Welcome to HollyFrontier Corporation's Third Quarter 2019 Conference Call and Webcast. Hosting the call today from HollyFrontier is George Dumouries, President and Chief Executive Officer. He is joined by Rich Valieva, Executive Vice President and Chief Financial Officer Tom Creery, President, Refining and Marketing and Jim Stump, Senior Vice President, Refining. At this time, all participants have been placed in a listen only mode Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Director, Investor Relations.
Craig, you may begin.
Thank you, Sheryl. Good morning, everyone, and welcome to HollyFrontier Corporation's Q3 2019 earnings call. This morning, we issued a press release announcing results for the quarter ending September 30, 2019. 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 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 George Dameris.
Thank you, Craig, and good morning, everyone. Today, we reported 3rd quarter net income attributable to HollyFrontier shareholders $262,000,000 or $1.58 per diluted share. Certain items detailed in our earnings release decreased net income by $16,000,000 on an after tax basis. Excluding these items, net income for the current quarter was $278,000,000 or 1.68 dollars per diluted share versus adjusted net income of $351,000,000 or $1.98 per diluted share for the same period last year. Adjusted EBITDA for the period was $523,000,000 a decrease of $90,000,000 compared to the Q3 of 2018.
This decrease was principally driven by lower product margins and weaker laid in crude advantage across our refining system. The Refining and Marketing segment reported adjusted EBITDA of $425,000,000 compared to $507,000,000 for the Q3 of last year. Consolidated refinery gross margin was $17.23 per produced barrel, an 11% decrease compared to the $19.41 for the same period last year. We set a new quarterly crude charge record averaging over 476,000 barrels per day in the 3rd quarter. Our lubricants and specialty products business reported EBITDA of $38,000,000 compared to $42,000,000 in the prior year despite improvements in the base oil market.
Rack Forward EBITDA was $51,000,000 for the quarter and EBITDA margin was 11% of sales. Weakness in Rack Forward earnings was driven by unfavorable sales mix and the impact of macroeconomic headwinds on end markets. With respect to our Sonneborn acquisition, as of September 30, we have achieved run rate synergies of $10,000,000 and continue to expect long term synergies of $20,000,000 per year. Poly Energy Partners reported adjusted EBITDA of $90,000,000 for the 3rd quarter compared to $87,000,000 in the Q3 of last year. This increase was driven by strong third party volumes and higher spot revenues on our crude oil pipeline systems in Wyoming and Utah, which contributed to a 10% increase in volumes year over year.
During the quarter, we returned approximately $260,000,000 of cash to shareholders through our regular dividends and share repurchases, highlighting our continued commitment of returning excess cash to shareholders. For the remainder of 2019, we are focused on completing the turnaround work at our Cheyenne, El Dorado and Woods Cross facilities and expect to return to normal operations later this quarter. We are pleased with the current strength in product margins across our refining system and look forward to a strong finish to the year. Looking into 2020, our outlook remains positive. We believe IMO implementation will provide uplift to diesel margins and further discounts to heavy crude barrels.
With a light turnaround schedule next year, we are well positioned to take advantage of strong product margins and improving crude discounts across our refining system. Now I'll turn the call over to Jim for an update on our operations.
Thank you, George. For the Q3, our crude throughput of 476,000 barrels per day was our highest ever recorded quarterly crude throughput across our refining system. For the Q3, our consolidated operating cost of $5.94 per throughput barrel was $0.11 lower versus the same period last year on higher consolidated throughputs. In the Mid Con, we ran 294,000 barrels per day of crude. OpEx per throughput barrel was $4.77 a decrease of $0.30 versus the same period last year.
Our El Dorado refinery set a new quarterly crude charge rate record during the Q3 averaging 160,000 barrels per day. In the Southwest, we ran 107,000 barrels per day of crude. Our operating expense per throughput barrel was $5.23 an increase of $0.54 versus the Q3 of last year. This was mainly due to higher than normal operating costs associated with the mechanical problem that we had with our reformer unit, which we repaired this month in October. In the Rockies, we ran 75,000 barrels per day of crude.
Our operating expense was $11.34 per throughput barrel, a $0.38 decrease over the same period last year. As George mentioned, due to our significant planned maintenance, we expect to run 380,000 barrels to 390,000 barrels per day of crude in the Q4. We are currently wrapping up a scheduled turnaround at our Cheyenne refinery and the ongoing turnarounds at our El Dorado and Woods Cross refineries are expected to be completed on schedule and return to normal operating rates in the second half of the fourth quarter. I will now turn the call over to Tom for an update on our commercial operations.
Thanks, Jim, and good morning, everyone. For the Q3 of 2019, we ran 476,000 barrels of crude oil, which was composed of 32% Permian and 18% WCS and black wax crude oil. Our average laid in crude cost was under WTI by $1.95 in the Rockies and $0.08 in the Mid Con and over WTI by $0.43 in the Southwest. In the Q3 of 2019, gasoline inventories in the Magellan system started the quarter at 7,100,000 barrels and ended the quarter at 6,600,000 barrels. Current inventories are slightly lower at 6 point 2,000,000 barrels today.
Group 3 diesel inventories dropped by 800,000 over the quarter to finish up at 7,600,000 barrels. Current distillate or diesel inventories are at 6,100,000 barrels. 3rd quarter 3/2/1 cracks in the Mid Con were $17.29 $26.78 in the Southwest and $26.85 in the Rockies. In our Southwest and Rockies regions, we continue to see higher margins as refinery operations on the West Coast and their problems have affected the markets in Phoenix and Las Vegas. In the Mid Continent, gasoline cracks are trading lower as fall refinery maintenance ends along with weaker seasonal demand.
Diesel cracks remain high however as harvesting has been delayed due to inclement weather. Crude differentials widened across the heavy barrel and narrowed on the sour slate during the 3rd quarter. In the Canadian heavy market, 3rd quarter differentials for WCS at Hardisty averaged $12.24 per barrel, slightly higher than 2nd quarter levels. Both the current and the forward market for WCS remains even wider with differentials in the $17 range as the market proceeds incremental crude production coupled with the perceived positive impact of IMO 2020. Apportionment on the Enbridge system remains high at 44% despite the continuation of production curtailments by the Alberta government.
We, however, continue to be able are able to purchase and deliver adequate volumes of price advantage heavy crude oil to meet our refining needs. Canadian heavy and sour runs average 72,000 barrels per day at our plants in the Mid Con and Rocky regions. We refined approximately 153,000 barrels a day of Permian crude in our refinery system composed of 107,000 barrels per day at the Navajo facility and 46,000 barrels per day at our El Dorado refinery delivered by the Centurion pipeline. Midland sour differentials averaged the Q3 at $0.50 below WTI and currently we see the same differential trading at $0.20 above Cushing as new pipeline capacity has come on stream. We anticipate this differential to narrow through the balance of the year as additional pipes come online.
Our rent expense for the quarter was $8,000,000 which includes $37,000,000 in small refinery exemption waivers we received for the 2018 year at our Woods Cross and Cheyenne refineries. And with that, let me turn the call over to Rich.
Thanks, Tom. As George mentioned, the Q3 included a few unusual items. Pre tax earnings were negatively impacted by a lower cost to market charge of $34,000,000 and Sonamore integration costs of $4,000,000 which were offset by a $37,000,000 reduction in the cost of RINs as a result of the small refinery exemption granted to our Woods Cross and Cheyenne refineries for the 2018 calendar year. Table of these items can be found in our press release. For the Q3, cash flow from operations was $441,000,000 including turnaround spending of $42,000,000 HollyFrontier's consolidated capital expenditures were $68,000,000 for the quarter, producing free cash flow of $373,000,000 The 3rd quarter's strong free cash flow allowed us to return a total of $260,000,000 of cash to shareholders, comprised of a $0.33 per share regular dividend totaling $55,000,000 and the repurchase of approximately 4,300,000 shares of common stock totaling $205,000,000 As of September 30, we had approximately 3 $20,000,000 remaining on our share repurchase program.
HollyFrontier has returned over $880,000,000 of cash to shareholders through both dividends and share repurchase over the past 12 months, representing a cash yield of 9%. At the end of the Q3 and with an eye towards substantial planned maintenance in the Q4, our total cash balance stood at $982,000,000 above our target of $500,000,000 This strong cash position along with our undrawn $1,350,000,000 credit facility with our total liquidity at over $2,300,000,000 As of quarter end, we had $1,000,000,000 of standalone debt and a debt to cap ratio of 14%. Total HEP distributions received by HFC during the Q2 were $38,000,000 a 2% increase over the same period in 2018. HollyFrontier owns 59,600,000 HEP limited partner units representing 57% of HEP's float with a market value of $1,400,000,000 as of last night's close. For the full year of 2019, we've increased our capital spending guidance driven by higher turnaround scope and costs.
We now expect to spend between $550,000,000 5 $90,000,000 for both standalone capital and turnarounds at HollyFrontier Refining and Marketing, dollars 45,000,000 to $50,000,000 in HollyFrontier Lubes and Specialties and $35,000,000 to $40,000,000 of capital for HEP. And with that, Cheryl, we are ready to take questions.
Our first question is coming from Matthew Blair, Tudor Pickering. Your line is open.
Hey, good
morning, everyone. I wanted to ask about lubricants. So your Rack Forward EBITDA fell quarter over quarter, but your volumes improved. Could you just walk through some of the challenges here? And does your 2019 guidance of, I believe, $240,000,000 to $260,000,000 Does that still hold?
Hey, Matthew, it's Rich. Good morning. So a couple of things here we'd point out. First, as we described in our press release and you've seen from some of our peers in the lube space, the macro issues that are driven by the trade war are definitely impacting sales here, particularly on the high end of the finished product side. So for example, we saw new tariffs on sales into China this quarter, and we continue to feel the indirect impacts on end markets such as autos.
2nd issue I'd point out is, as we discussed on our Q2 call, we have some maintenance occurring on the lube extraction unit or the LEU at Tulsa in the 4th quarter. So we did build some inventory there to smooth sales and handle customers through the Q4. To your point, looking at our Rack Forward guidance, it's going to be a stretch to get there, but it is possible. And then looking into 2020 and longer term, we're fully confident of our of where we are in that business, dollars 275,000,000 $300,000,000 of mid cycle EBITDA.
That's helpful. Thank you. Are you able to break out the contribution from Sonneborn in the quarter?
I don't have that handy, Matthew. No.
Okay. And then final question. Been some reports that some PADD IV refinery assets are on the block. It's obviously a market that you're pretty familiar with. Just wanted to gauge your interest if any in some of these assets.
Matthew, this is George. We obviously won't discuss any specific opportunities. I think we've been pretty consistent with our messaging regarding our desire to continue to grow and our preference to stay in inland markets as you just mentioned. So you can draw your own conclusions from that. Having said all that, any deal would have to be for the right assets at the right price where we can bring something more to the table than just cash and where that asset in that business can bring something new to our company as well.
Thank you. I'm going to re queue for a few more follow ups. Thanks.
Okay, Matthew.
Thank you. Our next question comes from Carly Davenport, Goldman Sachs. Your line is open.
Hey, good morning. Thanks for taking the questions and congrats on a good quarter. The first one is just on WCS. We've started to see differentials widen back out towards rail economics here in the Q4. Do you think that it's IMO 2020 fundamentals or some other factor has been driving that move?
And then can you remind us on your capacity to run Canadian barrels especially given the rail allowance deal that was announced this morning by the Alberta government?
Hi, Carly. Good morning. It's Tom Currie speaking.
I'll try
to answer the first one. I will answer the first question first. Yes, we have seen them widen out to $17 $18 We do believe some of that a lot of it is basis on IMO 2020. It's very difficult to ascertain how much of that move is attributable to IMO 2020, but we've been saying it's going to widen as we get closer to the onset of that program. And when we look at the forward curves, we see it staying at those levels, if not increasing through the year 2020.
We truly believe that some of it is basis on the incremental rail rates. As you know, the Canadian or the Alberta government has said that if you move it by rail, you can move over and above the quota system. So that barrel is the last barrel being moved. So it does tend to set the market price. And as we all know rail is a lot more expensive than pipeline economics.
Our volumes that we're able to run That depends on outright prices and what our LP models are saying. Typically, we're somewhere between through the whole refining network, 60,000 to 100,000 barrels a day, if not more, depending on market conditions.
That's great. Thank you. And then the second one is on the lubricants business. Your guys' market data showed 3Q base oils margins were materially improved from prior quarter. From what you've seen so far, do you expect to sustain here into the Q4?
And what do you kind of see as the biggest factors outside of maybe the macro that you already talked about to watch out for that could swing margins?
Hey, Carly, it's Rich. Yes, we're pleased. I'd say what we've seen so far in the lube market is what we in the base on market, excuse me, is what we've expected, which was really a trough in the late Q1, early Q2. With some typical seasonality, we're basically expecting this to grind better from here. The supply demand balance in base oil improves in the next few years.
So we'd expect cracks to move with it. To your point, there is usually a little bit of seasonality around year end. So that's probably something to watch out for. But we're pretty optimistic going forward here.
Great. Thanks so much.
Thank you. Our next question comes from Phil Gresh from JPMorgan. Your line is open.
Hi, guys. Nick Laman on for Phil Gresh. First question would just be on working capital. So 1H guys had real strong performance there. It looks like 3Q was kind of neutral.
We're just wondering how you're thinking of working capital going into 4Q and now you've been carrying the high cash balances, wondering if there's any correlation there?
Yes. So basically working capital is roughly neutral, you're correct, in the Q3. What we saw was a build in inventory out of all the maintenance we have planned here in the Q4. So we would expect to release that inventory in the Q4 and get that benefit accordingly. Going sorry, I'm spacing your other question.
Yes. And just a follow-up there. Sorry.
Sorry, just on the cash balance, George. Yes, and then we kept a higher cash balance into the end of the Q3 again with an item maintenance in the Q4. And we're going to have both the bills for the work performed and we're going to have some obviously lost revenue from having assets down. So we planned accordingly.
Okay. And then just a follow-up there. So how are you guys thinking about capital allocation now going forward? If you're carrying the higher cash balances, you see ability for increase on the share repurchases, any further thought on the dividend increase or we really just keeping it there for possible M and A?
So, I think we'd start with our cash waterfall that we always reference, which is first and foremost, we want to protect the balance sheet and the assets. Secondly, will be the dividend. 3rd will be growth capital or acquisition, and we view those equally, the best returns will win. And 4th, if we've got excess cash, cash over $500,000,000 will go to share repurchase. I think to your point, we obviously would expect a little bit lower pace of buyback in the Q4 again just because we've got this maintenance period going and then we'll see how we go into next year.
To your question on dividend, we're continuing to review that and balancing that with opportunities to grow our business and then what we're hearing from investors and their preferred form of cash return. I just note that we view the dividend as a commitment to the shareholder. We do not want to overextend and again we want to balance against our total priorities. So still working on that.
Okay, great. Thanks a lot and congrats on the quarter. Thank you.
Thank you. Our next question comes from Matthew Blair, Tudor, Pickering, Please go ahead. Your line is
open. Thanks. Just one follow-up. So I think it was yesterday Seaway announced a 200,000 barrel per day expansion. They're hoping to do that at a tariff of just $1.25 a barrel, I believe.
George, do you have any thoughts? Does this have any implications for narrower Brent TI differentials going forward?
I'll do this one time. No, I think directionally the dollar in a quarter if it comes to fruition is lower than we would expect for pushing the Houston move. But again, even factoring this in, it's really the incremental barrel that always sets the price in markets. So when we look forward to the Brent WTI spread, we still feel confident in that $5 per barrel range.
Thank you
very much.
Okay. Thank you. Our next question comes from Kalais Akhamin from Bank of America. Your line is open.
Hey, guys. I'm on for Doug. So thanks for taking my question. My first is just on the MOP. So one of your peers morning announced a strategic review of their MOP.
The market today just does not support it. I'm wondering if you can share any updated thoughts that you guys have of the structure of that business and what the strategic benefit to HFC is?
Hey, Kalei, it's Rich. So yes, like HEP's unit price performing has been disappointing and confusing, to be honest. We're talking about a tax deferred security with really no commercial risk, 12% yield in the world where the 10 year treasury is at 1.7. So we're incredibly frustrated, but I know we're also not alone. So all that said, look, we're going to do what's best for the shareholders.
HEP was really formed for two reasons. First, to highlight the value of these assets within HFC and HEP is still trading about a 4 turn premium to HollyFrontier. But second one to access the capital markets and clearly that is the equity capital markets in particular and clearly are broken at the moment. So we'll continue to evaluate our options here and monitor how the market is going. Right as we sit here right now, we don't believe a buy in makes sense.
And really the good news is that we're under no pressure here. HEP is very healthy operationally, commercially, has the right amount of leverage. It's got a coverage ratio north of 1. So we feel comfortable here and we'll continue to monitor the situation.
Thanks, Rich. My follow-up is just on the quarter. So the capture rate for the Rockies came in very strong. Anything you can offer there?
Yes. I think we had a couple of things going on there, Clay. Obviously, in the quarter, you'll notice we had the small refinery exemptions. So you got to clear those out. It was still outlook margins in the Rockies, particularly Salt Lake City were very, very strong and we had a good clean run there this quarter.
So I think you should keep that in mind as well.
Got it. Thank you.
Thank you. And there are no further questions in the queue at this time. I will turn the floor back over to Craig for any closing remarks.
Thanks, everyone. We appreciate you taking the time to join us on today's call. If you have any questions, as always, reach out to Investor Relations. Otherwise, we look forward to sharing our Q4 results with you in February.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.