Q3 2021 Delek US Holdings Inc Earnings Call
Good morning.
And welcome to the Delek U S. 2021 third quarter 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.
I would now like to turn the conference over to Blake Fernandez. Please go ahead.
Good morning, I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek U S Holdings third quarter 'twenty, one financial results.
Joining me on today's call Uzi.
Our chairman President and CEO Rubin, Spiegel, EVP, and CFO, and Todd O'malley, EVP, and Chief commercial officer as well as other members of our management team.
Presentation materials used during today's call can be found on the Investor Relations section of the Delek U S website.
As a reminder, this conference call may contain forward looking statements as that term is defined under federal Securities laws. Please see slide two for the Safe Harbor statement. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, We report certain non-GAAP financial results.
Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release, which is posted on the Investor Relations section of our website. Our prepared remarks are being made assuming that the earnings release has been reviewed and we are covering less segment and market information and then it created into the third quarter release.
On today's call Ruben will review financial performance I will cover capitalization and guidance Todd will cover operations and Capex and then Uzi will close with a few closing strategic comment with that I'll turn the call over to Ruth.
Thank you Blake.
On adjusted basis for the third quarter of 'twenty, one Delek U S reported net income of $9 9 million or <unk> 13 per share compared to a net loss of $99 5 million or a loss of $1 35 per share in prior period.
Our adjusted EBITDA was $110 million in the third quarter compared to a loss of $11 million in the prior year period.
The second progress of the press release highlights 11 million of after tax tailwind or 15 cents per share of items included in adjusted results.
Page 10 of the release provides a breakdown of inventory hedging impacts and page 14 provides other inventory impacts in the quarter.
On slide four we provide the cash flow waterfall in the third quarter of 2021, we had a positive cash flow of approximately $75 million from continuing operation, which includes a working capital detriment of $42 million with that I will turn it over to Blake.
Thanks, Ruben slide five highlights our capitalization we ended the third quarter was $831 million of cash on a consolidated basis and 139 billion of net debt, excluding net debt at Delek logistics of $896 5 million. We had net debt of approximately 495 million at September 32021, moving to <unk>.
<unk> six we provide fourth quarter guidance for modeling operating costs are forecasted to be in the range of $150 million to $160 million.
This reflects the impact of elevated natural gas prices and assumes no impact from ongoing insurance proceeds.
Before turning it over to Todd I would refer you to slide seven where we illustrate our cost structure relative to peers due partially to different permissible classification methodologies, our G&A tends to screen high while our opex screens low based on Investor feedback, we thought it would be helpful to combine the two expenses juxtaposed against different metrics, including <unk>.
Apprise value refining capacity.
<unk> of employees to gauge competitiveness of our overall cost structure against peers. As you can see we screened very competitively with that I will now turn the call over to Todd to discuss operations and Capex.
Blake during the third quarter, our total refining system crude oil throughput was approximately 282000 barrels per day.
Krotz Springs incurred a planned shutdown due to hurricane Ida, but was one of the first facilities back online, resulting in a fairly minimal impact of throughput rates during the quarter and.
In the fourth quarter of 2021, we expect crude oil throughput to average between 280, and 290000 barrels per day or approximately 94% utilization at the midpoint.
The next major planned turnaround is at our Tyler facility, which is currently scheduled for 2022.
On slide eight capital expenditures during the third quarter were $29 million.
Representing a significant decline from the first half spending levels.
The full year of 2021 capital program is expected to be in the range of $205 million to $210 million on a gross basis, which is consistent with previous guidance that contemplated the potential net impact of insurance proceeds I will now turn the call over to Uzi for closing comments. Thank.
Thank you Todd and good morning.
The significant EBITDA improvement reflect their operational performance and reliability compared to the first half of the year.
With no major turnarounds planned until next year, our system is well positioned to capture the improving macro environment.
Ongoing insurance proceeds and potential for more refinery exemptions offer tailwind into the fourth quarter.
<unk> units recently reached an all time high which lowers their cost of capital and reinforces the value embedded within the Delek portfolio.
As we move into 2020 to Wink to Webster should provide a positive contribution throughout the year.
Finally, there today, we plan to publish our 2021 sustainability report, we encourage investors to review our progress on our ESG efforts.
With that operator will you. Please open the corporate questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Ryan Todd from Piper Sandler. Please go ahead.
Great. Thanks.
Congrats on the results.
And maybe a first question Uzi, you've done a great job stabilizing and strengthening in detail over the past couple of years, which I know was.
It was one of the things you were initially focused on but the market still doesn't appear to really be reflected in the valuation of decay.
We continue to see numerous of your peers consolidate their MLP affiliates.
Can you give us the latest on whether you still see detail serving a useful purpose at least as an entity.
Thoughts on consolidation or at minimum.
Thoughts on selling down part of your stake in detail to try to force the market to reckon with the valuation discount.
Yeah.
Good morning, Ryan.
Thanks for that.
Thanks for taking the time to ask these questions. This morning.
Taking them one by one.
You know the strategy all along three years ago and I remember a couple of notes coming from from you guys think it will take time to unfold that strategy is coming to fruition.
Dk leave hitting all time high the.
Cost of capital of decay is on the low end of our MLP peers. If you will and also the.
Situation with the dropdown.
That is oh, the wink to Webster, the just starting maybe in the future dropdown as well as the fact that TPG.
From an organic standpoint is coming up because of all the activities in the Permian, we feel that decade is a very strong tool in our toolbox.
We're not going to limit ourselves to any of the options you mentioned.
We're looking at it carefully we thought that.
$50 is a fair value for a decade at the same time decay of any need of cash or anything like that I know that some or most of the market, sometimes give anxious for actions, but sometimes the best actions are no actions until things clear.
Clarify.
We know the value of these indicators.
We're not done we see the difference between the evaluation of both companies.
Uh Huh, there's an arbitrage, but we're not in a hurry to do anything just because of the fact that we want to protect decay.
And also with a decay.
Turning to a positive cash drive yourself.
Now turning the corner.
And the outlook for Fsrus, which we continue to believe that we are strongly deserve them I don't know that we are in no rush to do anything or not to do anything.
We just continue to evaluate all options.
Okay.
Thanks, and maybe I mean, you just mentioned the inflection in cash flow and free cash as we think about.
As we think about looking into next year any any thoughts on what the Capex budget could look like in and priorities for the use of <unk>.
How are you thinking about the priorities for the use of that excess cash.
Continue to generate meaningful free cash flow.
Absolutely I'll, let Blake all earnings Nikola for this morning, and I answer this question.
Brian I'll take I'll take the Capex piece.
So obviously, we need board approval and I think next quarter, we'll come out with a more formalized budget, but the way I would just help frame it up for you in terms of having a placeholder in the model. If you look historically, we've said maintenance capital plus turnaround is roughly $1 75 to 200.
Obviously during periods like Covid you go through a deferral process and you go to the low end of that so I think it's fair to think coming out of this we're probably trending towards the upper end.
200, $200 million in terms of maintenance and Capex. There are some additional projects now that we are generating free cash that I think we're going to probably look to have some minor growth and examples of that would be systems upgrades that I think is going to help us from an efficiency standpoint theres. Some small quick hit projects that are very low capital, but quick return.
Turns on EBITDA and of course, we have the retail build out.
So again without giving you a formalized number I think you were at the upper end on maintenance and then maybe a little bit of growth. The final thing I just want to make sure and point out on Capex is keep in mind as Teekay <unk>, becoming a much larger entity and coming into growing on its own.
The self sustaining entity so whatever the capex is for that going forward is really not impacting the cash flow to decay. So again, we'll give more formalized guidance on what the spending numbers look like next year, but hopefully that helps in terms of framing up something for your own modeling.
Thanks, a lot and that's great.
The next question comes from.
From Credit Suisse. Please go ahead.
Hey, Uzi.
I wanted to extend my condolences to the entire Delek family on the sat and untimely demise of Louis I think I only mentioned once or twice. He was a very nice gentleman, so I'm sorry for your loss Susie.
Thank you and myself. Thank you, we're really feel sorry about our planning to say, let's say something by the end of the call, but I'll say it now Louis was a great leader Great friends and then Dara.
Family.
Very excited about him.
Way too early and we are we keep him and his family in our thoughts and prayers go ahead of myself and thank you for your kind words.
Losing quarter.
Quarter over quarter Eldorado excellent improvement in its gross margin, whether it's opex both fronts. So help us understand what you did different how things came together because this is a very strong improvement quarter over quarter. If you look at that refinery.
Well manav.
We just came out of the turnaround it's Andrew I don't remember the.
The other one in two tranches of actually doing the off if you will we fixed.
Dr refinery.
And I think the.
The refinery manager, Mike Reid is doing excellent job over there.
We are running the refinery more than 75000 now actually are.
So up to 80000.
This this this month now obviously, we will continue to optimize that now the second part to do.
Bear job over there is to improve the commercial initiatives you see in the refinery of organization.
A big number of refining these are initiatives or things that we do on the commercial side that Dr.
Something that will continue to happen in El Dorado or Cros.
Because we want them to be competitive now one thing we need to remember we do believe that both cros and El Dorado, specifically, we do believe August as well, but specifically.
It's our ease and as we continue to work with the administration and Oh, we strongly believe that we deserve. These are these do like we got them in the past so if you.
Think about that in your aid.
The storm of operation.
Changed after the turnaround led by Mike with the commercial part that is changing as we speak and the ASR ease.
We believe that we should get them.
Looking at a very competitive assets also for cost. So thank you for that question.
Thank you for taking my question was he.
The next question comes from Carly Davenport from Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking the questions. My first one was just around refining profitability in the quarter, it's great to see the inflection there.
Are you able to talk about what is reflected in sort of the other refining bucket I guess, if we think about the earnings from from the four core refineries.
Results were probably more in line with our forecast and the other bucket was a very positive contributor so any colors on that would be helpful.
Well first of all we want to thank you all for the vote of confidence lately.
And as we said.
We'll do everything we can to not disappoint you.
This is a V a.
Refining organization as a whole.
And I can let Tom talk about that's all I'll, just say a few words beforehand.
This is we run our refining organization is.
Is it integrated system.
And some barrels sometimes find themselves in one place.
The other.
Looking at our obligations vis vis.
Third parties, we're looking at a range and sometimes we Oh, we move things around it's very different difficult to allocate that.
All that activity to specifically refineries always know sometimes these numbers are small sometimes they are actually taking a hate that sometimes there are more bigger than that so in this board.
Activities that.
As a result of us.
Taking steps head of the marketing different areas that contributed to that.
I'll leave it to that I'll, let Todd wants to add anything to that no I think uzi covered it very well, it's a number of different things that all add up in small little pieces.
And we're obviously watching that every day and making sure that we're managing and actively in the market.
Great. That's helpful. And then the follow up is just a bit higher level I guess as you think about where we are on the macro.
Curious, how you would frame the path towards the company and flashing back to positive earnings you know refining margins have certainly improved here, but on the other side, you've got Brent Ti has compressed a bit. So if you could talk a little bit about some of those moving pieces and how it ultimately impacts your ability to get back to that kind of more normalized refining earnings profile, yes.
Yes, absolutely call. It in and you know, we don't look at a Brent Ti.
As a normal thing we look at Brent Midland.
Only three weeks ago.
Midland was.
Positive what thoughts, 75% and now we are at a breakeven.
Around breakeven.
No.
If you look at that or we can move between Midland and MTI pretty easily.
And that's what we do on a daily basis that what actually you expect us to do so.
I I don't know that we are too concerned about the Brent Ti versus a Midland Ti because of our ability to go back to two Midland now. Please remember you know it and we see it every day I know that our producers are saying that theyre going to be very disciplined.
D P G.
The gathering system is growing by the day.
So if we thought a few months ago that the growth next year for Midland will be 500, 600, we're changing our minds as we speak because of price of oil being.
Around $80 I know that this was the lower yesterday, but.
Just to answer your question or point blank we are not.
Not concerned about.
Brent Ti because we think that it could if it compressive than Midland should.
Coming to.
Negative territory, otherwise if the arbitrage.
It makes sense for export that's one thing second vis vis the crack spreads.
We always thought that 'twenty, one will be a year that things will change and actually changing it for all of our eyes I saw the Pfizer came today with an idea that they have a medicine for this pandemic I think.
The world.
Start working.
Working towards.
Towards a solution here also.
Let's be clear.
People are tired of sitting at home and all for employers are tired of people not coming to the office. So so there is a chance that what you're pointing to in our mind will be a very very strong.
Demand here that.
Also on top of the idea that in Europe, the energy prices or the energy crisis.
Led or that lead to <unk> prices.
Don't make refineries over there is competitive so I think that we.
We are pulling out of the downturn as we speak that was a long answer to a short question, but I hope I covered everything.
Great. Thanks, so much easy.
Again, if you have a question. Please press Star then one.
Our next question comes from Roger read from Wells Fargo. Please go ahead.
Yeah, Hey, good morning.
Okay.
Just.
I guess in some ways I'd like to follow up a little on the last question Uzi.
It's been a long time since we've been in a market where we didn't have.
And inland desk and obviously.
Obviously, but I don't think we're seeing a production growth to really change that anytime soon.
So when you started the company first acquired the Tyler unit.
That was the kind of market. We're in so as you look at it today what changes if any would you make in terms of.
Were you trying to sell the product or any other crude sourcing opportunities besides switching between Midland and Ti to help you on the feedstock side.
That's a great one.
Do you want to take that one Tom yes, sure so Roger.
I think again, we've talked about this on a couple of previous calls, but one of the beauties of having the detail systems surrounding all of our assets means that we have just incredible embedded optionality and that Optionality is not just simply to run light sweet barrels we have the steel on the ground that gives us the capability to optimize across grades across.
Sweet and sour so on the crude side, we're looking actively at a lot of the dislocations that are happening in the market as we speak and shifting our crude slate around on the product side of it obviously with the.
The unfortunate circumstances and their end market.
<unk> Overvalued. We're also looking at how we can optimize the product slate in terms of pushing more of the selling <unk> away from the bulk supply of region in the refining system and out into the rack avail.
Availability that surrounds and pad three and other pads. So from that perspective, we're looking at that every single day, we're actively working with partners we look at exchanges.
And obviously different crude slate so.
Hope that answers your question.
That's definitely helpful.
You know in terms of the unrelated follow up closing in on the completion of that renewable diesel facility in Bakersfield or at least I imagine they're closing in on it I was just curious.
How that looks to you and as you look at other opportunities in renewable fuels I know you do a little bit already but whats. The what are some of the other things that are out there are some other opportunities that you'd be considering.
Considering our guests to be a good way to put it at this point.
So Roger I'll, just give you a quick update and really there is no frankly pivot from what we've said in the past, which is that the facility needs to become operational we have a 90 day free look and so I think.
Stay tuned <unk> event, where we could potentially exercise that option.
Obviously, we have our three biodiesel plants.
We are exploring other opportunities to look at different feedstock options around the country.
I think uzi has been pretty consistent in the past, saying that renewable diesel is a bridge, but not necessarily a solution to the global transition and I think anything outside of what we have in front of us would be extremely capital intensive and I think we want to be mindful of where we're spending our money. So we'll continue to evaluate but I think for the time being.
We're going to stick with our capital light approach.
Which is kind of.
The market already.
If that answers your question.
Thank you.
The next question comes from Chris Schott from Citigroup. Please go ahead.
Hi, good morning, Thanks for taking my question.
First one was just on the SRU status broader landscape.
Theres various litigation going on.
Against the EPA I was curious sort of big picture. If you could just help us to understand where things stand I think there was some news or some expectation that one of those cases, we could hear something this week and that might start to give us some clarity or some line of sight into the resolution of those applications so that little.
<unk>.
And in the coming weeks. So you guys are a lot closer to that I was just wondering if you could help us sort of walk us through.
What you see out there and kind of what the prospective timeline could be on that front in terms of what.
And what we should be looking for in the market.
Great question.
Good morning, I didn't say good morning.
Good morning.
Well I didn't say good morning to you and maybe I should say good morning to everybody.
So.
Anyway around the SRU is we continue to believe by the way we do continue to work with the administration answering questions. If they have one.
We do believe that the SRU should come soon it has been past due loan past due.
Almost 700 days.
We are behind the deadline.
I think that the.
Many people in in Uh Huh.
In different parts of the enemy, especially understand that.
E <unk> or something.
<unk>.
<unk> helped them keep gasoline prices low we all heard the president of <unk>.
Asking OPEC to a lower or to increase input to lower crude prices.
I do believe that they should come.
Soon not how soon I don't know that in the end of the.
Inspiration I could we continue to believe that we deserve several of them I'm going to remind you again that we are.
Over the last year of eight times out of our cost.
Of course, we got the seven times out of eight that we submitted.
El Dorado five times six times in Tyler five out of eight so we certainly believe that we are.
More impacted than others.
And we do believe that the deadline for compliance.
On the.
Sorry.
The rins market for small refineries is by the end of November November 30th we have one month away one month away from that so we believe that they should come out very soon and again as I said, we think that we're entitled to several of them.
We discussed with the administration.
Okay. Thanks Susie.
To the end of the month sometime in the next few weeks.
Second question.
Maybe a different tact on what was asked earlier.
Existing biodiesel production that you have could you maybe help us understand there's a lot of our D or b.
Bvd capacity coming on stream.
You know over the next couple of years your existing biodiesel production could you help us two things one.
Give us an update on what production levels again like this year and what you expect for next year and two where do you think it fits sort of competitively with some of the new production facilities are coming on stream the incremental supply.
Do you feel comfortable with you know the Ci score you get there in the med tax you get out of that biodiesel.
That's a great question for one thing what rates will do.
And if rates stay high then every plant is competitive if rates go down then the refining.
Uh huh.
Our refining of course will enjoy it so so.
It's a play between the two.
Now these are very.
Low capital.
Very low capital demand they have been very low capital demand in these are assets I think that the.
The person that runs them Mark page is doing excellent job.
Running them.
Efficiently as close to full capacity, we would just need to see a half feedstocks.
We're price next year, and how <unk> would react to that we do believe that <unk> should come down and come down then we need to look at the corporate parent co Pal.
How competitive.
These assets are like.
I don't know if you want to add anything to that.
I guess on a longer term kind of mid cycle basis, if you're asking like what kind of profitability that should have we have said to investors before that in general 20, a gallon on a full year basis time, 40 gallons a year, you're basically $8 million to $10 million a year of EBITDA. So hopefully that helps you from a general modeling standpoint, obviously that ebbs.
And flows per quarter.
Okay. Thanks, a lot I appreciate the time guys I'll turn it over.
Thank you Sean.
The next question comes from Phil Gresh from J P. Morgan. Please go ahead.
Hey, Good morning, this is actually John Royall sitting in Brazil, he's traveling today.
Is there any update you can share on your views on capital allocation I know you spoke about the Capex piece.
Given the improvement in your profitability in the macro environment will be better going into next year, just any updated thoughts on returns to shareholders.
Yeah.
First thanks for taking the time.
I'd like to add something to the mix here that's.
Our cash position.
While we are adjusting our earnings down our cash position is improving more just because of one time event.
Are helping the cash position and I'm, just going to use several of them.
Is there an opportunity to to give you a background about the capital allocation that you asked.
We do have insurance that we got the ruling was $21 million.
This quarter and we expect.
Significant more amount coming in the in the upcoming quarters now of course, we will adjust with that but that does it.
Of course.
Coming to the door also.
The settlement that we had.
The W.
W. Two W not building the connector.
This quarter will be cash.
In the fourth quarter that would be.
$25 million.
$24 million coming to our coming our way.
Also of course, SRT, he's may impact the cash position dramatically.
So if you look at all these events on top of the improvement in the <unk>.
The.
Underlying business. If you will we start to look to think about capital allocation and honestly, we are too small if a company right now.
And we'll.
We'll see.
How we pay data how we reinstate the dividend we don't want to reinstate the dividend too soon and then change.
Change our mind, we want to think about that and also how how we look at there are the market energy transformation.
Generating free cash flow is something that.
Many companies don't have and when we have that we want to use it.
Importantly.
That's really helpful. Thank you and then.
I know you've touched on.
When differentials a couple of different times, but.
Specifically thinking about the low levels of Cushing inventories.
How do you think the Cushing and U S crude oil situation is going to play out in the next couple of months and then.
How do you think that's going to impact I guess, the Midlands would be more important for you guys footprints.
So soon as well.
Yeah, I'll, let Tom take that one yes, John so.
Obviously.
The Sky is falling according to the market in Cushing, but if you look at what happened. This week we saw builds.
High prices cure high prices and the differentials in Cushing.
<unk> barrels into that market, that's ultimately going to cause that bath tub to fill back up again.
We use these point earlier today, we really are not super exposed to the Cushing market and we prefer to look at the market in terms of the Midland Brent differential and that differential has been performing in our favor.
Coming back to kind of flat in fact, a couple of weeks ago, we even saw a trade fairly significantly negative for for a day or two so we.
We feel pretty good about where things are where they're headed and in addition to that obviously again reinforcing the comment around TPG volumes that we see coming on much faster than we believe the market is anticipating I think gives us a lot of potential Tam lenses as we move into next year with a strong margin environment and relatively weak.
Midland differentials.
Helpful. Thank you very much.
The next question comes from Matthew Blair from Tudor Pickering Holt. Please go ahead.
Hey, good morning Uzi.
Hey, Matt.
Just given the increasing activity in the Permian I guess I would've thought that your retail segment would have been a little bit stronger.
It looks like your retail fuel volumes were down both quarter over quarter.
Both year over year, and then your merchandise sales per store were also down quarter over quarter and year over year. So I guess could you talk about dynamics in the retail segment.
Absolutely.
First we.
As you see we.
To close some stores, but if you look at same stores, we're still recovering from the pandemic. We are starting to see the recovery. If you look at September and October of course, you don't have the numbers, we see the recovery coming on the garden side.
And that would bring the merchandize, we always manage that business.
Carefully in terms of profitability because we wanted this year to be a profit year now. Please remember as we continue to bring online.
MTI and the new stores that will improve but youre absolutely correct that we elected this quarter.
To keep our margins high and.
Do we.
Wait for the market due to the activity in the Permian.
To pick up it will pick up and then like as happened in 2014.
Certainly you're expecting 2022, very very strong year for retail.
Got it and then circling back to the conversation on valuation so we see it.
On our numbers.
The only company, where refining trading for free.
You're sitting with a big stake in detail.
You also have the interest and the higher multiple retail.
And the stock has lagged year to date, so what I guess I'm, just not something much of an urgency to monetize these parts.
And could you just talk about what actions youre looking at to.
The improved evaluation here.
That's a great question, Amit as you know the market is.
<unk>.
I have a friend that became a CEO of a public company.
And infected me a week ago, saying, Hey, I've been a public company CEO for a week.
How did you do that for 20 years.
Sure.
And you know over my career here.
Seen it all.
Up and down with valuation and market can change.
Dramatically I think thats, what the market was expecting us to do to start producing free cash flow, which we obviously.
Continued to improve especially as I've mentioned, the insurance ASR ease and the.
The improvement in the underlying business.
We believe that valuation.
We'll improve with that with that being said.
<unk>.
All options are on the table vis vis other assets if that doesn't happen. So by the end of the day.
Wait for the market to improve but if it doesn't we will act.
Got it thank you.
The next question comes from Paul Sankey from Sankey Research. Please go ahead.
Hi, good morning, everyone.
Let me second.
Our condolences to you.
So uzi.
A lot has been covered here I'm just going to ask you about crude differentials, but you know you've pointed its pretty clearly.
The Midland Brent differential the one thing that's changed.
We had a couple of moments of history in the school was the natural gas price can you talk a bit about.
How that is changing things for you and the industry and particularly thinking about some of the crude differentials and if they are being affected by the change in natural gas prices and the change between.
Particularly natural gas prices, especially here, obviously in the U S much higher but secondly, the major arbitrage between here and Europe.
Paul first thank you for your kind of water vis vis Louis and.
<unk> also.
Yes.
In regards to the natural gas situation.
You know, if I told myself or anybody a year ago that natural gas would be at $6.
You would have told me that anybody that.
I would have told them that would have said to me you lost your mind and we are here we are $6.
I think that this is.
Got.
It is.
A unique situation.
We think that it will last more than.
A year or two and I don't know that we change our business, especially in light of the fact that we are.
We're well positioned in terms of our natural gas we are getting a very cheap natural gas because of our proximity to the source of the of that guest. So I don't know that we are changing our business model much with that being said if it continues then we would need to look at it very carefully and especially in the Permian.
With the associated gas to see what to do with it I don't know if you want to add anything to that Todd. The only thing I would say Paul is obviously with the elevated prices in northwest Europe now trading let's call it roughly about $22 <unk>, maybe slightly higher today.
That really puts a bit under the distillate crack as you see fuel switching around the world mainly focused in northwest Europe and then in Asia.
So from that perspective.
Seeing headwinds probably of $3 to $4, a barrel and northwest European cracks because of that and then again as a result of that we see a pretty good solid foundational base being built in the distillate that could set up for a very robust crack environment margin environment here in the U S. Continuing through 2022 went out out the curve into.
In 2023, if that persists.
Got it just a final follow up could you just.
When you look at my five year old, but you expect Midland to go to a much bigger discount next year can you just run it because it's important for you guys could you just run through that.
Yes, I don't know that its going to be.
We never said much bigger.
What we see is that if Brent Ti clauses then.
Still the Midland barrel needs to leave Midland and to go to.
To the export market. So if it closes then something needs to give otherwise.
<unk> says.
Uh huh.
The cost should be reflected somewhere.
So I don't know that we think are much bigger discounts, but we already saw it.
A minus 10 minus 20, minus 30 that especially and we are especially surprised with that with the wink to Webster coming online.
Right now with the line fill and still the Midland is weak. So we wouldn't see if Brent Ti opens up to $8 <unk>.
Jeff that Midland will go to a premium and vice versa. That's how we look at it.
I'm going to have to stick around the room in my head in my hands thinking about that but.
Thanks, a lot I appreciate the insight.
[laughter].
The next question comes from <unk> Akamine from Bank of America. Please go ahead.
Hey, good morning, guys standing in for Doug Thanks for taking the question.
I've got a couple of here. The first one is on the value of the refining business. So there is a perception by some that the finding its free but ex D. K L. Wondering what you'd see is that sustainable free cash flow for the Standalone refining business without the fsrus and fully loaded for additional dropdowns.
<unk> that burdened the cost of the refining business and of course applying what your thoughts are on maintenance capital. So what does that number look like on a mid cycle basis, perhaps assuming I don't know.
Three W at $3 <unk> Brent differential.
Well, okay. So let's go let's go one by one here.
You asked about.
Maintenance Capex I think.
<unk>.
Blake mentioned that is between $150 million to $200 million it depends on the year. So.
Our number if you will and you can you can write it down second.
Vis vis the.
The ability to.
Maintain free cash flow, regardless of how fast we think that we are adult two fsrus and administration thought that we were I talked to authorities because we were granted them year. After year. After year. So I don't know that this assumption is the right assumption is like assuming that btu.
Doesn't exist. So all these are renewable diesel should go away.
I don't know that this is an assumption that as a CEO I should take but let's just put it aside for just one minute and assume that we will go back to 10 or.
<unk> central 35th regardless of their size, just because the RVO would be.
Normalized.
We said it and we continue to say it again and again and again under $15.
<unk>.
Krotz Springs Wood.
No backwardation or contango I E zero mutual which have now I know we are in backwardation of this amazing.
And $1 backwardation, I know that but under $15 and with the cost structure we have.
The reason being normalized numbers and Midland being a zero no differential.
We are we think that we can generate $500 million.
EBITDA refining only.
So take $15.
With the cost structure that we have today.
And Wink to Webster Theres no burden on refining so I don't know why why there would be burden on refining with dropdown.
And.
With Midland Zero F.
Uh huh.
CMA of zero, which right now.
The data so it worked against US what in our mind $500 million I don't know Blake if you want to add anything to that Glenn the only thing I would add and I think you and Doug were asking about mid cycle earnings power of last quarter.
If you go through this quarter and isolate refining EBITDA and you kind of back out the headwind from Midland Contango natural gas etcetera, we generated about $50 million to $60 million of EBITDA and obviously I think the messaging there are $10 breakeven seems to be holding up.
As he said I think as you kind of escalate toward more of a $15 rent adjusted crack on a mid cycle basis. The earnings power of refining is going to exacerbate.
Exacerbate quite quite dramatically.
Got it I appreciate that so the nuance there is that the $500 million of mid cycle EBITDA it depends on a normalized rate environment.
I hope we get back there one day.
Yeah.
Now, let's be honest, it's not normalized.
And the cracks will go up but also we do not in that number we did not include the SRU, which.
<unk>.
Anybody can assume whatever they want.
But if we're getting them year after year. After you I don't think that we should assume that we won't get them.
Got it thanks for that clarification.
The second question is on the strategic rationale of Delek logistics.
It's really a question about.
Governments, so the pushback that we get.
Is that.
The free cash flow.
Free cash flow capacity of the refining business had been burdened by the fixed costs that had been added to it by E Mail.
So and it's wrong.
He doesn't pay a dividend, but detail that was done.
And that raises the concern about the governance, where management own a little bit of both entities, but may be influenced by the dividend next where it gets paid out we're sure a lot of this came up in the coffee deal meeting.
And the challenge you on a number of things, but I think the market, but like to hear you got disrupted.
Well I don't know that management is being.
Our compensation as management is largely.
Vis vis decay.
Very little people or very small group of people with very loose are being compensated if anything around.
So I don't know that.
If there is anything that impacts.
Management would go decayed or anything like that this is the typical structure that we have a spot where the sponsor MLP now please remember.
<unk> serves very well with the cost of capital So VK very well with all these dropdowns that allowed us over the years to take that cash pay dividend and buy shares at the dk level. So I don't know where it's coming from that.
Debt.
D Gayle.
Our management favorite TK also the ideas were eliminated 18 months ago, So I'm not sure.
What concerns there are if anything I'm, a little surprised with the question.
Not an easy one to answer but I appreciate the answer thank you.
The next question comes from Jason <unk> from Cowen. Please go ahead.
Yeah.
Good morning, Thanks for taking my questions.
A couple of quick ones it seems like a lot of.
The very material stuff has been covered first John sweet to sour switching it.
It seems like some of the impact from higher natural gas prices weakening sour depths gives you discuss your ability.
To switch between.
Midland and WTS crude and if you capture.
That that full depth or if there is.
An offset in terms of the yield and then the second one just a clarification on your cash flow numbers I think you had discussed.
Getting our cares act benefit and three Q.
Did any of that come through or has that moved to <unk>. Thanks.
So Jason this is Todd I'll take the first part of that.
In regards to the sweet to sour.
Obviously, the market's moving right now so we're not going to go heavily into detail around exactly what we're executing just simply because it's obviously very commercially sensitive information, but suffice it to say again that we have the kit on the ground between dk al in between the refining assets to be able to optimize around those streams <unk>.
Sure 100% of that uplift.
And in reality the natural gas is not really a headwind when you look at that it's already kind of factored into that based on what we're running today. So.
Incremental uplift I think is what you would assume.
Can you maybe tell us how much power.
Sure you run at the maximum level of kind of what the range is that that you can do.
While it depends of asks reversing a couple of pipelines.
We own we.
We have not made that decision.
Obviously, if it persists, we'll do that but remember, we're just coming out of the pandemic right now and the activity in Midland.
Just now picking up so give it some time.
Two the sweet barrels to come back to the market I know that everybody. Thank Jeff, let's do it in six months, where it was but that's not how you run a business.
Our outlook for the.
The production over the long term is that the Permian will continue to produce.
A high level I know that the pandemic put hold into that for the last couple of years, but give us some time.
The activity will pick up.
And Jason just to quickly answer your question on the tax refunds.
That was received and booked within working capital. So that is reflected in the in the cash flow waterfall that's on page four.
Thanks.
Again, if you have a question. Please press Star then one.
Our next question comes from Paul Cheng from Scotiabank. Please go ahead.
Hey, guys good morning.
Maybe it's a chat me.
Now let me.
And my condolences to you and do we spend on the television we need sorry to hear that news.
You see a number of quick questions.
First maybe.
What is your natural gas.
<unk> sensitivity to the Opex.
And also the margin catch away or they don't appear to have changed.
Hey, Paul Farrell basis.
Paul It's Blake.
Ill tackle that so basically every dollar per mcf equates to $20 million of annual.
Sensitivity or impact for natural gas and the corresponding impact of that for US is roughly <unk> 50 per barrel distillate crack move.
Would essentially offset that so in this environment, where youre seeing escalated in gas prices. The distillate crack move we've seen has been more than enough to offset that so we will take higher prices on operating cost any day to get a higher margin like we're seeing.
Hey, brain 20 million years, Oregon, Opex pop out in.
Margin catch it seems that you consume natural gas for a hydrogen plant hydrocracker or hydro treating so.
Peaceful at a margin capture.
Paul It's de Minimis, there is a very small amount in El Dorado, and it's frankly, not a as less than $1 million. So basically it's all.
And the Opex lines.
Right right.
Secondly that.
Can you share with us that what is in the third quarter.
The green Mark to market gain.
That you booked and also that once it stay at Carlin.
<unk> sitting on the balance sheet at the end of the third quarter.
The RVO liability funding.
Okay.
For the reasons, we never disclose that we consider that part of our ongoing business. Obviously, we are not building positions out one way or another.
Because that's not our business model, but if we are long or short a little bit here or there we are not disclosing to the market.
Okay, that's part of our ongoing business.
Sure can you tell me what yes.
Third quarter.
Net win.
<unk> expense or <unk> <unk>.
Net of the Mark to market, then you're going to.
2021.
Expense, what's that number.
Paul we don't disclose that we just historically have not given that so unfortunately I don't have that data to give to you man.
Alright.
And then two final questions.
You see I think Youll deal about are we finding has been changing somewhat over the past.
So yes, I think at one point you were.
Aiming to create a way finding capacity to get that type of economy.
Economies of scale and I think in the last quarter I think the question do we see it.
I'll say I'll make it that you are not going to focus on that any more.
That's a lot of quite a number of fondly uplift that we get the Gulf coast. So how's your view today.
Think that you'd still be interested in expanding their refining capacity cole inorganic means or that.
We meet that that's no longer part of our strategy.
And then the final question you said.
With no gathering system, what you heard from your customer.
Permitting in terms of their activity level over the next say six to 12 months.
Any insight you can say, yes, absolutely I'll take the last the second one first because it's easy we hear from every producer that theyre going to increase their activity.
Every producer to the T and on top of that new producers are signing up for that acreage dedication to <unk>.
Coming to the system. So the activity is picking up certainly I mentioned that on the detail.
Cole dot.
We think that we would see we would get to the towards the MVC bye.
<unk>.
Second part of next year of 120, which is an increase of 50%.
Versus what we have right now so.
That's an easy one on the on the other one which is a little more or a little longer.
Asked a great question and we need to wait in several factors.
Factors here first the energy transformation second about the fact that we think that our company too small it is still small, but and we need to grow third the fact that we have now.
Back to our free cash flow.
Fourth if we buy a refinery can we improve the operation and what is the sustainability of that refinery long term in light of what's going on with the ESG. So all of these factors are being considered.
Look at the future and we do.
Buying a refinery it's not like buying 10 shares tomorrow.
Marketplace, that's a strategic decision that we need to weigh into our into our metrics and we look at that almost on a daily basis.
Two.
To take the next strategic step for our company.
You say you do fun, a white candidate that you want to deal would be willing to acquire what is the maximum leverage that you were now teekay to go to.
Yeah, I don't think Thats the case should go or.
On a normalized basis more than one hour time, that's ex the decade. So if we look at the.
Net debt for Dk is now 500 million of roughly $500 million.
We want to I don't think that we should allow this to be more than one <unk> on a normalized basis now.
If there's an acquisition and then all of a sudden it we've done a deleverage.
Over a year or two that's fine, but long term I don't think that.
We should be above that one off that mid.
Mid cycle.
Alright, thank you.
There are no more questions in the queue I would like this concludes our question and answer session I would like to turn the conference back over to Uzi, you mean for any closing remarks.
Jason Thanks for hosting US this morning, I'd like to thank everybody that participated in the call on the call I'd like to have.
My colleagues.
Colleagues around the table thinking them for.
Making this company what it is obviously, we all mentioned Louis and his family. Please keep him in.
Our thoughts and prayers.
But mostly I'd like to actually I want to thank our investors and board of directors, but mostly I'd like to thank.
The employees of this company, who makes it will make it the great company. It is we'll talk to you soon have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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