Q4 2021 HollyFrontier Corp Earnings Call
Information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript and with that I'll turn the call over to Mike Jennings.
Greg Good morning, everyone two.
2021 was a momentous year for Holly frontier first and foremost I want to recognize our employees for their commitment to safety. Despite the.
Continuing challenges of the COVID-19 pandemic, the reportable injury rate for employee and contractor workforce was a record low for Holly frontier.
We delivered solid financial results led by record earnings in our lubricants segment advanced our renewables projects closed on the Puget Sound acquisition and announced our plans to acquire Sinclair.
We believe the combination of these strategic initiatives will enhance our value to shareholders over the long term.
These investments are significant both in terms of capital and for our people are.
Our team has taken these strategic initiatives head on and remain committed to execution.
Turning to our fourth quarter results, we reported a net loss attributable to Holly frontier shareholders of $40 million or <unk> 24 per diluted share.
These results reflect special items that collectively increased net loss by $22 million.
Excluding these items adjusted net loss for the fourth quarter was $18 million or negative <unk> 11 per diluted share versus adjusted net loss of $119 million or <unk> 74 per diluted share for the same period in 2020.
Adjusted EBITDA for the period was $126 million, an increase of $148 million compared to the fourth quarter of 2020.
The refining segment reported EBITDA of $25 million compared to $8 million for the fourth quarter of 2020 and consolidated refinery gross margin was $8 70 per produced barrel, a 116% increase compared to the same period last year.
This increase was due to higher margins driven by strong product demand for transportation fuels as we continue on the path to recovery to pre pandemic levels.
Fourth quarter crude throughput was approximately 421000 barrels per day.
Below our initial guidance of $4 50 to 470000 barrels per day due to heavy planned and unplanned refinery maintenance and weather related downtime during the quarter.
Our lubricants and specialty products business reported EBITDA of $75 million compared.
Compared to $49 million, which is before the goodwill impairment charge of $82 million in the fourth quarter of 2024.
For the full year 2021, our lubricants and specialty business achieved record financial results of $331 million and adjusted EBITDA led by strong margins for base oils throughout most of the year.
Holly Energy partners reported adjusted EBITDA of $80 million for the fourth quarter compared to $88 million in the fourth quarter of last year.
Despite the planned turnaround and unplanned maintenance at Holly Frontier's Navajo refinery.
<unk> delivered another quarter of strong operational performance and financial results.
<unk> maintained district distribution in 2021 and ended the year with a coverage ratio of one eight times and continued its deleveraging strategy repaying over $70 million in debt and bringing etp's leverage to three nine times.
Looking ahead within our refining segment for the first quarter of 2022, we expect to run between 490 and 510000 barrels per day of crude oil crude oil. This guidance reflects the impact of weather related downtime at the Puget sound refinery.
A scheduled turnaround at the Woods cross refinery as well as maintenance activities at the Navajo refinery throughout the first quarter.
We believe that demand for transportation fuels will continue to strengthen as the global economy recovers from the pandemic.
Within our lubricants and specialty products segment for the first quarter of 2022, we expect seasonal improvement in earnings and a continued shift in mix toward rack forward from rack back.
We expect base oil prices and margins to continue to decline through the first quarter as base oil supply continues to recover.
In 2022, ATP expects to hold the quarterly distribution constant at 35 cents per unit or $1 40 on an annualized basis.
<unk> remains committed to its distribution strategy focused on funding all capital expenditures and distributions within operating cash flow and maintaining distributable cash flow coverage of one three times or greater with the goal of reducing leverage to three <unk> to three five times.
In our renewables segment, we're pleased to announce that the 6000 barrel per day Cheyenne <unk> is now fully operational and we are aligning the unit out to produce on spec product.
<unk> Pretreatment unit is expected to be completed in the first quarter of 2022, and the Artesia <unk> is expected to be operational in the second quarter of 'twenty two.
Once completed we will have the ability to produce approximately 15000 barrels per day of renewable diesel with advantaged feedstock sourcing and flexibility through our own pretreatment unit.
We ended 2021 with a robust financial foundation and bright prospects for continued growth and value as.
As we look to 2022, we're focused on one thing.
Execution.
Execution will be critical as we ramp up to serve a recovering economy startup our renewable diesel operations and work towards the closing of the Sinclair business acquisition and subsequent integration after the closing.
With that let me turn the call over to rich.
Thank you Mike.
Previously mentioned the fourth quarter included a few unusual items.
Pretax earnings were negatively impacted by acquisition integration costs of $16 million.
The lower of cost or market inventory valuation adjustment of $9 million.
And charges related to the Cheyenne refinery conversion to renewable diesel production of $3 million.
A table of these items can be found in our press release.
Net cash used for operations totaled $333 million in the fourth quarter, which included $98 million of turnaround spending and $320 million of working capital headwinds.
Both planned and unplanned refinery maintenance reduced throughput, which was the single largest driver of the working capital consumption.
We expect to recover $150 million to $200 million of this working capital as refinery operations normalize and this will take us into the second quarter to fully recover.
Holly Frontier's Standalone capital expenditures totaled $254 million for the quarter and $725 million for the full year 2021.
As of December 31, 2021, our total liquidity stood at approximately $1 6 billion.
Comprised of a cash balance of $234 million, along with our Undrawn $1 35 billion unsecured credit facility.
At December 31, we have 175 billion of stand alone debt outstanding with a debt to cap ratio of 24%.
And our net debt to cap ratio of 21%.
We anticipate recovering $83 million in cash tax benefit in 2022 from the loss carryback potential under the cares Act.
ETP distributions received by HFC during the fourth quarter totaled $21 million.
Holly Frontier owns 59 6 million ETP limited partner units, representing 57% of Hep's LP units and a market value of over $1 billion as.
As of last night's close.
With respect to capital spending in 2022.
We continue to expect spending between $250 million to $270 million of Holly frontier refining.
$225 million to $300 million in renewables.
$45 million to $60 million at Holly frontier Lubes and specialties.
And 70% to $100 million for turnaround and catalyst.
At ETP, we expect to spend $15 million to $20 million for maintenance capital.
$5 million to $10 million for expansion capital and 35% to $50 million and refinery processing unit turnarounds.
Beginning in the first quarter of 2022, Holly Frontier will report a new renewable segment that will contain all financial information related to the renewable diesel units at the Cheyenne and artesia facilities as well as the Artesia Pretreatment unit.
And with that we're ready to take questions.
Thank you the floor is now open for questions. At this time, if you have questions or comments. Please press star one on your Touchtone phone, we ask that you. Please limit to one question and one follow up.
You have additional questions with welcome you to rejoin the queue.
Can you play to your questions asked and answered.
Sir you may remove yourself from the queue by pressing star one.
Thank you. Our first question is coming from Alicia Chung from Barclays. Please go ahead.
Morning.
Thanks for taking my questions I guess first if we can.
Go over it.
Progress on the Sinclair deal and where you are in terms of working with the FTC.
Given your comments yesterday from the HCP call of that monarch delayed the closing and can you just talk about what's driving that.
Yes.
This is Mike.
We are working with Sinclair closely and collaboratively to satisfy all the closing conditions. The principal gating factor at this time is the FTC process.
We're obviously cooperating with the FTC and Sinclair is working closely with us to obtain that clearance.
We expect to close transaction as soon as we can and at this point, we still expect closing in 2022 as we've said previously.
We don't have update beyond that.
Got it.
And then maybe turning to Puget given the volatility in the fourth quarter and still from downtown reflected in first quarter and can you just talk about your outlook for the asset from here and if we need to lay in <unk> coming online further postponement of that does that change.
The economics.
Crude outlook for the area in general.
Yeah. Lisa This is Kevin let me take a shot at that.
We were disappointed that the Puget sound refinery had some unplanned maintenance in the first 90 days that.
We owned it but it does not change our outlook for the profitability of that refinery.
Puget Sound got impacted by three weeks.
The crude pipeline.
<unk>.
Event that occurred in the fourth quarter is as you guys may have heard.
It was then followed by a record freeze event that occurred under freezing temperatures for basically seven to 10 days.
That basically impacted the operation and still carries into.
The first quarter as Mike mentioned in his prepared remarks, but none of that changes theyre all isolated events nothing that changes our long term view of Puget sound. We still think it has a mid cycle EBITDA of $150 million to $200 million.
And we believe that.
We are still in that mid cycle.
Or above mid cycle conditions for the rest of the year.
So if you look at that on an annualized basis, we still think that Puget sound will deliver that.
Most of the delayed <unk> now we've got loans based on the existing <unk> that is providing us.
With a large portion of our crude.
Today, the rest we bring in overall the waters through our through our dock and we believe that the delay is market impact our long term outlook on DSO.
Thank you.
Okay.
Your next question is coming from Paul Cheng from Scotiabank. Please go ahead.
Hey, guys good morning.
Hi, Paul.
Rich I think in the past you have been talking about a capital we plan to share with us.
Paul you had up to $1 billion in.
In the 12 months after first quarter I would say.
Can you given an update given the market condition and also seeing K is being delayed.
And also just some quite frankly that operation has not been living up to expectations at least doing that first 90 days.
Paul.
Thanks, Jim.
That's the first question.
Sure Paul So I don't think Theres any change to our capital return plans.
Consistent with what we announced at the time of both the Puget Sound and then the Sinclair acquisition, we expect to reinstate the dividend in may at that 35 per share level.
And we expect to then return of $1 billion of cash in total inclusive of both dividends and repurchase.
Into the first quarter of 'twenty, three and then the long term, we think a 50% payout ratio.
And the combination of dividend and repurchase is appropriate for a business like ours.
So Jason those dosing.
They could be because I think David sneak the expectation is that you may be able to close to <unk> by mid year.
Doesn't look like that's likely.
And so if thats further delayed beyond 2022 does that change the way how you look at the capital return.
Paul I don't think it does.
Okay.
And.
Second question.
Can we go back into the picture some operating issue.
Fourth quarter needs, we can understand you'll have a subsidy what your temperature, which.
From what I understand that that happen in at least the last 40 years, plus and then you have.
Chubb's Monotype.
But you're still into January that you'd have to hydro cracker PA and northern.
All of that the Qualcomm maybe.
Can you tell us that I mean, whats, causing that first quarter downtime.
And what is the game plan.
That too perhaps that to make the operation to be better than <unk>.
Quite frankly.
In your prepared remarks, you talked about execution for.
For the past.
Seven years I think the CEO is all about execution.
Most important.
Hydrology for their company, but unfortunately changed Tonight.
The company has been get Keith.
<unk> bye.
A <unk> issue.
So what gave you the confidence that this time you would get your advice.
That's a loaded question Paul Thanks.
As a starting point.
The issue in Puget sound.
Was was weather induced and the remaining issue.
Pertains to the Coker unit and a compressor that ifs.
Effectively needed major maintenance following damage by the weather.
So that is Tim to this point, if you want to take it from there yes, let me jump in.
Paul on this and then I'll turn it back over to Bob.
I can tell you that that issue has been resolved and so when we say that the Puget sound issue will carry into the first quarter. It has.
<unk> been resolved now and we are in the process of returning to full rates of Puget sound.
But it has impacted the first quarter.
And I guess beyond that.
We operate a network of inland refineries, where the degrees of freedom.
During unit downtime are pretty limited and so we get at the operational results matter, perhaps more in that context.
Then plants that they are among our coastal network.
And so effectively we have to be better and we have had operational issues, obviously affected our fourth quarter results and.
And we've told you they will roll into the first.
But we have people on the ground and asset strategies, I think that carry us forward towards improvement.
<unk> is going to be.
In the future results more than what I say on this call. So I think I'll leave it at that but we certainly put a high priority on it and we're working the issues heart.
Okay.
Thank you.
Okay.
Okay.
Your next question is coming from Silicon from Jpmorgan. Please go ahead.
Yes.
Yes, Hey, good morning, Thanks for taking my questions.
The first one rich.
Can you just talk about how you expect the cash balances to progress.
First half of this year.
You mentioned working capital tailwind as you mentioned the cash tax benefit at some point in 'twenty two.
I'm, just trying to think about getting back to those cash levels of $500 million.
That would then allow for the dividend statement.
Sure Phil So look obviously, we're going to have a hard first quarter.
Take this in pieces.
We would expect to see renewables really delivering.
On the income statement the cash line in the second half of this year, obviously as we ramp things up through the first half, we're not going to see a lot of cash generated there.
We clearly expect our refinery performance to be significantly better starting with the second quarter.
Which will clearly generate a lot of cash both from earnings as well as a recovery in working capital.
So that gives us the comfort around the dividend in the second quarter to your question on.
The tax refund.
We are extremely frustrated at this point to be honest.
The government is still not back in the office and their speed of work reflects that.
So we are diligently working this issue.
Hi al.
It's not in our control to be honest.
We obviously expect that to have this money back nine months ago. So.
So really I think to your point, we would expect that second quarter is when we'll really start seeing cash start to accumulate and that gives us comfort around the dividend number in particular.
And it's still correct in saying that the minimum target cash would be the five year Mark.
Yes, I think thats a good target I think as we were doing some of this work now as we close and integrate Sinclair I would expect we will seek more liquidity probably through an expanded revolver, but that $500 million target cash balance will remain.
We still think Thats, a good number and then expanding the company.
Yeah.
Okay. Okay.
Follow up would just be on some of your comments you just said in renewable diesel and with the startup and now that we're almost two months through this first.
You said you didn't expect mentioned the contribution in the first half.
Yes.
I guess as we look at the first quarter would you say that.
Startup costs and things like that that you are trending towards positive EBITDA.
Should we.
I'd be thinking that they're.
Starting with expenses and things.
Make that.
It takes some time.
No I think it's going to take a little while so I would expect small negative EBITDA in the first quarter, probably end of the second quarter to be honest.
We're being very careful and I'll ask Tom to chime in on how we start these units up obviously, we've seen others have major issues.
So were baby them, a little bit if you will but we think that's the prudent way to approach. This so that we have the earnings power in the next several years.
Yes, Phil this is Tom just to.
Richards comments, we are going slow on purpose.
These are somewhat new units to us, although we understand hydro treating process from the refinery operations business still something new for us. So we're going slow we want to do it right and we want to do it one time and Thats our goal here.
As you can appreciate as we start up a new business.
We have virtually no volumes in the tanks of renewable diesel that we're going to have to build up we're going to have to get working stock in place.
Before we can even look at entertaining sales to customers. So that does take some time and some of it's going to extend.
Even though that we're running it is going to extend the period of time until we can generate revenue. So it's going to be a slow process.
Got it.
And the Sinclair have their pre treatment.
Sinclair and pretreatment start up thank you.
To the best of our knowledge.
<unk>.
As just public information is that Theyre looking sometime between the second and third quarter of this year for startup.
Got it thank you.
Uh huh.
Your next question is coming from Roger read from Wells Fargo. Please go ahead.
Yes.
Alright, and then get the <unk>.
Microphone on the right place good morning, guys.
I would just like to maybe dig a little deeper and just how the renewable diesel startup process will go.
Recognize we've seen others had problems and you all want to be careful with it.
But as you look at running I.
I guess, maybe here's a question where are you in terms of running any kind of a feedstock through the units and getting comfort.
And where are you in terms of security of the feedstock.
Across all types.
Okay from a high level our Roger this is Tom.
First of all in the startup process, we have to heat up the units and we have to get them the warm and we do that by introducing hydrogen and once we reach certain temperature then we can start to introduce feed at <unk>.
Which time, then we start increasing.
The feed and.
And it's just a slow process, we just have to walk up these units very slowly and make sure all the instrumentation is working properly.
Levels are within the various units. So it's a slow process. So it's not like flipping a switch and these things run it usually takes.
Multiple days to get everything lined out and make sure that we're operating properties and we have stability at various temperatures throughout the whole units, both the reactor and the iphones.
In terms of feed.
Let me, we haven't had any problem whatsoever in acquiring feed.
For for Cheyenne Artesia or the PTU.
Has not been a problem we have secured some volumes to get it through.
The remainder of this year and even early into 2023 by long term contracts.
We don't foresee any problems going forward.
We still believe in our strategy of having the <unk> in place so that gives us more flexibility to buy different bids and we will continue on.
On startup to Dubai, the feeds that give us the highest return by balancing price versus carbon index.
Okay, Great. Thanks, and then just a final question for me on the renewable diesel side in terms of the Capex guidance and the original Capex guidance, what I would say original but the most recent which was $800 million to $900 million total.
Kind of where do you think youre going to come in at this point on Capex at the total level.
Hey, Roger it's rich, we will be within that range.
Okay, great. Thank you.
Okay.
Your next question is coming from Neil Mehta from.
Goldman Sachs. Please go ahead.
Okay.
Yeah.
Yes.
Now from Goldman Sachs. Your line is now open.
And your next question is coming from Connor Lynagh from Morgan Stanley . Please go ahead.
Yes. Thanks.
To stay on the on the feedstock sourcing question for renewable diesel.
Had said last quarter, you were kind of.
Evaluating options to participate.
Further up the value chain. So I'm, just curious where you are where your head's at on that any any options you've been exploring.
Sure.
This is Tom again.
We're currently tracking over 20, soybean oil processing plant investment opportunities that have been presented to Holly frontier.
We have been looking at strategic options opportunities two ways, either long term off takes our equity investments and we've had equity Brian I'm sorry.
Discussions are underway with possible counterparties.
Like I said before we want to offer to optimize the best Netback give us the most flexibility. So there is no shortage of crush plant announcements as you are probably well aware and we're trying to touch base with everything that comes across.
To see if it presents value for Holly frontier.
What type of criteria would you say are important to you and.
Determining that.
You certainly manage your feedstock independent of production.
On the refining side. So I guess the question is do you see the ultimate value creation shifting to that side or is it more of a hedge.
Basically.
What would make you want to invest.
More of a hedge its vertical integration so that it allows us to capture.
Profitability throughout the chain has a part to one one specific point.
Sort of along the same lines as the Pizza, you and why we entered into that market.
Just to pile on their counter look obviously, our criteria is returns against cost of capital.
Whether those returns come in the form of or dose reduction in price or return on the investment and we're just so far we have not seen returns that are clearing any sort of hurdle rate.
Which is pushing us back towards just an outright lifting or an offtake agreement.
Got it got it alright, thanks for the color I'll turn it back.
Okay.
Your next question is coming from Manav Gupta from Credit Suisse. Please go ahead.
Hey, guys.
More on inland refining seems like.
The cost a lot more now with some of the Ukraine crisis, and then Youre looking at Exelon, saying, they wanted to Oklahoma, and 25% of Chevron and 10% and all these guys and looking to excavate Permian BDC a scenario.
Hello.
Religion itself, a reemergence of some of these inland differentials as it looks like the rig counts I think sort of anything in the production is expected to go up in 'twenty two 'twenty three.
Yes, Manav. This is Tim ill take a first shot at that.
We've been pleased to see the the increase production in the Permian I think they hit over 5 million barrels a day here.
Here this last month.
Setting new records.
<unk> capacity is still greater than that so we still continue to see that dynamic playing out.
But certainly as the volatility and the rest of the world plays out.
The one uncertainty that seems to be.
Out there about the Permian production seems to be where most of the focus is on growth here in the U S and thats going to benefit us both in our mid continent refinery as well as our southwest refinery. So you've seen some short term blowout in the Brent Ti spread here just in the last day or so we don't expect that to necessarily.
Hold at these at these levels, but we do think that long term Brent Ti about $3 makes a lot of sense and if you look at the strip going out.
It seems like the market feels the same way if not even a little bit more bullish.
How much Permian can you run your system, if you could remind us.
While we run all our wholesale west refinery Navajo refinery runs on basically the Permian and then we can send.
Some additional.
Call It 50000 barrels a day down into our mid con.
Refineries are subterranean pipeline. So we've got good exposure of good optionality to be exposed to the Permian crudes.
Okay, and a quick policy follow up I think rich when you. Initially put out you are renewable diesel projections I remember very clearly you did not have BDC in 2023, and then we got to a situation with build back better than everything in tugboats zooming BDC, most likely will be extended now.
I understand from the policy perspective, there is a lot of support for BDC, but do you see a scenario like before year end, where BDC could be extended so it kind of takes all that uncertainty from Rd margins.
So manav.
Government Affairs perspective, if you will.
I think our view is that there is a lot of support for the BTC that we will see an extended in some former fashion consistent with the manner right Thats been done historically one of these last minute tax extender package.
Type events.
But to your point, our original project economics were not predicated on long term BTC.
But our long term expectation around BTC wasn't affected by building back better than it was at preceded that the political support for this extension. So we don't see those two as necessarily tied.
Thank you.
Yes.
Your next question is coming from.
Leggate from Bank of America. Please go ahead.
Hi, good morning, everyone not to sell student head start one more than months.
As Johan apparently.
Andrew Thanks for thanks for getting Montel's.
I hate to ask about from Sinclair, but I know you don't want to talk too much about it but I just wanted to ask a hypothetical question.
When Mark was trying to sell speedway.
Satisfied all of their filing requirements and we still didn't get a formal answer. So they went ahead and did the deal anyway I'm just curious.
How do you guys, where you guys out in the process of satisfying older.
On the back and forth on filing.
Well explicitly we have complied with the second request and we're in discussions with the staff.
And Paul Doug.
Doug I'm sorry.
Can't share more than that.
It's continuing conversation and our tactic tactics and strategy arent going to be public for this call.
But we expect this transaction to close in 2022, and we're really excited about it.
So that's as much as I will go ahead.
Yes, I apologize for asking it I just wanted to see if there was any additional color.
Maybe if I may.
Take two quick ones, one is micro and one specific tier and it's a follow up to two poles question about.
Operational improvement I'm, just curious when you think about Puget sound and Sinclair, who has the best operating best practice I'm thinking in terms of transfer of best practice, the Syncrude make wholly better this holding mixing clear Bachelor and some of the Puget Sound home, how do you think about the generic operational the line.
Ability of the go forward combined company.
Doug This is Tim let me take a shot at it I think I think the answer is yes to both questions.
Sound and Sinclair make Holly frontier, better and Holly frontier make Puget sound and Sinclair are better I think there are opportunities to.
So basically share both forward and backwards with each of these assets.
<unk> found as we've talked about before has a very talented workforce advair.
Advantaged assets.
Our growing market that it sits in.
Thank you.
Have a lot to offer Holly frontier, but I think we have some additional.
Things, we can offer them as well in terms of independent refiner mindset, a way to try to not have to work within a larger system, but try to optimize the asset within its within its individual region I.
I think theres a lot of opportunity there too to work together.
Sinclair.
<unk>.
We're still looking to close as you as you know so I'll limit my comments on Sinclair.
Sinclair has.
A very attractive market that they operate and they obviously have a very.
Different model and their branded marketing outlets that we will benefit tremendously from we're looking forward to.
Attaching that to our marching refining portfolio to take full advantage on the other hand, we think we have some systems and processes and people that we can offer to help Sinclair as well.
To try and get their assets to run better as well. So I think there's I think it goes both ways.
I appreciate the answer my last one guys as a micro one who wants to take this but.
We all remember the Golden age so so to speak back in 2000. My question is Europe , and Asia has gone very different natural gas supply dependency today than it did back then.
So I'm curious if Europe .
The European U S gas premium persist maybe not at current levels, but on a go forward basis, how do you how does that impact your thinking of let's say go forward mid cycle margins.
Okay.
Yes, we are.
Bullish on refining this year.
I think.
I think.
Natural gas is just one component.
That will.
That will continue to advantage the U S refining system versus the European One for example in this case.
We think.
LOE products supply if you look at inventories there five year lows right now in the U S.
We think there's going to be a heavy.
Maintenance and turnaround year associated with.
A lot of the majors in a lot of the other competitors out there already announced heavy maintenance workload this year.
As we've talked about before we do not have a heavy turnaround load for this year.
Aside from this.
Unplanned maintenance and then some smaller planned maintenance throughout the year, we're actually looking to be in pretty good shape to take full advantage of.
Of this environment and so we think we think this year is going to be at or above mid cycle. We think the natural gas situation will only.
Strengthen that and help that will help improve that whether that's going to persist I think it will depend on a lot whether that geopolitical risks out there play out or not.
Yes of course, guys. Thanks for taking my questions I really appreciate it.
Thanks, Doug.
Your next question is coming from Neil Mehta from Goldman Sachs. Please go ahead.
Great can you guys hear me okay.
Yes, yes, Sir Okay, sorry about before so hey look.
Product inventories in pad two I'd be curious on your views.
Mike and team.
We see that happen from time to time in the winter, where the inventories do get elevated relative to rest of the country and then you work through it.
But it is notable that the mid con margins are a little bit softer than.
And then other pads just your observation there and is this anything we should be concerned about or is just normal seasonality.
Now let me, let me take a first shot.
The mid Con inventories are definitely high right now, we do attribute that to seasonal.
Behaviors, we see this typically every winter we don't think this will be any different.
We obviously again think that the summer is.
Going to be.
Strong in the mid Con certainly mid cycle or above despite the higher inventories that we're seeing today.
Alright.
That's helpful. And then just your thoughts on on shape of curve with the time spreads being so <unk>.
Strong right now up at the front.
Given all the geopolitical stuff just your thoughts on how that affects capture rates.
A market structure.
And is that something that we should think of as a deduct relative to.
To the margins.
Yes.
Youre right on there Neil the steep backwardation is not helpful from a capture standpoint, but we obviously would prefer a contango shape market, but that's not what we've got and for the next few months it looks like we are.
Can it continue.
To face some higher than normal degradation here with all the geopolitical risk that's out there.
So yes, you should factor that in your models, but we don't think.
We do think it's going to widen back out here the rest of the year, Yes, I think I'll jump in and that is to add perhaps the obvious but the the product cracks even even RVO adjusted are seasonally strong.
If you look at mid Con as an example, they are depressed relative to the remainder of the country.
But still pretty decent for our February timeframe for gasoline if you look elsewhere in the country other served markets.
It's certainly better than I think what we're seeing is.
Either a snapback or a steady road back from Covid that you're seeing it in vehicle miles traveled you certainly see it in distillate demand and inventories.
And so well backwardation hertz capture the overall level of product margins pretty good and as we look forward into this year, we expect it to be a strong financial year.
For our sector.
Okay, Great perspective, Thank you Mike.
Sure.
Yes.
And your next question is coming from Jason <unk> from Cowen. Please go ahead.
Okay.
Good morning, Thanks for taking my questions.
Two on the renewable diesel business first.
Our financial projections I think when you sanctioned.
The renewable diesel projects that was a $165 million.
Annual free cash flow forecast is that still the right number there has been a lot of moving pieces with environmental credits.
Im wondering if thats the right number excluding the BTC.
And then secondly, just on thinking about.
M&A on renewable diesel you mentioned.
Tangela looking to take an equity stake in <unk>.
Upstream business is there a market for you to potentially sell a stake in your.
Renewable diesel project once you get it up and running and Louis conversations you've had or maybe you could discuss potential.
Interested parties or types of parties that that could be out there. Thanks.
Hey, Jason it's rich.
So a high level look there are some puts and takes as you mentioned.
But I think those that free cash flow and our earnings projections.
Remain the same with respect to renewable diesel obviously, we expect to see those second half of 'twenty, two and really going into 'twenty three.
BTC looks like a tailwind.
In the near term El CFS is probably a little bit of a headwind, but we are very bullish on that market in the long run.
With respect.
M&A look we are focused on executing the projects we've got in front of us.
Theres really nothing to speak to no activity to speak to here.
But look we are always open to anything that will create more value for our shareholders.
Yes, Jason This is Tom Yes, we've got a busy road ahead of us.
Not only starting up our own units, but integrating the Sinclair facilities can make it one.
Happy family of contiguous product.
Got some optimization to do <unk>.
<unk> the acquisition of Sinclair. So we've got a full plate from a renewable standpoint, so to rich's comments, we really haven't looked at any kind of potential of spinning off the renewables or spinning off an equity share in it.
Sure.
Thanks.
We once again if you do ask a question you May press star one on your Touchtone phone.
Your next question is coming from Paul Cheng from Scotiabank. Please go ahead.
Mike just a two quick follow up.
Just curious that the.
The.
So I am just wondering.
For today.
Today's economics that you're kind of making money.
That facility.
And also Todd.
In the long haul.
Gain panful of that pit sets I mean, how do you look at yet do you want to deal with substantially more.
Capacity or that.
This is we need one off because of some opportunity you see in <unk> and also with Cheyenne and so you would just stick with the existing operate this two facility and the <unk> unit, but not when they expand so one thing is the longest.
Gain painful updates.
Okay.
Yes.
Yes, Bob This is Tom create today's economics.
There's still a lot of factors.
We still don't have for example.
We don't have operating costs, our operating expenses, because we have yet to operate so theres a lot of unknowns.
It would still be profitable.
Today's circumstances.
We're seeing some headwinds.
Youre aware through lower <unk> prices. However, we don't expect those to continue.
So the long term and that's not we're not we didn't build these units on today's economics, we built them over 20 year economics. So we think over the long run they will be profitable and we hit our.
Financial targets.
Yeah, Paul looking forward within our renewable segment.
What we would say is we have a lot on our plate right now to get these projects completed and businesses up and running as we've constructed them.
With that said, we also like to look forward.
And tried to participate in future.
Future profitable opportunities.
Most likely those would be in and around our existing asset facilities, meaning.
<unk> field, but as of today. The focus is critically on the three assets that we're building and bringing up to operate.
Thank you.
Okay.
Your next question is coming from Phil Gresh from Jpmorgan. Please go ahead.
Yes, Thanks, sorry, I just had one follow up on lubes.
With your commentary around the rack back.
And some of the headwinds there with great too.
They were starting to see here in the first quarter relative to what we saw in 2021, just curious how youre thinking about rack forward.
And the potential benefits, there and sometimes in the past you've been willing to give a range of guidance for what you think rack forward could be.
Curious if you have any thoughts here on 2021 was that.
Different kind of year Directionally.
Yes, Phil This is Tim let me take a shot at that.
Last year was a very strange year.
Market fluctuations between rack, Florida rack back as you saw it's continuing into this year.
It's why we didn't provide any guidance on this year for rack forward in fact, I think what we would tell you is we still believe that our lubes business as a $250 million EBITDA business and a mid cycle environment and we would tell you that for 2022, we expect the year to be at or above mid cycle.
On a combined basis and Thats, probably excuse me that's probably how we would suggest you look at the lubes business for this year.
We are seeing some base oil margin compression starting to show signs of happening that will allow the rack forward business to return.
To more normal conditions, but at the same time, we're hearing of.
Unplanned events.
And heavy turnarounds and the base oil producing.
Market here, especially in the U S that we think will continue to keep base oil prices tight.
At the same time, we're seeing recovery in our rack forward business and we think that business will continue to strengthen and so we're optimistic.
Certainly here in the first half of the year.
That we're going to see above mid cycle.
Profitability from our lubes business.
Okay got it that makes sense. Thanks a lot.
And there are no further question at this time I will turn the floor back over to Craig for closing remarks.
Thank you operator this is Mike.
And thank you all for participating I'd like to wrap up the call. This morning, emphasizing a couple of points.
First is that the fourth quarter included some significant operational challenges many of which were brought about by extraordinary weather, but all of which we own and need to manage on one hand, they will recognize the major events made by our team to recover from these issues and on the other I'm going to say that my expectations are.
Better reliability and throughput.
You'll note that with respect to employee and contractor safety. Our 2021 year was the best ever for our company and our recordable injury rate was less than half of the industry average. This is a reflection of what we're achieving on the ground.
We're nearing the completion of our renewable diesel investments and look forward to the transition from project management to operations management. This is a really exciting new venture for our company and I believe it's going to be attractive business for our owners.
And the final point is that.
The Sinclair transaction is truly transformative for Holly frontier, it's an incredibly exciting time for us and well the lag from announcement to close may take some of the limelight away from this deal.
Internally, we are working really aggressively planned for the closing and the integration and we continue to view the combined company as strategic and compelling as an investment a supplier and an employer.
So thanks, all for participating today, and we look forward to talking with you again.
Thank you. This concludes today's teleconference. Please disconnect your lines at this time and have a wonderful day.
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