Q2 2021 Par Pacific Holdings Inc Earnings Call
[music].
Good morning, and welcome to the par Pacific second quarter, 2021 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded and now I'd like to turn the conference over to and Shimmy Patel Senior manager of Investor Relations. Please go ahead.
Thank you Jason welcome to par Pacific Second quarter earnings Conference call. Joining me today are William Pate, President and Chief Executive Officer, well monthly on Chief Financial Officer, and Joseph Israel, President and Chief Executive Officer at par Petroleum.
Before we begin note that our comments today may include forward looking statements any forward looking statements are subject to change and are not guarantees of future performance here of that are subject to risks and uncertainties and actual results may differ materially from these forward looking statements accordingly investors should not place undue reliance on forward looking statements and we disclaim any obligation to update or.
The revise them and.
I refer you to our investor presentation on our website and to our filings with the SEC for non-GAAP reconciliations and additional information on.
Now I'll turn the call over to our President and Chief Executive Officer of L. P.
Thank you Ashish and good morning to those of you on our conference call today.
Our retail and logistics segments performed very well during the quarter as our sales volumes nearly returned the pre pandemic levels.
Second quarter, adjusted EBITDA was a loss of $7 million and.
And our adjusted net loss was <unk> 81 per share.
These results include a $27 million noncash.
Non cash mark to market adjustment for our prior years RFS compliance.
Excluding this impact consolidated adjusted EBITDA was $20 million and adjusted EBITDA for our refining units approached breakeven for the quarter.
We were pleased to see the Supreme Court affirmed the Epa's obligation to review small refinery exemptions on a non continuous basis.
We believe the EPA needs to quickly review outstanding Srs and address the range shortfall created by prior year increases and RFS obligations.
The renewable fuel standard has been pushed to levels that is creating unintended consequences for the domestic refining industry.
This regulation is also creating inflation and volatility and gasoline diesel and ultimately food prices, which hurt the consumer hamper our desk domestic economic recovery.
Turning to our performance all of our business lines showed significant improvements on a quarter over quarter basis.
Logistics profitability returned to 2019 levels due to the dramatic upswing and our Hawaii tourism and our retail segment benefited from increasing gasoline demand. Although there was some offsetting margin compression from the rise in crude oil prices during the quarter.
Conversion of our northwest retail locations to our non non brand is growing very well for us.
Launching several new initiatives with the rebrand, including our proprietary loyalty card program dynamic.
Dynamic pricing for <unk>.
All of checkout past and greater brand marketing investments and.
The refining operations and then.
Continue to improve from pandemic lows.
And Wyoming regional cracks increased rapidly during the latter part of the second quarter kicking off a strong summer driving season.
Present conditions or even tighter than pre pandemic summers and our.
Biggest challenges meeting strong demand.
Hawaii refining is also improving although the progress is partially masked by the price lag related to some of our product contracts.
Although the Asian crack spreads are still well below historical averages recent Chinese reforms appear to be supporting Asian cracks. Despite the surge of the Covid Delta variant.
The Singapore 3.1 to market outlook for the remainder of the year is currently in excess of $6.50 per barrel.
While the physical oil market is tight our crude oil differentials have continued to be and the $2 per barrel premium range.
Washington refining was a bright spot during the pandemic as product sales benefited from declining crude oil prices.
But this year rising prices or having the opposite impact as asphalt cracks are hampered by a significant price lag in.
In addition, tightening inland crude differentials and the narrow ti Brent spread have increased our feedstock costs and west.
West Coast cracks are improving early in the third quarter, given increasing demand and limited supply and feedstock costs are benefiting from improved differentials and Canadian and inland crudes and.
In summary, when you exclude the noise of the mark to market on our prior year rents position, we showed substantial improvement over the first quarter and.
And we foresee continued improvement for the last half of the year, Despite global cracks remaining well below historical averages.
This is a testament to the actions taken during the pandemic to improve our long term profitability.
With these changes we're now focused on reducing our debt load.
And with very limited capital investments planned, we expect debt reduction to accelerate as our free cash flow grows at this time I will turn the call over to Joseph to discuss our operational performance. Thank you Bill and the.
Second quarter system continues to demonstrate safe and reliable operations with.
Which allowed us to maintain exceptional low cost structure for.
The refineries.
Starting in Wyoming.
3.2 on index and the second quarter was.
$30 and flow cents per barrel driven.
Driven by strong.
Gasoline demand impact for.
Oh and refinery team the new quarterly records for crude charge with approximately 18000 barrels per day throughput.
Oh, the United the adjusted gross margin and the quarter 10.
And dollars and 25 cents per barrel, including and approximately $4.48 per barrel.
The prior period Mark to market the expense.
Production costs were $5 and <unk>.
71 cents per barrel.
Reflecting the reliable operations and a relatively high refinery throughput.
So far and the third quarter of Hawaii.
And 3.2 on index has averaged over $40 per barrel.
And we are well positioned to supply the strong seasonal demand and our rocky mountains of markets.
Third quarter throughput target is the.
Approximately 18000 barrels per day.
And Washington.
Second quarter of Pacific Northwest 5221 Index was.
$16.05 per barrel on a N.
The spaces.
And on a refinery throughput average approximately 39000 barrels per day.
Hello, and realized adjusted gross margin was the negative for.
<unk> per barrel and.
Clothing, and approximately $1.69 per barrel.
Prior period come on.
The expense.
Other than Marines all of them.
Margin capture the zone from.
Negatively impacted my day.
Relatively narrow.
And back and discounts as well as the flat pricing back on now.
I'll ask on netback.
On production costs.
The record loan and $3.28 per barrel in the quarter.
Driven by stronger and our ability.
Following the successful and first quarter of turnaround execution.
So far in the third quarter.
5221 index has improved to average more than $18.50 per barrel and all.
The planned throughput is approximately 39000 barrels per day.
Moving to wine.
The Singapore 312 index and the <unk>.
Second quarter with total.
And 38 cents per barrel on Brent basis.
And our realized crude differential.
Average <unk> and 1 cents per barrel premium for Brent.
And throughput averaged approximately 84000 barrels per day of approximately 47% distillate yield compared to only 41% from the second quarter of last year.
This move is driven by 2 reasonably Calgary and in Hawaii.
And the increased demand for debt.
Which has pushed the why back to and important.
Our realized adjusted gross margin was 34 cents per barrel, including and approximately $1.83 per barrel of prior.
Prior period amongst the market expense of <unk>.
<unk> cost were free Donaldson.
40 <unk> per barrel.
And finally, the team continues to focus on the bottlenecking opportunities and.
And the recently, we successfully completed upgrades.
Which will allow us to run additional and 5000 barrels per day of crude oil.
For the full conversion to high value products.
And the third quarter, we will execute the plan 10 day easily for them and the catalyst regeneration.
Combined with the routine cogent maintenance.
The estimated cost is approximately.
And $1 million.
So for them in the third quarter of Singapore, 312 index is up to approximately $5.50 per barrel.
Estimated crude differential is approximately 1 <unk> and.
And 84 cents per barrel premium for Brent.
Oh throughput targets in the quarter is and the 82 to 85000 barrels per day range, including the maintenance impact.
In summary, we continue to focus on safe and efficient operations.
Oh and co structure and commercial culture.
And you to service will cause and we transition to a more positive profitability territory.
Now I will turn the corner of the 2 wheel to review our consolidated results.
Thank you Joseph.
Second quarter, adjusted EBITDA and adjusted earnings for a loss of $7 million and $48 million for 81 cents per fully diluted share.
Focusing on accounting items first.
The finding results include a $27 million noncash mark to market expense related to the 2019 and 2020 RFS compliance years.
Excluding the mark to market Rens expense, our adjusted EBITDA and adjusted earnings per share would be $20 million and the loss of 35 per share.
Our GAAP results also include a $7 million charge related to debt extinguishment costs.
Shifting to our segment results.
The retail segment, adjusted EBITDA contribution of $14 million compared to $8 million and the first quarter of 2021 the <unk>.
Same store sales fuel volumes were up roughly 29% on merchandize sales were up approximately 6% compared to the second quarter of 2020.
The logistics segment adjusted EBITDA contribution was $20 million up $4 million from the first quarter of 2021.
The improvement was driven by a full quarter of Hawaii neighbor island demand growth as well as seasonally increased Wyoming sales.
The refining segment reported a segment adjusted EBITDA loss of $28 million.
The prior period noncash mark to market rent expense of $27 million was split $14 million and Hawaii.
$6 million, and Washington, and $7 million and Wyoming.
For Hawaii operations continued to make operational strides and anticipation of distillate margin improvements.
As previously referenced the Singapore 312 during the quarter was $4.38. However.
However, if you look at the components, Singapore jet average $2.39 per barrel.
To provide context of third quarter seeing jet crack has averaged $2.91 per barrel. Thus.
Thus far during the third quarter and the 5 year average excluding the pandemic has been approximately $11 per barrel.
Why refining results remain tightly coiled to the ongoing recovery.
Yes.
Wyoming for improvement throughout the quarter with volumes and margins expanding steadily and.
In addition, Wyoming refining results include a $5 million LIFO benefit and a rising price environment.
Moving to Laramie.
And we generated adjusted EBITDAX of $15 million and net income of $100000 for the second quarter of 2021.
During the early July Laramie completed of $160 million of refinancing of the senior secured credit facilities. The new facility has a 4 year maturity.
As part of this transaction Laramie hedged the substantial portion of its projected future production, which should drive accelerated debt pay down over the next 12 to 24 months.
We expect <unk> net debt to adjusted EBITDA to be below 1 times at the end of 2021 with nearly $100 million and free cash flow permitting the company to reduce its net debt load by 50% through the course of the year.
Second quarter cash generated from operations was $33 million.
Excluding rins and working capital was a small source of funds during the quarter.
Capital expenditures were $6 million and accrued cash interest equaled $15 million.
1 balance sheet items I wanted to provide further information on.
Our net liability for the 2019 and 2020 RFS compliance years totaled $151 million based upon and average price of $1.68 per RIN unit.
With respect to 2021 compliant share activity, we expect there to be approximately $40 million of cash outflows related to the fixed price commitments and the second half of 2021.
In addition, we expect to continue accruing for quarterly rent expense consistent with our past practice.
Looking forward, we expect our annual cash interest expense to decline to $50 to 50, $50 to $55 million down approximately $7 million annually and GAAP interest expense to be and the $15 million per quarter range.
In addition, we expect our 2021 annual capex to be and the 35% to $45 million range and <unk>.
System with our prior expectations.
Our quarter and liquidity totaled 243 million made up of 174 million and cash and $69 million and availability.
And this reflects the $49 million cash redemption of the convertible notes and the $37 million pay down of the 12 and 7 eights notes.
We also entered into a multiyear extension with J Aron for Hawaiian supply and offtake requirements are.
Our liquidity on hand remains strong and provides flexibility to consider alternatives to reduce our funding costs.
This concludes our prepared remarks, operator, I'll turn it back to you for Q&A.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then 1 on your Touchtone phone.
And if youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 at.
At this time, we will pause momentarily to assemble the roster.
Okay.
Our first question comes from Neil Mehta from Goldman Sachs. Please go ahead.
Hey, good morning team. That's currently on for Neil Thanks for taking the questions. This morning.
Wanted to just start off on our favorite topic of rents can you just walk us through your latest thoughts around where par stands on the small refinery exemption and following the Supreme Court ruling and then just remind us how you plan to satisfy the.
And the obligation payments, if required and 'twenty 2 and 'twenty 3.
Sure Carly this is bill I'll, let will handle the question in terms of when will when and how will satisfy.
And any liability associated with the with our rent for prior years, but with respect to the policy.
Our expectation as I said on my prepared comments are that the.
The EPA will act on <unk>, I think the lack of relatively quickly and.
Certainly laid out of timeframe given the requirement that the that we effectively conclude our 2019.
Compliance here by early next year.
<unk> the.
I'll have to act quickly.
We expect that will be granted SRA each based on the hardship ruling certainly with respect to 2019 and 2020.
I think it's fair to say that that these have been 2 of the more try and years.
For the refining sector.
And I also think that the <unk> bank is depleted and the EPA needs to do something to address this issue and it's starting to create issues not just in the energy sector, but kind of throughout the economy.
So we're expecting a resolution relatively quickly and expect to receive.
Small refinery exemptions for our refineries will you want to discuss the timing and how we would address it sure.
So Carlos I think as I referenced our net liability for the 2019 and 2020 compliance tiers at the <unk>.
630 prices and which was the $1.68 average.
Just north of $150 million.
And we'd expect that to the extent the small refinery exemptions do not.
Go in our favor and we need the subtle that underneath the current regulation by January of.
That being said I would point out that our expectation and current commercial plans for 2021 and include ratable purchasing activity.
And so we'd expect it by the end of 2020.1 the rents that we have on hand with respect to the 'twenty, 1 and compliance here.
With the ultimate would be worth it.
Approximately $125 million of current prices. So our net settlement obligation at the end of January on a cash basis would be substantially less than the $150 million with asset on hand to support it.
Ultimately the final settlement would need to occur and the 2023 time frame underneath the current EPS.
Timelines, so again, which I think continued to remain subject to change.
Based on and action.
Great. That's super helpful. Thank you and then the follow up is just around retail you mentioned the rebranding and the northwest could you just talk a little bit more about some of the initiatives there that you're focused on and what type of impact do you think that could have on the retail contribution going forward.
Sure.
I would point out that the northwest retail is substantially smaller than Hawaii, and our Hawaii retail business continues to perform very well and is a very strong franchise in the northwest.
Decided to adopt our non non brand, which we use for convenience stores and Hawaii, and we're rebranding our stores and our fuel under the non brand and that's gone very well we started that.
And at the end of last year.
Really didn't complete the.
The temporary signage until the middle of February by rebranding at that point, we're also able to shift our fuel supply and improve our economics at the pump.
We are now on the process of <unk>.
Converting to a permanent.
The image and that's going extremely well and we're also at the same time, that's facilitating some investments in information technology that will allow us to rollout of loyalty card.
Which we think will allow us to improve our.
The customer experience.
As I mentioned, we're running some self checkout, Texas summer.
Our cash at some of our higher volume stores, where.
On the.
Activities are such that people have to wait.
And then we're rolling out and information technology that will allow us to engage and dynamic pricing I think I think 1 of the real advantages going forward will be the ability to adjust our pricing on a real time basis and markets.
It's a much more competitive market in terms of pricing than Hawaii, and I think that technology will be extremely valuable there.
Great. Thank you.
Our next question comes from Phil Gresh from J P. Morgan. Please go ahead.
Good morning, Phil.
Hey, good morning.
First question just on the Hawaii.
And the past you've talked about being able to get the EBITDA neutrality.
With the $4.50, crack and the $2 differential.
Obviously, this quarter and some transitory headwinds from rising price effects, but.
Curious how you think about that now do you still build.
And believe that to be kind of a normalized breakeven.
And with trends and the third quarter or do you think you are.
North of $5 and you feel like you can get to that EBITDA and neutrality.
I think we can I think we can actually achieve profitability, yes, we looked at the $4.50 and tested that against the second quarter and I think that the we would've been there but for the price lag and really market structure. If you take into account the price lag market structure and then the the mark to market on.
<unk> for the prior year compliance years.
And then take into account of $2 premium to Brent for feedstock costs were a breakeven and try to at that $4.50 per barrel range and again as I mentioned is Joseph noted I think we are and the $5.50 range.
Quarter to date this morning the <unk>.
<unk> closed at 627, and Singapore, and if you look at the forwards it its about its over 650 for for the remainder of the year. So I think we're at that point, where we're going to generate positive EBITDA for the refining system and Hawaii.
And if I may add the.
Upside and Asia.
It's very clear.
And the recovery in China.
And it was pretty decent from both.
Asia, and even in India of far from the full potential.
We need to remember that the recovery.
It was not focused on the distillate side and jet fuel is the lagging and with our yield structure. It will be of big upside once you catch us up with.
<unk> and.
And then we own her the about trying to tax reform that will keep export probably lower and will support Singapore cracks in the future. So we don't have the improvements we made the tough.
Sure.
Scott Julian and Hawaii.
And additionally, expecting a bright future.
Okay, Great just the follow up on that Joe do you think debt.
The changes and the China market are already influencing.
And the current improvement and crack spreads or do you think that's ahead.
Okay.
Phil This is well I'll jump in and provide a little bit of.
But on that front.
I think it's we've.
We've definitely seen in the July timeframe.
The reduced.
Product exports out of China, particularly on gasoline and gasoline range of molecules.
And so again I think that those are beginning to impact balances and the Singapore market and then obviously the issuance of product export quotas for the second half of the year have been more limited.
Which again I think provides some further part indications with respect to.
Ongoing Chinese policy changes there that are happening.
And I think there is that the push and pull recurring and in Asia right now between that change and product flow with the ongoing recovery, but I would say.
And the last 3 to 4 weeks incremental data points of continue to validate that these policy reforms appear to be real and.
And they appear to be reducing.
Exports out of the Chinese market.
Got it fills the China.
Ex the imported some gasoline and July.
But to give you a sense of and the change.
Yes.
Okay.
My last question just on the Opex side on your Opex on refining was pretty well managed and I was just curious are you seeing any rising natural gas impacts to your refining business.
As we look at kind of <unk> and <unk>.
Yeah, So Phil I mean, really no natural gas impact and Hawaii.
And then and Washington, It's it's modest and.
And the same in Wyoming, but I don't think its a major factor for us as you would see versus a typical Gulf coast refiner.
Alright.
Great. Thank you.
The next question comes from Jason <unk> from Cowen. Please go ahead.
Hey, Thanks for taking my questions I wanted to go back to your and exposure if I could I think you mentioned.
By the end of this year you would the value of the Rins on your books would be kind of equal to your 2019 and 2020.
Liabilities.
Is that based on those fixed commitments are.
And for buying Rins or does that require.
On a future cash outflow for buying rins and kind of tied to that.
You mentioned working capital was the small source of funds excluding rins while the.
The impact with.
And I guess thanks.
Sure.
So I think Jason and these questions are somewhat related because they ultimately tie back to the fixed commitment on the rent front you are correct and that our expectation is that our rent assets and aggregate and.
And the January timeframe will match the potential obligation that we'd have for the 2019 and 2020 settlement.
And again that in order to achieve that that requires us to satisfy the fixed commitments I referenced the $40 million as well as to continue to by 2021, Rens Ratably, which has been our our stated plan.
And so I think that's ultimately how we settle that liability.
The working capital.
How flow that we expect of the $40 million tied of the Ford RIN commitments as I think the.
The impact that Youre trying to quantify so.
Okay and the question.
Yeah.
I also was hoping you could quantify the working capital and the net working capital benefit and QQ.
I think $40 million of the right way to think about it with and it's.
Alright, thanks for.
The commitments that I referenced.
Got it great. Thanks, and then the second question.
Just on Laramie, It seems like a big step up and free cash flow of potential. This year are you exploring the opportunities to monetize that asset.
Yes, Jason I'd say, the the outlook for Laramie has definitely improved with the commodity price backdrop for both natural gas liquids and natural gas.
That said I think.
The rapid debt pay down remains I think laramie.
Principal focus and I would say the.
The acquisition and divestiture market for E&P assets remains high.
Quite depressed.
Given the lack of capital flowing into that space and.
And so again I think we'll continue to look at options there and it's not a core asset for us but at the same time I think we will look at the ultimate.
A&D market values that are out there versus our hold values and continue to think about that and I would take today. The A&D market is very challenged still.
Great. Thanks, a lot.
Again, if you of a question. Please press Star then 1.
Our next question comes from Matthew Blair from Tudor Pickering Holt. Please go ahead.
Hey, good morning, Bill and well hope Youre doing well.
Wyoming, the indicator is up $11 a barrel of quarter over quarter could you talk about what's driving that and.
Is that something that you still would capture and Q3.
Hey, Matthew and good morning, It's bill yes.
Yes, I do believe that's something that we'll be able to capture and Q3 and it's really just the reflection of a very tight market.
With significant demand and theres been a lot of rationalization of the area with the.
The shutdown of 2 refineries.
And.
The market is struggling to meet the demand.
I'm not aware of any major outages.
And it's I don't think of that are indicators of any different of than other.
Metropolitan areas and the market I mean, Denver strong Salt Lake strong.
Our little rapid market strong, but youre seeing this throughout the region given the high level of driving which drives gasoline consumption.
And also Theres a high level of jet fuel consumption because of lot of people are flying into the region for travel so really across the board, we're seeing very strong cracks and that market.
The typically win.
2 and 5 differential to <unk> for.
Hi.
Trucking and the logistics will tend to close them and this time because of the shortage and drivers and trucks.
And we see this moral and sustainable.
Sounds good and then it looks like your free cash flow positive in Q2 do you think you can still be free cash flow positive for the year.
And so Matt I think part of the free cash flow benefit that Youre seeing reported there is related to the working capital benefit and.
And the quarter and.
And I think we would expect some of that for reverse in the second half of the year as I referenced but.
Nonetheless, our fixed charges when you look at it as I laid out or close to on a pro forma basis $50 million to $55 million on the interest side, you've heard us talk about our maintenance capex levels.
And again for the full year, our capex expectations and the.
35 to 45 range. So when you think about covering our total fixed charges.
We're in the $85 million range.
And and so again I think.
When you look at the outlook for the back half of the year with where the forward margins are I think for optimistic about.
Shifting to free cash flow.
Great and then lastly, it looks like Hawaii Air traffic is down about 11% versus 2019 levels currently.
In Q2 was down 29% versus Q2.19.
With this provide some tailwind for your logistics segment in Q3.
Yes, I think Matt the key thing that drives the logistics segment is really the neighbor island.
Activity levels and I think if you look at that.
I went by island Youll see the in certain cases, we are actually tracking above 2019 levels and I would also point out it is.
And as highly related to domestic travel activity into the neighbor Islands. There is a limited amount of international activity that flows.
And to the neighbor islands directly so.
I think that last kind of leg of growth on the.
Passenger arrivals side is heavily weighted towards the wahoo and heavily international so I think neither of those provide significant margins to our logistics business.
So I think they are incrementally helpful for the state kind of GDP and and overall activity levels, but it's not the same bang for Buck that you get on domestic arrivals into the neighbor Islands.
Sounds good thanks.
Thank you ma'am.
For the next question comes from Patrick Sheffield from Beach Point Capital. Please go ahead.
Hey, guys. Thanks for taking my question.
Sorry to beat the dead horse on rent just.
Tell me if this is the way and we should think about it.
You got it sounds like you guys will spend $40 million in the second half of this year.
Buying rents and then.
And at the beginning of 2022.
I think I thought I heard you say you would have $125 million of assets of 150 of liability. So does that mean kind of 40 million outflow back half of this year and 25 at the beginning of 'twenty 2 if there arent small refinery exemptions.
Yeah, So Patrick the $40 million really relates to think of it as the accrual we've made with respect to the first half of the year impact and then again, we will continue to accrue and our EBITDA continues to reflect our rent expense right and every period right. So just big.
Big picture during the second quarter, our current period Rens expense for 2020, 1 activity was about $23 million.
And so that's embedded inside of our adjusted EBITDA results right. So we've already accrued for that and.
And we will we expect the continued to accrue based on market prices and.
And volumes at the time, so think of it as the $40 million and the second half of the year and then plus some portion of the accrual that we are going to take and the second half of the year is probably the cash impact and then we'll ultimately settle the difference sometime in the first quarter of 2022 to the extent theres not small refinery only relief.
And it.
Liquidity is strong and so and you can see the over $140 million.
There's no issue.
Oh, yes, and not worried about it and just trying to tick and tie it looks like.
It didn't hit actual cash flow and the first half of the year.
But.
So I wasn't sure if that meant that there would actually be of cash flow hit and the second half or if it was just the.
Adjusted EBITDA would be $40 million less from the second half.
And really cash anyway.
Think of it as just solely working capital, where it's we've taken the accrual and the first half of the year and we're going to settle that accrual on the second half of the year and then we're going to continue to accrue expense.
And our adjusted EBITDA and our results and the second half of the year. So.
I think that's the best way to think about it is just the $40 million of working capital outflow and the second half of the year.
Got it and then.
Well for us.
As of expressing confidence on the FRE.
What I guess what drives that.
Have you guys had conversations with.
And with regulators.
Sure.
But we cannot share you think about the odds of getting it.
Well first of all I don't think it'd be appropriate to comment on conversations, but we're obviously engaged with our counsel and have multiple conversations regarding yes, sorry, and I think most importantly, the Supreme Court, having a firm that the EPA should review of Fsrus. We're just looking at the historical precedent and the fact that we received that sorry and the past.
And I think if anything our case for and sorry for 2019, and 2020 is as strong or stronger than our cases was in prior years.
Yes that makes total sense and then if you do get it does that mean you're on.
151 liabilities goes to zero.
Yes, I think it's a good way to think about it as it goes to zero I would also just point out that I mean, it's not ex substantial it's more a matter of what is the liability and when we have to pay it and based on the market values today, most of that liabilities and elaborate on will probably have to settle in 2020 early 2020.3.
And.
And I frankly think that the market prices are going to go down over time, So I don't I don't view it as the as initiatives as being at that value today.
Got it and I apologize because then it will.
2 hours of claims made before and we'll keep.
And I asked me about it but the.
And not anything for that 151.
The 150 on liability also include <unk>.
The Mets for beyond 2019, and 2020 is that would you say you're talking about January of 23 of settlement settlement.
<unk> and 'twenty.
And Thats, just 19, and Tony and then I mean, Patrick the other way to think about it is that there is an incremental 40 that we have today, but it's at a fixed price right. So theres no of market risk per se on the price changing.
It's just that the cash hasn't left the system yet.
Got it and I don't want openings can of worms, but then beyond 2019 and 2020 of compliance.
Is there a framework for thinking about that or do.
Do you need to wait until.
The RVO the chipset and.
Yes, I think I think we should wait for the RVO and <unk>.
Obviously determine what SRA is we want to file for going forward.
Okay great.
All of the fruition and we're not going to get SRA. So our EBITDA reflects no SRU grants.
Got it thanks and.
And congrats on a good quarter.
Thank you.
The next question comes from Jake Colby.
Go Malinski Echo from Ellington management. Please go ahead.
And.
Hey, Thanks for squeezing me in here.
And you work to get the SRA outcome, you anticipate you I mean effectively $171 million of.
The liabilities goes away and.
We just went through at $40 million of working cap on unwind plus 25, and the next year, so call that $65 million plus whatever your ear and whatever you are hurting EBITDA by for the second half of the year. So what would the it's a relatively meaningful amount of cash what you use that cash for if the sorry on your way.
And I think this gets into capital allocation priorities and again I think this is I think the bill's point with respect to.
Again, the existential issue, it's just a question of timing and when we ultimately settle if.
If we need to settle this liability, but again I think our key focus remains.
Paying down debt and reducing our cost of funding.
Again, I think we continue to believe the.
Retail franchises or.
And our strong assets and I think.
Warrant improved cost of capital and again, I think getting our gross level of debt down to the level that we can convince the credit markets remains I think probably 1 of our top priorities.
Got it and so.
If this.
Sorry it.
Goes away and like just to keep it if you get the <unk> sorry, if you get the small refinery exemption.
You that's not that's already been appealed and it's already at the EPA levels. At this point there to say to you and it's not like you didn't have to worry about the reversal of the decision you can just sort of.
Immediately you effectively get minimum $60 million of.
Incremental free cash flow on the next 6 months.
Yes, again, I think the incremental 60 youre talking about has to do with 2021, Jake I think.
And in Europe, and math, because again, the 40 really relates to 'twenty ones, but.
Again, I think the easiest way to think about this is to the extent that we're successful on the small refinery exemptions at the $150 million potential settlement liability goes away.
And again at that point in time.
Again, we would be and are.
Pretty strong and balanced position with respect to even go forward rents because I think yet the viewed 2019 and 2020 completely separately from 'twenty to 'twenty, 1 and forward.
So, yes, sorry on modeled 2 different issues.
And I asked the question of Harley.
If the EPA gives you the small refinery exemption of is there any uncertainty left at that point due to some sort of appeals or it's basically it's already been appeal back to review it and that's their choice and.
And if they make the decision to grant for the exemption and Theres no sort of.
Undoing of settings and granting of the exemption.
And as final at that point of view.
Perfect, Okay and so.
And the immediate yeah, and I was being short term oriented I understand that the.
Larger liabilities.
Patrick was just asking would go away, but I'm just thinking you're.
Your free cash.
You're sort of assuming you're the $25 million and early 'twenty.
2 plus the.
The working cap plus you're hurting the EBITDA right for you.
Meaning the year.
For the second half of this year. So those would all be sort of immediate impacts in terms of of you wouldn't have to spend that capital or the cash anymore.
I think it really it comes down to thinking about the 152 million and I think that's the key issue and.
So happy to cover it more offline with you and make sure.
Net.
And we're on the same page.
No I think we are and I'm being and articulate alright.
Net debt that was it for me and that makes sense and sorry, the timing I guess on that when you expect the small refinery exemption decision I know you expressed confidence and the way it will go but what do you think around timing of that.
We think it will be in the near future.
And I guess.
Last question is around what you, presumably you're being conservative and maintaining some level of liquidity and anticipation of the decision not going your way. What do you think is the minimum amount of liquidity and you need once this decision is made either way.
Take again, I think I think the way to think about it is we don't we won't have a significant cash funding requirement. If the decision goes immediately of the decision designated for any cash funding requirement will be and the future.
Have some working capital changes to address our 2021 accrual this year, but that's unrelated to the sorry, Paul for prior years.
Okay.
Thank you very much.
Thanks.
There are no more questions and the queue. This concludes our question and answer session I would like to turn the conference back over to William Pate for any closing remarks.
Thank you.
I think these results this quarter illustrate the value of our diverse business lines and the improving characteristics of our refinery locations have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Sure.
Yes.
And then.
[music].
And.
[music] range.
And.
And.
[music].
And.
And.
The third.
And then.
Good day.
And.
And.
[music].