Support an HFC valuation of $60 per share. We'll start with the business that is easiest to value, HEP. Our recent IDR transaction simplified valuation. We no longer need to discuss the value of the GP. HFC owns 59,600,000 HEP units, which have a current market value of approximately $2,000,000,000 We believe refining has a value over $6,500,000,000 Going forward, we are guarding to a crude rate in the range of 460,000 barrels per day.
Frankly, as our reliability initiatives fully kick in, I believe we have upside to the four sixty. We'll stick to the four sixty range for now. Multiply that crude rate by historical Gulf Coast cracks and our inland location based advantages, Brent WTI, WCS WTI, and our premium niche product differentials yields a cycle average EBITDA in excess of 1,000,000,000 per year. Tom Creery will be walking us through this EBITDA buildup in more detail. Specialty lubricants is the business that's least under understood.
We've heard that loud and clear. It is the single biggest reason we are here today. Specialty lubricants is basically two businesses in one. The first business is base oil production, converting gas oils to base oil or what we call rack back. The rack back business is basically similar to refining.
The real value is created in the second business, formulating those base oils into finished lubricants and specialty products or what we call Rack Forward. This may sound easy, but it is not. It is tech it is it is technology and intellectual know how driven. It requires manufacturing, r and d, sales, and marketing capabilities to identify customer needs and customize solutions to satisfy these needs. Between PCLI and Tulsa, our Rack Forward business is a $200,000,000 per year EBITDA business.
Because of its stable high margins, this business deserves a specialty chemical type valuation in the range of 10 times EBITDA, which places a value on this business of approximately $2,000,000,000. Rich Volova will be walking us through this EBITDA and valuation buildup. This business also has significant upside potential. Approximately onetwo of the base oils we produce remain available to be formulated into finished lubricants and specialty products, and there are plenty of markets available to place these mark these products. Mark Plake and Tony Witherell will further discuss our specialty lubricants business.
Adding it all up, it yields a value of $60 per share. This map illustrates our location based competitive advantages. As an inland refiner, all of our crude supply is priced off WTI, providing us the Brent WTI or w t Brent or WTI LLS competitive advantage versus coastal refiners. Our refineries are also the closest to the crude oil production with the incremental market being a pipeline movement away, allowing us to typically buy our crude oil at a discount to WTI. We gather and process over a 160,000 barrels per day of Permian crude oil between what we run at Artesia and what we pipeline up to Cushing for El Dorado.
We run approximately 100,000 barrels per day of Canadian crude oil, predominantly heavy sour for El Dorado and Cheyenne. Our product markets are typically short with the next increment of supply coming from another refining center, primarily the Gulf Coast, allowing us to realize premiums to Gulf Coast pricing. Our largest market is the group market, group three market in the Mid Continent. We can access Denver from both Cheyenne and El Dorado, and we compete against West Coast products in markets such as Phoenix, Las Vegas, Northern Idaho, and Eastern Washington. Our two lubricants facilities are located in Tulsa and Mississauga, Ontario, a suburb of Toronto.
On the strategic front, we'll continue to squeeze value out of our existing assets through safe, reliable operations. Safe and reliable operations also allow us to identify and capture low cost debottlenecks. Jim will be providing some examples of recent low cost debottlenecks. We will continue to look to grow our company. We believe growth is important because scale is important.
We believe scale is important because the capital markets, both debt and equity, tell us scale is important. Our industry tells us scale is important as it consolidates, our competitors continue to get bigger. The talent market also tells us scale is important. We've attracted talent at HollyFrontier that neither Holly nor Frontier could have been able to attract as two or three refinery companies. Having said all that, we will continue to be very disciplined.
Maintaining our investment grade rating is very important to us. We will not grow simply for growth's sake. It has to be a good deal or we can bring something to the acquisition, and the acquisition could bring something back to us. We believe our track record speaks for itself. From Tulsa through PSLI PCLI, we've acquired great companies, quality businesses at good prices.
We look forward to continuing this growth into the future. I'll now turn the floor over to Jim Stump, our Senior Vice President of Refining, who will cover our refining operations.
Thanks, George. Good afternoon. I'm Jim Stump. I've got over thirty years of experience in refining operations, capital projects, and environmental health and safety, and those are the things I'm responsible for at our company. Tom was introduced Tom Chattin was introduced a little while ago.
Tom heads up our refinery operations division, and he's a catalyst that made a lot of our reliability improvements happen over the last several years. So if you wanna know more detail about that, Tom will be available later for questions and answers. As George mentioned, our overarching goal is to be a safe, environmentally compliant, and reliable operator. To that end, we've added a lot of resources over the past several years, created technical networks, and we're implementing best practices across our refining fleet by rolling out an operations excellence management system, and it's showing really good results. After thirty years, I still love to make gasoline and diesel, and I'm really proud of my team's efforts to do this more of it safely, more predictably, and more cheaply than we've done in the past.
With that, I've got a
few slides that show some
of our accomplishments. I'll
start
with safety. As George said, safety is the most important thing we do at HollyFrontier. The first slide shows our employee and contractor recordable injury rates, and this is really the metric that tracks our goal to send each and every person that comes into our plants every day home as in the same condition as when they came to work. You can see that over the past four or five years, we've cut our injury rates in our plants by more than half. The second slide shows process safety tier one events, and that metric tracks what we call loss of containment incidents that could have resulted in a serious process safety incident.
That's our refinery industry's front page kind of incident. These aren't those kind of front page incidents, but they could have become that. So they're really near miss when it comes to process safety. So you can see we've had an incredible reduction in in these tier one events, which directly says that we've driven a lot of risk out of our business through the years. 2017 backslid a little bit, but we're confident we're gonna turn the trend back to a declining trend.
I'm particularly proud of this next slide. Over the past several years, we've increased the capability of each and every one of our six refineries to produce more, better, higher quality. Through our efforts to improve reliability, we obviously increased the capacity of that plant, but we've also invested wisely, both large capital projects and many small capital projects. These slides show the crude capacity capabilities by region and some of the specific improvements we've made by plant. I'm not gonna go through every one of them, but I wanna give you a high level review.
At El Dorado, we've invested through the years on many capital projects, and we were able to get the crude rate at that plant up to about 138,000 barrels per day. We asked the team at El Dorado if if the plant was fully optimized with all the capital improvements that were made, And they took a good look at it about two years ago and decided we could actually get much higher than we were with no capital investment. So that team took the capacity of El Dorado from about 138,000 barrels a day to 160,000 barrels a day, which we're running right now today with absolutely no capital, and we're really proud of that team's effort. That's 15% more rate for free. At Tulsa, we've invested in in many smaller projects, but really the story about Tulsa, as George mentioned earlier, is we continue to find more and more benefits by running those two refineries that are about two miles apart commonly as one facility.
We've also been successful in running more volume of the higher or the heavier lube feedstocks in the Tulsa lube plant, which is much more profitable for us. Navajo, over this last several years, has been our most predictably reliable plant. In addition to that, we're very proud of the debottleneck project we finished up earlier this year that raises capacity in the plant by eliminating recycle streams, but we also got a big benefit in flexibility both in being able to run lighter crudes that are now available in the Permian. We also have more flexibility now shifting our gasoline and diesel swing piece back and forth. The plant used to be pretty set on how much gasoline it could produce, how much diesel.
We now have much more flexibility as those those two products change. At Woods Cross, we're fully utilizing the capacity of phase one expansion now. We're also proud that we've we've in fact creeped the rate on our new cat cracker above the design rate, and we've also added a lot of diesel capacity for hydrotraining for desulfurizing diesel at Woods Cross. And our major focus at Cheyenne over the past year and a half has been on improving reliability, but we've also invested
in a
new hydrogen plant and a heavy oil rail loading rack. Both of those investments aimed at increasing that plant's capacity to run heavy Canadian crude.
Putting that all together,
our fleet is now capable to run between four hundred and fifty and four hundred and seventy thousand barrels per day on an annual average basis. We reported earlier this year a new quarterly record that we set that was 467,000 barrels per day of crude running for a quarter. We're absolutely confident that you'll soon see that that's just business as usual, and I'm I'm excited about that. One of the major focus that we've had over the past several years is to reduce our operating cost. In 2015 at Analyst Day, I told you all that we had a goal to drive our operating cost below $5.50 per barrel.
I'm happy to report that we achieved that in a little bit more as you can see from the graph. We think there is more room to keep working on operating costs, and that focus will be on maintenance costs, both through better reliability and better efficiency, turnaround performance. A large part of our spending every year is is to do turnarounds. It'll be through rightsizing our organization, especially in the hourly ranks. And we're taking advantage of our larger size through several procurement initiatives to leverage our spending.
To close, I wanna say that I believe we've built a very solid and strong team. We've made a lot of progress turning six refineries with various legacies prior to our merger into one cohesive refining complex, and I think you'll be pleased with continued better operations at HollyFrontier. Our next speaker is my good friend, Tom Curry. Tom runs the organizations that supply the crude to our plants, market the products from our plants, and optimize between refinery and commercial organizations. Tom, the floor is yours.
Thanks, Jim. Good afternoon, everyone. My name is Tom Curry, and I'm the senior vice president of commercial here at HollyFrontier. I've had over thirty five years of experience over which the past eleven years have been spent here at HollyFrontier. In my current role, I'm responsible, as Jim said, for all things commercial as well as logistics, planning and analytics.
Jim has set the stage in terms of refinery operations. And as George mentioned before, I will now walk you through our expectations for mid cycle EBITDA and then talk about two examples of how the Commercial Group is working to increase capture rate and help maximize earnings. So with that, let's turn to the earning potential for the Refining segment. As George mentioned before, our estimate and forecast for mid cycle refining EBITDA on a yearly basis is between $1,000,000,000 and $1,200,000,000 So how do we come up with that? First of all, we started with The Gulf Coast three two one crack spread of $10, which was based on historical numbers.
We then took a look at the Brent TI spread and used $4 a barrel, which assumes that the domestic pipelines use full cost economics. The product transportation for HFC back into our markets gives us what we're calling a $3 advantage over the Gulf Coast. When you add all that up, we come to what we call the HFC index, which is $17 a barrel, which, when compared to the same basis in prior years on the right hand side of this chart, is well within the range. A capture rate of 75%, as demonstrated historically, gets us to $12.75. Then when you use Jim Stump's $5.5 of operating costs and SGA estimated at $100,000,000 a year.
Factored into a 460,000 barrel a day run rate gives you the $1,100,000,000 We believe that these are relatively conservative forecasts. So let's move on to a couple of examples of how the Commercial Group is maximizing earnings. The first slide deals with maximizing feedstock flexibility, and the first bullet point is optimized transportation. But before we get there, let me talk a little bit about the difference between an inland refinery and refineries located on Tidewater. Tidewater refineries have a definite advantage, and they can use ships to move large volumes in and products out of their refinery.
Inland refineries, for the most part, are relegated to using pipes, trucks, and rail. This puts us as a bit of a disadvantage. The map on the right shows some of the major crude lines that HollyFrontier uses to deliver crude into our refineries. The first opportunity that I want to talk about is the Centurion line, which runs from the Permian Basin to Cushing and then onwards to El Dorado and Tulsa. HFC has a term lease on this line and as a result is the sole shipper.
This allows us to control which crudes are transported to Cushing as well as affording us the opportunity to move raw diesel and gas oil into crude as well. HFC does not sell this crude to other third parties, but is for our sole use. The ability to control this flow provides us with a secure feedstock in terms of quality. I'm sure you've all heard about the sweet crude at Cushing and that it's a combination of blend of various crudes. Some of this has lower quality as compared to WTI.
This line allows us the ability to minimize the necessity of us to buy a blended crude oil that we can buy pure stocks in which we can control. The line also came into great benefit during the last major turnaround at the Navajo refinery. The ability to ship gas oil and raw diesel via the Centurion line allowed us to keep the sub plant in operation, thereby lessening the overall cost of turnaround downtime. Needless to say, the cost of moving product by pipe is dramatically lower than that of truck and rail. And from a logistical standpoint, it's a lot easier to move a batch of crude oil in a pipeline than it is to mount a campaign of either railcars or trucks.
The other point that I want to make on this slide is that we are one of the few refiners that have the ability and the flexibility to move Canadian crude to Cushing via three different routes. Everyone in the room is probably well versed with both the Keystone and Enbridge alternative. However, a new pipeline will start up next year, which will allow crude to move the Express line through Guernsey, Wyoming, and then on the Platte line to Steel City, Nebraska, where it is then tied into the spearhead line that can get to Cushing. So what does this do for us? The new pipeline will allow us to optimize crude better between Cheyenne and El Dorado.
We're also working with various crude pipelines from from the Rockies to Cushing to be able to move intermediates, and we believe we will have successful results in that score. When we do, we're going to have the same flexibility for the Rockies that we currently have with the Permian. These examples add value by optimizing feedstocks at lower cost and helping us keep our plants operating. My last slide talks to the maximization of products in the marketplace. I've used two examples, one from the top of the barrel and one from the bottom of the barrel.
So let's start at the top of the barrel. Since 2012, we have worked very closely with Jim Stump and his guys to produce and then sell increasing volumes of premium gasoline. You can see over that time frame that we have increased our gasoline pool by premium by roughly 5%. Since we produced 220,000 barrels a day of gasoline, this 5% equates to 11,000 barrels a day or 14,000,000 barrels per year. The chart at the bottom left represents the uplift in price between premium and regular gasoline.
And on average, that number is $0.29 or $12 a gallon sorry, dollars 12 per barrel. I'll let you do the rest of the math. The ability to produce higher amounts of octane also allows us to blend off lower octane feedstocks and thereby being able to run higher volumes of crude overall. The bottom of the barrel also provides us the opportunity to increase netbacks. Since 2014, the Tulsa Refinery and the commercial group has made a big push to produce and sell flux.
So now your question is what's flux? Roofing flux and paving asphalt are the products off the bottom of the vacuum distillation unit. The primary difference between the two is that roofing flux is a higher penetration and softer material than asphalt. And as a result, it needs a different mix of crude oils to be run as compared to that of asphalt. Roofing flux is a specialty product and is sold into the roofing market at a premium price compared to asphalt.
Since 2014, we've increased production of this material by 1,800 barrels a day from 3,200 to 5,000 barrels per day. As was the case with premium, there's a big price difference between selling into a VTB or asphalt market and the roofing market, as shown on the bottom right. Between these two examples, revenues have been increased on an annual basis by more than $60,000,000 We continue to develop and monetize opportunities in the commercial group, and we're just not content of disposing of product. And with that, I'm going to pass it back to George.
Okay. So fully realizing I stand between all of you in a break, I'm gonna try to make the a g HEP discussion short and sweet. HEP has a solid business model with a history of strong performance and stable cash flows, underpinned by revenues that are nearly 100% fee based with minimal commodity risk under long term contracts with refiners, including and especially our favorite investment grade refinery, with volume commitments and FERC index or PPI based escalators. This revenue stream has allowed HEP to pay 52 consecutive quarterly distribution increases since its IPO in 02/2004. This slide illustrates the IDR simplification I mentioned earlier.
HFC traded its 2% GP economic interest in its IDRs for 37,250,000 HEP units, increasing HFC's interest to 59,600,000 HEP units that have a current market value again of approximately $2,000,000,000 HFC continues to own a 100% interest in the GP. The IDR transaction accomplished two primary objectives. It simplified valuation, and it lowered HEP's cost of capital through the elimination of the IDRs. This timeline summarizes HEP's historical deal flow. It shows a series of dropdowns, acquisitions, joint ventures, and organic projects that have driven HEP's growth.
We're not going to re review these projects individually, but they generally fall into these categories. The contractual escalators that I referenced earlier are the easiest source of organic revenue growth for HEP. We estimate these escalators will be in the 3% range starting in July of twenty eighteen. We will look to lever continue to leverage our existing HEP footprint to grow organically, especially in the Permian. The Malaga Pipeline Project that converted a former product pipeline to transport crude oil from South Of Artesia into the refinery is an excellent example of this type of project.
We are currently expanding this pipeline. We also have a project to expand our now 100% owned interest in Salt Lake City and Frontier pipelines to to bring more Canadian and Rocky Mountain crude oil into the Salt Lake City refining basin. We will continue to leverage our relationship with HFC to replace incumbent service providers with HEP as we have with the Osage, Cheyenne, Frontier, and Salt Lake City crude pipeline acquisitions, as well as the tank farm in Tulsa. HFC spends approximately $1,000,000,000 per year on logistics. Not all of this spend is addressable, but even a small percentage presents opportunities for HEP growth.
We also expect the MLP sector will begin to consolidate. There are simply too many MLPs, especially smaller ones and those that are private equity backed that will be looking for exit strategies. We believe HEP is well positioned to participate in this consolidation. Regarding dropdowns, future dropdowns will be tied to HFC's ability to acquire or build new assets or new businesses. We will continue to pursue all of these strategies to extend HEP's growth and distribution increases.
Having said all that, the MLP appear appears to be in an odd situation. The public equity markets do not appear to align with the acquisition and even the organic growth markets. We are seeing acquisitions being done at very high multiples and new pipelines being built with minimal underlying support, with many companies resorting to nontraditional methods to finance them. Under the very disciplined philosophy I mentioned earlier, we do not see currently we do not currently see value in these markets. Based on this view and our desire to maintain a leverage target of four times debt to EBITDA and a coverage ratio greater than one, we are reevaluating our rate of distribution growth in 2018.
We have every intent and desire to continue to grow, and we'll do so prudently.
We will now adjourn for a quick fifteen minute break. If you could please return to your seats at approximately 3PM, we'll resume with our lubricants portion of the presentation. If you guys wanna take your seats, we're gonna get started with the second half. We will now resume with the second half of our presentation, and it is my pleasure to introduce you to the president of our lubricants business, Mark Plank.
Thank you, Craig, and good afternoon, everyone. My name is Mark Plaque, and I'm president of HollyFrontier's Lubricants and Specialty Products business. I started in this industry a little over forty years ago. Admittedly, I was in college at the time and working out in the oil patch in Oklahoma. But after a detour for about ten years after college, I've been moved back in the industry.
I've been with HollyFrontier nearly twenty years. Joining me presenting today is Tony Wetherill, our managing director of marketing research and development. And also with us is Patrick Gribbon, our vice president of sales, who many of you already know as the architect of our Tulsa Specialty Products business. We are collectively pleased to tell you why HollyFrontier Lubricants and Specialty Products business is driving differential value to HollyFrontier and its stakeholders. We were excited when we were able to add PCLI to our Tulsa business earlier this year.
Our excitement level only increased as we learn more about their ability to make some of the best base oils, specialty products, and advanced finished lubricants on the market. George introduced the concept of Rack Back and Rack Forward to you earlier. HollyFrontier Lubricants and Specialty Products is comprised of three segments today. The production and commercial components of PCLI, as well as the commercial component of our Tulsa lubes and specialty products business. We will introduce the concept of rack back and rack forward more in a bit, but it is our way of measuring the impact of production and commercial aspects of our business from a financial standpoint.
By bringing PCLI into the fold, we are now an integrated player as HollyFrontier Lubricants and Specialty Products. We have strengthened our internal product development team with over 30 professionals having over five hundred years of experience. We have a global footprint that is ready for expansion. We have two recognized brands in HollyFrontier and PetroCanada with demonstrated excellence in the industrial and commercial markets. We see a path for growth through internal and external opportunities.
And last but certainly not least, we make all grades of high quality base oils that are used as foundation for finished lubricants and specialty products. I mentioned a moment ago that we now have a global footprint. We we sell our products in over 80 countries. We are the largest producer of base oils in greases in Canada, and we are one of the largest producers of white oils in the world. Our manufacturing facilities are in Mount Of are in Mississauga, Ontario, Canada, and Tulsa, Oklahoma.
These locations are protected from the major severe weather events regularly impacting The US Gulf Coast. This means we are running and supplying North America when many of our peers cannot. Our sales efforts are supported by excellent marine, rail, and truck access. As I mentioned at the outset, we're going to introduce the concept of Rack Back and Rack Forward to you today. When I talk about Rack Back, I am speaking of both an operating segment and a financial value component.
The operating segment of RackBack reflects the production of primarily base oils from vacuum gas oil and hydrocracker bottoms. The use of RackBack in a financial sense captures the value between feedstock cost and the market price of base oils. So to use a refining analogy, instead of crude oil, we buy VGO and HCBs. And instead of selling transportation fuels, we make and sell base oils. So the rack back can then be compared to a crack spread.
Rich will speak to this in more detail later. But what are base oils? Base oils are simply the foundation for all lubricants and specialty products. PolyFrontier Lubes make top of class group one, two and three base oils in its two manufacturing facilities. Various groups, as indicated in this chart, are differentiated by purity and viscosity index.
My first car was a 1963 Plymouth Savoy. It was a classic. It was a actually, it's actually quite ugly. But it was a slant six push button transmission that I used to get out literally beneath the shade tree and change the oil in. I think the statute of limitations on my environmental sins have now long passed because I used to take that oil and take it into the alley and use it as a dust suppressant.
That used what was now basically a group one base oil. Today, that I I'm coveting a a a new Mercedes AMG automobile. I can promise you that's using a group three, three plus or or better base oil. That tells you the advances that have come over the course of the last thirty, forty, fifty years. But why does it matter that our group two and group three base oils are 99% pure?
Because impurities reduce the life of lubricants, and they also cause more and more wear on wear and tear on parts. If you are interested in learning more about base oils, I would like to call your attention to the lubricants primer published by HFC and Craig earlier this year. This slide presents a look at how we make base oils. I would like to particularly call your attention to the catalytic dewaxing unit or CDW at our Mississauga facility, which runs hydrocracker bottoms to produce our highest purity, highest viscosity index base oils. Our group three base oils are extremely well positioned to meet the demands of automotive manufacturers in order to meet the tougher CAFE and environmental standards.
And due to their characteristics, these group three and three plus base oils are proving to be less costly alternative to the group four base oils in many applications. Tony Weatherill will tell you more about these in just a moment. As I mentioned earlier, tougher industry standards and product innovation is driving original equipment manufacturers from group two to group three base oils. We feel particularly well positioned to increase our foothold within North American given that we are the largest region regional producer of group three base oils. The vast majority is supplied from Asia and The Middle East.
We are also able to shift production from group three from group two to group three base oils as the market moves in that direction. This is a flexibility that not everyone has. But more importantly, we are accelerating plans to up upgrade these group three base oils into higher value finished lubricants and specialty products. With that, I would like to take to turn things over to Tony to discuss those plans.
Thank you, Mark, and good afternoon, everyone. Before I discuss those plans, I'd like to formally introduce myself to you. I have thirty years experience in the lubricants business working in many regions of the world. As the Managing Director of Marketing, Research and Development, I head up a dedicated team of approximately 80 professionals and specialists. I'm responsible for building the Petrocanada Lubricants brand globally, to developing and executing our international marketing strategies and to govern our lubricant and specialty products development programs.
So coming back to Rack Forward, what exactly do we mean by Rack Forward? Mark has previously explained that base oils are the foundation for all lubricants and specialty products. In simple terms, Rack Forward is the value that we create in converting non advertised base oils with a relatively low raw material premium to complex, advertised, finished product in which our customers are willing to pay a premium. But what do I mean by advertised? Additives are essentially highly developed chemistries that impart performance to a finished fluid.
Petrocanada Lubricants uses a unique combination of additive technologies in our formulations developed with our in house research and development team to produce lubricants with exceptional performance and advanced protection. I shall speak more to performance, technology and innovation shortly. PetroCanada Lubricants is fully integrated. But what do I mean by fully integrated? Well, firstly, we produce our own high quality Group II and Group III base oils using our unique HT purity process resulting in crystal clear base oils that are 99.9% pure.
We have one of the world's most efficient lubricants blending plants. We have a distribution network that spans the world. And we are still one of the very few lubricants companies that can boast of having its own in house research and development teams. We own our technology and are clearly differentiated from our competitors. Our marketing teams have true regional expertise.
We are based in all key territories. Finally, our products are sold and distributed to end customers by our direct sales force, affiliates and distributors globally. That's what we mean by fully integrated. Many make a claim to be fully integrated, but very few can actually make that claim. So let's take a look at our credentials and products in more detail.
PetroCanada Lubricants has been a long term player in the lubricants and specialty business. We've been developing, manufacturing and distributing products for over thirty years. We currently produce over three fifty varieties of world class advanced lubricants, specialty fluids, greases and innovative products. I mentioned earlier that we have our own in house R and D team. In that team, have more than 35 scientists, engineers, regulatory affairs and technologists, of which over 25 have a PhD degree or master's degree.
And as Mark highlighted earlier, that's more than five hundred years of combined experience formulating with our base oils and developing our finished products. We are unique in that we produce in house Group one to Group three plus base oils. We are the only company that can make that claim. You may have heard of PAO or poly alpha olefin to use the full descriptor. This is classified as a group four base oil.
Typically, formulations containing PAO are three to four times the cost of a group three, three plus based lubricant. Our Group three plus base oil has been demonstrated to be technically viable as a PAO alternative. Indeed, many major OEMs or original equipment manufacturers are recognizing the significant value proposition we can bring, including Volkswagen, the world's largest automotive company. So let's take a look in more detail as to how we make a finished fluid. The first building block is using a base oil or a combination of base oils.
As we heard earlier, our base oils have no impurities. They are highly stable. They handle extreme temperatures and provide superior resistance to oxidation. Depending on the application, for example, engine oils are formulated differently from gear oils, we add a combination of specially selected additives. These additives impart performance on the finished fluid.
So for example, anti wear and protection, rust and corrosion inhibition, thermal stability, physicometric control. You may be surprised to understand that there are up to 20 components or elements in chemistries that can be used in making just one product. These are highly engineered performance products. We work with the largest global technology partners to ensure best in class innovation, best in class efficiencies and best in class products. We are recognized as technology leaders, working with OEMs to develop tailored products to meet very specific design criteria.
Many of our formulations are protected by intellectual property and non disclosure agreements. Our products are backed up not just by industry and laboratory testing, but by field and real world testing, we have a huge bank of customer testimonials. And with the world in mind, let's turn our attention perhaps to our global strategic geographies. As Mark alluded earlier, our products and services are sold to over 80 countries. We supply into all major continents, including some which may be of a surprise to you.
For example, Africa, Indonesia, and Latin America. However, we have four territories that are strategic, namely Canada, United States, China, and Europe. We successfully compete against the biggest global players due to our three strategic advantages. Number one, top quality base oils that are the foundation of our commercial and industrial products. Number two, innovative products that perform beyond today's standards.
And thirdly, recognize brand positioning that is unique from competitors. So let's take a look at these four strategic regions in more detail. Canada is our core market. The Petro Canada brand is highly recognized and instills confidence and trust, and we have a large market share. The United States is an adjacent market with very similar characteristics.
We are leveraging our experience and track record in Canada into The United States. HollyFrontier's footprint in The United States provides significant growth opportunities here and in Mexico. In Europe, we have an extensive and long term presence in Germany, Europe's largest market and also The United Kingdom, which is Europe's second largest lubricant market. We have been in Russia for many years. Indeed, our products are ideally suited given its similarity to the Canadian weather extremes and vast mineral resources.
And finally, China. China is one of the largest and fastest growing lubricants market in the world. Petrocannabolubicants is an established player. We're investing in both people and resources in that region. Indeed, we have just opened our third office in China.
But our core focus that underpins our geographic strategies is and always will be on selling high value products that are clearly differentiated. So let's take a deeper look at our products. We are unique in being able to provide a full suite of products that includes base oils, white oils, specialties, wax, finished lubricants and greases. It's a significant competitor advantage. We can provide our customers a one stop shop solution.
All of you in this room have probably unknowingly used a PetroCanada product today. We're in pharmaceuticals, beverages, food, clothing, transport. If you took a shower this morning, we're more than likely in your shampoo. If you took a Starbucks coffee this morning, it's likely we are in the packaging. We are truly everywhere.
Our reason for being is to provide innovative, value creating solutions to customers around the world by both products and services. We make money doing this successfully. On the topic of making money, as I look at the slide from left to right, the value and hence margin potential of our products increases. Given the size of the price and value potential in the finished fluids segment, Petrocanidolubricants has proportionally focused our product development and technology in that segment. We are seen as industry leaders, and that is a b demonstrated by four major product launches in the last two years alone.
Hydraulics next generation, best in class industrial hydraulic fluid. TurboFlo LV, best in class power turbine fluid. Purity FG NextGen, best in class food grade products. And last but not least, Duron Next Generation,
best
in class heavy duty diesel engine oils. But as highlighted earlier, it's not just about products, it's also about solutions. We are problem solvers. Our customers are willing to pay high premiums for solutions. We work hand in hand with our customers to find lubricants and program solutions that can help improve productivity, eliminate unscheduled downtime, streamline inventory and save them money.
We are recognized globally as having one of the best technical and field support services in the industry. Many oil companies have removed field and technical support and rely on third parties. We are still very much close to our customer. Our product and service innovation delivers tangible benefits to customers across a wide range of industry segments and geographies. We are highly diversified.
We are not reliant on one segment or industry, and hence, we are protected against industry downturns and geopolitics. All our eggs are not in one basket. We are working with many of the world's leading OEMs given our ability to deliver solutions and high innovation. For example, global household names such as Rolls Royce, Siemens, Honda, Chrysler, MTU. I'd like to highlight a recent product launch that speaks to true innovation and technology leadership.
I briefly mentioned Duralon, our heavy duty engine oil brand. Duralon
is
a topic very close to my heart. It was the reason I was brought into Petro Canada Lubricants four years ago. Every ten to fifteen years, the heavy duty engine oil category goes through a complete change. It was an opportunity to lead the industry, and we achieved that with Duralon Next Generation. We had one goal in mind for Duralon Next Generation to be the most advanced, most durable, most protective high performance engine oils we have ever made.
To put this into context, it cost over 10,000,000 United States dollars to gain the necessary industry and OEM approvals and four years to complete the project. You may ask, did we succeed? Well, we were first to market, achieved on the 12/01/2016, first license to distribute. We demonstrated our superior toughness in the Cummins engine test, recognized to be one of the toughest heavy duty engine performance tests there are. It's proven to go beyond the most exacting industry standards and deliver unique points of difference, particularly with emission performance, fuel economy and engine protection.
Due to our unique location and legacy experience, we have specific expertise and a competitive advantage in cold temperature performance and in the off highway and mining sector. We believe Duralon is our best product ever. We stand by our tagline, Duralon is truly the tougher, the better. So why is that Duralon experience so important? Well, let me share some information on the passenger car motor oil segments as that sector is also going through some rapid change.
The passenger car motor oil sector in 2018 is due to go through a complete category change. We are currently on what is known as GF5 technology, but GF6 is just around the corner. GF6 is the toughest PCMOS specification mandated to date. However, like Duralon, it offers a huge opportunity to PetroCanada lubricants. In a nutshell, all the oil companies have to introduce new products, potentially new technologies and certainly new collaterals.
We can win. How, you may ask? Well, for starters, we have a demonstrated Duron track record. We beat the oil majors, and we are growing the business at a fast rate. The global passenger car motor oil is also moving to lower viscosity products, primarily for fuel economy reasons.
And lower viscosity products speak to our base oil sweet spot, namely high quality Group two, three, and three plus base oils. We intend to lead the industry in introducing a full range of low viscosity products, including zero w sixteens, the lowest we have ever manufactured. Furthermore, North American automotive OEMs have a problem. That problem is known as LSPI or low speed preignition, which is causing engines to fail. PetroCanada Lubricants can solve that problem with our technology and formulation know how.
Significantly, the passenger car motor oil segment is the largest lubricant segment in the world. It offers huge opportunity. We can gain big volume and make margins without disrupting the market in any of the regions. The market in China alone is approximately 500,000 gallons. Our current market share is less than 0.1%.
We truly have everything to play for. And on that exciting thoughts of huge growth potential in Passenger Motors Oil, I'd like to hand you back to Mark.
Thank you, Tony. Briefly and in conclusion, if there's if you're in the audience today and if there's one page in this presentation that you might want to dog ear, it would be this page because this is the page and information on it that gets Pat, Tony, and I geared up and ready to go to work every day. And that is our ability to upgrade base oils into finished products. If you look on the on the left side of the page, it shows the margin opportunity when we produce specialty products and finished lubricants. The right side of the slide shows that we are selling 45% of our base oils as just that, base oils.
That means they are not being upgraded into finished products. But when we do when we do convert one barrel of base oil sales into finished products, it has historically resulted in margin uplift of around $50 a barrel. When we ran through this, kinda did a dry run, it was suggested that it was a good point for a couple of personal remarks. I'll make them very brief. And that was when George approached me about this opportunity late last year, early this year, the idea of moving from Houston to Canada was not particularly appealing.
One, I had somewhat of my dream job. I grew up in the pipe I mentioned earlier in the pipeline, pipeline business. You know, even though I got the opportunity to catch up with a lot of you quarterly on a regular basis, it was truly was a dream job. I've also lived south of the Mason Dixon line most of my life. As you can tell, I love barbecue, Mexican food.
And I could tell you whatever have and to say that even the best poutine does not equal a good brisket from Dallas. But with all of that, I've absolutely come to love the GTA and found that joining the lubricants organization is absolutely a top notch group of people. I frankly think it's the best in the industry in within HollyFrontier. Opportunities abound. We the integration with HollyFrontier is going very well, and everybody is excited to grow this business and continue to convert these base oil sales into finished products.
With that, I'd like to turn things over to Rich to wrap things up.
Okay. Thank you, Mark. My name is Rich Bolivar. I'm the CFO for the HollyFrontier Companies. I've been with the companies for about four years now, having originally joined as on the m and a and BD side of HEP, our pipeline business.
As most of you know, not only did I used to have more hair, I used to work in the capital markets as well. Spent about fifteen years, the last ten, twelve of which in the energy space specifically. Before jumping to slides, I'd to take a moment to introduce our treasurer, John Harrison. Sitting in the back, please take a moment and take the opportunity to say hi to him later on this afternoon. Okay.
Starting with the fourth quarter two thousand seventeen, we'll be reporting our earnings in three segments. High Frontier Refining and Marketing, Holly Energy Partners, and High Frontier Lubes and Specialty Products. We're gonna allocate SG and A to each of these segments in order to reflect the true earnings power of each. We'll continue to report the corporate and eliminations line. This will be primarily for stewardship costs we cannot allocate.
It's worth noting that the PCLI integration costs will continue to show up in that corporate line. Rough numbers, we expect that to run between $10,000,000 and $15,000,000 per year going forward. Within our lubes business, we'll report earnings in both a rack forward and a rack back basis. The Rack Forward business will include all of our lubes and specialties businesses, both the PCLI business as well as our legacy Tulsa business. The Rack Back portion of the segment will include the Mississauga base oil plant.
It will not include the Tulsa base oil plant as this is completely integrated with the Tulsa refinery. Transfer pricing where appropriate between the Rack four and the Rack back will be based on ARGUS spot average, which should provide transparency and objectivity. In the appendix of this presentation, we've presented pro form a quarterly financials for each segment as well as for the Rack Back and Rack Forward businesses dating back to 2015. Additionally, we've provided twenty eighteen operating capital guidance for each segment. The Rack Forward business accounts for the vast majority of HollyFrontier LSP's profitability.
As you can see on this chart, our business shows tremendous stability with EBITDA margins ranging between 917% quarterly since 2015. In 2018, we expect RAC Forward earnings to be about 175,000,000 to $200,000,000 based on an EBITDA margin of 10% to 15%. This guidance is at the lower end of recent years. HollyFrontier Lubes and Specialty Products is an integrated business, and we do have scheduled turnarounds at both the Tulsa and Mississauga base oil plants in 2018, and those will have some impact on our sales volumes. In the long run, we see tremendous opportunity to grow this business, as you just heard Tony and Mark describe, particularly on this more stable Rack Forward side of the business.
The made two years.
Ir
business. And And Using we're consensus estimates for 2018,
in these comps are trading on multiples of nine to 13 times forward, and we think HFLSP fits right in that group. Mark and Tony discussed that upside in terms of ranks growth. This chart shows that there's significant upside in terms of valuation for our business. So what all this means is HFLSP is worth almost $2,000,000,000 today as we stand here, taking no credit for that rack back business. We expect average through the cycle capital spend of 50,000,000 to $60,000,000 Most of that CapEx volatility driven by the turnaround schedule at the Mississauga base oil plant.
This earnings and CapEx profile, HFLS people generate substantial free cash flow going forward. Slide 46 depicts the value of HFR and M based on discussion you heard from Jim and Tom. Using the midpoint of our crude rate guidance at 460,000 barrels a day, reasonable assumptions for crack spreads, crude spreads and product basis differentials, dollars 0.5 a barrel in operating expenses, SG and A of roughly $110,000,000 We expect HFR and M's mid cycle EBITDA to be between that 1,000,000,000 and $1,200,000,000 range. Using market multiples, this business is worth almost $7,000,000,000 today. And these earnings assumptions and the macro assumptions are not aggressive.
We'll continue to invest both capital and sweat equity in improving the reliability of our plants, reducing costs in those plants and adding to the capabilities of those plants, as Jim highlighted earlier. Opportunity and to to Using consensus price targets of $35 per LP unit, HFC's holdings here are worth over $2,000,000,000 today, and that attributes no value to the control premium in HollyFrontier's general partner. There's upside to this, obviously. HEP is the pioneer of the refinery sponsored MLPs, has a demonstrated track record of growth, and we expect to continue that legacy of disciplined and profitable growth going forward. Let's put this all together.
What we've presented here is the sum of the parts for AliFrontier. Using those conservative macro assumptions, we're showing HFR and M generating $1,100,000,000 a year at the midpoint, a business worth almost $7,000,000,000 or $37 for HFC's share. HEP, with a market value of over $2,000,000,000 today in terms of Ollie Frontier's holdings, worth about $12 a share to HFC shareholders. HFLSP is worth almost $2,000,000,000 sitting here today, taking no credit for the growth prospects that Tony and Mark outlined in a very reasonable multiple compared to market peers, translating to $11 a share for an HFC shareholder. And as of the November, we have basically no net debt at the HollyFrontier level.
Add this all up, you end up with a net sum of the parts value of $60 per HFC share. Even after the run we've had in the last few months, substantial upside here. So I just wanna leave you underscoring one important point here in the earnings power of our company. Since we closed the PCLI acquisition on February 1, we've generated over $800,000,000 of free cash flow at HFC. Effectively, we recouped the entire purchase price of PCLI in just that ten month period.
So again, this is a company with tremendous prospects both today as we stand here and going forward. With that, I'll turn it over to George.
Rich is a little bit taller than I am despite the fact he has no hair. So I really don't have anything to add. We've shot all our bullets. We do put up a one page summary here just to make sure we drive home the major points we wanted to make today. Again, in refining, the going forward crude rate guidance of four fifty to 470,000 barrels per day, depending on turnaround activity, and that drives EBITDA with mid cycle crack spread and competitive advantage differentials in excess of a billion dollars, with upsides as Jim and his team continue to improve reliability to improve their crude rate guidance, decrease costs, and Tom's commercial initiatives.
In mid midstream, again, the story is very sim very similar and simple. 59,600,000 HEP units. We've got a lower cost of capital now with the IDR simplification. As Rich just said, demonstrate demonstrated track record of growth. Specialty lubricants, 175 to $200,000,000 per year of annual EBITDA, deserving a specialty chemicals type multiple in the range of 10 with significant growth potential in the form of approximately 50% base oils that are still sold as base oils rather being rather than being formulated into finished lubricants and specialty product specialty products.
Add that up, the forward summary is $60 per share. With that, I think we're ready for the q and a session.
I'd like to invite all of our speakers up to the stage now for Q and A. We ask that you please limit yourself to one question and one follow-up so that we can accommodate everyone. Jared and I will be walking around with microphones, so just raise your hand and flag us, and we'll begin. Ready for our first question.
Thanks, Craig. Roger Read, Wells Fargo. If we could go back to the Duluth's discussion, you made the comment moving a base oil barrel to a finished product barrel, let's say, is where the uplift is. What are the main barriers we should consider that you know, I mean, if it's obvious to make the $50, why not do it with every barrel tomorrow or even yesterday? So I'm just curious what are the barriers, and and what is there in terms of a pace to bring all of that up?
I think I could probably take that one on board. I think I alluded on the section on Geron that we spent over $10,000,000 to get the approvals for the products. So these categories, when they change, are significant in terms of the engineering, but the products which are required to meet those requirements. So on the passenger car motor oil side, we'll need to make similar investments to actually get those approvals. Those approvals take time.
They actually involve engines in engine labs. Those cycles can take six months to one year. And then we have potentially a whole series of field testing as well, which can also take a lot of time. So it takes time, it takes money, it takes resources from a people perspective, which is why I come back to that comment. These are highly engineered performance products.
You don't just put them into a beaker, mix up the ingredients and hey, presto, there's a product. It takes a lot of effort to actually get to a finished product. But by so doing, we then raise the value of that base oil significantly. Consumers, when you're spending $80,000 for a vehicle or perhaps more if you're looking at the high prestige vehicles, you don't want to put in the wrong lubricants. If I look at the off highway segment, so for example, we supply, I alluded to it in the presentation, into a lot of low temperature markets given our sort of location.
I can mention sort of brand names here, Caterpillar, for example. To purchase a brand new Caterpillar machine, you're probably spending in the region of $3,000,000 to $4,000,000 minimum. Why would you put into that engine a product that isn't qualified or could potentially make that engine break down? So clearly, customers, OEMs are willing to pay a premium. They're willing to work with high quality lubricant companies that can guarantee they will meet the approvals.
Thank you, Paul Stanket, Wolfe Research. George, you've gone through the details of the valuation as you see it for the company on a somewhat trailing basis. Can you talk about growth? I think the way I understand the base lubricants is that you're going to grow into specialties more. That's kind of what I took away, but I didn't really get any numbers out of that.
From your market share numbers, it looks like you can grow by buying other guys. I don't really know anything about that business. I have a sense for where you are in refining. I have none on the sort of lubricant side. And I guess the outlook for
the MLP growth as well
would all be helpful. Thank you.
So on lubricant side, as we said, we have a lot of room, a lot of headroom for organic growth before we even start thinking about potential acquisitions, bolt ons, and things of that nature. Again, we make about 15,000 barrels per day of products at PCLI And 40%, 45% base oils that are still sold as base oils, that's roughly 6,000 barrels per day. So that's the the type of headroom we're we're talking about there when Tony and Mark and Pac Ribbon do what they're gonna do to formulate those products, get those special certifications, the GR six type of certifications, and get ourselves qualified to make those products. We still think, in addition to that, there's significant opportunities for acquisitions. But again, that's not our major focus right now.
Our major focus is on the organic side. We're continuing to learn about this business and the various potential acquisition candidates, and, you know, we're gonna continue to get smarter in that area. But we have a lot going on at BCLI, as you can imagine. Mark has his hands full as well as the whole team just to integrate it in the piece into HollyFrontier. We're trying to get these certifications, as Tony just mentioned.
So, again, we're in logical sequential order to capture the value. And then as far as the question on HEP, there again, we're seeing a lot of potential opportunities at HEP to build new pipelines, especially in the Permian, to acquire existing pipelines or quasi existing pipelines with hockey stick projections. Because quite frankly, again, we're not seeing the value in that segment that we think we see in our other segments, especially on the lubricant side. So, again, we're gonna be very disciplined in our growth. Where we don't see value, we're gonna continue to look, but we're not gonna bid on a hockey stick to make an acquisition, again, just for the sake of growth.
We're gonna be very disciplined and prudent about it.
Thanks. It's Blake Fernandez with Scotia Howard Weil. One, I wanted to
just confirm the guidance on lubes. I believe the midpoint of the previous range was a 150,000,000, and now it looks like you're giving guidance just on the RAC forward of $1.75 to 200 even though you have turnarounds next year. So I'm just trying to understand, is this comparable to the previous guidance that you were giving, and is this actually an increase? Yeah, Blake. So I think what you gotta keep
in mind is that we've shifted the Tulsa Rack Forward business into the loose business. So it's not perfectly comparable, and we're guiding very specifically on the loose on the Rack Forward business because we have great visibility and great stability in that business. So we can give that guidance. Rack Back business, as Mark made the point, it's going to look essentially a lot like a refining business. There is effectively a crack spread, if you will.
Now historically, those cracks have been higher, higher highs and higher lows, frankly, than, say, gasoline cracks have been, but they do show that kind of volatility. So we can give you firm guidance on the Rack Forward business. And then I think what we'll do is try and work with you all on the missile base oil portion, much like we do in our refineries. Say, look, here's benchmark indicators, which we're publishing today. Here's volumes and off we go from there.
Suffice it
to say, though, your previous guidance is still intact. Everything seems to be working along as you Yeah. We have
no we've had, frankly, we've been pleased with how this is performing at the end of the day. So I think going forward, our what we're hoping to achieve with you is make this because as Tony alluded to, there's so many products, so much detail to this. Business.
We're
And And
to the
was an ambition to double grow our the size of the company, and that's noticeably kind of absent from this discussion. So I'm trying to see, is that still your your ambition? And if you could just elaborate on that.
Yeah. Again, in a word, yes. We still want to grow this company for all the reasons I mentioned in my presentation, the largest being we believe scale is still very important in this business. But, again, we're not gonna double just for doubling sake. We're We're gonna be very disciplined, can protect our investment grade rating, and do do good deals like PCLI when we bring something to PCLI, and PCLI is bringing something back to us as evidenced by the integration of the PCLI and Tulsal, especially lubricants businesses.
Thanks, George. Doug Leggett from Bank of America. Just very quickly before I go into my questions, can I just clarify Blake's question? So Rich, the 150, if we were looking at apples for apples in your prior guidance, that's still the number before we make the adjustment for Tulsa?
Yes. I think it's probably slightly higher,
but yes, apples to apples is roughly the same. So my two quick questions then, please. I guess, George, the use of free cash flow, if you're not looking at acquisitions or you're looking about nothing imminent, I guess, What is your priority for the use of free cash? And I guess specific to the lubricants business, you haven't laid out a capital plan on a multiyear basis yet. So how should we think about the maintenance spending you've laid out as a starting point?
What's the growth capital look like on top of that? Yes, sure.
I think Rich did a pretty good job at his slides laying out more of our sustaining or maintenance capital type of spend In round numbers, in refining, 400 plus or minus. In specialty lubricants, 50 plus or minus. In HEP, 30 plus or minus. So that's just on a maintenance CapEx perspective. And then as far as free cash flow after that, as I said, we're gonna be looking very actively for acquisitions.
We still have some organic growth projects within refining that we wanna execute, so expect to hear more about that soon. It's not gonna be major, but we'll we'll we'll divert some of our free cash that we have on our balance sheet towards that that type of activity. But to the extent that we still have cash after protecting the floor with the maintenance CapEx, logical organic growth growth projects across our whole portfolio, and we can't find acquisitions to put that free cash flow to work, we will return that that cash to shareholders, most likely in the form of share repurchases. We still have remaining authority to the tune of about a $150,000,000
It's about a 180 at this point. So Yeah. Thanks.
My my final one is, Rich, for it's a tax question, I'm afraid. So given what's going on with corporate taxes, can you give us an idea of what you would think would be the impact to your after tax cash flow and maybe address it as a tax rate, given that you've got a little bit of international earnings now. But specifically, if you could address in your you've presented the sum the parts valuation. HEP is a pretax entity as listed on the market. You guys are a taxable C corp.
Why should we look at HEP and your sum of the parts on a pretax basis?
So speaking to tax reform, we continue to evaluate what's going on, but to be perfectly honest, it changes every week materially. It's a bit of a moving target. Directionally, it's all positive for us. We're running a tax rate a little less than the statutory 35%. At the end of the day, it's basically gonna be dollar for dollar through.
We are a full cash taxpayer at HollyFrontier level. So an improvement from 35 to 25, it's really gets to be as simple as improve the cash tax rate by 10 percentage points for us. Specific to your point on HEP, at the end of the day, the market is much smarter than I am is my general view of the world. So if the market tells me that's where it's turning it, that's what it's worth. I understood your point about the after tax customers, you can say they have a lot of assets and a lot of things.
So I think it's a great point of debate. I'm not claiming to have the biblical answer on this. But at the end of the don't think the market's valuation is the market valuation.
Thanks. Ryan Zahid at Deutsche Bank. Maybe a question on the business plan updates. You got a slide in there where it talks about some of the targets you laid out at the twenty fifteen Analyst Day, how much has been achieved by full year 2017. Could you maybe give a little bit of, I guess, any clarity that you give on refining operations?
You've achieved about half of what was set out there in the target. What what would we need to see to kind of achieve some of those the run rates on cost and reliability? Last bit
of wedge between what was laid out originally and what you're So we'll start with the easy ones first on the commercial synergies that are shown on that slide, Ryan. That's where we've included a lot of the low cost debottlenecks that Jim mentioned earlier, getting El Dorado from a 138 to a 160,000 barrels per day. The the value of that additional 22,000 barrels per day is included in that number, as well as the additional throughput we're gaining through Artesia through the projects we did during the last turnaround this spring. The areas where we still have a lot of lot of headroom is the reliability line there. You can see we really haven't made as much progress as we would like there.
We're just beginning to see the fruits of that reliability effort in the second quarter. Crude throughput that Jim mentioned in his presentation, the 467,000 barrels per day. So we're just we're just getting there. We still have to prove it with more consecutive quarters of type of throughput, but we're confident that we're gonna show that to you very soon, as Jim said in his prepared remarks. If you
were to I mean, if you were to sustain the type of reliability that we saw in the second and third quarter, would that largely capture a a good chunk of
what you see here? I think that'd be
about three quarters of what we expected. I can't remember the exact numbers, but it roughly around $90,000,000 of reliability improvements. I think we could be in the $65.70 range.
Let me
one one one follow-up on that. I mean, you you hinted on or you you mentioned on the 3Q call how you've had you've had days of over 500,000 barrels a day of throughput through the refineries. What can you as you look at debottlenecking going forward in terms of sustaining a higher level of throughput, are there is it is it just a question of reliability or are there capital projects that
you would
to drive throughput existing throughput over 500,000 barrels a day on
sustainable basis? It's it's just we have the capability. If you look at all the numbers in Jim's presentation, you can add them all up, they exceed 500,000 barrels per day. So we can run 500,000 barrels per day on any given day when everything works right. Well, you've been around refining enough to know that not everything works right on every given day.
Okay? So there's planned maintenance, major turnarounds that would come off of that 500,000 barrels per day. There's other planned maintenance, catalyst change outs, things of that nature that that back you off the 500 as well. And there are unplanned things that happen from time to time. And we've tried to bake all three of those categories of downtime to back off the 500,000 of ideal per stream day type of throughput to provide the 450,000 to 470,000 barrel per day guidance range that we gave you today.
Thanks.
Paul Chan, Barclays. George, just want to clarify. Earlier, you say $400,000,000 for the sustaining refining CapEx. I think in the past that the general rule is that $100,000,000 for maintenance, dollars 100,000,000 for turnaround and $100,000,000 for regulatory. So is that apple to apple comparison that your sustaining CapEx is now that is actually higher?
If I
can jump in there. It's not purely sustaining, much like the HEP number is not purely sustaining. So you're including some Yes. There's a There is growth capital. I'll give you one very finite example.
You're to change out a pump at a refinery because it's at end of life. You change it out with an improved pump, now you're getting better rate on the unit. It's sort of maintenance. It's also, at the end of the day, sort of growth. You've added directly, we've added earnings power to that piece of equipment.
So there's some gray area in there to be perfectly honest. But when we say sustaining too, we mean, hey, those assets are at least as good as they were the day before. It is not purely, hey, we just need to keep the lights on.
Okay. Now your point is well taken, Paul. The 400 includes some sort of growth CapEx in it. So we typically, again, think of $400 $400,000,000 a year of CapEx in $4,100,000,000 buckets, maintenance, turnarounds, environmental compliance, and other sustaining, and then some some growth CapEx as well.
Okay. I think when you bought petrochemical lubricant business, at the time, that's an inspiration. You will be able to upgrade Tausa from Group one to Group two, and you also will be able to move some
of the feedstock from yellow wax or black wax to Canada. How are we in those progress? Is there any development on those? Sure. So the upgrading of group one to group two from Tulsa, that was gonna be primarily through blending.
We're only gonna make group one at Tulsa, period. We can't manufacture anything higher than group one at Tulsa. But how we can upgrade it to group two is by using some of that Tulsa group one material and substituting it in replacement of group two in certain formulations that don't compromise the formulation to meet our customers' requirements and basically, in essence, upgrading group one to group two through that type of substitution. As far as the production of more group three and group three plus at PCLI, that's still very much a work in progress. I think the good news is we've made group three out of these materials.
It's not significantly more economic than our current slate of of products due to yield differences. We've also made group three plus, but there, the economics are even less compelling than we thought on the group three side. And frankly, we're not totally understanding that right now, So we have some work to do. Again, it falls into a matter of prioritization. But everything else we've got going on, again, our our highest opportunity is upgrading our existing fleet of base oil production to finished lubricants and specialty products.
We'll continue to work the further production of group three and group three plus base oils at Mississauga. But right now, again, it's still very much a work in progress. Can I sneak
in a real quick one, the third one? The $1,000,000,000 of the logistics spending, how much of them over the next two or three years you think you will be able to move to the in house to be managed by HEP? Yes.
I don't think we're ready to give any specific guidance on that one, Paul. But I think, again, look at our track record. We've done a good job of leveraging our purchasing at the HFC level to get into either joint ventures or outright acquisition of pipeline systems, and we'll continue to do that going forward.
Want to understand a little bit better market. And very concurrently? That's Tony, do want to take that one?
In simplistic terms, absolutely, yes. So clearly, we base our products on our own base oil economics. Invariably, we but we also price to the market as well. So it depends on a combination of factors. So in essence, the margin does increase for a finished fluid versus a base oil.
Base oil, as you've already seen, can be depends on the product, could be 80% of a product, it could be 95% of a product. So it depends on that relationship between that chemistry that we add to that product. And then frankly what the market is willing to pay for that particular product in any particular region. Okay. So last week, Motiva announced that they
are getting into Group three production at their large facility in Port Arthur. You've got a supply demand balance shown on page 31. Do you have you taken that increase in group three production into account? And how do you think that event will affect group three pricing? Yeah.
Think do you hear me? I I've got that one. And that the answer to that is we Motiva coming into the market is not unexpected. They've been out sending samples out to the marketplace for probably a year or so. We don't think it's going to, in any way or shape or form, kind of block our kick in terms of getting those additional products into into North America in terms of the group three base oils.
The as as far as pricing is concerned, we just really see them in that particular case really backing out the significant number of of import barrels coming into the marketplace. If you notice from that particular slide, you'll see the well over, you know, two thirds of the of the group three base oils coming into the into North America are imported primarily from Asia and The Middle East.
So so you looking at the appendices, you lose money on your rack back margin. So are you saying that with Motiva coming in, you're stable on that end, that's not gonna impact you're make or you're gonna lose more money with Motiva coming out of
the market on Rack Back? Look, think, Chi, to Mark's point, we don't have much color on how much volume that's not in the chart we showed you because I came from an industry consultant at the end of the day. But I think what we push is or point out is, look, the secular demand is going to group three at the end of the day. So even with Motiva coming in, we're expecting those group three margins to to maintain and, frankly, increase over time. To George's point, if you look at base oil supply demand balances across different groups, group two is the one that's got the fundamental problem.
We do produce some group two base oil. Now fortunately, and one of the reasons we're so focused on upgrading it is because it can be used in a lot of our finished products at the end of the day. George mentioned that 45 percent, that's actually on our entire 25,000, 28,000 barrels a day of base oil capacity. So even with those kind of margin uplifts, each of the small increase is going to have material earnings growth there. So generally speaking, like on the rack back business, we anticipate to be volatile, not quite as volatile as fuels refining, but volatile.
And really for us, the goal, the longer term goal is, yeah, we want to push more Group three, but really want to take those Group 2s and upgrade them.
Theresa Chen from Barclays. George, I wanted to follow-up on your comment about potentially decelerating the distribution growth rate at HEP. That was quite a cliffhanger into the But break can you give some guidance on what that deceleration can look like? Are we talking about going back to like a mid single digit number or low single digit and when you might come to this decision? And in the same line of thought, given the MLP market aversion for externally funded equity models currently, is this a move towards more of a self funding model?
What's your perspective on that?
Yeah. I don't think we're ready today to give additional guidance as far as magnitude and timing. That's a board level decision. We haven't had those discussions with the board. You know, it's not like it we're in a great hurry or need to do something quickly here.
This is just in the spirit of the abundance of caution and, again, our very disciplined approach. We thought while we had you all today here, it would be appropriate to provide that signal in the case we did something down the road. It'd be better to do that than not to say anything now and do something later and not even take advantage of this Analyst Day. So, again, we're still evaluating it. We haven't talked to the board about it.
But, again, we are we are concerned. We're not seeing value in this space. And, again, we're not gonna chase space that doesn't have value. And, Rich, you wanna handle the second part of
your question? Theresa, to your point, as we've been following this debate, HEP really was was IPO ed and spun out, if you will, of Hollicorp originally for kind of two reasons. One of which was access to capital markets, the other which was to highlight the value in this business. So the access to capital markets is an important part of HEP's purpose at the end of the day. So we're going to continue to monitor the market and see what the market wants.
For us, HEP continues to provide superior equity capital markets access It does provide
it does highlight the value of
the assets we've got there.
And my second question is related to the organic growth projects, expansion of Malaga as well as SLC and Frontier. Can you talk about how much that will cost? What kind of returns or EBITDA multiples you're hoping to generate and when those the extra capacity will come online? Yes. These are the good news is these
are tremendous return projects actually. We're going to invest well under $10,000,000 to expand the SLC in the frontier lines at roughly 10,000 barrels a day capacity across the two that should fill basically on contact. Malaga, order of magnitude is a similar cost expansion and return. The issue we run into is these are not larger expansions and bigger projects in and themselves, but they're contained in the capital guidance we gave
for 2018. You. Hi, Cristina Kazarian over at Credit Suisse. You guys alluded to acquisition opportunity sets in the lubricants business. Can we just talk a little more here in terms of how I should be thinking about locational preference, size, multiple?
Should I be thinking similar to what you guys did with BCLI? Just some general thoughts here would be great.
Yeah. I think it's still way too early to give too much guidance here on this one, but I think you could probably cap it on the upside and thinking in terms of another PCLI acquisition. Frankly, I'd like to keep it smaller than that, more of a bolt on type of nature than than a doubling of size. But, again, it all depends on what we see opportunity wise, what we see value wise. Just like in refining, these properties don't sell all the time.
So when they come available and you like them, that's the time to move. So but, again, generally, I would think in terms of instead of a $800,000,000 acquisition like PCLI, something more in the range of 200 ish and doing a a series of those those type of bolt ons. But, again, can you never know what the market's gonna present to you and whether you're gonna wanna jump on it.
And anything around locational preference?
Location wise, we still feel comfortable with our North American footprint. Believe it or not, we've gone through some growing pains just to branch from The United States to Canada. You know, there's obviously, anytime you cross a border, there are different rules, regulations, forms that need to be filled out, so we're we're learning. Like, I didn't say that in this in my in my prepared remarks, but we're definitely not desirous of going too global here even though a lot of our sales are global, as Mark and Tony pointed out. But again, for the right opportunity, we'll cross another border.
But for right now, let's think in terms of North America.
Thanks. Faisal Khan with Citigroup. Just going back to the distribution policy question, does any of that sort of decision on slowing down the growth rate translate to your dividend policy to HFC and how you're looking at that?
Yeah. You know, we haven't given that much thought lately. We went through that cycle HollyFrontier years ago, as you probably recall. We increased the regular. We played the specialty dividend game.
And at the end of the day, we don't think we saw much value from either of those. So we're still leaning towards share buybacks rather than anything on the dividend side. But, again, I'm not gonna
rule anything out going forward. And, Faisal, just you know, our regular our intent with our regular dividend is that after protecting an investment grade or any maintaining competitive dividend is essentially ranked two, if you will, from a cash allocation perspective.
We're not dependent on HEP to pay the regular dividend. Okay. Can you just also remind us with HEP, what percentage of the revenues come from third parties? It's less than 10%. Okay.
And then in terms of your guys' commentary around the specialties business and loose business, we've very And the the in If we we're sit here past. In a couple of years, is it going to be that you captured more of this higher margin through just gaining more market share or just through market growth? Like how do you actually capture that that higher that higher margin over time? I think
Tony may have mentioned that in most of outside of Canada, we are less than 1% of the overall finished product market in those areas. And so as a result of that, we can go we we feel like we can go in with these high value products and and take, you know, a little bit of business in that area without really disrupting that marketplace at all. And so our plan to do that is really to go in and continue to be a very product driven strategy that looks at working closely with OEMs to be able to move into those respective markets in a very, very calculated way that is not disruptive. Is there any goal involved in that? Like, if
you said, you know, in a couple of years, you'd have 5% more more market share in these higher value products or 10%. I mean, is there something that we could we could look at that you guys are thinking about over the long run? That it's it's at least for me, it's a
bit early to be able to say that because we're spending a lot of time right now just simply trying to integrate this business into HollyFrontier and actually taking a good hard look at what those opportunities might be. So I'm really not in a position to be able
to give you much guidance that right now. Thanks. I think the only thing I'd add to that is the growth rate from some for some of these higher valued finished products is typically higher than the industry average. So we can we can take some share but also participate in that higher growth rate.
I think we have time for one or two more. Anybody else?
Remember, all these questions are keeping us away from the bar. So
you. Sean Seyin, Guggenheim. Maybe could just talk a
little
bit on the margin side, I think, was it one of your slides there, the EBITDA margin for specialty or the Rack Forward business, highlight kind of your average over the last, call it, two years has been kind of 13% range versus the average, which is 16%. So I guess what explains you guys being on the lower end of margin there? Is really product mix? Is it cost? Or can you talk a little bit when you see the opportunity set is on that front?
Yeah, I think to your point, is product mix at the end of the day. This is not a very wide category, if you will. So those are all the companies that deal in lubricant space. Some are purely additives manufacturers, some are additives in finished lube manufacturers. There are a couple of privates as well that produce some of these products.
So it's a little bit it's a product mix at the end of the day. I think to these guys point a theme we've been we've been pounding on here is that there's tremendous opportunity for us to kinda move up that value curve at
the end of the day. And remember, our PCLI rack back business is embedded in that EBITDA margin. No? PCLA? Okay.
And
then I'm sorry. Just as a follow-up to, I think, a
prior question. You look at
the kind of the growth opportunity there, what market are you most excited about for the Rack four business? Or what's the kind of lowest hanging fruit there? Is it The U.
S. Or talk about that? If I look
at the I mean, we are very we're fairly substantial in Canada. We have a very large footprint there. And we can grow, for sure. But if I look at the regions of real opportunity, United States, where we are here today, as Mark's already alluded, we have a very, very small market share, but the business environment is very, very similar. It has a real sort of double digit growth though.
Perhaps I would suggest that China offers some fantastic opportunities for the business. Again, as I say, we are expanding. We're putting in resources into that region. Clearly, we would not do so unless we felt that we could actually make some inroads into that market. I think it plays to our sweet spot again.
China, very favorable to Western based oil companies. The Petro Canada brand known as a safe to be trust integrity, Poly Frontier as well. So we look at the opportunities there, particularly with OEMs. We have a there are a huge amount of OEMs in that market looking to upgrade, looking to become more fuel efficient in particular. As you probably any of you have been into China, Shanghai or Beijing, it's the emissions there are particularly poor.
And those the Chinese market is going through some rapid change in terms of the technology. So the work that we're doing on products like GF6, I already indicated, Duralon, for example, is a low emission product, speaks to actually meeting the market requirements. We're particularly excited about that
market. I might just add to that, that Pat Gribbon has just taken one of his most senior people over in over in Europe and put them over that China operation. We think that's going to make a big difference
in the days to come. Thank you.
Thank you all very much. This concludes our two thousand seventeen Analyst Day. We now invite all of you to join us for a cocktail reception with management that will take place in this room in
the back. Thank you. Another table with bottles in the back that shouldn't be drinking, but they're the some Duron or other PCLI products. So check those out too, please.