Q1 2022 HF Sinclair Corp and Holly Energy Partners LP Earnings Call
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Please note that this conference is being recorded it is now my pleasure to turn the floor over to Craig Biery, Vice President Investor Relations Craig you may begin.
Thank you Chantelle and good morning, everyone and welcome to Hff's Sinclair Corporation in Holly Energy Partners' first quarter 2022 earnings call.
This morning, we issued a press we issued press releases announcing results for the quarter ending March 31 2022 if.
If you would like a copy of the press releases you may find them on our website that HFF Sinclair Dot com and Holly energy Dot com.
We proceed with remarks. Please note the safe Harbor disclosure statement in today's press releases.
In summary, this says statements made regarding management expectations judgments or predictions are forward looking statements.
These statements are intended to be covered under the safe Harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings.
The call also May include discussion of non-GAAP measures. Please see the earnings press releases for a reconciliation to GAAP financial measures.
And please note any time sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript and with that I'll turn the call over to Mike.
Thank you Greg Good morning, everyone. The first quarter of 2022 was transformational as we closed on the acquisition of the Sinclair companies' marketing the new HFF Sinclair and.
And we made our first sales of renewable diesel from Cheyenne.
Our combined integrated platform delivered strong financial results led by the performance of our refining and lubricant segments.
We reported first quarter net income attributable to HFF Sinclair shareholders of $160 million or <unk> 90 per diluted share.
These results reflect special items that collectively decreased net income by $16 million.
Excluding the items adjusted net income for the quarter was 176 million or <unk> 99 per diluted share compared to net loss of $85 million or negative <unk> 53.
Per diluted share for the same period in 2021.
Adjusted EBITDA for the current quarter was $377 million, an increase of $329 million compared to the first quarter of 2021.
With the closing of the acquisitions of the Puget Sound refinery and Sinclair and our renewables business approaching full operation.
We're pleased to announce that the first milestone in our capital allocation plan.
The HFF Sinclair Board of Directors has declared the reinstatement of the regular quarterly dividend at an increased rate of <unk> 40 per share.
This announcement reflects our commitment to our capital allocation strategy of returning $1 billion in excess cash to shareholders over the next 12 months with the long term target of returning 50% of our net income to shareholders through dividends and buybacks.
The refining segment reported EBITDA of $208 million compared to $134 million for the first quarter of 2021, and adjusted EBITDA of $208 million compared to an adjusted loss of $65 million.
This increase was driven by higher sales volumes from the Puget sound and Sinclair acquisitions, as well as the impact of stronger product demand and gross margins.
Consolidated refinery gross margin was $12 69 per produced barrel, a 59% increase compared to the same period last year.
First quarter crude throughput averaged 525000 barrels per day.
The renewable segment reported adjusted EBITDA of negative $25 million.
In total sales volumes were approximately 5 million gallons for the first quarter of 2022.
The Cheyenne renewable diesel unit was mechanically complete in the fourth quarter of 'twenty, one and fully operational in the first quarter of 2022.
The pretreatment unit PTU at our Artesia, New Mexico facility was completed and fully operational in the first quarter of 2022.
And the Artesia argue is expected to be complete in the second quarter of 2022.
Also effective with the Sinclair acquisition that closed March 14th.
The renewable segment includes the Sinclair our Du.
We will continue to ramp up production and optimize these assets with the expectation of moderate modest positive earnings in the second quarter.
The marketing segment EBITDA was $6 million and total branded fuel sales volumes were 85 million gallons, representing a 7% margin per gallon for the first quarter of 2022.
We believe the addition of the branded marketing business provides a consistent sales channel with margin uplift for produced fuels and we remain focused on growing this segment in our existing geographies.
Within our lubricants and specialty products segment for the first quarter of 2022, we reported EBITDA of $145 million compared to $87 million in the same period last year.
This increase was driven by strong finished product demand and pricing initiatives that outpaced rising feedstock and energy costs.
<unk> reported EBITDA of $73 million for the first quarter of 'twenty, two compared to $96 million in the first quarter of 2021.
The decrease is mainly attributable to a $25 million gain on sales type lease accounting that was recorded in the first quarter of 'twenty one.
Looking forward as we head into the summer driving season refining fundamentals are very favorable due to strong gasoline and diesel demand coupled with low product inventories.
Together with our new employees, we remain focused on executing our strategy, which includes the successful integration of our new assets.
The realization of $100 million of synergies over the next two years ramping.
Ramping up production in our renewable segment.
And returning excess cash to shareholders. So with that let me turn the call over to rich. Thank you Mike let's begin by reviewing Hff's Sinclair is financial highlights as.
As previously mentioned in the first quarter included a few unusual items pre.
Pretax earnings were negatively impacted by acquisition integration costs of $25 million and decommissioning charges of $1 million related to the Cheyenne refinery conversion to renewable diesel production, which were partially offset by a lower of cost or market valuation gain of $8 $6 million.
A table of these items can be found in our press release.
Net cash provided by operations totaled $461 million.
Which included $45 million of turnaround spending $214 million of cash sourced from working capital.
Hff's Sinclair stand alone capital expenditures totaled $144 million for the first quarter.
As of March 31.
Hey, just unclear as total liquidity stood at approximately $1 $9 billion.
Comprised of a standalone cash balance of $592 million.
Along with our Undrawn $1 35 billion unsecured credit facility.
At March 31, we have $175 billion of stand alone debt outstanding with a.
Debt to cap ratio of 18% and a net debt to cap ratio of 12%.
In April we Upsized, our revolving credit facility due in 2026 to $1 65 billion from the previous $1 $35 billion.
In order to provide additional liquidity for increased operational scale.
ETP distributions received by HFF unclear during the first quarter totaled $21 million.
Hff's Sinclair on $59 6 million ATP limited partner units.
Which following the acquisition of Sinclair transportation represents 47% of Hep's Outstanding LP units at a market value of approximately $1 1 billion as of last Friday's close.
Yes.
Turning to some guidance items.
With the completion of the Sinclair acquisition, we have updated our expected capital guidance for 2022.
We now expect to spend between $240 and $260 million in refining.
Between 250 and $320 million in renewables.
$45 million to $60 million of lubricants and specialties.
15% to $25 million in marketing.
$90 million to $110 million at corporate.
And $110 million to $150 million for turnaround and catalyst.
At ETP, we expect to spend between 55% and $75 million in total capital.
At this time, we are suspending construction of the Sinclair Pretreatment unit till 2023 pending a review of project economics as well as other potential alternatives.
For the Cheyenne, <unk>, and Artesia Rd, and PTU projects, we remain on budget for our total capital spend of $8 million to $900 million.
With respect to tax we still anticipate recovering $83 million in cash tax benefit in 2022.
From a loss carry back potential under the cares Act.
With the closing of the Sinclair acquisition going forward.
The HFF Sinclair corporate tax rate is expected to be approximately 19% to 21%.
For the second quarter of 2022, we expect to run between 615 and 645000 barrels per day of crude oil in our refining segment.
This guidance reflects the strong underlying demand trends in our markets.
Impact on product margins from the global reaction to Russia's invasion of Ukraine and.
And a full quarter of contribution of the Sinclair and Casper refineries.
As Mike mentioned, we remain fully committed to our capital allocation strategy of returning $1 billion to shareholders over the next 12 months.
In addition to the reinstated a quarterly dividend of <unk> 40 per share, we intend to resume share repurchase.
Common stock under our existing $1 billion repurchase program in calendar 2022.
Turning to ACP on March 14th we completed the acquisition of some clear transportation company.
Upon closing consistent with Hep's business profile, we contracted the Sinclair transportation assets with 15 year fee based minimum volume commitment contracts, representing approximately 75% of expected revenue.
Our EBITDA guidance related to Sinclair transportation assets.
Remains unchanged at $71 million $80 million annually.
Yes.
ETP delivered another strong quarter of operational and financial performance overall volumes continued to improve representing an 11% increase quarter over quarter, and a 26% increase year over year.
These increases are mainly attributable to strong volumes in the Rockies region and contribution from the Cushing connect pipeline and terminal.
Additionally, we announced a <unk> 35 per LP unit quarterly cash distribution to be paid on may 13th to unitholders of record as of May 2nd.
For the balance of 2022, we expect to hold the quarterly distribution constant at 35 per LP unit or $1 40 on an annualized basis.
Turning to financial highlights for the first quarter net income attributable to <unk>.
<unk> was $49 6 million compared to $64 4 million in the first quarter of 2021.
For comparison, excluding a $25 million gain on sales type leases and an $11 million goodwill charge in the first quarter of 2021 net income was $58 million.
First quarter 2022, adjusted EBITDA was $85 $3 million compared to $88 million in the same period last year, a reconciliation table, reflecting these adjustments can be found in our press release.
ETP generated distributable cash flow of $64 $5 million with a quarterly.
Distribution coverage ratio of approximately one five times.
Which is reflective of the higher outstanding LP unit count as a result of the Sinclair acquisition.
During the quarter total capital expenditures were approximately $29 million, including.
Including $20 million in turnaround expenses related to our woods cross refinery processing units.
Approximately $6 million of maintenance capital.
And approximately $2 million of expansion capital.
Full year 2022, we expect to spend between 55 and $75 million in total capex.
Apprised of $30 million to $40 million of turnaround capital.
20% to $25 million of maintenance capital.
$5 million to $10 million of expansion capital and joint venture investments.
Which is inclusive of capex related to the recently acquired Sinclair transportation assets.
In April we issued $400 million of senior notes due in 2027 and applied the full net proceeds to partially repay outstanding borrowings under our credit facility.
We remain committed to our capital allocation strategy of 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 to three five times.
And with that we're ready to take questions.
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Thank you our first question.
Comes from.
Manav Gupta with credit Suisse. Your line is open.
So thank you, Mike and rich for keeping <unk>, you said, you will restart the dividend and linear in your deck. So thank you for that my quick question. Here is one you saw a very strong <unk>.
Bound in your refining earnings, but <unk> still had some lingering issues from <unk> you will not really running all out even in <unk>. We look at <unk> you have Puget sound running you have since net assets running and it looks like most of the stuff is up and running so when you look at <unk> and relative runs.
No downtime unplanned into Q should we expect them materially stronger Q, given the cracks that in that.
The fact that most of the planned and unplanned downtime is behind you.
Yes, Manav. This is Tim go I'll take a shot at that.
We are very.
Constructive on our second quarter outlook.
As you mentioned we've got.
Full quarter.
<unk>.
Sinclair contributions.
To look forward to in the second quarter, we have some maintenance activities that will occur in April and May.
But overall no major turnarounds and as you see them.
Throughput guidance that rich mentioned, we've got.
Over 100000 barrels a day more throughput that we expect to see in the second quarter versus the first quarter.
So yes, we see in the overall industry Manav.
Pre pandemic demand.
And post pandemic supply.
When you look at the.
The rash.
The rationalization that is taking place in the refining supply.
Capacity and you look at the.
The impact of the Russia, Ukraine conflict.
<unk> see an impact on supply in our markets, which is leading to the constructive market that we see in the second quarter.
Well take my quick follow up it is a very strong quarter again from yields.
If you could talk us through what drove that but the bigger question is.
One point you wanted to grow the loops business now you have got a lot of other pools, having news and sometimes what happens is as the business is not growing in a film it kind of becomes a little bit of a divestiture candidate and the reason Im asking is like you to think about it $100 million a quarter business in the past you have said multiple even with some facts.
Gauge like you could get it.
Question about your market cap in cash flow.
And build cash if you do decide to divest this business. So typically you could be doing like an MPC kind of speedway transaction here. So just trying to understand this was a business you wanted to grow now you have a lot more avenues is it still very core to you and if the right prices. There would you be open to looking at divesting your views.
And I'll leave it there. Thank you so much.
Yes, manav. Thanks for your question, obviously with the earnings power of lubricants and this apparent sustainability of that is a very attractive business.
Certainly for our owners.
And we still feel like Theres, some meat on the bone in terms of opportunities to improve that business grow it's finished lubricants.
What are proportionate the expensive base oil sales.
We think the wind in our sales here and we obviously look at all of our assets in terms of what they're worth to our shareholders versus their worth to somebody else, but our present intention is to try to grow this business and realize the opportunity inherent tenant.
Okay.
Thank you so much guys.
Our next question comes from Phil Gresh with Jpmorgan. Your line is open.
Yes, hi, good morning first question.
Just on the buyback plans you talked about obviously starting those back up later this year I was just wondering if there any particular goalpost youre looking for to decide specific timing around that if anything that would preclude us from considering that here in <unk>, given the strength and fundamentals where your cash balances stand today.
Hey, Phil it's rich.
I think the real time guidance, we would give you is we expect to return $1 billion of cash to shareholders over the course of the next 12 months.
We will look at to your point, our cash is growing and what the opportunity is and deploy accordingly, but.
Again, we would reiterate the point of $1 billion of cash over the next 12 months.
And just on the cash rich you talked about tariff was $14 million from working capital in the first quarter on the last earnings call you talked about.
Certain factors that we're going to drive positive working capital in the first half you also had the Sinclair close which I believe is supposed to have a working capital benefit can you just update us on where you stand other than the cash tax piece.
Absolutely so.
We picked up about $214 million of working capital through the first quarter to your point, Phil Sinclair contributed about $90 million at close of that number.
At our.
Our last quarters earnings.
Quoted about an expectation of $150 million to $200 million of working capital recovery through the year, we still think Thats correct with the base business or the legacy business excuse me.
So we've got probably another $50 million to $100 million to go here and that would include our expectation of reducing inventory of <unk>.
See Sinclair assets.
Got it.
And then just my one fundamental question.
And R&D as we look at the second quarter here your guidance that you expect to be modestly positive on EBITDA is there a way we can think about the production.
Let's say target for the second quarter, and just ultimately where you think the opex per gallon is going to go given all the startup costs you saw in the first quarter.
Yes, Phil this is Tom that's a good question.
Yes.
I think probably for the next core this quarter.
Maybe even a little bit further it's going to be pretty messy in terms of EBITDA and production.
First of all we have to do is fill operating tanks, we're still doing some optimization across.
Theres a lot of things going on at this point in time.
So it's going to be a little up and down that you saw some numbers in the first quarter and there was a lot of cost and not a lot of revenues as you can well imagine.
So thats impacting it and we're going to see some of that carryover for the short term.
I will point out that we do.
On our indication our published indicator margin, we're now providing.
Providing you with a renewable.
Diesel index and this is sort of a candidate to what refining crack spread is and what we do is we publish a number on a quarterly basis.
Based on.
Market prices for seaborne USD <unk> <unk>.
Rens BTC and transportation, so like I say, it's like a three to one if you want to talk to Craig afterwards, he can give you more of that.
The detail on the formulation of this but we thought it would help you guys look a little further in the future to see what's going to happen on the renewal business.
Okay. Thank you.
Yes.
Yes.
Our next question comes from Roger read with Wells Fargo Securities. Your line is open.
Yes, thanks, good morning.
Congratulations on the quarter getting all these transactions done.
Thanks, Roger and I have rich is going to come back to you again on the cash returns question.
$1 billion over the next 12 months what is the outlook you have.
Kind of mid cycle or something along those lines to support that versus Manav. I think was trying to get at things look pretty good right now so how should we think about.
The pace of that share repo and what would be the difference between the environment. We're looking at today.
And the environment that sets that $1 billion sort of baseline expectation.
So Roger.
Yes.
Point, you back to what we've talked about previously for mid cycle earnings.
The new company.
We think about it as a $2 5 billion EBITDA business and about 1 billion and a half of free cash flow. So in that environment, we can easily support a $1 billion of return.
To your point currently obviously crack spreads are far better than a mid cycle environment.
As always impossible to predict what theyre going to look like over the next 12 months, but we feel very comfortable with our ability to return that cash over the next 12 months.
Again, I'd reiterate the $1 billion over 12 months when the run rate, where we're at that's going to be about $350 million of dividends with the balance in share repo.
Roger Im going to add to that and just say that that $1 billion was poured.
And more of a mid cycle environment, when we when we announced the combination with Sinclair. We're well ahead of that today, but we are going to walk before we run and we can start executing to this plan before we raise the bar.
No I think that's totally fair I just wanted to understand kind of the the ground rules here of the situation.
Second part obviously.
Obviously progress here on renewable diesel in terms of things turning on but profitability I think as you all have been very clear.
Are going to be a secondary factor to making sure. The units are running can you give us just.
A quick recap.
How the two units have turned on are the pieces that have turned on so far in your.
Let's call it the actual versus expectations, you had for the <unk> and the R&D units.
Sure. Roger This is Tom again, we will start with Cheyenne currently running really well.
Running a mix of both spo and Palo.
Whereas at 6000 barrels a day.
<unk> capacity today, which was our nameplate capacity.
It's on spec it looks real good.
Ed.
It's very stable, we've had a few glitches, but they've been short term glitches.
And on the <unk> at Cheyenne.
It's looking really good there on the <unk> side.
As you recall, we had two trains each of which is 6500 barrels a day one's clean and one's a dirty we've got both of those trains not currently but over the course of the past two or three weeks. We've had one of those trains at any given time running at capacity at the 6500 barrels a day and making <unk>.
<unk> product.
Basically now.
Turned it back a little bit in throughput and Thats just dependent upon.
Our ability to put finished or do you back into the marketplace and then into Cheyenne as well as.
Rollins given some.
Some past obligations for buying <unk> in the marketplace. So we're filling in the holes with their own product now.
So we're not going to be going forward, a huge buyer of our BD per se and that was the whole intention behind the pretreatment unit is to give us more feedstock flexibility and that's working out.
Pretty well.
Our I would say very well given the short time that we've had both the units up and Sinclair units in hand.
Thank you.
Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.
Good morning team congrats here on a good quarter. The first question I had was around mid cycle refining EBITDA you guys have put out illustrative mid cycle.
Earnings at $135 billion, but that was predicated on a $10 Gulf coast crack and certainly the forwards are about that I'd be curious on.
On how your views of refining EBITDA are evolving and then as we move into the second quarter given all the backwardation in the curve, how we should think about things like capture rate I think in your illustrative example, if I remember is 70% so any thoughts on the market and how your view of mid cycle has evolved.
Yes.
Yes. This is Tim I can take the capture comment here and then.
Maybe open up to the Groupon mid cycle perspective, but.
From a capture rate certainly backwardation.
Is going to hurt us on a on a capture going forward.
Anytime we have.
Dropping.
Commodity prices, it's always going to impact the ability for us to capture what is being quoted as the index market.
We're pleased to say in the first quarter, our capture rates improved.
A little bit lower ethanol costs helped us a stronger jet crack helped us as well and of course, just the overall strength in the gasoline and distillate markets improved we do see that improving in the second quarter as we have.
First of all no turnaround as we had in the first quarter with Woods Cross and then less maintenance and unplanned downtime as we did in the first quarter as well. So we do expect to see some improved capture rates even despite.
The steeper backwardation that we're seeing in the second quarter.
As far as mid cycle.
EBITDA I'll open it up to the group to kind of comment on that.
Great Crystal ball, ladies and gentlemen.
Neil I think there are a couple of very important things going on.
And these are well documented in both depressed and the sell side, but.
The lack of <unk>.
Refined product finished product and intermediates coming out of Russia has created a shortage for sure and Thats reflected in the distillate cracks.
How long that persists.
I don't see any signs of it ending sooner or well.
So I think that the draw on U S refining capacity is going to be very strong.
And that as you well know a million a million barrels of distillation capacity has exited the system since pre pandemic.
So now we're at sort of one of capacity and $1 five supply.
Two 5% of world consumption, it's a big number and I think that we can expect assuming the economies stay reasonably strong.
The commodity prices and particularly prices of our products are going to be relatively high.
Unknown around China demand and Coke zero and things like that there's obviously quite a lot of uncertainty out there.
But for our planning deck. Our purpose is to try to run very strong keep our markets and customers supplied with an expectation that the margins are going to be pretty good for the foreseeable future.
Okay, Great perspective, and the follow up is just around Capex.
It sounds like Capex might have moved higher relative to previous guide, but maybe I misheard that.
Talk about could you go through the moving pieces again and anything we should keep in mind as we think about balance of year.
Hey, Neil it's rich so yes, capex went up which was entirely reflective of the Sinclair acquisition. So we've increased capital about $200 million to account for those assets.
We did re bucket a little bit you will notice.
Now there is obviously a marketing segment that's broken out.
<unk>, we've broken our corporate capital, which historically, we have allocated across the businesses.
Buckets are a little bit different but at a high level, you've got about $200 million increased due to Sinclair.
That's perfect. Thanks, guys.
Thank you.
Our next question comes from Doug Leggate with Bank of America. Your line is open.
Hi, Good morning, guys. This is clay on for Doug.
Taking the question.
My first question is a follow up to deal with mid cycle question.
Wondering if the guide real estate you used to estimate that mid cycle crack has improved and what I'm thinking about are the shutdowns in U S refining capacity and what looks like it's a higher structural net international Nat gas cost that your peers will have to incur and ultimately passed down to their consumers.
So I'm wondering if you can address is the guide rails on the mid cycle and whether or not some groups.
Well, yes, I mean, what we definitely think the market.
Has.
Structurally improved.
When you look at.
The U S competitive advantage on natural gas when you look at the 1 million barrels as Mike said of capacity has come out of the.
The United States refining capacity here in the last couple of years.
I don't know if I would necessarily say mid cycle.
The definition of mid cycle has changed as much as we are in above mid cycle part of the cycle right now and so we continue to see strengthening demand as particular jet has improved here over the last quarter.
We're seeing a definite.
<unk> and supply relative to that demand right now, but as we continue to grow as the market continues to rebalance. We think we're just in that upper part of.
The normal refining cycle right now, we're going to take full advantage of it.
And then beyond.
The natural gas element.
If that proves to be durable and part of the fundamentals. It is going to roll through the margin has to accommodate the cost of the inputs and thats.
Higher now.
Bye you pick it, but probably up to $1 a barrel versus not too long ago.
Thank you for that my next question is for you Mike. So wondering if you can talk to your accounts mature and start getting to $1 billion.
And clarify the non dividend portion will be 100% buybacks, noting that in your past the special dividend was an important part of your value proposition. So maybe you can just talk to the change in philosophy.
Yes.
I don't use the words, all are never always or never.
100% buybacks, that's a strong element.
I'd tell you is that.
Through our Sinclair transaction, we took on a large new shareholder.
In the form of the holding family, formerly fifth year of owners of Sinclair and there is some expectation that there'll be some selling in the future to date their posture is one of <unk>.
Not being sellers, but.
But we want to be able to offset those sales and so far as they come.
And so I would say with that as context, we will probably favoring share repurchase to a large degree.
But to date no open market activity on the part of our new owners and their near term expectation is that there won't be any so.
Directionally favor towards share repurchase we keep all options on the table, but I think share repurchases will be the biggie.
Great I appreciate it guys. Thank you.
Okay.
Okay.
Our next question comes from <unk> Chen with Barclays. Your line is open.
Good morning, Thank you for taking my questions.
First I wanted to touch on the.
Im concept of changing product flows globally and domestically as.
Global product inventories remain tight and the Gulf coast seems to be the Marshalls supplier.
Internationally, especially asked a question that's come off market.
Potentially over.
Long period compressing the arb to the mid con and increasing.
Sanction from the kind of assets, providing a tailwind for your assets there on the flip side you do have both enterprise and Magellan, having announced projects acute types Houston based refined products.
All the way to Colorado.
Well into West, Texas, and New Mexico.
Potentially compressing some of the premium niche margins that you've experienced historically in that segment.
I was just wondering if you could help me think about net net what this means.
The macro backdrop.
Macro back drop on a structural basis.
<unk> project can.
Ken come online as early as mid next year.
Yes, Theresa this is Tim let me take a shot at that.
We just talked about how the U S refining industry is advantaged versus the rest of the world in terms of cost structure and we believe that.
That's going to result in more exports from the U S into the rest of the world as you talked about global trade flows and it feels like the natural home.
<unk> for the barrels that are being produced on the coasts are to be export into these.
To these other parts of the world, where they can supply them at lower cost.
We have watched these pipeline announcements obviously with interest when we look at the typical Gulf coast gifts into these different regions.
We look at the season the seasonality of those deaths, we look at the low volumes in those markets in terms of demand and we look at the long term shipping commitments that are required.
It's hard for us to see the economics of all of that play out. So it's just not obvious to us that those will go forward, but obviously, we will watch that with interest.
Thank you.
I also wanted to get your take on why you decided to defer the peaches deal.
What have you observed in the market. That's led to this change and how much capex have you invested to date on that and under what circumstances would you return to complete it.
Yes traded with business, Tom as we've said.
When we acquired Sinclair, we took a look at the PTU and we thought it might be a good idea to take a pause on this look at the project economics look at our alternative options given the current market as well as our future outlook. Our main goal here is to come up with a cohesive operation.
And that allows us to optimize across the system and as you can well imagine we've got.
Numerous.
<unk> plants, and we're going to have numerous PTA plants. So we wanted to make sure that we allocate capital in the smartest way possible going forward. So that we can be responsive to market conditions and maximize profitability.
In terms of spending so far.
I'm going to pass it over to rich I think he's got a better update on the numbers than I do.
Sure.
So we've got about.
$40 million or so of capital in the revised budget associated with the Pizza U.
And thats really bringing it to pause here.
And then as Tom mentioned right, we're going to take a look at all of our alternatives.
Rated system to see what the best decision is going forward.
Yes, that's a really important point. The addition of Sinclair.
It gives us additional scale and additional ability to optimize and we obviously have a large pizza you that we've built in artesia, it's very productive.
Whether it might make more sense to add on there.
To the exclusion of the Rollins Btu.
Otherwise get the most efficient capital deployment in this market and that's really one of the reasons. We're taking a step back is just to ensure that we're getting.
The best bargain than we can.
Thank you.
Your next question comes from Connor Lynagh with Morgan Stanley . Your line is open.
Yes. Thanks, I wanted to go back to the Lubes business, obviously, a great quarter. There I think your expectation had been that you were going to see some compression in rack back with expansion in rack forward. It seems like you saw a ladder, but outperformer just curious if you could give some color and what's happening in the market there.
The relative sustainability of those dynamics.
Yes. This is Tim let me make a couple of comments on that we definitely saw base oil supply.
Catch up to demand early in the first quarter you saw that in our posted.
Base oil cracks biggio cracks that we put out in our index and we did see some weakening as a result of base oil cracks, especially in the Groupon and group too.
Area at the end of the first quarter those base oil cracks strengthened again.
In light of the Russia, Ukraine conflict, obviously had a big impact on <unk> balances and overall base oil availability globally.
The dip in base oil cracks just gave our finished lubes business the opportunity to catch up and Thats why you see.
Our finished lubes business do well at the same time, just as a reminder.
Our group one base oils are primarily.
Specialty oils and process oils that we're able to be a little stickier than what you saw in the postpaid.
Group, One group to index and so we were able to in the first quarter, we had an excellent quarter by having wrapped backend rack forward contributions kind of hitting at the same time.
It's more than just the market impact. So I just wanted to kind of point out if you look back at our lubes and specialty business. We had a record year last year in terms of EBITDA and of course, the first quarter was a record as well on the back of higher throughput lower cost higher margins all of that contributed here.
In the first quarter to the results that you see.
All of that despite.
What you hear about supply chain disruptions, especially in the additive world.
Covid of course still impacting mobility.
The extreme price volatility and being able to try to keep up with that.
A real shout out to our lubes and specialties employees for being able to manage through all of those challenges and still deliver the results. They did in the first quarter.
I appreciate it if you could give us any steer directionally, whether you think about it on a full year basis or just sequentially in the second quarter here.
Is this is this first quarter EBITDA was a high watermark if so.
How much just broadly speaking what should we expect for the business for the rest of the year.
We've done our signing.
It was obviously, a very favorable quarter depending.
Depending on what we see with the Russia, Ukraine conflict the base oil market.
Now look very constructive and I think our view is more positive now on them than it was earlier this year.
Rack forward side, obviously prices have built back up so we're probably still a little bit of margin compression here in the second quarter.
But we've been very successful holding price and keeping price up with base oil.
We are optimistic in general this year, we're expecting a very good year.
Thanks very much.
Our next question comes from Matthew Paul with Tpa. Your line is open.
Hey, good morning, and congrats on the strong result.
I wanted to ask about the renewables efforts now that you have the San <unk> plant.
Could you talk about your geographical end markets do you have a california else GFS pathway and if so are you railing all of that product to California, now or are you, sending you need to Canada or the Gulf coast.
Yeah, Matthew it's Tom I'll answer that.
Like everybody else when you start up a plant.
You don't get a pathway automatically so we're on a contingency basis with a car right now.
A lot of our product is destined towards California, as you could well imagine it is the biggest market, but thats not to say that we're not looking at other markets.
Canada is looking more and more attractive.
In fact at some point in time, it's offering a better netback than these California.
And that's even without understanding completely are getting all the information is what the Canadian RFS equivalent program is going to look like so we're starting to see more products move out of the United States towards Canada, and what we'll do is we'll chase the best market that gives us the best netback wherever it may be and thats, including.
Portland.
Oregon, California, potentially offshore or even Canada. So we're looking at anything and everything to maximize our returns.
Have you been given any indication on how long that California pathway might might take to come through.
We have to get three months of data into them and then they come back to us with their number and typically at lower than the provisional number that they give us.
So.
It's just the way that you have to do business in that market. So.
Got it and then.
On the refining side could you talk about opportunities to send barrels to Las Vegas.
With that.
You were able to capitalize on them.
In Q1, and it has that persisted in Q2, and just just looking at the spreads between Las Vegas gasoline and Rockies gasoline it looks like that might have been an opportunity for you in Q1.
Yes. This is Tim yes.
The Las Vegas market has been pretty strong.
During the first quarter a lot of that as a result of some of the outages in California.
Where some of the barrels with typically overflow into Las Vegas.
Because of some shortages there the Las Vegas market.
It became more sure we have the ability to ship barrels from the Rockies.
Into Las Vegas area, which we did and in addition, with the <unk>.
With the Sinclair.
Molecules in our portfolio now it gives us the ability to really optimize where we put those those barrels.
Usually maximizing here in the Salt Lake City area, and then spilling over into Las Vegas says as.
That's opportunity allows.
Yes.
Great. Thank you.
Once again, if you do have a question you May press star one on your Touchtone phone at this time.
Our next question comes from Ryan Todd with Piper Sandler Your line is open.
Got it okay. Thanks.
Maybe just.
A follow up on some of the operational commentary earlier I know the Puget Sound refinery ahead.
From the time you took over I had a couple of early bottles in the fourth quarter and early into the first quarter. How is the Puget sound refinery running now I need to comment on the outlook from here and then maybe with.
I know you haven't had a lot of time, yet with the Sinclair assets any thoughts with the assets under your belt.
In terms of what Youre seeing in opt.
Opportunities out there in the western Rockies.
Yes, there is no doubt we had a rough start with Puget sound back in the fourth quarter and spilled over into the first quarter, but.
We're very pleased with how Peter's down has rebounded.
Very strong March.
<unk> contributed significantly to our bottom line, our long term view of Puget Sound Hasnt changed we believe it's a very competitive asset.
With strong.
Talent.
With strong ability to take advantage of the market. We're seeing that we saw that in March we're seeing that in the second quarter as well we.
We do have some planned maintenance activities that are going on not quite the same as a turnaround.
But claimed planned maintenance that will.
Continue to provide feature set and the ability to capture.
Fault margins to the rest of the summer.
Sinclair on the other hand came out of the gate strong we've been very excited to have Sinclair, we're really only had them for 18 days in the second quarter.
<unk> made sizable contributions to our bottom line and we're very pleased to have them. We think there is.
Just a tremendous opportunity.
Continue to optimize across the Rockies region, we have woods cross refinery as well as the two Sinclair refineries that allow us to move barrels as we talked about earlier.
Various parts of the country.
Where the demands are.
Our asking for the barrels announced and that's one of the things you will see we talked about mid con.
Geography, a lot, but because we have access to the west coast, because we have access to even pad one it allows us to take some of these barrels.
We have in the mid con and move them to the areas that.
Where they where they are or opportunities are opening up we saw that in Las Vegas, a little bit.
The first quarter, we're seeing that a little bit in pad, one now where some of the pad two barrels are starting to move that way and creating good.
Structural cracks here in the mid Con were just a quarter ago, everyone was worried with the mid con margins, we're going to be down for good.
We've certainly rebounded significantly from there because of that.
Logistics opportunity to move barrels to where it needs it.
Great. Thank you and maybe.
Maybe to follow up on renewable diesel.
Any.
I know.
The startup process. There you talked about some of that is U S.
As you think of the feedstock you've been running through.
The PTU and the learning curve that youre getting up to both in terms of running that in and logistics in terms of accessing feedstock.
What are you seeing in the feedstock market I believe that you.
And originally contracted.
So this year for maybe fully contracted for one of the units.
For another are you looking to increase feedstock contracts, but those are you having any issues are you seeing the market is tight or has it been easier to get all the feedback that you have made any comment just in general in terms of what youre seeing around feedstock dynamics as you look over the rest of the year.
Sure Ryan.
Right now I'll just make the statement that we've had zero problems of buying feedstock in the market. We just haven't run into any problems.
You are correct in that we've got a fair amount of volume secured through the year 2023, which puts us in a pretty good position right now and as we move forward what we're trying to do is optimize.
And looking at buying in advance to more of a spot basis.
As you can tell the times are pretty volatile right now differentials are wide black price.
AG products like everything else is going up.
So having said that we're looking at the best Netback that we can possibly get and looking at various factors such as price incentive values.
Yield and we do have an LP or our feedstock optimization model that we run.
To pick out the best ones the best feedstocks as we move forward. So we think we're in a pretty good position as it comes to feedstocks theres lots of options and that includes looking further upstream at crush plant facilities and things like that so we're not excluding anything at this point in time, so we're keeping our options open in that.
Part of this optimization process that we're looking at moving forward, which encompasses the btu at Rollins.
Okay.
Alright, thank you.
Our next question comes from Jason <unk> with Cowen Your line is open.
Hey, Thanks for taking my questions.
I wanted to first ask.
On some lineup.
The line items you can hopefully guide you are now that Sinclair.
The Sinclair acquisition is closed.
Uh huh.
Can you can you give some.
<unk> indication on.
Refining opex per barrel, either at a corporate level or within the Sinclair assets.
What depreciation and SG&A goes to.
Moving forward per quarter, and then on the renewable diesel any guidance on if you expect to run your assets at 100% rates or is it lower.
In line with what your PTU.
Capacity is relative to the entire portfolio and then I have a follow up thanks.
Jason.
There are a lot of questions there, but I would probably tell you is if you go back and look at some of the long term views that we put out there a long term perspective, we have on Puget sound and Sinclair you can go back and look at Opex contributions in DNA as well, but what I would also probably refer you to is why don't you take that offline with Craig.
And you guys can work through those details.
As needed.
Okay, well, let me ask you this way.
Yes, sorry.
No I was just going to talk to the renewable section but.
Just saying that we still got one unit to bring on and Thats. The <unk> at our <unk>, which is going to make a big impact.
On our ability to run off feedstocks, but right now.
We will we will be running towards maximum wherever we can wherever its economic and thats using volumes that have been committed to as well as PTU volumes and then having to buy in the marketplace to fill in any holes. So.
Unless economic conditions dictate that we shouldn't run we will be running as much through the through the R&D segment as we potentially can.
Got it and then my second question is on the Rockies refining region, which is very strong right now.
But as I think about moving forward there is going to be another refinery returning to market I believe early next year and then there has been discussion of another product pipeline to <unk>.
<unk> product into that region. So can you just discuss.
How do you think about the product premiums youre receiving in that market I expect those to evolve over time and what's embedded in your mid cycle EBITDA.
So Jason let me.
So let me take a crack at that Tim mentioned earlier that we have a we have a hard time seeing the logic to some of these pipeline projects.
So we would continue to expect that these regions. These the Rockies in particular, it will be very seasonally strong.
But again the emphasis on the seasonal.
I think this is all folded into the mid cycle guidance, we've given.
No changes on our.
Our expectations there in terms of capture or regional basis.
Alright, thanks for the answers.
Our next question comes from Paul Cheng with Scotiabank. Your line is open.
Hey, guys good morning.
Hello, Paul.
I have to apologize first because we wanted to talk about the mid cycle margin.
In your.
In the street.
Sample that you use a 70% capture rate.
But if we look back over the past five quarters.
Call you lost me about 50%, yes, youll capture way.
We understand private education class property Alright, Ian.
Poppy only call you in maybe two.
<unk>, 2% and also on the capture rate so on a going forward basis.
Do you still believe 70% is the right.
Capture rate that we should use or that you think that you could ultimately settle back down into that LIFO and yet things. So.
What kind of improvement.
Do you expecting that drives that.
That's the first question.
Paul It's rich.
We still believe that 70% number is accurate I think the the operational problems. We had the last six months impacted our capture.
In order of magnitude larger than the number you are quoting.
I think as long as we run the plant study and the kind of markets, we're looking at 70% of the appropriate.
Okay.
And on marketing.
I mean, I think that that is a great platform that you guys now have.
Debt.
I want to see is there any plan how would you want to expand.
Our geographic reach.
In that business and maybe making it.
Substantially larger than where you are.
Or that you're going to stick with.
Where youll refinery is operating so what's more stickiness in that business and how that you can further integrate.
And Tom talking perhaps then also doing the winter time.
And that type of operation no need that and financially.
I would expect because I mean, your operating region during the winter time.
<unk> to be long.
And so that typically be causing some problems for the region.
If you're on outlet.
And that we have a non op operation will benefit for you and maybe financial deal itself, but can you maybe help us understand I think it would be better.
Yes, Paul Thanks for thanks for Teeing that up for me I appreciate it.
Youre absolutely right. When you go to bed at night with confidence that you've sold most of your product. The following day through your own branded outlets.
It's an easier marketing regime, right and more consistent and Thats. The important point, we want to be in the market everyday reliably.
Supplying these branded stations and our unbranded customers, but our.
Our intention is to work within our supply footprint effectively converting.
Existing sales to branded sales, but branding more stations and thats going to happen one 510 at a time.
As these things often do but.
We think it's a very productive channel.
Super excited about the brand itself and its possibilities.
And in terms of having that channel to market. We think it provides some more consistency to our marketing into our margin structure. So.
That works real well as you suggest in the wintertime summertime.
I think it's just all about consistency.
Mike will you expand beyond the existing market region or do you plan to stick to them kind of end market region.
It's certainly a nationally appealing brands, Paul but the real.
The best Economics are with our own molecules as a starting point.
And so far as we get saturated there we'll take it further.
Alright, thank you.
Our next question comes from Matthew Blair with Tpa Your line is open.
Hey, Thanks for taking the follow up I, just wanted to confirm with the Sinclair marketing as well as the Rd startup or you know net long range.
So Matthew on a run rate basis, once we're up and run rate will be about balanced.
So as Tom alluded to right, we suppose that the artesia already you to ramp up here in the second quarter. So as we sit here today, we're still a little short, but we've got line of sight to be in balance here within the year.
Great. Thank you.
There are no further questions at this time I'll turn the call back over to Mike Jennings for closing remarks.
Thanks Chantelle.
So thank you all for participating with US today I will close with just a couple of thoughts first is that I believe we've assembled a really strategic group of assets and team members and that we're quite prepared to meet the market opportunity that sits in front of us.
We believe that because of the supply shortfalls from Russia, and Europe , our production capacity will be in really high demand through the medium term.
And then that should be financially very productive.
Our operations and integration activities are going well and I appreciate the teamwork and the progress that I see in just a couple of months or less and that in fact.
And what is in many respects, a new venture and a great new opportunity for Jeff Sinclair.
And finally.
While our day to day focus is always on safe execution, we're in business to serve our customers and owners and our focus on cash generation and capital returns to our shareholders is intense and it's engineered to reward the capital that they have been entrusted us to manage so thank you again for joining us on the call and we look forward to.
Speaking to you soon.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.