reasons.
So it has advantages in respect of operating environment and operating cost versus the remainder of pad five.
<unk>.
Want to be on the north part of that five and believe we will benefit from what's going on in California.
Got it and then could you talk about per RIN exposure at the refinery.
Much internal blending.
Can it do and then also just with Washington recently, passing on the health care cost program.
What's your outlook, there and what would you do it from.
And on conditions became.
It's pretty weak on the west coast right.
Renewable diesel.
Electrification.
Or is the outlook for West Coast refinery.
Hey, Matthew it's rich so with respect to rents.
Plant has historically export I'd call it 15% of its transportation fuels gasoline.
Gasoline and diesel.
And can blend about that quantum at the rack there.
So call rent call, Eric exposure here, 60% ourself.
I would point out that because of this plan is a relatively low diesel cut and Thats went into our thinking as you look at pad five in general.
Closures that have been announced versus what we're seeing on renewable diesel and we would expect that diesel market. That's in balance in the gasoline market. That's actually short. So we're we feel like this plant is really well positioned and frankly, our company. When you consider our renewable diesel investments are really well positioned vis vis that outlook.
Okay.
Got it thanks.
Your next question comes from Theresa Chen with Barclays.
Good morning, Mike I was hoping you could dig in a little further on your comment about having got commercial foothold and on Lcs that states from Stan.
Washington State Assembly has passed that Greenfield standard legislation what does this mean for your existing projects and what kind of commercial synergies can you drive there.
So immediately.
It will be small because our commercial relationships are directed towards California, but theres going to be clearly a knock on benefit in terms of demand for renewable diesel and as we get up to speed and marketing light oil liquid products in Washington on we will have the opportunity to arbitrage between those two.
Markets, and so thats really where that comment comes from.
Got it.
And in relation to.
The uptick on the project spending can you talk about whats driving that and at this point what is their luck deal on the execution side.
I'm curious if this is Tom I'll make a few comments.
In response to your question.
The cost debt for the renewable diesel project has gone up due to a variety of different factors, we have changed the scope a little bit as we move forward with this project.
And in doing so we are encouraged marketing's construction costs and metallurgy costs.
With the idea being is that we have to metal ought to be able to run on alternative feedstocks that have lower Ci. So this is an economic play. It's also a longevity play as we move through the marketplace with renewable diesel and we're not hanging our hat on one particular feedstock that soybean oil so thats part of it.
<unk> also seen some COVID-19 effects in terms of construction costs have been going up as well as raw material costs, such as steel we've seen those prices going up we.
We've seen a little bit of a delay in the delivery of some parts and and vessels from overseas locations.
And while we've tried to do is risk previous wed previously said is to stay within our schedule because we're trying to capture that BTC price at the end of the day, which is worth a lot of money to us on the long run.
So schedule was very important to us so we're having to balance.
Some of the schedule versus the increased costs.
And Thats, where some of our most if not all of the costs are coming from at this point in time in terms of future spending.
We have ordered or have on order.
Most of the equipment on very high percentage I think we probably have a very little left to do so most of those costs are already locked in and set and are included in our new numbers. We've made allowance for some construction cost increases on our new numbers and Thats, probably where the bulk of our risk is going to be.
As we go forward is in terms of construction cost and there again the impact that would be whether COVID-19.
Such things like that.
Thank you.
Your next question is coming from Ryan Todd with Simmons energy.
Great. Thanks.
Following up on the acquisition can you.
Walk through the decision to do.
To suspend the dividend how are you thinking about debt from our balance sheet exposure point of view with debt.
Was it necessary or just or just cautious on your part.
Earnings over the next couple of quarters ended up more supportive than expected is there any sensitivity on the length of the suspension.
Hey, Ron on its rich look.
I would call this cautious for sure we.
We see obviously, a tremendous opportunity here, but it comes in the midst of financing another great opportunity in renewables as well as a really heavy maintenance here in our refining business.
These investments all have to be viewed in the context of our longstanding commitment to an investment grade credit rating.
So with that in mind, we feel it's prudent to invest a year's worth of dividends to ensure our balance sheet through 2021.
We're not doing this lately.
We view the dividend as our primary vehicle of cash return.
And in our industry and at Holly Frontier cash return is an essential part of the investment thesis.
To your point, we intend to return the dividend.
I mean, its previous rate on a year I think if things go better than we were expecting could be earlier than that.
Last thing I'll say on this is as you'll recall in November of 2019, we articulated our plan to grow our dividend.
Forgotten about that and we strongly believe that the Puget sound on the Buildout of our renewables business is going to enhance our ability to do that going forward.
Alright, Thanks, rich and maybe.
Additionally on following up on some of your comments earlier Mike.
I think with.
With getting a foothold in Lcs.
State, they're in Washington, There is a benefit.
That may come but Theres also.
Potential obligation burden down the line under the under the standard I mean, how do you think about the.
<unk>.
On the obligatory burden.
If you kind of if you look 510 years down the line.
And is there.
Is there any possibility that you could ever converted in accordance to two on R&D facility or is that low.
Nowhere in the plants.
Okay.
A few questions on going to try to hit on one at a time.
Hold on the <unk> date is is the opportunity for us because we think that the renewable diesel molecules will flow and we will be out there actively marketing product. So so that is an opportunity as I previously spoke as to whether it's <unk>.
And opportunity are also an obligation on our burden I think we look to the California market, which Washington is trying to link to now recognize this legislation just passed but trying to link to California in.
California, the consumer is effectively taking 100% of the burden of else DFS.
No.
We don't see that and coaching significantly into our refining economics.
Third point would be as we've as we've made this is a gasoline maker.
Does that diesel and jet, but the diesel yield is relatively low on this plant. So we think it is regionally well positioned because of that.
And finally as to the legislation itself and the opportunity to convert.
Okay, what I would say is the legislation as modified by need for in state production of renewable fuels are low slower Ci fuels and at the same time theyre very cautious about permitting new emissions and so that impacts both our ability at anacortes to do something with renewed.
Diesel, but also the ability for the sales DFS to roll forward.
And the invention innovation manner. So that's a question mark.
And I think we'll play that out through time as to what the state really in Canada with respect to local production opportunities versus the permitting of associated emissions.
Okay I appreciate the color.
Yes.
Okay.
Your next question is coming from Paul Cheng with Scotiabank.
Hey, good morning, guys.
Paul.
Just wanted to go back to which on the dividend suspension.
Is that day pill a day.
In total no decision or a bad yet.
Question from the rating agency also so.
So just trying to understand that the background behind why you guys decided to set the price.
And yet because it does look like your bonds.
<unk> is strong enough.
Even with the increasing the renewable capex.
Type expanding debt you should be able to handle yet.
With all day suspension.
Sure Paul.
Now this is a decision we made before speaking with the agencies.
This was made out of an abundance of caution and I think you'd agree that's consistent with how we've run on our balance sheet historically.
We have obviously since spoken with the agencies were not expecting any changes to the ratings.
And in the long run this is.
Objectively positive from a credit perspective.
Okay. So now but this was done from an abundance of caution nothing more than that.
Alright.
And the second question is two part maybe separate one is debt.
Capex spending expectation for purchase.
For 2022 and forward.
On the average cycle also and also debt.
I think this is for Mike.
Do you guys have been in the Western States.
Total day stockpile.
And it's a very progressive pace and so I guess that the pushback. We got from people is that how can you feel comfortable about the long term regulatory and political environment.
Progressive this day over day ethane.
Per Paul Let me, let me hit your capital question I'll hand, it to Mike.
And consistent with what you've seen historically, we'd expect that spend 30% to $50 million a year in sustaining capital. Obviously turnarounds are similar to what we would see elsewhere. The first one that scheduled is 2024.
So that speaks to the capital.
Tim do you have anything else on average.
We've got some numbers in the in the Powerpoint slides that we posted last night Opex is.
$5 55 per barrel and then what I would basically tell you is.
On the asset is high.
The high quality asset as Mike mentioned before on a competitive not just in the past five region, but also in the whole Washington area itself.
Thanks, Tim.
So Paul your second question I think was a point that Doug.
This isn't Kansas anymore, Dorothy and we fully understand.
First.
This refinery has operated and has been operating in the Washington State for very long time. So the real question is really are around the progressive agenda, and what happens going forward to limit our ability to operate and make money.
And our viewpoint on that is really kind of two or three people, but first.
California is going to be more progressive.
It is also a higher operating cost jurisdiction.
In terms of Opex, and Capex and lesser in respective crude economics, we believe were relatively advantaged and that usually creates opportunity within the refining business.
Beyond that we're going to have to be good stewards, just like any other operator, and we will also be opportunistic lending what we see as opportunities created by <unk> and other such things against the reality of a more progressive or otherwise demand destroying.
Hydrocarbon agenda.
Beyond that I think there is a there is a cap and trade.
Legislation that debt recently passed the impact on us will be about 6% reduction in greenhouse gas emissions and we feel like we can address that through energy efficiency.
<unk>, an operating procedure at the plant.
The more elaborate answer is.
We're looking hardest this we believe we understand it we've studied it through due diligence and we're prepared.
Mike can I sneak in one final question.
Sure Paul.
On renewables.
Based on project budget increase.
Sales you had 90 day, it's only about a year ago yield.
<unk> already raised a couple of times.
So when we look back in hindsight.
Have you done anything in terms of.
<unk> may be that the pause that when get budget.
<unk>.
The project that Nick to change.
To avoid this kind of cost increase on OLED overrun.
Yes, so Paul we've increased one time, our previous advice was that we're looking towards the high end of the range.
Not too through this period and in respect of your question or your point.
Learnings are threefold.
One is that.
We chose to add scope to these projects.
As things have evolved to take advantage of lower Ci better feedstock economics, we think those are intelligent decisions and warranted by the increase in project return second.
<unk>.
Had we known then what we know now in respect of trying to execute projects in a COVID-19 environment with people working from home supply chain constricted et cetera.
We would add in more contingency and Thats a lot of what we're seeing in addition to the scope change around feedstock.
The final bit was I think as announced.
We wanted to get in front of this in terms of capturing blenders tax credit.
And in so doing final investment decision was made relatively early.
And on one hand, we can take stripes for that and on the other hand, we're going to make money relative to blenders tax credit. So that was a reason to decision that we made and it led to scope evolution that was firmly tacked down when we announced the project.
Thank you.
Net.
Your next question is coming from Phil Gresh with Jpmorgan.
Okay.
Yes, hi, good morning.
With respect to mid cycle EBITDA guidance.
For Puget Sound of $1 50 to 200 could you share what 2020 was and how you think 2021 zone.
All of them.
Hey, Phil on <unk> 2021 was a loss.
I don't have the number in front of me.
But we'll get back to you on that I will say that at today's cracks.
Plant, that's clearly running at that mid cycle number or better.
Thus the have you seen those levels really probably since early March.
Presenting on northwest.
Okay got it.
On the renewable diesel side.
Could you just elaborate a bit on your plans for startup exactly when you expect to start up and how do you expect that process to go some other facilities on that.
Some teething issues startup.
Youre talking about bundling up to run alternative feedstock. So what progress are you, making there to be sure that you will be able to capture these blenders tax credit in 2022.
Well Joe vs Com.
Some of the things that we've done in terms of startup.
Let me per se, but what we've done is we've already secured some feedstock at this point in time. So we're getting ahead of the ball at this point in time to get the feedstocks in place.
Our scheduled startup in terms of the actual startup itself.
I think we're learning some lessons from those who have come before us.
In dealing with our suppliers and.
Technology, we're using their their knowledge and information.
Changes at the refinery or are they or do you plan to.
To accommodate this low putting.
Putting income some other bell shape on.
Devices at the refinery so we're definitely in a learning mode.
We've also moved people around internally to take advantage of hydro treating knowledge. So that we're not putting new people into new positions were doing the same with hydrogen plants. We're doing cross training. So are on internal people are getting as much knowledge from within on our.
Operating units and then we are using external sources.
Other.
All alternatives to help us with these new units as they come on as well as like I said before and learning from those who went before us on what happened there.
Sure.
Okay got it.
Yes, and Phil This is Tim what I would just day is as Tom mentioned.
We are working closely with our technology license licensor.
Who is also involved in some of the projects proceeding on us.
They are helping us with lessons learned and helping us.
Beef up our startup procedures on our processes. So that we can be successful as we as we train and prepare for startup.
Okay Rich last question as well.
Looking ahead to 2022 or future spending can you just remind us how to think about normalized capex Larry again.
It sound as well as I guess the residual.
Renewable spend that will bleed over into 2022, just from some kind of framework for 'twenty two and from beyond.
Yep.
So Paul on the sustaining level right, we typically quote call it $375 million for the corporation as mid cycle sustaining an has always emphasized on the there's a lot of volatility around that number with the timing of turnarounds.
The Puget sound.
Staining capital should be on that $30 million to $50 million range and will obviously have a turnaround every five years or so as well.
On that $3 75, probably moves to call on 425, a day round number.
To your second point on renewables Capex.
There will be some bleed over.
In the 'twenty two.
Right now, we would expect somewhere between 75 and $150 million, it's going to depend a lot on timing of invoices.
While we're looking at here obviously is most of the spend is going to come in most of the work is going to come in the second half of the year.
We're having a little bit of a hard time figure on a standby since going to show up in December of 'twenty, one or January of 'twenty, two but that's what's in play here.
Okay, and then it should be a lower turnaround year.
Yes.
Dramatically.
And any ballpark on that.
I don't have a number in front of me now, but I believe the only thing we have scheduled a partial turnaround at woods cross in 'twenty two.
Okay Alright.
Alright, thank you.
Your next question is coming from Neil Mehta.
Good morning team.
On a go back to the dividend Thats still struggling on this point rich what's your what's your point that given.
Rating agency conversations Hollywood likely on track.
And the dividend either way given market conditions and therefore this wasn't related to funding the transaction or was this a decision to suspend the dividend.
Because it was a conscious decision to invest in.
And this growth asset.
Non <unk> this was a conscious decision.
To suspend the dividend Adam on abundance of caution, while making the investment in Puget sound.
Directly related to this acquisition.
Again done out of caution and before we talk to the agencies, Greg We expect no action from them.
Right.
So just look for you to spend some more time on this point because.
Thats correct community continues to to push return of capital to shareholders and that's one of the things Thats made Holly special over the years with the introduction of the special dividend and the outsized return of capital, particularly during the stronger margin environment.
Or do you get comfortable debt.
<unk> growth was the right thing to do versus returning capital to shareholders over the next year.
So I think but the reality is our return of capital in 2021 was going to be restricted to the dividend.
Given what we had from capital spending perspective.
And I think I.
I hope, we've been pretty clear that the opportunity for our shareholders within the growth that we're going to see in the cash flow ergo. The cash returns in 2022 2023 and beyond that thesis is absolutely still intact. If anything I think it is more powerful today.
To your point, we have a period of investment here through 2021, which gets us to higher cash returns in 'twenty two and beyond.
Okay.
The other thing I would add if I can as debt.
The engine that drives the return of cash to shareholders is obviously return on capital employed.
And we believe that through renewables and through this investment we take return on capital employed substantially higher.
Obviously, we had some concern about balance sheet stress.
One of the.
I would say criticisms of Holly frontier by the agencies is size and the <unk>.
Because of the scale and lack of diversity tend to want to run us at different metrics than our larger peers.
Active retaining the investment grade rating. So we maybe have a little less wiggle room per unit of debt to cap.
But end of the day. This is about driving cash returns on our business that can ultimately be provided to our shareholders and we feel like it's the right decision given the high return on the investment.
Mike if I could just perhaps here on debt with parent cheaper way or an alternative way that you could have funded debt either maybe asset sales or.
Or elsewhere without having to practice on the dividend.
The cheaper way is obviously debt and on our concern is that that ultimately increases our overall cost of capital by.
By increasing our cost of debt and by introducing volatility into our our equity. So we believe that this reduces our cost of capital.
Okay.
Thank you Sir.
The next question is coming from Jason <unk> with Cowen.
No no.
Hey, yeah, thanks for taking my questions.
I wanted to ask on the financials, we disclosed on.
You did sound.
Are the RIN cost is that fully burdened within those disclosed financials and.
Where would what would what would I guess the range cost be today above where it may be.
It is in those financials, just based on wherever on the prices are low.
Right now and I have a follow up thanks.
Jason It's rich, yes, low historic financials fully reflect the cost of wind.
A volatile.
Number four today.
Okay.
Way to ballpark it I mean.
Are we talking one to $3 a barrel.
<unk> volume.
If we can blend or export 30 per cent of the product.
Windsor, obviously publicly quoted.
Well known blend rates right I think you can probably do the math based on your expectation on Brent prices going forward.
It's effectively 60% of the product slate fuels make as rich said.
On the question is how much doing capture by crack.
Crack spread uplift due to higher end price.
Sure.
That's obviously the $64000 question in today's market, but the fastest fully burdened in the plant as rich said is nicely profitable on this in the spot market today.
Right got it okay.
Helpful and then my.
Second question is just on the opportunity cost on investing in this asset versus maybe doing something in the energy transition space. That's more aligned with peers can you just discuss.
One are you now limited in your Optionality of investing in.
Opportunities that better future proofs.
Business and are you worried that as we move forward on theirs.
Likely increasing.
Alright.
Turned around the terminal value of the refining business that that business can be valued even even lower than where it is true today as.
You've expanded your refining footprint. Thanks.
Jason that's a good question.
Right now the <unk>.
On the new object is clearly renewables.
But I think we have to take a step back and say what is powering this economy through the next 10 years and we will talk about terminal values later, but the fact is the gasoline diesel and jet fuel provided from petroleum hydrocarbons.
The major mover of people and equipment around us economy, and and other fuels are making inroads and we're participating in some of those.
We think at high returns but.
We see a pretty bright future for petroleum here in the foreseeable future.
And we are obviously willing to invest in it it's a part of our core business, it's what we do well.
And we think that despite the headlines the numbers would argue that debt.
Lot of money can be made in petroleum.
Responsibly operated for a good period of time.
Yes.
Great I appreciate the thoughts.
Okay.
And your next question comes from Doug Leggate.
Bank of America.
Thanks for taking my question guys, Hey, Mike I really appreciate the voice of reason not last comment from you will remember be on petroleum 20 years ago. So thank you for that.
I have two quick questions. If I may one is related specifically I guess with both the weighted securities.
So on.
From the fundamental liability that comes with refinery to shell holding on to that.
Are you guys, taking that one can you put any.
Characterization around the financing also ask whether or how competitive this <unk> was up direct negotiation.
Okay.
I'll answer the first the second question first.
As a direct negotiation we were chosen.
Through an organized process and then the second answer is frankly tied up in certain confidentiality, but I will tell you that as an asset purchase and we are not taking full liability for the past.
Okay I appreciate it.
My follow up is you mentioned briefly the potential from MLP dropdown.
Wonder if you could elaborate on.
On an emotional numbers.
Products like <unk>.
Hey, Doug it's rich.
I think theres, some logical assets that will evaluate here on the second quarter.
Truck rack in the marine dock, namely.
At a high level, we see probably $50 million to $75 million.
Total range of a dropdown potential there.
Okay. That's really helpful typical cold Shang in glucose.
Yes.
Sorry.
Mike you're on your body under the bus.
Paul I apologize published clinical data.
So in the debt you put out last night.
On the kind of on the.
Not terribly nice question I, just wanted to understand what's going on here.
Now it's on a new approach growth capital on.
There is no obvious worked on.
Two two.
<unk> eliminated from our go forward free cash flow estimates, because obviously, we said that crude throughput levels.
And then the lease up here to be any change.
Do you have any insight as to what net growth capital Walter matures.
Gross line item will disappear going forward.
Digging around here, Doug bear with us for a second.
Sure. Thank you.
Doug Doug This is Tim what I would tell you is.
You did sound has gone through their typical turnaround cycles. They have of course identified.
Incremental gross projects that continue to yield.
Primarily as well as product qualities.
We are very.
Pleased with the flexibility that Puget sound has to blend gasoline.
Can make carb gasoline they can they can make gasoline that can supply Canada. They can supply in Alaska.
Those types of growth projects have increased the flexibility of the future.
It sounds portfolio to be able to position themselves for those future option that a lot of folks have asked about on them and on the call today as the landscape changes and as the ability to place product becomes chain.
Change is a result of regulations vs.
These growth projects give them flexibility moving forward and we have not assumed any growth projects, specifically going forward and our investment analysis, but of course as that comes forward, we will evaluate them and consider them on a case by case basis.
If I'm going on.
Some color on to that.
<unk> spent fairly heavily on crude flexibility as many did in the Pacific northwest targeting receipt of mainly Bakken barrels.
By any variety of means.
Not all of those investments are currently on the money.
But there was.
$60 million to $80 million spend in anticipation of those step towards sorts of deliveries in terms of things like crude defaulters in receiving facilities and based on crude infrastructure. So obviously that wouldn't carry forward facility is really well capitalized it's made into compliance.
Investments.
And frankly, the regulatory environment is going to make it tough to do much from a growth perspective. So I think we can expect that.
Thanks for all those questions I appreciate it.
I'll stop there thanks.
Your next question is coming from Matthew Blair with Tudor Pickering Holt.
Hi, Thanks, two quick follow ups here.
One is their logistics EBITDA associated with the refinery.
If there would you would you expect to eventually drop that into HCP and then two can you provide any specifics on on just the actual product yield.
The refinery.
Hey, Matthew it's rich.
<unk>.
On the logistics side I would go back to that we do see potential here.
Within that.
Within the total that we've guided.
Again, I think there's there's room for a $50 to $75 million dropdown in here if it makes sense for everybody.
I'd point, you to slide eight on the deck, we put out last night has detail on historic product mix I think that would be reflective of what we would expect going forward as well.
Got it okay. Thank you and.
In addition to the gasoline diesel and jet yields there I'll just point out.
They make and great.
Blake Koch and they make specialty noni and petrochemicals as well so those premium products just enhance.
On the base product portfolio.
Great. Thanks.
And there are no more questions I will turn the call back over to you Craig.
Yeah.
Thank you operator will finish up here and obviously follow up individually with investors and analysts, but just in our wrap up I would say that with respect to the quarter. It was a solid quarter, obviously affected by by storm Euro to the extent of sort of $65 million of Opex.
Our product markets are well on recovery and demand is now, allowing us to run full with the margins that youre seeing on the screen. So we're pleased with what we're seeing recover.
Recovery wise reopening wise on end demand wise.
Lubricants business is really hitting on all cylinders, it's right markets and the right geography on what I mean by that is our markets served.
I'd like to cover a lot of these commodities that are being produced and in short supply such as lumber.
And deep into the Canadian sort of commodity markets.
Also.
We weren't affected by the storms and others work. So that we really are doing quite well both on our base oil business and in our finished products business.
But obviously, what's in front of US right now is Puget sound Puget Sound and music Puget Sound.
And we've got a lot of focus on it we're really excited about it.
It was important enough to us to do that deal.
Maintain our investment grade credit rating that we're willing to do something we really didn't want to do with respect to our dividend, but we think it's right for the long term and right for the value creation of the company.
With that we'll wrap up and thank you very much for your participation.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
Okay.
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