Q2 2021 PBF Energy Inc Earnings Call
Yes.
[music].
This time, all participants have been placed in a listen only mode on the.
Flow will be open for your questions following the managements prepared.
Paired remarks, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This conference is being recorded it is on my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir you may begin.
Thank you Laura good morning, and welcome to today's call.
With me today are Tom, namely, our CEO, Matt Lucey, our president Erik Young our CFO and several other members of our management team.
Copy of today's earnings release, including supplemental information is available on our website before getting started I'd like to direct your attention to the safe Harbor statement contained in.
With press release in summary, it outlines that statements contained in the press release and on this call, which express the company's or 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 that could cause actual results to differ from our expectations.
Including those.
We describe in our filings with the SEC.
Consistent with our prior periods, we will discuss our results today, excluding special items in today's press release, we described the noncash special items included in our second quarter 2021results the cumulative impact of the special items increased net.
Today's from by an after tax benefit of approximately $200 million or $1.65 per share.
As noted in our press release, we will use certain non-GAAP measures, while describing pbf's operating performance and financial results for reconciliations of non-GAAP measures to the appropriate GAAP figure. Please refer.
Her to the supplemental tables provided in today's press release, I'll now turn the call over to Tom Nimbly. Thanks.
Thanks, Tom.
Good morning, everyone and thank you for joining our call today.
As we expected coming into this year general market conditions are continuing to improve.
Before providing comments on the <unk>.
Market I would like to address last week's decision by the board of the Bay area Air quality Management District.
To implement stricter, particularly on emission standards related to fluid catalytic cracking unit or FCC.
The board has set a numerical standard and we have 5 years to meet it.
Importantly, how we meet that standard is entirely up to us.
They have not required us to install any specific technology, including a wet gas scrubber.
As such we will not have to incur the estimated $800 million that this project would conservatively have cost what we are doing.
He is progressing a project included in our capital plan for this year that will get us below a point O 2 emissions level, which is a long way towards the point O..1 level established by the recent rulemaking.
After that project is complete we will have time to test on emissions and identify possible changes that could.
Essentially reduce emissions further.
Last week's rulemaking was another step in an ongoing process.
We anticipated the outcome, we expect that the rule or parts of the rule will likely face legal challenges in which the California Environmental quality Act requires a mandatory.
Detore mediation between all parties.
We appreciate the support we received from the building of trade unions Western States Petroleum Association and other business partners and our efforts to present alternatives that achieve the mutually desired goal of improving air quality.
Well continue interest why our products to 1 of the largest markets in our country.
I want to reinforce the fact that we have many potential options and time to address the newly implemented standard.
5 years, which is 1 analysts noted last week is a lifetime in refining.
Moving to the present to refining market has improved somewhat as we expected over the course of 2021 the recovery continues.
Inventories have fallen back within historical bands demand is improving with gasoline and distillate at or above pre pandemic levels.
Jet demand has increased to 80% to 85% of pre pandemic levels.
Up from 65% earlier in the year.
Benchmark cracks improved during the quarter driven in part by rising gasoline demand, but the realized crack continues to be hindered by the high cost associated with rents.
We saw on.
A softening of the gasoline market late in the quarter, which in part was driven by an increase in imports.
More recently, we've seen an improvement in gasoline margins.
As European demand has improved and refinery issues in other region have reduced trans Atlantic shipments.
On the crude side ongoing discussion.
<unk> and production limits by OPEC OPEC, plus have kept global crude prices elevated and the light heavy spreads narrow.
<unk> now has to be an agreement in principle that will allow the expected OPEC plus output increase to proceed through the rest of the year and we believe this could help maintain or.
Overall prices and provide incentives for more production to come to market with.
With the incremental crude being predominantly heavier higher sulfur crude.
<unk> see some additional widening of the light heavy sweets our spreads.
Demand remains the key driver.
Domestically demand continue.
<unk> to gradually improve and we see the next inflection point coming towards the end of the third quarter as the nation's students return to school, which should allow more parish to return to normal work routines.
We expect as this occurs going forward, we will also see increasing business travel, which should incrementally improve jet demand.
And margins internationally, the recovery has been less consistent.
But we expect those regions to recover which should set the stage for gradual but sustained growth and product demand globally with that I will now turn the call over to Matt.
Thanks, Tom.
Tom mentioned market condition.
<unk> are trending in the right direction.
Our aggressive efforts to improve pbf's competitive position should help accelerate the company's recovery.
In regards to the rulemaking in California.
As Tom mentioned and I will say again.
Big takeaway from the rulemaking.
<unk> is that we will not be required to install a.
On a wet gas scrubber.
That was Inc. Feasible from a land.
Cost and water use perspective.
As part of the Martinez acquisition shell agreed to pay per new reactors.
For the refineries Catherine hydrogen.
<unk>.
These reactors are on scheduled to be delivered towards the end of the third quarter.
And we intend to install them.
Scheduled to work in.
In the fourth quarter.
The new reactors will reduce the sulfur and other particular matter and the feed to the FCC.
We believe the improved fee will directionally improve product quality.
On lead to a reduction in particular emissions from our FCC to below point zero to.
The installation of the reactors, which will amount to less than $20 million.
Was included.
<unk> and our initial capital planning for 'twenty 1.
And represents zero incremental spend.
The reduction of emissions will begin to be realized in the first quarter of 'twenty 2.
Once we've had the time to evaluate the results of this project on our FCC emissions.
We've identified additional potential changes that could further reduce submissions.
Importantly.
We will have over 4.5 years to continue to work with the refinery.
And the EQM day to reach the new standard.
Yes.
In the second.
Our refineries ran well.
Approximately 875000 barrels a day of throughput.
We expect to run similar volumes in the third quarter.
We are now completing turnaround work at Torrance.
The bulk of the work occurred in July and should be complete over the next 10 days.
Quarter.
This turnaround is included in our throughput and capital guidance.
Earlier, this year PBF announced the potential renewable diesel project on our Chalmette refinery.
Our project is intended to maximize the benefits of Chalmette strategic location on the Gulf.
Coast.
With its excellent access to water rail and truck logistics.
As well as our synergistic, California logistics footprint.
We are progressing discussions with partners to develop the 20000 barrel a day of renewable diesel production facility.
Which would include a pretreatment unit.
Or so.
We've continued our detailed review of the project and expect that once we reach final investment decision.
Our project will be capable of coming on stream within 12 months.
At a significantly lower expected cost and similar announced projects.
An important.
And the process and and in determining the economics of the project, where the ongoing negotiations in Louisiana to secure state tax incentives to help bring this renewable fuels and the economic development project to the region.
We are pleased to announce that earlier this week, we received approval for these incentives.
We work closely with the state and our neighbors in the St Bernard parish and wish to thank all those involved in advancing the project.
With this necessary step accomplished we look to finalize partner discussions and move to a final investment decision in the coming months.
Instead regard to returns I've said many times over the last 10 years the program is broken.
And say what does that mean.
The program is not administered fairly and there are winners and losers on a massive scale.
Furthermore, as currently administered high RIN prices.
And do not increase ethanol consumption.
Simply put the facts show that.
Hi, Rend prices did not get the ethanol industry past the blend wall.
Therefore, the program operates with an insurmountable annual shortfall.
Yes.
Now we come to the point, where if the program does not get fixed.
It actually breaks.
We are now more than halfway through the year and students and still do not have an RVO.
FTE RVO percentages are held constant in 'twenty, 1 as they were in 'twenty.
The RIN bank, which has been depleting will actually run dry.
Some time potentially as soon as the end of this year.
Returns are effectively permits to sell gasoline.
If not enough rins are available to meet the mandate refiners will be forced to sell domestic gasoline.
Portion of <unk> to.
To the Rins supply.
If at that point the programs still goes on unaddressed RIN.
RIN prices will skyrocket beyond dilutive levels they are today.
Consumers will be forced to ration gasoline consumption.
And pay even more exorbitant.
EBITDA in prices for the fuel that is available.
Refiners will be forced to export gasoline because of there are insufficient returns.
The gasoline cannot be sold domestically.
And obviously imports will be limited because they will not be enough rooms available.
The net.
EIA noted there was 800.
Hundred million deficit in RIN generation in 2020.
Compared to what was needed to meet the RVO mandates.
This means there was an equivalent drawdown in the RIN bank.
Which according to EPA data likely puts the bank at around $2.6 billion Rins as of the beginning.
Of this year.
If we look at current projections for demand.
And assume an RVO flat to 2020.
21, when the 2020 one's RIN requirement is over $2 billion rins more than.
And then what we're on track to generate this year according to EPA data.
On.
Say it differently the current pace of RIN generation compared to the RVO.
Will result in a $2.3 billion drawdown in the RIN bank in 2021.
Leaving only 300 million Rins remaining at the end of the year.
That rate of both.
<unk> demand and the RVO remained flat for next year.
Could quickly run out of Rins sometime in the first quarter of 'twenty 2.
Perhaps sooner.
The scenario above yet again highlights the fact that the RFS is dysfunctional.
While I am hopeful.
<unk> fuel that we will have action by the current administration.
That will enable us to have a workable program in the very new in the very near future.
I'm virtually certain issues will need to be addressed before 2023.
Which is the outside compliance date.
2021 <unk>.
I am if you choose to exercise a deferral for the 'twenty 1 program year.
The EPA.
Congress.
And the administration have created uncertainty in the market with continued delays in setting the 2021 RVO.
And risk economic calamity.
<unk>.
In consumer outrage, if they left the above scenario unfold.
At this point given recent news we know the administration is aware of the situation.
And believe they will take action to avoid the crisis.
Now I'll turn it over to Eric.
Thanks, Matt.
<unk> today PBF reported an adjusted loss of $1.26 per share for the second quarter and adjusted EBITDA of $2.1 million and important to note included in the adjusted EBITDA figure is approximately 60 million of net noncash mark to market expense related to environmental credits.
Our.
Also include approximately $298 million of rent expense during the second quarter cash.
<unk> with our prior disclosure this represents a full accrual of our expected RVO for the period plus the mark to market adjustment for our carrying value of credits.
Consolidated Capex for the quarter was approximately 70.
$9 million, which includes $77 million for refining and corporate Capex and $2 million for PBF logistics.
For the first half of 2021 capital expenditures totaled approximately $140 million.
Consistent with prior guidance, we expect second half 2021 capital.
A result expenditures to be approximately $250 million to $300 million.
Our financial results continuing to improve as the pandemic recovery progresses, we believe the second quarter was an inflection point as we generated positive adjusted operating margin and we continue to believe the combination of an improving.
Moving market backdrop, and a more streamlined cost structure at PBF should continue to generate incremental positive cash flow.
Our liquidity position remains consistent with more than $2.6 billion of total liquidity, including approximately $1.4 billion of cash at the end of the second quarter.
We.
Capital needed to prudently manage our balance sheet and financial resources to provide flexibility for the near term.
Our full financial statements were released this morning, and I would like to take a moment to help navigate 1 item in particular.
And looking at our balance sheet included in our accrued expense footnote.
PBF reported accrued.
Continual energy credit and emissions obligations of approximately $1.1 billion.
This figure includes roughly $400 million related to our current and future, California, environmental credit obligations and.
And roughly $700 million related to rents.
Related to our California environmental credit.
<unk> obligations, we expect approximately $250 million of working capital outflows during the fourth quarter should satisfy more than $290 million of the $400 million accrual Inc.
To note. This payment represents the final obligation and a 3 year compliance scheme.
The 700 million RIN related accrual consolidates, our 2020 and 2021 compliance years as.
As we have previously mentioned, we currently expect to satisfy in full our 2020 obligation by the compliance deadline in January of 2000.
22 and.
In order to achieve this target, we expect to use approximately $200 million and net cash through the remainder of the year.
In addition, our RIN accrual includes an incremental $100 million in fixed price commitments that we expect to cash settle throughout the remainder of the year.
Having said that the RIN market is dynamic and depending on how the market moves there may be opportunities to take advantage of market dislocations to improve our position.
Important to note that 2021 proposed RVO has yet to be published and this is a key factor in determining our overall strategy.
As currently available under the program, we can defer some or all of our 2021 obligation.
Through March of 2023.
Operator, we've completed our opening remarks, and we'd be pleased to take any questions.
In a moment, we will open the call for questions.
The company requests that all callers limit each turn to 1 question and 1 follow up you may rejoin the queue with additional questions.
You would like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star 2 if you would like to remove your question.
<unk> from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys, 1 moment, while we poll for questions.
Our first question comes from the line of Roger read with Wells Fargo. You May proceed with your question.
Yes. Thank you good morning.
Good morning, Roger.
Just to come back I think first off on the macro are Eric you made the comment about you know it seems like you hit an inflection point in Q2, and then you talked Tom earlier about crude dips probably opening up with.
OPEC plus putting more oil on the market third quarter start.
So a little weak, but has really improved the last couple of weeks do you see something that is fundamentally better.
We're progressing or would you attribute this to the typical volatility we see in margins and I recognize there's a whole bunch.
Are things that affect what's going on on a daily basis, but I was just curious if things look a little bit better as youre paying attention to inventories as you are paying attention to imports and then the guidance you put out in terms of volumes for Q3, yes.
Yeah, Roger is there's a lot there, but you're spot on.
We know we think.
It's it's gradual.
I wish it was a little bit faster, but there's clearly.
Improvements in the market from a variety of reasons were basically.
Below historical averages on all major clean products.
A little bit higher on jet, but not much within the 5 year ban.
Certainly they're on gasoline and distillate distillate is below the 5 year average when we look at.
On the crash they had been improving.
We believe that's associated clearly with.
Demand recovering and as I said distillate has been holding up all year.
And in fact.
Because last year, it held up stronger than anything else as youre, well aware and in fact as above pre pandemic levels for this time in 2019 gasoline is just about at that level and demand continues to improve and that's the key.
To be honest that is absolutely a key.
Net if jet does not improve.
And I will keep the ability for the refiners to run more limited because of the jet limitations that being said the industry is running at 91% utilization.
So we have this demand getting back to levels of 2019, and we have over a million barrels a day less capacity than we had in that period.
At a time and that's why utilization is at 91% so demand it looks it looks like it's recovering.
Inventories are in control if you look at the light heavy spreads.
Our spreads compare them to the beginning of the year.
A heavier higher sulphur crudes Maya.
Our medium.
Kirkuk all other crudes that have higher sulfur.
Have moved out about $2, a little more than $2 from the beginning of 2021 to now and as I said when you start bringing on 400000 barrels a day more crude each month, it's all going to.
Incrementally basically medium heavy higher sulfur crude which should work to the advantage of high complexity refineries refiners like PBF.
Okay. Thanks for that and then.
No. This is not something that gets answered.
Any 1 question, but as you think about the RFS and the Rins program. There's what you want and then there's what might be achievable from a political standpoint, and thinking about what has happened with previously with the Obama administration.
They they did at times tweak the RVO.
The Trump administration more of the <unk>, which seems a little tougher.
Solution here politically given some some recent legal issues and pushed back from the RFA at all but I was just curious what do you what kind.
Kind of get it if you're getting rid of the program you're happy, but that's not happening.
What is it you think would be reasonable within the political framework, maybe 2 to see the E. P. A due between now on year end is it as simple as simply resetting and RVO for 'twenty, 1 or is the deficit that you highlighted for the rent bank potentially so large that.
So what has to be a <unk>.
Step out kind of decision not a tweet, but a bit of rework.
Roger I would say a couple of things.
1 <unk>.
In regards to a solution there are many solutions and there are many easy solutions.
But the first thing they need to do is make sure that.
The scarcity of Rins doesn't exist so the simplest solution on the.
It has been.
Talked a lot about is simply setting the RVO at a level where rins.
Cannot become so scarce and it's that's something that they can do.
With a snap of a finger there's other.
Opportunities they can do to rework the program. Indeed, we're sort of engaged on all fronts with our partners with a representative.
<unk> represented workforce.
You alluded to it there is no question about the Trump administration completely failed this program.
They are.
They took away sru's, but.
Be allocating the volume so it was sort of a double damning event.
They granted <unk>.
Year round waiver, which was just overturned.
By the courts, and so I think the ethanol industry is is scratching their head, saying, hey, how do we come to a workable solution now that.
We're re Trump administration is going on so I think there are other aspects of the program. They can change, but the most simple 1 is setting an RVO that works for all the stakeholders and I think they understand that.
And we just need to get through the political process on that.
Thank you.
<unk>.
Our next question comes from the line of Phil Gresh with Jpmorgan Chase you May proceed with your question.
Hey, good morning.
Eric Thank you for all the color around.
The accrued.
Expenses piece.
Just a quick follow.
Or 2 on that 1 is.
Steve It looks like it's $550 million Youre talking about on the second half of the year.
That number sounds consistent with the last quarter call I believe so I guess should I just infer that in the second quarter. I think there was an initial plan and maybe pay some of that in the second quarter was it just pushed to the second half.
Follow up and then related to that I guess, what you're implying is that about $500 million of the range is for 'twenty 'twenty..1 I just wanted to confirm that number.
Who isn't here today.
2 quick responses on that I think folks should assume if we.
We think about we had an overall rent expense of.
Almost $300 million during the quarter.
We did ultimately spend a little north of $150 million on Rins throughout the course of the second quarter at the same time I think we've been fairly vocal we've been active in the RIN market.
And so ultimately there are incremental purchases that are made to cover.
Certain forms of compliance and on a go forward basis I think the key message is we today included in the $700 million. There's about 400 that ultimately is floating slash fixed non fixed price commitments right. So that's a mark to market adjustment, it's going to fluctuate.
It runs get cut in half that 400 goes down by 50%.
The $300 million as what's remaining on the books fixed price commitments 200 of which we've allocated to our 2020 compliance that is our first priority at this point is to ultimately show up at the end of January 2020.
With our full RVO turned into the EPA.
The remaining.
Capital that we know we have earmarked through the remainder of the year involves the $250 million of AB 32 related compliance credits that we have a repurchase obligation that.
22, <unk> hit in the fourth quarter.
Okay got it.
And I guess could you give us an update Eric on.
How do you think about operating cash levels I think in the past you've given a 500 million dollar number.
Wanted to see if that's something that would still hold.
This current oil price environment.
I think anywhere you know again.
Price of crude oil will be a key determinant in what we feel comfortable carrying from a cash perspective.
Today.
Absent anything that we're dealing with in terms of coming out of the recovery.
Following the pandemic, yes, I think $500 million is more than.
Then reasonable number and quite frankly in a similar historical period, we probably operated with between 250 and 500.
Operating cash.
So I think that's a reasonable number though given given the current market environment that we have for crude price in and around kind of a $70.75 per.
Barrel number.
Okay got it that's very helpful..1 last 1 on disappear from Matt.
I think last quarter, you were hoping perhaps to have a bit more color on renewable diesel on on the progress of the project I think by this point.
I guess.
You got the approval this.
Incentives so how much of that do you think was I guess a factor in you know the next steps of this of this process.
And you know the willingness to have a partner step and versus say other things like feedstock or other issues, you're still trying to figure out.
It's a big project.
That has a lot of.
Work streams that are simultaneous obviously working with the state of Louisiana, and bring economic development potentially to that region.
We are working that working all aspects of it are not only the engineering coming to final costs working with.
Weak potential.
Potential partner in doing the diligence around.
Central partner as well as I'm doing the diligence around the us.
In addition to all the engineering work that you have to do on the front end to make sure that your project is viable thing. So we continue to work it on all fronts.
France and.
Quite honestly I would characterize as sort of being right on schedule, where we expect it to be.
There's no there.
There's no big delays or anything we're going to have to assess the market and decide to go forward and that should be done in the very.
Near future.
Okay. Thank you.
Our next question comes from the line of Theresa Chen with Barclays. You May proceed with your question.
Good morning.
I am curious to hear your view on what's happening in the east.
Coach currently on at this point you know summer driving season is in full force and on.
Facilities in that area.
<unk> capacity, including capacity at 1 of your own on plants and.
On the quarter with noisy.
You know colonial being shut down for 6 days and imports and such.
Looking past all of that can you talk about what is happening on a capture front you know.
What are your expectations.
Going forward on a normalized normalized basis.
Since you know there has been a capacity rationalize and demand has rebounded and get you know.
We are in the midst of working through the volatility of imports from Europe, and elsewhere and that seems to have subsided at this point with the maintenance issues going on there, but just looking forward what are your expectations for the east coast.
I think you are spot on in that there's been a lot of choppiness.
Choppiness.
Particularly on the east coast and that was.
Once you get past the fact that certainly got more mobility on east coast is there isn't a country, we're seeing that.
A lot more cars on the road people are returning to work and we do expect as we said that.
After even after we get past rate per day.
Traditional slowdown in the driving season might be counted by the fact that there will likely be.
More and more school buses on on road and more people coming back to work because their children have returned hopefully to a more normal life. The big thing on the East coast in pad 1 has clearly been a.
The fact.
There's been such a huge off between northwest Europe and the med.
And.
North America, and particularly the east coast.
2 weeks ago, we had imports of 1.4 million barrels a day.
Significantly higher than we had in 2019.
So I think 1 of the things that we're really looking for and hopeful on is in fact that Europe.
Get control of the pandemic or make strides and they seem to be doing in that area and their business environment improves and that is clearly happening cracks have moved up <unk> in Norway.
On to Europe by several dollars a barrel theyre, not where they need to be but certainly the imports.
Down.
Week yesterday's numbers were still elevated but on a go forward basis. It appears as though they will be dropping off that in combination with what we said about.
Continuing.
On increasing in demand, we expect to crash to continue to improve I will say that we are pleased.
With.
How the east coast reconfiguration is done specifically in our environment.
It does appear to be working as we intended we effectively took the strength of 2 refineries and kept them and eliminated.
Some of the weaknesses and P.
Particularly in Paul's borrow on the fuel side of the business. So.
We hopefully will see continued improvement in pad 1 in on the East coast.
Thank you that's great color on.
And then maybe turning to the West coast.
In light of that.
Commentary.
You gave on net the Bay area Air quality management districts New standard.
And the projects and development.
<unk> to potentially meet that and it seems like that in itself is a moving target given the arbitration process I'm coming on.
So just curious in addition to the react.
The actors that should decrease the particulate emissions below the <unk>.
Level, what other projects are you looking at that can further reduce that.
Well, let me just backup.
Great question talk about the project itself that we are implementing.
You said that was a project that was.
Basically contemplated negotiated as part of the acquisition itself.
And what we what we're doing is <unk>.
Shell has purchased these reactors.
And these reactors are going to operate at a higher.
Operational severity than the current react so.
As Matt run at a higher price your highest temperature.
And the reason we wanted to do this project initially and importantly is that by increasing the pressure on the reactors and the temperature on the reactors.
Increases the amount of sulfur nitrogen aromatics and metals that you take out at a fee to the.
The cat Cracker, which results in a higher yield pattern and a higher volume expansion across the SEC. It improves the quality of the Cat P.
As a result it also.
<unk> nitrogen metals contribute to.
Matt so by taking it out into cash.
P hydro treating you reduce the particulate matter that has been emitted from the cat Cracker and Thats, how we can get down below point or 2.
There are myriad ways of trying to make additional changes including feedstock changes.
Using additives to try to see if you can inject additives to reduce the particulate matter further.
Operational changes on many things that we have already been contemplating.
But we want to see what we can get.
Proves that we can get at least.
Hello <unk>.
But we think we're going to be able to do better on that with this project and then that will allow us to take the time work with the agency. This is going to be mediated.
I remain confident that we're going to get a an unacceptable outcome on this.
Thank you.
Our next question comes from the line of Doug Leggate with Bank of America. You May proceed with your question.
Hey, guys.
You gave a fairly thorough.
View as to how you are going to respond to this issue on the west coast, but.
I just wonder if you could kind of spell out quarters, you've got a reasonable amount of near term flexibility to get below zero point you too.
What happens.
Yes.
The auction us if it is true in force what does that mean for you guys in terms of potential additional spend.
Well as I said.
We actually think theres not going to be a huge amount or a significant material amount of additional spend this project will get us.
We say, it's going to be below a point or 2 we think it's going to be better than that the agency itself has modeled this reactor.
<unk> and its been kind of agrees with that but we have to demonstrate that so we've got to get that project online and see what our new baseline is.
If it is where we think we think that we're going to get very.
There.
There, maybe not there, but very close.
With the operational changes and maybe use of added additives as I said, we're not going to be putting in a very very large project that's clear.
But we have to see what we get from this project and a negotiation process or the mediation process, which is almost inevitable.
Because some people are going on.
Maybe even us.
Mitigate this.
We have to first see what we can get from the project and I don't think we're going to wind up being in a bad position on this.
Doug It is important to note, we're replacing 50, we're replacing 50 year old equipment with these new reactors.
Nevertheless, and to Toms point, there's a lot of computer modeling that's going on today, but until the full.
Installation and implementation is concluded we have got a lot of different knobs that we can turn folks need to understand these are very complex machines that we that we're operating out on the west coast.
And again, we feel confident that we're going to be making some progress, but let's get through the first part of 2022. When again, we have a real live baseline and then can start changing different things and testing and going through the process that really needs to be concluded.
Well Phil.
My follow up is also related to this which is obviously 1 of your large competitors was talking about.
Maybe how this solution as you guys might have and we're talking about north of $1 billion of potential capital.
I'm just wondering if you could offer any thoughts as to.
<unk>.
You see not so much how chevron situation plays out, but how do you see the risk score upsize to balance is product balances.
And that market, if they don't get their situation resolved.
Leave it there.
Yes.
We don't know what chevron is going to do.
Right now.
<unk>.
The day match supply demand situation to balances as you referred to in California. It looks for this year.
The immediate next several years reasonably good and that's principally because we have martinez.
The former Avon refinery.
<unk> already been idled.
Have a rodeo and Santa Maria from P 66, that's in transition and.
Frankly is already shut down 1 of the hydro crackers and rodeo in terms of neutral renewable project. So there's been a fair amount of capacity that's been taken offline, we see California market.
Being constructed once and demand has come back it really has come back.
Last week yesterday's numbers were strong so we see the market being.
Constructive now.
If obviously there was some additional steps taken either because somebody decided to take equipment offline or 1 of the ways.
Sure Ken.
Actively reduce.
<unk> mission is to reduce rates.
So if that became a case you would obviously have some more capacity or throughput.
Be reduced and that would be further constructive to the marketplace.
I appreciate you offering those perspectives from thanks Charles.
As you.
Our next question comes from the line of Paul Cheng with Scotiabank. You May proceed with your question.
Hey, guys good morning.
Good morning per home.
Tom and then not that.
It happened hopefully not but every itself is similar on a stand yeah, that's our bay area here.
Yes, Paul runs have had similar elegant solution.
What do you see it in the teens.
Or that wet gas swap.
Scrap on you're seeing on the wafer.
Solution volatile lines.
That's not even been put on the table, obviously, we just exxon replace the.
Electrostatic precipitated after the explosion and we're in compliance.
There are no issues. This has not been contemplated in the south coast.
Bay area has been working on and we've been working on for how long with this and the Bay area.
<unk> since we took on since we took over so that's been a work in progress.
Here the same situation doesn't exist down there with the new precipitated.
We're in full compliance and there's no discussions in this regard at this time.
Okay, and just curious that I mean this year. Your capex is about 400 to 450.
How long term you can.
Progress spend just at this landfill.
Yes, let's say over the next several years.
Market condition.
Moving into lighter latched on that as we hope.
Well, obviously you go even lower that for a couple of years on what that says we need the bang minimum.
We're going to respond to the market conditions.
In our spend there is no doubt about that but they will become time, there's so many units unit to talk to you.
And at some point that you can defer turnarounds, but you might have to either take a squad.
These are things, we're looking at what do I mean by flat instead of doing a 45 day turnaround might.
Have a piece of equipment that is saying they need some help you shut that piece of equipment fixed that down restart the unit and then run it a little bit longer.
But to your question on we've had a low spend we're continuing to have a low spend we're continuing to put do everything we can to reduce capex with some of the best practices, we've put in place.
<unk>.
But this equipment ultimately is going to be need to GAAP first and foremost we have to run a safe reliable environmentally responsible operations. So we will have to maintain spend to maintain a day units and a correct operator operable condition.
So we would expect to see some increase in Capex go forward.
And.
Paul My opinion before the pandemic hit 1 pool on what kind of see that sustaining or maintenance Capex for you guys is about 619 force to $6.50 is that still a reasonable number in a normal market condition.
Actually.
I remember what would you say.
Sustaining capex is.
Just plain sustaining probably close to $500 million. So you heard that Paul is that sustaining is about $500 million.
And then of course, you've got some.
No.
We might be spending some money on return on projects and.
Things of that nature, but that's going to be a function of what the market, but the market.
Yes.
Mhm.
And talking about that.
Yes, do you have any sense to pull jackup renewable diesel plant that you're talking about any P memory capex that you can share.
I'm.
Sorry, Paul Capex may be true.
Capex in regards to the project.
We have not we've not published share spoken about it just because it's being actively worked what we can say on what we have said is the project from a capital perspective, and quite honestly from an opex perspective appears to.
To be a top quartile project.
So when you compare to the other projects have been announced the project looks very very good.
We benefit because we had an idled hydrocracker quite frankly that was that was preserved in a professional manner.
And so.
It's a tremendous leg up and then on the operating cost side with the project, we directly benefit or we would directly benefit from the fact that you have.
Synergies with the refinery so all the ancillary services you would need to do if you're a standalone business.
You get the benefit of.
<unk>.
To reduce opex being connected to the Chalmette refinery.
2 final question from me it's helpful Eric Eric.
So on LOE, you can give us some light.
Since that how's the current debt market.
What's the opportunity unique to raise additional debt in the near term.
It gives us on you said doable and secondly, I think in the first quarter you were hoping by now that you will be may be turning.
The page and we become positive free cash flow.
So just curious that I mean, how does that look and what did you guys from a cash flow standpoint in.
Josh you're aligned with it you breakeven in the cash flow.
Thank you.
So in reverse order I think we're a bit disappointed with the second quarter, because we didn't get to the level.
In the June timeframe that we were really shooting for unfortunately, the market didn't deliver the economics that we wanted and the continued.
<unk> pressure from returns did not allow us to generate enough free cash flow from operations to cover essentially our capex and interest. However, it is important to note we have seen a relatively steady recovery overall since the first quarter. So if we go back over the course of the past 12 months.
On the refining industry, obviously, everybody has lost a lot of money and so the first step for US was getting to positive operating contribution or on operating margin, we feel very confident and we've gotten there and now the next step will be what is the incremental.
Operating margin that we ultimately need to generate.
We think about overall costs right. We've got roughly $20.25 million a month in terms of interest if we think about a circa $300 million a year interest burden.
And for our guidance that we've provided for the second half of the year, we're going to have $45 million to $50 million a month and overall capex.
And if with the actual cash itself is relatively lumpy simply because we do have fixed income payments that come not every month.
And the Capex is also not ratable, but if we think about that over the next 6 months I think again.
Tom pointed out on the front end from a macro standpoint is what we're seeing today.
1.
1 of the things that needs to be settled near term.
Is what is the near term 2021, RVO. So we can put this RIN.
Issue behind the entire industry and move forward, that's going to be a critical point in understanding exactly where this market is going to go the macro is the macro for us.
And so I think we continue to operate in the balance where we feel comfortable our capex numbers are increased for the second half of this year that is in anticipation of continued economic recovery coming out of the pandemic.
I think on your debt question to be completely honest with you we have zoom.
Zero plans to.
Into any type of that market and have not spent a lot of time talking to investment bankers or investors around if we had to raise debt what would the price P. I think we pay attention as we've said before to where our fixed income securities trade.
Today, we have more than ample liquidity.
It's going to fluctuate.
Commodity prices fluctuate, but overall our key our key focus internally is maintaining safe reliable operations to be able to get to the point, where we're covering all of our fixed cost across the board.
Clearly the cash expectations that we laid out we have exceeded those through.
As of June a lot of that however is driven by working capital I think we've tried to be very transparent in terms of how that working capital is ultimately going to flow through the second half of this year. So that we remain in compliance with our AB 32, and RIN programs for calendar years 2020.
Thank you.
Our next question comes from the line of Neil Mehta with Goldman Sachs. You May proceed with your question.
Yeah. Thanks, Thanks, so much Eric I just wanted to build on that obviously the credit markets are what the credit markets are but the unsecured has been under a lot of pressure.
The energy.
And.
As if to say that there are liquidity issues at the business, but 1 of the things that was I think incremental in today's releases that you are up to $2.6 billion of liquidity. So can you just put a bow on a lot of the comments that you made over the last 50 minutes of why you feel comfortable about the liquidity position.
The company is in and summarize that for US as you look out over the next year.
I think the key the key piece being we know what our dedicated uses of cash are from a working capital standpoint through the remainder of the year. We've provided some capex guidance for everyone.
We know what our interest burden is and ultimately.
That he believes that this industry is going to continue to recover and margins will be there for us to be profitable.
If they're not then ultimately there are other steps that the industry overall is going to have to take.
And so again I just.
Just taking a very very high level view it is hard to imagine.
That the refining industry over the course of multiple years, we will consistently lose money.
That has never been the case historically and every time there has been a recession there has been a recovery coming out of it the P.
Endemic was recession on steroids and so ultimately a lot of things will need to be addressed.
Over the next 12 months, but directionally, what we're seeing in terms of macro recovery everything is trending in the right direction.
Thanks, Eric and the follow up here this 1 might be per ton, but it just strikes us that the industry in the in the second quarter was running at an elevated utilization.
On the demand has come back very nicely ex cat.
Margins until recently have have not followed.
Do you think that industry discipline on the refining space is still intact and ultimately will the industry, let demand run a little ahead of utilization as we go into the shoulder to enable the margin.
Perform a little better.
I think certainly that's that's the key right. We have absolutely. The interest is a spectacular job during the pandemic and in actually rationalizing capacity.
And not letting the inventory situation degrade even for further because of the destruction of demand.
Just.
As.
I think there was a feeling that when we got down to very low case rates and hospitalization rates and mortality rates that.
Perhaps this is indeed, and we will open it up the country. Okay. This is it will go on on a freeway and let's let's see what happens.
<unk>.
But.
2 things 1 is in fact variance you got to watch the variance obviously, we're going through.
Spiking cases, now hopefully the fact that a high percentage of the population has been vaccinated, but wont result in a huge amount of a step change in hospitalizations et cetera.
We.
I think that's it very closely and I think the industry will watch it very closely and in fact.
Until we get to jet demand completely.
Rick or get close to full recovery.
Governor on this as I said you cannot run.
Higher than we're running I think the 91% is about it from a.
Half the wet limitation and we'll just watch the inventories and if the inventory start building a set a thousand times over the last many many years.
Running to put product in the tank and hold it is a fool's errand.
We would have to cut back and reduced production to make sure that we don't let.
From maturities get away from US, which of course that would result in obviously decrease through the cracks.
Thanks, Tom.
Our next question comes from the line of Paul Sankey with Research you May proceed with your question.
Good morning, everyone.
Very specific question.
Got you.
Some reports the shortages of jet fuel around the country I didn't really understand that given with jet fuel inventory is I wondered if you had to.
Perspective on the follow up would be on.
The way crude inventories exiting it's just interesting that Cushing is coming down the way it is and I was wondering.
Got.
It's a very very low Saudi imports, whether that was purely a function of.
This differential so whether it is actually a limitation on availability of Saudi crude than on any other comments on heavy.
What was interesting from heavy light differential is always interesting for me. Thanks.
Hey.
I'm going to take the first part and then maybe.
So I wanted to get a second partner I think we have.
Tom O'connor head of commercial is on quantify on I'll ask him to weigh in and give some some thoughts on the crude situation it's interesting that.
What's going on recently in jet.
As everybody is aware.
A lot of things have happened that have caught industries by surprise.
A little bit in the supply chain.
So when you even the airline industry it appears as though demand.
A number of people that are wanting to fly.
As being restrained by the fact that the airlines don't have enough people to put them on a yeah.
So they've got to get more pilots back there you can kind of held up on that similarly.
On reports on the jet shortages regional jet shortages.
Some are some in some ways supposedly due to a lack of drivers.
On that are getting jet fuel from wherever they are lifting in Iraq and getting it to the airport. So there's a supply constraint and.
Surprise came out this morning, and said they were going on.
And to see and try to see what they can be done to to help that and thats being done at the same time recently.
We've had these fires on the west coast.
In parts of the country and there's a lot of there's been a rather significant increase in cargo planes that would be flying flying around China.
The government deal with that issue. So you have had an increase in demand the demand associated with that event at the same time. It appears as though there is a supply chain restriction that is impacting the ability to get the jet fuel from say a refinery to a terminal, but ultimately to an airport. So I think that's what's going on on the desk.
Cash side.
Situation I've made my comments Tom are you on line.
Oh, yes, I am on Palm in regards to that I mean throughout the second quarter as we looked at for balance is basically I mean, the Cushing market.
Ultimately have to get to a price where it was.
Was basically incentivizing crude to state.
Domestically.
We continue to see that in terms of above your guidance.
We're on differentials, taking in terms of where the Houston market is because effectively the market got so strong domestically that it basically.
Shut the arbs to move to different areas effectively now we're starting to see that softening.
On what term structure is still quite strong.
It is starting to weaken and this balancing in terms of the arbs are starting to soften a touch in fact that.
The market's gotten P.
Essentially close to where we were talking about the industry wouldn't be talking about tank bottoms.
And it appears that that initial concerns.
May be alleviated as we basically have approached peak runs and then we'll be heading into the seasonal decline in terms of also increased turnaround activity in the fourth quarter. So in terms of overall crude avails I mean, we are starting to certainly see you know.
More barrels available sort of I'd say across the fleet.
Different areas, particularly on the fuel oil market.
Which is.
You know move from a very stubborn.
Digit differentials in the first half of the year or 2 starting to expand a little bit.
And based on everything you've just sort of assume that Saudi middle Eastern oil it's basically.
Saudi Slash middle East on the oldest basically price, though to the market.
Oh that continue.
Can use to be the themes I'm going to take 1 more.
We'll start to see.
Awesome dating back on that right is that you know we've had obviously a lot of.
A lot of issues to sort out through the month of July in particular as you know.
Issues regarding around their baselines have been sorted so I think we'll get better clarity of that as we start to move forward.
And starting to see where the Osp's on volumetric started to proceed.
Thanks, and if I could.
I'll ask a follow up from me.
Maybe from Mr. Lucy the is there is there something can you highlight any.
The.
Catalyst moments going forward or timeframe going forward from when we saw the stupid RIN thing as is.
Is this something that you're looking for some next.
Series of data points, perhaps through we just going to continue drifting.
Kind of vague.
Leave it to Washington kind of mode.
Well, even though I actually I actually think we're in the window Paul.
There was some paralysis because the Supreme Court.
That's now passed us by and obviously.
Holly prevailed on that.
But as I said before.
It becomes a moot point unto itself because.
<unk> <unk> at the discretion on the administration, but you have a window now where first of all they are required to put out an RVO and.
And Secretary Regan has been.
Ben.
On the country talking about they feel the need to be transparent and unlike the previous administration put out an RVO on a timely basis. They haven't lived up to that promise yet, but statutorily. They are required to do that.
And I expect.
Sure.
You know, we always dance around with paralysis and with the politicians, but I will tell you we've had excellent partnership.
With the represented workforce that we work with every every day and they are speaking.
Speaking on as loudly as they.
Back to the administration because they understand.
The threat to their livelihoods and what it means to them and so next year you get into election year and you can create a whole new list of reasons why things get frozen, but I actually think we have a window.
And as I said in my comments I'm hopeful that.
On the near future, where you have more clarity and.
And in the worst case scenario.
You know if it all plays out as I described as I was sitting with the governor.
Reasonably sized stayed in the not too distant past and I sort of laid this out till they said well.
They can't they're not going to let that happen are they and I said I presume your price.
And so the EPA and administration can move as quickly or as fast as aim on in the world and but I expect I expect that we're going to have a window here in the not too distant future where there'll be more clarity.
Okay. Thanks, a lot.
Yeah.
And your final question comes from the line of Matt <unk> with Tudor Pickering Holt you May proceed with your question.
Hey, Good morning, everyone. You mentioned you are in advanced discussions with partners on the R&D project.
Any.
In order to provide you with access to advantaged feeds or should we think about this as more like a financial partner.
Entering this process probably have said this in the past we've been focused on partners where we.
We think that theyre going to be additive.
Through the process to the to the project.
And that can come in multiple ways, obviously money money as a commodity that's fungible, but.
But we have been much much more focused on.
Partnering with someone that can.
Improve the dynamic of the <unk>.
Project and make it even more compelling than it already is so that's where our focus is I'm not going to get.
Get in on specifically what types of partners, but.
We've been pleased with our discussions in that regard and we continue to progress. It every day.
Okay.
And then this might be a tough question to answer now, but any early thoughts on the and geographical markets.
<unk> for the summit our day project.
Do you expect to price volumes on the California, or do you kind of see it as more of like a New York, Canada Europe end market for you.
We are merchant refiners and as such and 1 of the things you learn in refining you on as many options as you possibly can.
Because the reality is we don't know where the balance getting a rig when it is going to ring and so you want to have complete optionality that goes for feeds but also access to product markets. It's 1 of the reasons that we think chalmette is uniquely positioned for me.
Patient standpoint, not only for sourcing feeds, but optionality to go to California.
To go to western.
Canada or go to Europe, or quite frankly anywhere else where it becomes.
The most attractive product market for that renewable diesel product. So we think chalmette being having access to water rail and truck.
It gives us the greatest amount.
On a flexibility and we will be able to deliver very competitively.
Competitively into whatever market.
Presents a highest netback.
Great. Thank you.
We have reached the end of today's question and answer session I would like to turn this call back over to Mr. Tom Nimbly.
Closing remarks.
Thank you very much for attending the call today, we look forward to meeting with you at the end of the third quarter and hopefully demonstrate that we.
We have in fact seen the inflection point and turned the corner and have gotten to positive cash flow have a great day.
This concludes today's conference you may disconnect.
At this time, thank you for your participation enjoy the rest of your day.
Okay.
[music].
Okay.
Yeah.
[music] on.
Yeah.
Okay.
[music] channel.
Sure.
[music].
Okay.
Okay.
[music].