Q4 2022 Holly Energy Partners LP and HF Sinclair Corp Earnings Call
Attrition and Holly Energy partners fourth quarter, 2022 conference call and webcast hosting the call today is Mike Jennings, Chief Executive Officer of HFF, Sinclair and Holly Energy partners. He is joined by Tim Go President and Chief operating officer of Hff's, Sinclair Aetna, a tennis off chief.
Officer of Hff's, Sinclair, and John Harrison, Chief Financial Officer of Holly Energy partners. At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation, if you'd like to ask a question at that time. Please press star one on your Touchtone phone.
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Craig you may begin.
Thank you Rob Good morning, everyone and welcome to HFF Sinclair Corporation in Holly Energy Partners fourth quarter 2022 earnings call. This morning, we issued a press release announcing results for the quarter ending December 31, 2022, if you would like a copy of the press release, you may find them on our website at <unk> Dot com and Holly energy Dot com.
Before we proceed with remarks. Please note the safe Harbor disclosure statement in today's press releases.
In summary, it 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.
Also 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 Jennings. Thanks, Greg. Good morning, everyone. Today, we reported fourth quarter net income attributable to HFF Sinclair shareholders of 587 million.
Or $2 92 per diluted share.
These results reflect special items that collectively decreased net income by $11 million.
Excluding the items adjusted net income for the fourth quarter was $598 million or $2 97 per diluted share compared to adjusted net loss of $18 million or a negative <unk> 11 per diluted share for the same period in 2021.
Adjusted EBITDA for the fourth quarter was $1 8 billion, an increase of approximately $878 million compared to the fourth of 2021.
In our refining segment fourth quarter, EBITDA was $864 million compared to $25 million in the same period last year.
This increase was primarily driven by higher refining margins in both the west and mid con regions and a 39% increase in sales of refined products year over year due to the acquisition of the Puget Sound refinery and the acquired Sinclair businesses.
Despite the winter storm impacts we experienced in December crude oil charge averaged 628000 barrels per day for the fourth quarter compared to 421000 barrels.
Per day in the fourth quarter of 'twenty, one for full year 2022, we achieved records for annual crude charge of 607000 barrels per day, and refining segment EBITDA of $4 2 billion.
Despite the tight supply environment in 2022, our continued focus on operational excellence allowed us to safely increase throughput to meet customer demand for our transportation fuels.
In our renewable segment, we reported adjusted EBITDA of negative $7 million for the fourth quarter and total sales volumes of 54 million gallons.
Driven by unplanned downtime.
We continue to increase throughput at our renewable facilities and expect to achieve normalized run rate in the second half of 2023.
We remain constructive on the <unk> RIN market and on our ability to source advantaged feedstocks for our renewable diesel plant.
Our marketing segment reported EBITDA of $23 million for the fourth quarter and total branded fuel sales volumes were.
336 million gallons, representing a <unk> <unk> per gallon margin.
We continue to make progress expanding the Dino brand as our number of branded sites grew by 24 during the fourth quarter and by 81 since the acquisition of the branded business from Sinclair in March of 'twenty two.
Lubricants and specialty products reported EBITDA of $67 million for the fourth quarter compared to EBITDA of $75 million for the fourth quarter of 2021.
This decrease was largely driven by a FIFO impact from.
Consumption of higher priced feedstock inventory in the fourth quarter of 2022.
For full year 'twenty, two lubricants performed well above our mid cycle guidance reporting annual EBITDA of $382 million due to strong demand for base oils and finished products.
<unk> reported adjusted EBITDA of $116 million in the fourth quarter compared to $80 million.
In the same period of last year. This increase was primarily driven by contributions from the Sinclair transportation assets, which were acquired in March of 2022, coupled with record volumes across our integrated system.
We returned $475 million in cash to shareholders through share repurchases and dividends during the fourth quarter.
And since the closing of the Sinclair acquisition on March 14th 2022, we have returned over $1 6 billion.
Which is well ahead of our initial target of returning $1 billion to our shareholders by the end of the first quarter of 'twenty three.
This represents a 2022 full year cash return of 16%.
As of December 31, 2022, we have $662 million remaining on our share repurchase authorization and remain fully committed to our cash return strategy in payout ratio, while maintaining a strong balance sheet and an investment grade credit ratings.
We also announced today that our board of directors declared a regular quarterly dividend increase to <unk> 45 per share payable on March 17, 2023 to our holders of record on March seven 2023.
This 12, 5% increase reflects our constructive outlook on cash generation from our recently acquired assets and our board's commitment to returning excess cash to shareholders.
Looking ahead, our focus remains on operating safely and reliably while executing on our integration strategy to fully optimize our new and more diverse asset base.
We believe we've created a strong foundation as a downward integrated business with increased scale to drive growth and capital returns to shareholders.
So with that let me turn the call to Atlas.
Thank you, Mike and good morning, everyone, let's begin by reviewing <unk> financial highlights net cash provided by operations totaled $915 million, which included $47 million of turnaround spend in the quarter.
Sinclair is stand alone capital expenditures totaled $99 million for the fourth quarter.
As of December 31, 2020 to HFF Sinclair has total liquidity stood at approximately $3 3 billion comprised of a standalone cash balance of $1 7 billion, along with our Undrawn $1 65 billion unsecured credit facility.
As of December 31, we had $1 7 billion of stand alone debt outstanding with a debt to cap ratio of 16% and net debt to cap ratio of 1%.
HCP distribute the distributions received by HFC clear during the fourth quarter totaled $21 million Hs Sinclair owns 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.
This nights close.
Let's go through some guidance items.
With respect to capital spending for full year 2023, we expect to spend between $250 million to $280 million in refining.
25% to $35 million in renewables.
$35 million to $50 million in lubricants and specialty products, 20% to $30 million in marketing.
<unk> $50 million to $80 million in corporate and $530 million to $630 million with turnarounds and catalysts at.
At <unk>, we expect to spend between 25% to $35 million in maintenance and $5 million to $10 million in expansion and joint venture investments.
For the first quarter of 2023, we expect to run between 500 530000 barrels per day of crude oil in our refining segment and we have planned turnaround scheduled at our Puget sound with Cros and El Dorado refineries in the period.
I will turn the call over to John for an update on HCP.
Thanks, a lot and us I am pleased to report Hep's strong fourth quarter and full year earnings driven by record volumes across our integrated system.
Hep's fourth quarter 2022, net income attributable to Holly energy partners was $68 5 million compared.
Compared to $45 6 billion in the fourth quarter of 2021.
The year over year increase was primarily attributable to earnings related to the Sinclair transportation assets, partially offset by higher interest expense and operating costs.
Hep's fourth quarter 2022, adjusted EBITDA was $115 7 million.
Compared to $79 7 million in the same period last year, a reconciliation table, reflecting these adjustments can be found in Hep's press release.
HCP generated distributable cash flow of $85 8 million.
And we announced a fourth quarter distribution of <unk> 35 per LP unit, resulting in a distribution coverage ratio of one nine times.
Capital expenditures and joint venture investments during the quarter for approximately $18 million.
Including $11 million of expansion and joint venture investments $5 million in maintenance Capex and $2 million for Reimbursable Capex for 2023, we expect total capex of $30 million to $45 million.
During 2022, we made good progress on reducing our leverage ratio and ended the year with a pro forma debt to trailing 12 month adjusted EBITDA ratio of three six times.
We expect to reach our target leverage ratio of three five times in mid 2023 at which time, we will evaluate incremental cash return to unit holders consistent with our previously announced capital allocation strategy.
Now ready to turn the call over to the operator for any questions.
Yes.
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Your first question today comes from the line of Theresa Chen from Barclays. Your line is open.
Good morning, Thank you for taking my questions and congratulations to Mike Mckenney for round two at retirement.
So now that you have.
Achieved $100 million.
It will run rate synergy following that Sinclair acquisition and have had assets under your umbrella for some time, how do you view the further stages with the integration effort. What phase are you at in terms of pulling out there at Sinclair marketing branch at the legacy HFC refining market and downstream channels either.
Aspects of integration and synergies that we should be anticipating.
Good morning Theresa. This is Tim go let me take a stab at that first here. We're very pleased that we were able to achieve the $100 million of synergies so quickly.
Just right out of the gate, we definitely see more opportunities for us to continue to take advantage of.
The larger refining portfolio, but more importantly, the integration with our marketing assets.
That was as you recall one of the core.
Objectives of our Sinclair Holly frontier merger was to be able to get that brand at wholesale integration and our merchant refining markets that we currently didn't have any.
Really exposure to in the past, we've done really well Mike said in his prepared comments.
We had 24 additional stores in the fourth quarter 81 branded.
<unk> for the year will really three quarters of the year since we've.
Since we've owned and clear and we think Thats just the beginning we think there are a lot more opportunities. We're seeing a lot of interest in the southwest and were seeing a lot of interest in the PNW.
Basically.
Bring out the branded stores in those areas, which coupled with our again, our refining output to help us.
<unk> integrate that value chain.
We also see a lot of opportunities just within our operating assets to procurement.
Combining processes to improve our reliability theres a lot more opportunity out there we're not ready at this point to give you a number but.
But I can tell you that we are we.
We are seeing a lot of opportunity and we're going after it.
Sure.
Thank you so much and congratulations on the new role.
Turning to refining and can you give us a sense of what happened on the West coast and this quarter is further detailed on the capture results and do you see this improving over the long term or medium term taking into account of course, the near term downtime they have.
And the first half.
Yeah Theresa this is Tim let me, let me take that again.
<unk> the fourth quarter.
Impacts were about 20000 barrels a day less heavy crude than we typically run primarily in the west and about 4% lower diesel yield across the portfolio, but again, primarily in the west and that was due to both planned and unplanned maintenance.
As well as some higher natural gas prices that occurred that also impacted the west.
On the planned basis, we had.
We had.
Coker maintenance planned at our Parco refinery, we had coker maintenance planned at our <unk> refinery.
We had diesel hydro treater maintenance planned at our Puget Sound refinery and then we had distillate hydro treater maintenance planned at our El Dorado refineries all of those contributed to the lower heavy crude runs as well as the lower distillate yields. In addition, we had some hydrogen outages.
Both planned and unplanned at our Navajo refinery and at our <unk> refinery, so really that's what drove.
The lower west coast productivity and.
In addition, though if youre looking at Opex and if you are looking at even some of the gross margin capture associated with natural gas. We saw some very high natural gas prices on the west coast.
The basis for the PNW as well as for our Salt Lake City refinery had gotten up to about $40 to $50 and then btu above the Henry hub baseline price in that December and really carrying over into the January timeframe. So those three factors less heavy crude less distillate yield.
<unk> and higher natural gas prices really explain the.
The weaker west results that we had.
Thank you.
Your next question comes from the line of Paul Cheng from Scotiabank. Your line is open.
Hi, good morning.
First.
Jason to stope mining and team for the retirement and promotion.
Thank you Mike for the half.
I guess that I have.
Two questions in here.
Meanwhile team when you are looking at all the new bit surprised that you've seen and we've taken into the second.
Year to which the normal noise one way.
Given that you actually start up all the pain.
One in the first quarter. The other one you see in the second quarter. So maybe you can give us a little bit.
Better understanding why that with I think a lot of people would have thought.
By now you will moving.
Moving into normalized one way.
And what have you learned so far up on operation.
And also whether you have already certified.
Bye now.
That's on that.
The second question is on the marketing.
If I look at last year, only 10 months of operation.
<unk> been in EBITDA.
Much better than at the time of the acquisition.
Turning to about $50 million at Union normal line.
Nicole.
So yes, yes.
Exceptional in that base.
What that that visit that came much better than what you had been assuming.
Thank you.
Thanks, Paul Tim.
Tim and I will split this up I'll start with the renewables questions and just to put it candidly.
The renewables performance operational performance to date.
Is not what we planned and it's disappointing.
But we're pretty resilient and we're going to fix this thing so what's in front of us.
There are a number of things first process optimization and catalyst performance.
Adding the renewable diesel yields up and getting the units to run more consistently we ran just 14000 barrels a day, which is 60% utilization in the fourth quarter.
Process industry, Paul as you well know that is too low that number needs to be more towards 90%.
So in terms of availability and reliability of the underlying units and the catalyst performance getting the renewable diesel yield higher at the expense of naphtha yield.
But as importantly these.
These processes are very hydrogen dependent and we've got two things going on there first is based reliability of hydrogen production and we've got a number of things working internally to improve that but.
But also with petroleum or conventional distillate margins as high as they are.
We're needing to optimize hydrogen use across these refineries.
And that is that's a competition at present, so longer term, we need to increase the availability of the high purity hydrogen that feeds these plants.
Nameplate wise, they respect to perform at capacity and we found that were not there.
So we have some initiatives working to improve that optimization within the refinery in longer term improve gross availability of the hydrogen so.
There's a lot to do operationally here in these current six months to get toward.
Considerably higher throughput and yields in these plants and no we have not yet achieved that but that is the pathway to profitability.
Yes.
Paul I'll take your second question on marketing. This is Tim again, we're very pleased with the results that we've seen on the marketing side. This is again one of our core objectives that we've been focused on as far as integration and again for the reason for the Sinclair Holly frontier merger.
You have asked if we're ready to.
Change our $50 million your mid cycle I would say probably not at this point, but I would tell you that we are operating above mid cycle right now and we think that's the case because with.
With with inventories being low across the country and demand being fairly high, especially in our areas that we operate in which in the Rockies in particular.
Have low inventories and high demand.
We're able to get.
Little bit more from our brand premium than maybe what we would during a mid cycle type environment.
More importantly, though we saw a 5% growth rate last year.
And the number of stores that we have and we think that we're going to continue to see a 5% to 10% growth rate in our branded wholesale market year over year and in fact in 2023, we're hoping it'll be towards the upper end of that range. So from that standpoint, we do think there'll be growth in our in our mid cycle number.
Thank you Tim.
I cannot say.
Circle back then about the CFS have you.
Achieved certification on that.
Okay.
Paul we're still operating with provisional for the Artesia facility and we expect in the first quarter that we will get the permanent certification.
Okay. Thank you.
That being for Ci.
Yes.
Your next question comes from the line of Ryan Todd from Piper Sandler Your line is open.
Yes.
Great. Thanks, maybe.
A couple maybe one first of all on cash return to shareholders and I guess, I'd say, congratulations Mike and Tim on the on the retirement of the promotion.
On the cash return to shareholders, which continue to be really impressive obviously well in excess of your earlier guidance can you talk about.
How youre thinking about that run rate going forward, how aggressive you may look to be there versus building additional cash on the balance sheet and in general.
Is this is this kind of $400 million per quarter type of run rate, we should expect for a while or how can you can you bookend is how to think about that going forward.
Hi, Good morning, this is asking us and thank you for your question as Mike indicated in his prepared remarks.
Are you fully committed to our core.
Capital return strategy and as we pointed out 16% return for 2022 is very healthy.
With respect to.
Our capital return for 2023.
So far in 2023 is shaping up to be a nice year in terms of cracks and.
We remain fully committed to what we what we have been doing so with respect to.
Pes, we don't we're not going to guide to pace, but we can say that we are.
I'm not shy to exceed.
The 50% target payout ratio that we have talked about previously and both in terms of when you look at buybacks.
Obviously the dividend.
And we're also starting from a position of privilege and that we began the year with $1 six on the balance sheet.
Which does represent itself some excess cash.
Is there on that cash on the balance sheet is there.
Kind of an appropriate level of cash that we should expect you to carry on the balance sheet going forward.
Previously, we had talked about the range of around $500 million, but thats, not a hard and fast number.
<unk>.
We take into account our immediate capital needs and as we've indicated in our press release and remarks.
We've got to write some pretty large checks early in the year, but as we progress through the year.
Obviously, we'll look at our cash balance and again focused on very robust or shareholder return, which includes looking at our cash balance.
Great. Thank you and maybe.
I'll follow up on the earlier question on the renewable diesel business outside of I. Appreciate I appreciate the clarity on the operational issues outside of the operational issues can you talk a little bit about what you've learned from nearly a year of operations on in terms of placing renewable diesel product into the market.
And feedstock acquisition, maybe what type of feed mix Youre running.
Product sales in feedstock acquisition been about as you expected.
Or have you seen any challenges there.
Okay.
Yes, so I would tell you that were older and wiser and.
For some some operational issues, we've learned a lot and I think we are more optimistic about what we see in the marketplace and respective ability to place this product outside of California.
Profitably. Okay. So there are many other markets that we've become involved with.
And certainly with the current low Lcs FFS price that just opens the doors to placing these barrels otherwise so.
Much more opportunity to place the barrels than we initially understood.
Beyond that on the feedstock side I think we've found that.
That maybe being a little more conservative relative to volumes and picking up the remainder in the spot market is probably the right strategy for us.
Given operational issues, we really worn the scars of pushing forward.
Excess inventory into further periods and a backward market structure and Thats, a big piece of cost in terms of our profitability. So.
Probably a little different strategy on that front with respect to the more strategic of what feedstocks are right for our plants. The PTU is operating like a gym.
The yields coming off of that unit are higher than we anticipated and the reliability is good the downstream units I can't say the same about but we'll fix that but the PTU is great.
And the ability to put new and lower Ci feeds in.
Is going to be strategically something thats really important to us we're working on a venture at present that we can't disclose but really.
As a bit of a game changer, if we can get it done but is heavily dependent on having the PTU. So.
I would say overall well diesel prices have softened recently and that gets into the profitability.
The overall market structure in terms of the AG oil has come down as well and the RIN price kind of bridge that gap. So we feel like the margin structure, if you will or the market structure is there for us.
The optimization will happen through improved operations, greater hydrogen availability and newer second generation feedstocks.
Thanks, Mike.
Yes.
Your next question comes from the line of Doug Leggate from Bank of America. Your line is open.
Good morning, guys.
Excuse me.
Mid coffee there I apologize.
Mike.
I guess, we only just got a short time to see each other recently.
You've taken off again, so congratulations to both you guys and Tim Louie.
Going forward Youre seeing what youre going to do here and not really as my my kind of first question. If I may just at a high level.
What should we expect as we look forward continuity of strategy or something different I guess.
A part a and a part b to this.
And that will be my two questions. The part is Mike <unk>.
It seems to me you were never really.
Bought into the lubricants as a part of it you saw dark sequence.
It seems.
How does this position in the company going forward could be looked out potential monetization. That's number one and number two is and this is a tough one I guess, but.
The legacy reliability of the Standalone Holly frontier business.
It was always the achilles' heel in the portfolio relative let's say to your peers.
It now seems the same thing is kind of harping on the acquired seem clear assets what assurances can you give.
The market those reliability are somehow not.
Structurally endemic to the portfolio for the business that you can actually work companies going forward and I'll leave it there. Thank you.
Those are meaty questions. Doug. Thank you Tim is going to take on the bulk of it but for clarity I would say.
Well I wasn't the one who bought the lubricants businesses theres been no lack of commitment to growing those businesses and optimizing them.
Once in the portfolio they have been a nice contributor contributor to the company and as you recall, while refining was losing money during COVID-19 lubricants specialties were kicking out a steady $30 million a month of EBITDA. So.
Our business has performed well and has been improved significantly under Tim stewardship, So Tim I'll pitch. It to you because really the future is about your vision and what youre going to do in this business well thanks, Mike.
I am excited about the opportunity and the challenge ahead.
Mike has done such a good job of.
Setting this company up for success Star.
Starting with the really the Holly frontier.
Combination that occurred 11 12 years ago, and then now with the Sinclair addition to it as well as the Puget Sound addition to it we are really set up with some nice assets some nice people.
<unk> capability and really a bright future ahead of us so very excited about that.
I can tell you there are some things that won't change as we as we go forward and that's the focus on long term growth, which Mike has clearly demonstrated and the commitment to cash returned to our shareholder which again, Mike has really shown and demonstrated here in the last few years.
Things that we want more of you hit the nail on the head we need more.
Progress more focus on safety reliability operational excellence that has been an area that we've been coming up from a.
A point of.
Point of behind I guess, the competition and we've been really trying over the last three years at least that I've been here.
To really catch up and I think thats going to leverage my skill set in my experience a little bit trying to focus more on that and trying to take us to the next level.
And in fact, I think thats almost my mandate from the board.
But I think we've made some good progress and so Mike talked about on the.
Prepared remarks, how we set some annual records.
Not just crude throughput, but also.
Diesel and gasoline production I will tell you that's not just because of the additional assets that we added in terms of Puget sound and in terms of the Sinclair assets.
Our our individual plants most of those legacy plants El Dorado.
Woods Cross and Tulsa set individual crude throughput records.
Distillate production records and gasoline production records.
2022, and I think thats a sign that.
We're heading in the right direction, we have the capability to deliver that higher safety reliability and operational excellence, but it is going to be an up and down.
Journey as we go along and as long as we see that underlying kind of performance continuing to rise kind of up into the right I'd like to say on a from a charge standpoint.
It gives us confidence that we're doing the right things and we're heading in the right direction.
I think from an integration and optimization standpoint.
We've got.
It's almost feel like a kid at Christmas, We've got a lot of new opportunities a lot of new assets, a lot of new people and capability.
We still haven't tapped fully into and we're going to see more of that going forward in terms of trying to optimize and particular the Rockies area.
The whole west area with Puget sound in the southwest I think a real fertile grounds as we've mentioned earlier more synergy opportunities there more opportunities for higher utilization that our capture rates and lower costs, which is what we're going to go after.
And then the last point Doug is yes, we are really pleased with how our lubes and specialty business has performed over the last three years, we've been working very hard to improve the profitability of that business.
To say that we set a record last year in fact, its the third year in a row that we've set a record lubes and specialties earnings and.
And we're pleased to see that improve.
With that we still think there's more out there and we're going after that that's another testament to our focus on operational excellence and margin improvement.
But with that better performance.
More doors open and yes, we can consider more strategic opportunities I would say in the short term, we're focused on improving that business, but I would say in the mid term there may be more opportunities to look at for lubes business to maximize shareholder value.
Terrific full crew loans most of my questions, Tim and Mike. Thanks, very much indeed, guys and we'll see you a bogo virtually see you next week. Thanks, so much.
Thank you Doug.
Our next question comes from the line of John Royall from Jpmorgan. Your line is open.
Hi, good morning, Thanks for taking my question.
You've called out a heavy maintenance year in refining your full year guide in the <unk> throughput guidance.
Pretty heavy maintenance early in the year, but as we think about how maintenance might progress throughout the year any guidance in terms of maybe first half second half or just anything more granular timing wise.
Yes, John this is Tim.
We put out the guidance of 500 to 530000 barrels a day in the first quarter I think gotten as mentioned in the prepared remarks that is a combination of lingering winter storm effects as well as the.
As well as the turnaround impacts in the first quarter.
That of course is <unk>.
Our utilization than what we normally run we do believe if you look at the second quarter and on that we'll be back into the mid I'm, sorry into the low 90% utilization type range.
As we get through the first quarter turnarounds, we will still have some more turnaround work throughout the year, but the impact on crude rate and the impact on utilization is clearly front end weighted here in the first quarter. So if.
If you think about.
<unk>.
Leveled ninety's utilization, that's really back to normal in terms of what we typically produce in in those.
And the rest of the year.
Yes.
Okay. Thank you and then I was just wondering your view on Brent Ti.
Your exposure there.
Relatively wide even with the SPR are we spending can you talk about the drivers there and how you think that could progress in 2023.
Yes, there is a lot of drivers of course, and the Brent Ti spread but I think the one that seems to be <unk>.
The biggest impact right now is just the high freight rates.
Freight rates.
Globally, I think that Russia, Ukraine conflict has created.
Even more pressure.
On shipping rates and what you're seeing we've always said that the Brent Ti spread is basically determined by shipping rates.
Ti into the rest of the world and we're seeing that play out with the higher freight rates now keeping that Brent ti spread wide.
We're also pretty.
Happy with the WCS <unk> spread that we continue to see that.
It jumped up in the $25 $30 discount here in the fourth quarter and it's come off that since then but we still are fairly bullish that.
A $20 or so.
WCS WCS spread for the rest of the year feels pretty good to US and then the last thing that I'll just point out is as <unk> has been pricing at a discount to Brent.
Here over the last few months that has a big impact in our Puget sound refinery.
We think thats associated with the higher <unk> crude.
That we've seen.
Otherwise coming out of the north slope, and we think thats going to continue to advantage our PNW location.
Thank you.
Okay.
Our next question comes from the line of Neil Mehta from Goldman Sachs <unk> Company. Your line is open.
Congrats Tim and congrats Mike to both the view.
I had a follow up on the return of capital question then.
I don't know if you can comment on the Sinclair family and their intentions, but one of the things thats been nice over the last year is even as they've been monetizing the position you've been in a position to take take down some stock December notwithstanding so just your views on whether you can continue to be over the wall in your capacity.
Two to mitigate any outflows from them.
Yes, so neal thanks for the question.
We as you know are very close to the individuals we have to have their representatives one family member on our board.
And we speak frequently so yes December notwithstanding.
<unk>.
And an interesting trade.
We expect to continue to buy shares from them.
Hey.
Liquidate some of their position.
They have an intention to sell down to zero by any stretch, but they do want some liquidity.
And it has been.
Fairly synergistic relationship as you will in that we're buying.
Chunky quantities at a discount to market.
And that to us benefits our shareholders. So we would expect to do more of that assuming theyre still willing.
Okay.
Helpful. Mike and then we.
Talked a little bit about the crude markets, but love your perspective on the product markets, it's hard to make sense of the EIA weekly. These days, there's a lot of noise. It seems.
In the data, but what are you seeing through your own wholesale channels in terms of and retail channels in terms of demand and how does that influence. The way you think about the way both diesel and gasoline are set up into the summer.
Yes.
Yes, Neil this is Tim that EIA data is confusing every week, it's interesting just to see how it plays out but what I can tell you is on the product side, we're seeing strong demand in our markets and so for example on the gas side.
I would say, we're seeing demand that's 98% of what our 2019 peaks were.
That's in the mid con the southwest and the Rockies, it's up versus 2021, but about maybe 2% down versus 2019 on the diesel side, we're seeing <unk>.
Demand, maybe 10% higher than what we saw in 2019 and the areas that we operate in.
And on the jet side, which has been very.
It has been lagging I guess through most of the Covid period, we're seeing that about 90% of where we operated at the peak in 2019. So we continue to think that as this year plays out that jet demand is going to continue to climb. We also think as most people do that with with with.
The China situation opening back up that there'll be some more global demand pull for these products and that we are really shaping up.
For a for another strong.
Rest of the year in terms of refining and Theres been a lot of talk about macro factors.
Factors and drivers for the refining industry and I don't really have anything more to add to that but what I can tell you is that if you look at our regional advantages that really is something that we're excited about here. The rest of the year. If you look at our presence in the Rockies you look at our position on.
The west coast in the PNW, and especially you look at our asset in the southwest we think that regional advantage gives us a step up above even the macro drivers that we've been talking about.
Our demographics in those areas are still growing so that overall demand for transportation fuels.
Continues to go up just with demographics.
We've got access to advantaged crudes that we've talked about earlier at each of those locations and of course, we've got the strong local product markets that we're in.
Excited about especially in the summer months, when Theres, a lot of travel and Theres a lot of activity going on.
And the pad four and really in the West coast and the southwest. So so Neil we are pretty bullish.
This year, we still think that despite the EIA reports.
Our areas and our markets are shaping up to have to have a nice year.
Thanks.
Okay.
Sure.
Your next question comes from the line of Matthew Blair from GBH. Your line is open.
Hey, good morning, and congrats Tim on the new role and Mike on the retirement.
I was hoping you could walk through the moving parts on lubricants in Q4, why did your rack back EBITDA improved even though the base oil indicators moved down.
What was the FIFO impact in the quarter.
And then the volume seemed a little low was that due to like maintenance or turnarounds on your side or was that more due to just like weaker demand and matching production levels to the current demand in the market. Thanks.
Yes, Matt This is Tim let me let me just say again, we've been we've been very pleased with the results.
For our lubes and specialties business.
We did see lower volumes in the fourth quarter Thats a combination of.
Just some some softer seasonal demand that we typically see in the fourth quarter, but also as prices were dropping.
We saw a lot of.
Customers, just slowing down and waiting for those prices to drop before they put in their orders, but more importantly, we have been.
<unk>.
Rationalizing some of our low.
Profit opportunity areas.
We've talked about SKU rationalization.
Many quarters now that continue to play out in the fourth quarter. We are purposefully trying to shed barrels that are of gallons that we think are low margin in favor of focusing on the areas that are higher margin. So what youll see is lower volumes as you pointed out, but you will see a higher gross margin per gallon.
Which youll see is well play out in the fourth quarter and really for the year. That's on purpose and we think thats going to continue as we continue.
To streamline our business and focus on profitability.
The other thing I'll mentioned FIFO impacts we had headwinds in the fourth quarter. It was about a 7% seven $5 million headwind.
So the so you can add that back on to the 64, if you want to kind of get a feel for run rate.
Kind of numbers will continue to see headwinds in the first quarter.
We believe that.
Underlying business will still show strength seasonally the first half of the year is always a little bit better for lubes and then finally, what I would tell you is.
That.
<unk>.
Roughly $300 million run rate that we're seeing here in the fourth quarter, We think will play out as we continue here in the <unk>.
<unk> 2023.
<unk>.
The strength of the rack back business as you pointed out is really on the group three margins. So your overall comment about base oil margins coming down is true, but it applies specifically to groupon and group to.
Group three margins have actually stayed fairly robust you see that in our published index is about $130 a barrel still and we continue to take full advantage of that in our <unk> business. We think that will continue at least here through the first quarter, probably in the second quarter as well.
Sounds good thanks for all the color and then Tim I think you mentioned the WCS spreads have been been a relative bright spot what's your outlook going forward on WCS spreads, especially given the strength.
Mine expansion.
Yes, Theres a lot of speculation on what will happen when Trans mountain starts up of course, the publish start date is still in the fourth quarter of this year.
There is a possibility that that could slip further as it as it has in the past, but we are planning for that to happen there'll be some line fill impacts as they try to.
But some barrels in the line to start that thing going which will.
Which will tightened the spread of course, we also tend to see seasonal tightening in that WCS WCS spread in the spring when the spring maintenance activities come into full.
Activity up there in Canada, So we're not surprised to see the WCS spread come off from the $2830 diff to the call. It 18 to $20 diff that we're at right now and we would expect that to hold in this kind of area here for the next couple of quarters.
Great. Thank you.
Your next question comes from the line of Jason <unk> from Cowen Your line is open.
Jason gave women your line is open.
Yes.
Yes.
And we'll move on to the next question from the line of Doug <unk> from Citi. Your line is open.
Hey, everyone. Thanks for the question.
I just had one on the midstream side.
I was wondering if you could just expand a bit on the capital allocation strategy at HCP.
I guess, specifically around the potential distribution increase kind of how youre thinking about balancing the flexibility of being almost two times covered versus also being able to kind of achieve your leverage target and maintain that going forward.
Sure. Thanks, Doug This is John Harrison.
Our capital allocation strategy really remains the same here. So we've kept the distribution flat, while we have reduced leverage and we're really pleased with the progress that we've made there happy to report we're at three six times on a pro forma basis.
We do have that short term target of three five times.
Leverage and we expect to hit that in mid 2023.
And then longer term, we plan to maintain leverage in that three <unk> to three five times with a coverage ratio of at least one three times so.
Fair to say incremental cash return is top of mind for us.
And as we approach our leverage target over the next couple of quarters we.
We will communicate what we're going to do in terms of incremental cash return.
To the shareholders.
Got it and then I guess on the ACP outlook.
Already kind of squarely in.
In the lower half of the pro forma range outlined after the Sinclair acquisition can you maybe just talk a little bit about some of the puts and takes are kind of 2003, and maybe your ability to kind of push towards the higher end of that range. This year.
Right.
Sure so we.
We are in the in the middle of that range already so we're really pleased with that.
And that includes obviously only three quarters of the Sinclair transportation assets. So we have some room there.
And also we also have.
Inflation adders to our contracts.
For HCP that really is applicable to all of our revenue.
At HCP, so definitely inflation can be a tailwind for the AGP piece of the business here.
Okay.
Got it.
Thanks for the time.
And there are no further questions at this time I will now turn the call back over to Craig Biery for some final closing remarks.
Thanks, Rob This is Mike Jennings I wanted to wrap up with just a couple of points 2022 was obviously.
Pivotal pivotal year for our company as we completed the <unk> Sinclair acquisition and established ourselves as HFF Sinclair a downstream integrated company.
And then further integrated the Puget Sound acquisition that had been done just in the previous year.
Really dramatic changes in our business and at the same time operating full and well to serve the needs of our customers and generating.
Really the tremendous income and returns to our own shareholders. So we.
We executed well we executed on some really key points, which would have included getting these acquisitions integrated realizing that initial $100 million of synergies.
Completing our startups within renewable diesel and importantly, returning over $1 billion six of cash to our owners.
Proving up our commitment to get this done and frankly get it done early.
Moving forward I think Tim has called out priorities well and they include.
Continuing to optimize this portfolio, improving our reliability and obviously maintaining our foot on the accelerator in terms of cash returns to shareholders.
We get it that's a fundamentally important part of the investment equation.
Within this sector and for this company.
And then finish up with with the little note on Tim and I want to publicly congratulate him for the announced appointment to president and CEO of HFF Sinclair.
This culminates a multiyear succession planning process on the part of our board to find and develop the right leader for our company's future.
<unk> had great pleasure of working with Tim for almost three years now kind of come to admire his knowledge of the business desire to improve and optimize our operations.
An important ability to attract and retain strong talent for the key roles.
And then tremendous passion for our company and for his job so well it will be with some regret that I stepped down simply because I love working in this industry and with the great people at this company who are committed to our success.
Past the sentimentality, we're really fortunate to have Tim and the rest of this great team onboard and engaged and I believe that they will together get the job done for our owners. So thanks a lot.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
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