Welcome to the HollyFrontier Corporation's 2nd Quarter 2020 Conference Call and Webcast. Hosting the call today from HollyFrontier is Mike Jennings, President and Chief Executive Officer. He is joined by Rich Valava, Executive Vice President and Chief Financial Officer Tim Goe, Executive Vice President and Chief Operating Officer and Tom Creery, President, Refining and Marketing. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. Please note that this conference is being recorded.
It is now my pleasure to turn the floor over to Craig Biery, Director of Investor Relations. Craig, you may begin.
Thank you, Calandra. Good morning, everyone, and welcome to HollyFrontier Corporation's Q2 2020 earnings call. This morning, we issued a press release announcing results for the quarter ending June 30, 2020. If you would like a copy of the press release, you may find 1 on our website at hollyfrontier.com. Before we proceed with remarks, please note the Safe Harbor disclosure statement in today's press release.
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 press release for reconciliations to GAAP Financial Measures.
Also, please note any time sensitive information provided 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.
Thank you, Craig. Good morning, everyone. Before we discuss the quarter's results and updates, I'd like to briefly address the COVID-nineteen pandemic. Along with the rest of the HollyFrontier team, I want to wish each of you and your families and loved ones good health and well birth being during these trying times. Companies across the country are adapting to this new normal to ensure the sustainability and continuity of business and it's no different for us here at HollyFrontier.
With the health and safety of our employees as a top priority, we've continued several initiatives including limiting on-site staff at our facilities to essential operational personnel only, while using a work from home for certain employees and restricting travel. These actions, along with the hard work and dedication of our employees, have enabled safe and reliable operations across all of our business segments. We will continue to monitor COVID-nineteen developments to properly address these policies going forward. Turning to our Q2 results. Today, we reported a net loss attributable to Holly Frontier shareholders of $177,000,000 or a loss of $1.09 per diluted share.
These results reflect special items that collectively decreased net income by $136,000,000 Excluding these items, net income for the 2nd quarter was a negative $40,000,000 or a loss of $0.25 per diluted share versus adjusted net income of $372,000,000 or $2.18 per diluted share for the same period in 2019. Adjusted EBITDA for the period was $100,000,000 a decrease of $547,000,000 compared to the Q2 of 2019. The weakness in earnings was driven by the decline in global economic activity caused by the COVID-nineteen pandemic, which reduced both volumes and unit margins across our business segments. The Refining segment posted adjusted EBITDA of $25,000,000 compared to $556,000,000 for the Q2 of 2019. Weak demand for refined products resulted in lower utilization rates and product margins across our refining system.
Consolidated refining gross margin was $8.44 per produced barrel, a 57% decrease compared to the same period last year. Our Lubricants and Specialty Products business reported adjusted EBITDA of $15,000,000 compared to $29,000,000 in the Q2 of 2019. Rack Forward adjusted EBITDA was 23,000,000 dollars representing a 7% EBITDA margin. Here, we saw demand improve over the course of the second quarter as compared to the depressed levels at the end of the Q1. Our Rack Forward volumes were down 40% year over year in April May, but showed significant improvement in June and were only down 7% year on year during that month.
This volatility was driven by demand in our industrial and automotive end markets, and demand continues to run slightly below normal in our personal care end markets. And in our industrial end markets, we expect demand to rebound with the broader economy. Within the Rack Back portion, we did see small improvement in base oil markers versus this time last year and we continue to expect base oil demand to rebound with the reopening of its primary transportation related end markets. Similar to our Refining segment, we intend to match production to market demand. In June, we welcomed Bruce Lerner to the HollyFrontier team as President HollyFrontier Lubricants and Specialties.
Bruce has spent almost 30 years of his career in the material science and specialty chemical sectors. His experience and leadership will help us improve the profitability of our Lubricants and Specialties business. Holly Energy Partners reported EBITDA of $113,000,000 for the Q2 compared to $89,000,000 in the Q2 of last year. The Q2 of 2020 includes a non cash gain on sales type leases of $33,000,000 At HEP, we have seen an improvement in demand for transportation and terminal services during the Q2 of 2020, consistent with trends in refined products. During the quarter, we announced plans to further expand our renewables business through the construction of a pretreatment unit located at the Navajo refinery and conversion of the Cheyenne Refinery to a renewable diesel plant.
Along with the previously announced renewable diesel unit at Navajo, these projects will have the capacity to produce over 200,000,000 gallons of renewable diesel per year and generate 165,000,000 dollars in free cash flow excluding the blenders tax credit. We're excited about the opportunity to enhance both the profitability and the environmental footprint of HollyFrontier through these investments in our renewables business. Our focus remains on the safety of our employees, contractors and communities as we continue to face the COVID-nineteen pandemic. Despite this challenging environment, HollyFrontier continues to demonstrate its financial strength by maintaining a disciplined approach to capital allocation. Our strong balance sheet and superior quality of assets provides us with a competitive advantage through the cycle.
And it's now my pleasure to introduce you to our new Chief Operating Officer, Tim Goh. Tim brings with him more than 30 years of experience in the refining segment, having served in various leadership roles in our industry. Tim's initial focus will be on operational excellence within our refining system. He has a strong track record of business improvement and value creation, and we're really excited for his contributions across our company.
Welcome, Tim. Thanks for the warm welcome, Mike. For the Q2, our crude throughput was approximately 350,000 barrels per day, slightly above our guidance of 300,000 to 340,000 barrels per day. Utilization rates were most impacted when product demand bottomed in April and saw a modest recovery in the back half of the quarter. Our focus remains on running safely and reliably.
And in the Q2, we had no employee injuries or Tier 1 process safety events. We are an essential business in these unprecedented times, and I am proud of our employees' focus and execution to operate safely and reliably. Our refinery operating expenses per throughput barrel were $6.97 in the Q2 versus $5.73 we recorded in the same period of last year. On an absolute basis, refining operating expenses of $239,000,000 declined $13,000,000 versus the same period last year due to reduced utilization rates in the period and the deferral of certain maintenance projects. Variable cost savings related to throughput reductions included electricity, natural gas, catalyst and chemicals.
In terms of maintenance, we have one planned turnaround on our white oils unit in Mississauga, which is scheduled to begin in late September and last through the end of October. Additionally, as Mike previously mentioned, we will begin the decommissioning of the Cheyenne refinery during the Q3 of this year. We ran the last barrel of crude on August 3 and expect to run off final intermediate and product inventories in August. We will then begin the conversion of certain units for renewable diesel production and continue to anticipate the Cheyenne Refinery conversion to be completed in the Q1 of 2022. While we have seen a recent stabilization in demand and expect a strong recovery for all of our products in the long run, there remains little visibility on the timing or extent of recovery in the near term.
We will continue to focus on what we can do internally to ensure safe, reliable and efficient operations as market conditions evolve. For the Q3, we expect to run between 340,000,370,000 barrels per day of crude oil, and we expect to adjust refinery production levels with market demand. I will now turn the call over to Tom for an update on our commercial operations. Thanks, Tim.
For the Q2 of 2020, our crude oil slate consisted of 31% Permian and 20% WCS and black wax crude oil. Our average laid in crude cost was under WTI by $1.72 in the Mid Con, $2.46 in the Southwest and $1.39 in the Rockies. Our exposure to crude market contango benefited our laid in crude discount in all of our regions in the Q2. We ended the Q2 of 2020 with gasoline and diesel cracks trading at under $10 in the group. In the Magellan system, we ended the quarter at 8,200,000 barrels of gasoline, some 2,400,000 barrels lower than at the end of the first quarter, but still above 5 year average levels.
Diesel inventories ended the quarter at 8,900,000 barrels, roughly 2,300,000 barrels higher than the end of the first quarter and well above 5 year average levels. 2nd quarter 3/2/1 cracks averaged $7.91 in the Mid Con, $14.66 in the Southwest and $18.15 in the Rockies. 2nd quarter differentials for WCS at Hardisty averaged a discount of $11.47 under WTI. The differential compressed significantly in the back half of the quarter with the June discount averaging $4.34 Recently, we've seen this differential widen back out to over $10 Midland differentials averaged the 2nd quarter at $0.61 under Cushing. Midland Barrel strengthened $2.25 over WTI at the end of June but have recently traded closer to parity with Cushing.
Canadian heavy and star runs averaged 64,000 barrels per day at our plants in the Mid Con and Rockies regions. We refined approximately 110,000 barrels per day of Permian crude in our refining system composed of 79,000 barrels per day at the Navajo complex and 31,000 barrels per day by the Centurion pipeline at our El Dorado refinery. Our RINs expense in the quarter was $33,000,000 compared to $31,000,000 in the Q2 of 2019. Despite current markets being more than double the levels at this time last year, total costs have remained relatively static due to lower volumes being blended due to lower utilization rates and the purchasing of RINs early in the calendar year once the flat price was lower. Crude oil runs at various refineries were set to match refined product demand.
This resulted in an average run rate of 70% for the quarter and with June levels approaching 80% to coincide with the increases in the market demand. As always, we adjust yields to maximize volumes into higher netback markets. And with that, let me turn the call over to Rich.
Thank you, Tom. As Mike mentioned, the Q2 included a few unusual items. Pretax earnings were negatively impacted by long lived asset impairments at the Cheyenne Refinery and the PCLI Asset Group totaling $430,000,000 along with other charges for corporate restructuring, Cheyenne Refinery Severance and Sonneborn Integration, which totaled $5,000,000 These items were partially offset by a lower cost or market inventory valuation gain of $270,000,000 and HollyFrontier's pro rata share of Holly Energy Partners' gain on a sales type lease of $19,000,000 A table of these items can be found in our press release. Cash flow from operations was $119,000,000 in the 2nd quarter, which included turnaround spending of $11,000,000 $38,000,000 of working capital costs. HollyFrontier's stand alone capital expenditures totaled $34,000,000 for the quarter.
As of June 30, our total liquidity stood at over $2,200,000,000 comprised of standalone cash balance of $884,000,000 along with our undrawn $1,350,000,000 unsecured credit facility. We have $1,000,000,000 of standalone debt outstanding with a debt to cap ratio of 16% and a net debt to cap ratio of 2%. Our earliest debt maturity is $1,000,000,000 of senior notes due in 2026, which are rated investment grade by S and P, Moody's and Fitch. In order to fund the planned expansion of our renewables business while preserving liquidity, we may raise additional capital in the next 6 to 12 months. Turning to Q2, we declared and paid a dividend of $0.35 per share totaling $57,000,000 We did not repurchase any shares in the 2nd quarter and do not intend to repurchase shares until market conditions and visibility improve.
HEP distributions received by HollyFrontier during the Q2 totaled $18,000,000 HFC owns 59,600,000 HEP Limited Partner Units, representing 57% of HEP's LP units with a market value over $850,000,000 as of last night's close. We still expect to spend between $525,000,000 $625,000,000 of consolidated capital and turnaround expenses in 2020, which is approximately 15% below our initial 2020 guidance and is inclusive of our recently announced renewables projects at Cheyenne and Artesia. During the quarter, we implemented a restructuring program focused on our corporate shared services and we expect to save approximately $30,000,000 per year of ongoing cash expenses from this effort. These savings will be split across the income statement with roughly 2 thirds in SG and A and 1 third in operating expenses. We continue evaluating additional ways to reduce the cost structure in each of our businesses in order to preserve our strong balance sheet and liquidity position.
And with that, Calandra, we're ready to take questions.
The floor is now open for questions. And our first question comes from the line of Ryan Todd from Simmons Energy.
Thanks. Good morning and congrats on a great result guys. Maybe if I could start out on CapEx and then some of your comments you made there. Obviously, you talked some on the last update on the renewables about the rising CapEx into 2021. I mean, can you talk about any potential range of where that CapEx number might fall next year?
What are some of the moving pieces and how much flexibility outside of the renewable spend you have for that? And then maybe as a follow-up, you just mentioned the potential to for the need to raise capital. What sort of I mean, can you talk through the thought process in terms of scale of capital, maybe debt versus equity, how you view the possibilities there? Thanks.
Good morning, Rhino. It's Rich. So on capital for 2021, there's not a whole lot of update from what we discussed 8 weeks ago with our renewables announcements. If you look into 2021, we're expecting to spend between $450,000,000 $500,000,000 in the Renewables segment. And I think as we've discussed, we've got a fairly heavy turnaround year next year.
So our normal sort of sustaining and turnaround mid cycle guidance of $375,000,000 will probably be north of that. We're still evaluating the turnaround schedule to see what we can push out. We're optimistic we're going to be able to get some of that work out, but certainly not the majority of it. We'll get the detailed guidance as normal in the winter. So then to your question on capital raise, look, we're in an excellent position here.
We're going to do this while maintaining the investment grade rating. And frankly, all the options are open to us. So our expectation will be to access the debt markets. We'd expect to do this in the next 6 to 12 months and our logic here is the bulk of that renewable spending is in the first half of twenty twenty one. So that's the bogey we're looking at and we have turnaround in capital spending at Tulsa in the spring of twenty twenty one.
Order of magnitude still to be determined, I think. But again, if we've got a renewables spend in aggregate of $650,000,000 to $750,000,000 over the next 18 months. That's really what we're looking at funding here.
Thanks. I appreciate the color.
And your next question comes from the line of Brad Heffern of RBC Capital.
Hey, good morning, everyone. Thank you for taking the questions. I'll just start off with the demand question. Can you talk about in your various operating regions how demand has trended since the end of the second quarter?
Sure. Good morning, Brad. It's Tom Creery. Splitting it out, we've seen pretty good demand through the Q2, especially in the Southwest. The Phoenix market has been strong partly because of some refining problems on the West Coast, but it's maintained higher margins and allowed us to put incremental volumes into that market.
The Rockies has been probably okay better towards the end of the quarter than it was at the 1st of the quarter in terms of demand. And going over to the group, the distillate demand has been pretty constant throughout the quarter, maybe rising a little bit as we get back into the back half of the quarter. And gasoline really hasn't been that bad. But when you compare it to last year's, it's definitely lower. So we have adjusted runs, especially in the Mid Con to take advantage of that or compensate for that.
So we don't get too far and start building inventories. So going forward, I think in terms of demand, gasoline, we still are in the driving season right now. So that's adding some additional volume. And we're probably seeing as the stay at home is rescinded, we're starting to see higher total miles across the country. Distillates, it's a little harder to read with the understanding that probably a third of the distillate demand comes from industrial and off road use.
But we've seen that fairly steady. Inventories in Magellan have been fairly steady in the group, which is our big market and we're getting geared up for the harvest region sorry, the harvest season. So we expect a perk up in inventory as we get into the fall there. And just the wildcard, With international travel restrictions and the corona, it's very difficult to ascertain when jet demand is really going to start to come back. We don't expect that to happen probably until 2021.
So we're minimizing jet production across the fleet.
Okay. Thanks for the detailed answer. Maybe for Rich, Holly hasn't really had a change in net debt overall since the end of 2019, in contrast to basically everyone else. So I was curious if there are any working capital or tax impacts that we need to think about going forward that maybe might distort that number one way or the other? Thanks.
Hey, Brad. No, I don't really think so. We've had some pretty good business performance considering the environment and excellent operating performance, which has really helped here. Tom's team has done an excellent job of managing inventory within our refining business, so we're not expecting any changes there. So no, I don't looking forward, I don't have a crystal ball in the crude price, but I have nothing to call out for you going forward here.
Okay. Thank you.
And your next question comes from the line of Manav Gupta from Credit Suisse.
Hey, guys. A material improvement in the RAC back results below $10,000,000 loss that has not been the case for quite some quarters. Can you talk about what drove this trend in the rack pack market relative to the prior quarters?
Hey, Manav, it's Rich. Look, we had demand pick up, as Mike noted, and if you think about Rack Back, really the end markets there are primarily automotive and industrial. So we had some more pull there. Margins are better year over year. There is some discounting off the indexes that we post, but they're still improved year over year.
So generally speaking, I think it's healed the base oil markets are healing. They're not 100%, but they're getting better. And so we saw some improvement there. And then the third thing I'd note for you is we had good cost management across lubes. So that helps as well.
This is more of a policy question, Rich. So Democratic presidential candidate Joe Biden doesn't have renewables agenda yet in his Clean Energy Program. But is there are you hearing any chatter that this that it could come in, which would mean that the BTC could be extended and LCFS becomes a national standard? Any comments over there?
Manav, this is Mike. I think it's probably a little premature. As you likely know, the RFS in particular doesn't really fall on partisan lines. But clearly, a Biden administration would be more progressive in terms of green initiatives, haven't yet rolled out LCFS. But I think BTC is probably directionally more likely in the future under both administrations frankly.
It's one of those things that we believe will gain support.
So one last quick follow-up here. You mentioned BTC. Your current estimate for the renewable diesel project, which is 20% to 30% IRR, that assumes BTC ends in 2022, right?
That's correct.
So if it gets extended the returns go up?
Yes. We're talking about another $200,000,000 per year of cash flow based upon a $1 BTC extension.
Thank you so much for taking my questions.
Thank you.
Your next question comes from the line of Paul Cheng from Scotiabank.
Hey, guys. Good morning.
Hi, Paul.
A number of quick questions. Which on the impairment, how much is related to the lubricant side and what's the rationale behind?
On the lubricant side, it was about bear with me one second, Paul, I got to find a number, $205,000,000 The rationale is pretty simple. At the end of the day, while we are very positive on that business outlook, the impacts of COVID-nineteen on 2020 and then going into 2021 are undeniable. And particularly with respect to PCLI's business because it's heavily industrially levered. I'd point out, too, keep in mind, look, this is a recent acquisition, say, in contrast to our refineries. So it's got a higher book value.
And the plants, for example, are fully depreciated. So it's a higher hurdle, if you will, to cross as well.
And from that standpoint, is that in any shape or form change your M and A outlook related to this business? I mean that before that, I think you guys have been looking at and that's one of the major target area. Obviously, that gives you the impairment. Is that changing your view?
Paul, I think that we've been pretty clear about probably not further investing in base oils manufacturing in a market that's reasonably well supplied, but that the Rack Forward business in terms of formulating, blending, selling, that's an area that we would continue to look to extend our footprint. Not a lot of activity right now, but we do distinguish between Rack Forward and Rack Back in terms of relative attractiveness.
So might you still interested in further expand on the rack forward even though that the last couple of quarters has not been that great?
Yes, Paul.
Okay. Then can you help us to maybe looking at Cheyenne with the shutdown on a pro form a basis that how the impact on the unit cost, DD and A and the margin may look like? Paul, it's Rich. Do you have any pro form a number from the previous quarter or the last 1 or 3 years?
No. So let me give you some color here, Paul. It will hopefully help. So as Tim mentioned, we ran the last barrel of crude at Cheyenne a couple of days ago, August 3. So on the revenue side, we're going to continue to run down intermediates through August and we will have sales into the month of September.
To your point on the cost, Paul, we're not expecting to eliminate any real fixed cost at Cheyenne in the 3rd quarter. So I'm not expecting the Rockies cost number to change a whole lot in total. So look, Q3 is going to be a bit messy from a modeling perspective. I'd urge you to keep in communication with Craig. Going forward, we'll expect to provide guidance, I'd say, late September, early October on how we're going to set up reporting for the Q4 and beyond with respect to refining and Renewables.
And that format will go into effect for the Q4 of 2020, which we reported obviously in February of 2021.
And which SKU is that?
Sorry, Paul. I missed that. Okay, Calandra, I think we'll probably go to the next question.
Your next question comes from the line of Roger Read of Wells Fargo.
Hey, thank you. Good morning.
Good morning, Roger. You all hear me?
Okay. After that,
I want to make sure I'm here.
Fair enough.
Really just one question on the renewable diesel construction. Can you give us an idea of how the management of the construction process will go? And what I'm coming at here is this is a fairly I mean, as you've laid out, it's a large amount of CapEx. It's to some extent a new business to you. And I just want to make sure that for a company that hasn't built something this large in a while, how you are set up from a project management, construction management side, maybe the nature of the contract of the company that's building this for you, lump sum, do they have penalties or bonuses for getting it done sooner?
Kind of understand the risk factors to you beyond the 18 months and beyond the budget of kind of plus or minus maybe $700,000,000
Yes. Roger, let me start with this. First off, there really are 3 projects here and the execution strategy for the 3 is different. If we can start with Cheyenne, that is a refinery conversion. We consider it similar in nature to a turnaround though with a highly engineered new process.
We have an outside engineering firm that we have great faith in and we're pulling in construction management resources. But the Cheyenne project, we think will be executed well within the time and budget, and not dissimilar to a refinery turnaround. The Artesia projects are a little bit different in nature. And as you suggest, these are large projects, that will require very active management. We have not yet bid the construction yet, but we're working with a variety of different vendors.
Right now, we're in engineering phase. And so what I would tell you is more to come. But at our company, we have a very disciplined stage gate process through which we're going
to take this
project and expect to bring it in on time and on budget with a whole lot of focus with both inside and outside resources. So I guess that's another way of saying we agree with you. This is a very high priority for us and there will be more to come in terms of the specifics around project management.
Okay. And so I guess just to be clear here, we won't see any sort of construction starting at Artesia until all the engineering is absolutely set in stone, right?
Roger, this is Tom. Actually, we started to break dirt at Artesia now in preparation. Artesia is probably a little further ahead than the other two projects. So that's why we're starting construction there or at least moving some dirt. And the other thing I want to make clear is that on a lot of, if not most, if not all of the long lead items, we have either put in our orders for those items or are very close to putting in our orders.
So we're well into the queuing process. So with effects of COVID, we still expect to be on schedule and at budget. Okay. All right. I appreciate it.
Yes. Yes. Roger, this is Tim. One more thing to mention. As you guys probably know, you really can't start construction until you have the permit for your facilities.
We do have the permit for our Artesia RDU, and that's why Tom is saying we are able to start construction on that, and we don't anticipate any issues with the permitting on the other projects as well.
That's great. Thanks. And congrats, Tim,
on your new role there.
Thanks, Roger.
Your next question comes from the line of Matthew Blair of Tudor, Pickering and Holt.
Hey, good morning, Mike, Tim and Rich. I wanted to just touch on your refining throughput guidance. I think it implies about 74% to 81% utilization in Q3, which if you take the midpoint, it's pretty similar to Q2 levels despite just an overall recovery in absolute demand and higher overall U. S. Utilization.
So could you just talk through that why you ran above U. S. Averages in Q2, but potentially below U. S. Average utilization in Q3 here?
Yes. This is Tim. Let me try to take a shot at that. We do think our throughput guidance and the demand that we've seen here at the tail end of the second quarter has improved and will continue to improve into the Q3. The guidance that I mentioned in my prepared remarks of 340,000 to 370,000 barrels a day is actually about 10% higher than the guidance we provided for the Q2.
Don't forget that Cheyenne is coming out of the picture as of August 3. So we do see improving throughput from Q2 to Q3 to the tune of about 10%.
Makes sense. And then I was wondering if you could quantify how much contango benefit rolled through your system in Q2, either in terms of, just like absolute millions or maybe it's like a percentage of just the contango that we saw on the screen there?
Yes, Matthew, it's Tom Creery. Yes, the contango benefit, we're looking at somewhere around $3 for the quarter. Of course, that level isn't in the market today, but we'll take it for the Q2, that's for sure.
Sounds good. Thank you very much.
Your next question comes from the line of Theresa Chen from Barclays. Good morning. I wanted to first ask about your renewable diesel plants. So since major announcement in June, we've had additional announcements of competitors either wanting to enter into space or further developing their plans to build out their footprint in the space. Can you give us a sense of what is your framework in the near and medium term as far as the supply and demand dynamics go for this end market?
Sure, Therese. It's Tom Ferry. Like you, we've seen a flurry of announcements coming out on renewable diesel of late. And as we go on the supply of feedstock for bean oil and veg, we see probably 2 pinch points. 1 is the crush capacity and the second one is the refining capacity as we go forward.
It's interesting to note though that we only crush 44% of the soybeans in the United States and the other 56% is exported. So there is capacity to increase that as more projects come on. In the demand side, we still see fairly robust demand. California is there, but we also see Colorado, Washington and other states moving towards LCFS adoption. And as that goes along with Canada, we think there's going to be sufficient market.
The other thing that we do see is that there's increasing demand in Europe. And even today, there is some renewable diesel leaving the United States and going to Europe. So that will always be an option going forward. And on the supply side in Europe, we don't see the expansion of announcements that we're seeing in the U. S.
Today currently.
Understood. And then just on the Rack Forward portion of the lubricants business, can you provide us any live data points of where you're seeing demand and economics as we're almost halfway through the Q3?
Hey, Theresa, it's Rich. So I'd say, as Mike mentioned, right, our June sales volume was down about 7% year over year. We saw a big rebound in the auto and industrial end markets. July looked very similar, and the order book for August is along the same line. So we'd expect big improvement sequentially, 3rd quarter to 2nd quarter, but probably at least on a volume side still down a little bit year over year.
Margins have held in pretty well. Base oil prices obviously are compressed with crude prices in general. So we're feeling considering the environment, we're feeling pretty good.
Thank you. Your next question comes from the line of Phil Gresh from JPMorgan.
Yes. Hey, good morning. First question, I thought I'd throw Tim's away. I was curious about your early observations about opportunities to improve operations, reduce operating costs. There's obviously been a target out there at HollyFrontier for a long time around operating costs.
And clearly with if you take Cheyenne out of the picture, then that would have a per barrel reduction impact. But any thoughts you might have about the opportunities set moving forward?
Yes. This is Tim. Thanks for the question. It kind of feels like a non deal roadshow kind of question, but I'd love to provide you some early thoughts. Mike said on the last call, the last quarterly call that focusing on improving reliability and really overall operations excellence was a priority here at HollyFrontier.
And my early observations are, yes, I'm thinking we should double down on that. We really do believe that they're building structural competitive advantages at our assets are critical for our business, especially as the market factors come and go. And from a safe, clean and reliable operation standpoint, I do believe there's a lot of opportunities. Our operating costs are a little bit higher in the Rockies, And we believe that focusing on reliability and efficient operations will help us do that. My early observations are there are opportunities out there.
We're developing long range plans right now to try to address how we want to go about strategically to do that. And I'd just say more to come on that. It's probably a little early to go into any kind of details or any kind of specifics around that. But I do think the reason I came here was I do think there are great opportunities for us to pursue, and I'm looking forward to those.
Okay. Thanks for that. Second question, I know there's already an M and A question about lubes that was thrown out there. With several refining assets on the market right now, is this an area of interest for the company? Or is the focus more on the organic renewable diesel and any, I guess, probably bolt on Lubes opportunities more so than refining?
The renewable diesel is obviously a huge priority for us, and that's going to consume a lot of capital and management focus as we execute those projects and develop that franchise. Yes, there are assets that are being sold currently. And through time, we believe that this industry will consolidate and most likely would want to participate in that. But it's not a large area of emphasis for us right now.
Okay, got it. And the last quick question just on Oogues. I know in the past you have provided guidance on Rack Forward EBITDA and recognizing it's a volatile environment. Do you feel like as you move through the second half of the year that I guess we'd be kind of reapproaching prior levels that you had thought? I mean, it sounds like volumes are quite close, only down single digits.
But is there anything else we should be thinking about there?
Phil, this is Rich. No, I mean, look, we're as of what we know today, we'd expect sequential improvement Q3 versus Q2. But the reality of the COVID situation is we just don't have that kind of visibility right now, unfortunately.
Understood. Okay. Thank you.
Your next question comes from the line of Neil Mehta from Goldman Sachs.
I just want to add my congratulations here, Tim. It's great to connect again here. My first question is related to some of these outages and idling of capacity. We saw Gallup in New Mexico and then obviously Martinez on the West Coast. And as you think about your footprint, particularly the western part of your footprint, how do you think of these the impacts of these closures on margin?
Yes, Neal, it's Tom Currie. With the announcement of Gal being idled or shut down, that's kind of helping us move incremental barrels into the northern part of Arizona. So we have 2 main locations there, Bloomfield and Moriarty. So we've seen the increase of products going there, which is basically just pulling them away from other markets as we optimize our product flows. The West Coast does have an impact on Phoenix as you well know.
And as barrels get tighter on the West Coast, it makes for better Phoenix margins. So I think those are both tailwinds for us at this point in time, which over time we would think that would improve our profitability.
Great. And then Tom, the follow-up is a couple of macro questions and get your prognostication on three things in particular, if we can lump it into one question. One views on the Brent WTI and the path here to WCS recognizing we're in a tight period right now with maintenance, how it evolves and 3, just views on D6 RINs. So there are 3 parts to that question, but any thoughts on each would be valuable.
Okay. Well, we'll start with Brent TI. What we think going forward is that the transport and quality impacts will set the differential on the Brent TI. We're looking at somewhere between $2.50 $3 both for the remainder of this year and through 2021 absence of any other big market movers in the international side. WCS, we saw probably saw well over 1,000,000 barrels being shut in, in April, which accounted for low differentials, as I mentioned before, going into $4 We're seeing some of that production come back on stream.
And as a result, we're seeing higher differentials at Hardisty as well as apportionment and Enbridge, which in the early part of the second quarter was at 0 for the first time in a long time has now come back out to 7% apportionment. We think that's going to continue through the Q4. So we're seeing higher differentials probably if you're looking at through next year probably compared to the curve probably on a dollar basis, dollars 13 to $14 differential off WTI. E6 RINs? E6 RINs, yes, that's the $1,000,000,000 question.
We think that they're probably overpriced down. And we expect we think that they should be going trending lower through next year. A lot of it is going to have to come down to what's going to happen with small refinery exemptions, the RVO, which we have yet to seen and other developments that includes from the governments as well to set the pattern for D6s as we go forward. But directionally, we think they should be trending lower.
All right, great. Thanks, Tom.
Okay.
Your next question comes from the line of Doug Leggate from Bank of America.
Hey, guys. Good morning. This is Kalei on for Doug. A couple of quick follow-up questions here. As it relates to the renewable diesel economics, does the supply outlook that's kind of changed over the last couple of months or so, I guess, with the announcements of new projects, does it affect your view of the sustainability of the LCFS credits?
No. I would think I think it would not have an impact on LCFS credits. It may have with all these announcements coming on stream, it may have an impact on feedstock availability. But that's one of the main reasons why we invested in a pretreatment unit was to give us feedstock flexibility. So we weren't beholden to any one product or feedstock so that we could pick the best product.
So as we look forward in terms of LCFS, we see that as fairly static and we see the big driver is being able to get the lowest price or highest CI feedstock into the plant and turned into renewable diesel.
Thanks. And my quick follow-up is just on the Galp Refinery. Irene's understanding is that MPC was running a sale process on this and it's located in a market that you know very well. Wondering if you guys took a look at that asset? And I'll leave it there.
Thanks.
We never saw a sale process.
Okay. Thank you.
Are there more questions? I
see Jason. No. Okay. Very good.
We're going to wrap it
up at this point. Thank you for your questions. Thank you for participating with us on this morning's call. We always enjoy sharing our business results with investors and analysts in both good times and more challenging times. And quite frankly, we're very unaccustomed to printing a loss in the 2nd calendar quarter of the year.
But on the flip side of that, I want to give a particular shout out to our employees and business partners who have done an outstanding job in creating what we are looking for, which is excellence in our operations every day, very steady operations, very strong cost management. And I think that was reflected in the capture rate for the quarter and the operating cost for the quarter. And given the business environment, quite frankly, I'm proud of that and I'm proud of them. So that's the first piece. The second is really with respect to renewable diesel and where we're going with that.
It is, as I said, a huge priority for us. We are very excited about it. It's a large capital deployment for this company in the $650,000,000 $750,000,000 range. But in terms of the earnings accretion of these projects and the change in our business profile, I see a lot of value in it. And I see it as a really strong platform to continue to advance HollyFrontier and the earnings capacity, cash generation capacity of this company.
So that's a real bright spot. As to the COVID related refining environment we find ourselves in, we're going to work hard through it and we're going to try to deliver that operational excellence that is so important to us as we go forward. So thanks again for your participation and we look forward to talking next quarter.