Welcome to HollyFrontier Corporation's second quarter 2017 conference call and webcast. Hosting the call today from HollyFrontier is George Damiris, President and Chief Executive Officer. He is joined by Richard Voliva, Executive Vice President and Chief Financial Officer. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star zero. We ask that you please limit yourself to one question and one follow-up. Additionally, we ask that you pick up your handset to allow optimal sound quality. Please note that this conference is being recorded.
It is now my pleasure to turn the floor over to Craig Biery, Director of Investor Relations. Craig, you may begin.
Thank you, Melissa. Good morning, everyone, and welcome to HollyFrontier Corporation's second quarter 2017 earnings call. I'm Craig Biery, Director of Investor Relations for HollyFrontier. This morning, we issued a press release announcing results for the quarter ending June 30th, 2017. If you would like a copy of the press release, you may find one on our website at hollyfrontier.com. Before we proceed with prepared 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. Today's statements are not guarantees of future outcomes.
The call may also include discussion of non-GAAP measures, and please see the press release for reconciliation to GAAP financial measures. Also, please note that information presented on today's call speaks only as of today, August second, 2017. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or rereading of the transcript. With that, I'll turn the call over to George Damiris.
Thanks, Craig. Good morning, everyone. Today, we reported second quarter net income attributable to HFC shareholders of $57.8 million, or $0.33 per diluted share. Certain items detailed in our earnings release that Rich will discuss in his prepared remarks decreased net income by $58.2 million on an after-tax basis. Excluding these items, net income for the quarter was $116.1 million, or $0.66 per diluted share, versus $49 million, or $0.28 per diluted share for the same period in 2016. Adjusted EBITDA for the period was $306 million, an increase of 78% compared to the second quarter last year. This increase was principally driven by higher product sales volumes and margins, combined with earnings from our recently acquired Petro-Canada Lubricants business, PCLI.
Due to strong refining operations and reliability during the period, we set a new quarterly crude charge record, averaging 467,000 barrels per day, which generated strong financial results and positive free cash flow. We're pleased to report the first full quarter of financial performance from PCLI in our consolidated earnings. Adjusted EBITDA for the quarter was $30 million, with product sales averaging 23,720 barrels per day and operating costs at $53 million for the period. Our first five months of earnings equate to $140 million of annualized EBITDA, well within our guidance range. Production levels were lower in the quarter due to downtime taken to upgrade and maintain certain under-invested refining assets. Our plant is now back to normal operations, and our go-forward plan is to run the plant at maximum capacity.
As we progress with the integration of PCLI, we remain confident in our ability to achieve operational and financial synergies between our two lubricants businesses. This morning, we also announced our board of directors declared a dividend of $0.33 per share, payable on September 20th to holders of record on August 23rd. Today's dividend declaration reflects our continued commitment to returning cash to shareholders. Looking forward, we remain focused on operating our plants safely and reliably and executing on our business improvement plan and growth strategies. With no major planned downtime until October, we are well positioned to continue on the path of strong operational and financial performance for the remainder of the year. Now I'll turn the call over to Jim for an update on our operations.
Thank you, George. As George mentioned, for the second quarter, our crude throughput was 467,000 barrels per day versus our guidance of 440,000-450,000 barrels per day, driven by strong refinery reliability. This represents our highest quarterly crude charge achieved by HollyFrontier. We also set a number of individual refinery throughput records across the fleet. Most notably, El Dorado and Woods Cross achieved record crude charges for the quarter, and Tulsa and Navajo ran record monthly crude charges in June. Our consolidated operating cost of $5.18 per throughput barrel was an improvement of 23% versus the first quarter. We remain focused on improving operations and reliability at our Cheyenne plant and are seeing positive trends in the Rockies region.
The Rockies operating costs improved to $8.31 per throughput barrel, adjusted for the HEP tariffs embedded in the Woods Cross refinery OPEX. During the quarter, we ran nearly 75,000 barrels per day of crude charge and are encouraged about increasing our Rockies throughput going forward. We are very pleased with the overall performance of our refinery system during the period and remain confident in our ability to continue improving upon our operational reliability. I will now turn the call over to Tom for an update on our commercial operations.
Thanks, Jim, and good morning. For the second quarter, we ran 26% sour and 19% WCS and black wax crude oils. Our average laid-in crude cost under WTI was $0.39 in the MidCon, $2.97 in the Rockies, and $0.87 in the Southwest. We experienced tightening differentials primarily among our heavy and sour crude slates during the second quarter and was coupled with apportionment on various lines coming from Canada. Currently, we continue to see compressed differentials in both synthetic and Western Canadian heavy crudes due to the Canadian synthetic production interruptions. Apportionment has decreased as a result of the closing of the transportation arm. The crude differentials were challenging in the quarter, we were able to optimize our system accordingly and source the barrels necessary to achieve the record product output. In future, we expect differentials to revert to pricing based on both transportation and quality.
On the product side, gasoline inventories in the Magellan system have dropped by over 2 million barrels since March 31st of this year. This has helped to keep crack spreads in the second quarter higher when compared to the same period last year. Excluding the Cheyenne RIN benefit, second quarter consolidated refinery gross margin was $10.76 per produced barrel, a 21% increase over the $8.88, which was recorded in the second quarter of 2016. Realized gross margin improved at all our refineries, despite the less than favorable crude differentials during the period. We continue to see improvements in our Rocky Mountain region with an adjusted realized gross margin of $15.05 per produced barrel, which excluding the RIN benefit, represents a 50% increase from the second quarter of last year.
RINs expense in this quarter was $83 million before the RIN benefit, driven by higher production and sales volume and higher RIN prices. For the third quarter of 2017, pardon me, we expect to run between 450,000 and 460,000 barrels per day. With that, I'll turn it over to Rich. Thank you.
Thanks, Tom. The second quarter included several unusual items. Pre-tax earnings were negatively impacted by an $84 million lower of cost or market charge, $23 million of asset impairments, a $5.1 million inventory charge related to the purchase accounting at PCLI, and $3.7 million in acquisition related charges. These charges were partially offset by a $30.5 million gain as a result of the waiver of Cheyenne's 2016 RFS obligation. A table detailing these items can be found in our press release. PCLI's adjusted EBITDA for the second quarter was $30 million. We remain confident in our annual EBITDA range of $100 million-$200 million for 2017. For the second quarter of 2017, cash flow provided by operations was $513 million inclusive of $38 million of turnaround spending. HollyFrontier's standalone capital expenditures totaled $56 million for the quarter.
For the full year of 2017, we still expect to spend between $375 million and $425 million in standalone capital, including turnarounds. Additionally, we expect to spend $40 million of capital at HEP and $30 million for PCLI. As of June 30th, our total cash and marketable securities balance stood at $460 million. During the second quarter, we announced and paid a $0.33 regular dividend, putting our yield at 4.5% as of last night's close. As of June 30th, we have $1 billion of standalone debt outstanding and no drawings under our $1.3 billion credit facility, which puts our liquidity over $1.8 billion and debt to cap at a modest 18%. HollyFrontier owns 36% of Holly Energy Partners, including the 2% general partner interest. HEP units continue to perform well, and the current market value of HFC's LP units is over $800 million.
Second quarter general partner distributions were $18.7 million, a 43% increase over the same quarter last year. As a reminder, we have published benchmark margins for group one, two, and three base oils. Going forward, we will continue to publish these delivery indicators monthly, along with the WTI-based 3-2-1 margins for each of our operating regions. These regional product and base oil indicators do not reflect actual sales data but are meant to show monthly trends. Realized gross margin per barrel may differ from indicators for a variety of reasons. You can find all this data on the investor page of www.hollyfrontier.com. With that, Melissa, we're ready to take questions.
Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press *1 on your touchtone phone. We ask that you please limit to one question and one follow-up. If you have additional questions, we welcome you to rejoin the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Thank you. Our first question comes from Doug Leggate from Bank of America. Your line is open.
Thanks. Good morning, everybody, and congratulations on a strong quarter. I got a couple of things, if I may. First of all, the throughput was obviously pretty strong, and it really looks like you've turned the corner operationally now. As we go forward, how would you characterize any additional steps you think you need to take to sustain that? Is there anything unusual about the absence of maintenance or reliability or something that is driving that change? Can you just characterize whether you think we've really turned the corner now on reliability? I've got a follow-up, please.
Like you said, Doug, we're very pleased with our results in the second quarter. It's basic blocking and tackling. Our focus is on continuing to sustain the levels that we've seen this second quarter. I don't think there's any plans or programs that we haven't previously discussed or that we haven't been working on. It's just a matter of, again, continuing to focus and setting that high expectation for our operations team and having them maintain this second quarter type performance.
I guess I was just looking at the delta between actual throughput and guidance is obviously well ahead. That's really what I was getting at in Q2. Okay, I'll leave that one. My follow-up is just hopefully a housekeeping question for Rich. Just on the cash flow, Rich, can you walk us through, there's extraordinary cash flow in the quarter. Just walk us through if there's anything unusual in there, and then I'll leave it at that. Thank you.
Hey, Doug. Yeah, there was nothing really unusual in there. Typically, we catch a little bit of a working capital benefit in the second quarter, and we get the flip of that in the first quarter. We saw that this year. We did catch a tax carryback in the second quarter of about $80 million or so. That helped a little bit. That was for 2016. Those are the only two items I'd call out.
Okay. I'll wait for the queue. Thanks, guys.
Thanks.
Our next question comes from Blake Fernandez from Scotia Howard Weil. Your line is open.
Guys, good morning. Congrats on the strong results.
Thanks, Blake.
Question for you on the lubes business. The full quarter of reporting was broadly in line with what we saw last quarter, which was kind of a partial quarter, despite the fact that some of these benchmark indicators that you publish here were up pretty strong. Can you give us some help or guidance on how to think about using these indicators and modeling or how these are directionally going to move the earnings going forward?
I think I'll start with a couple of general comments and maybe Craig or Rich can help you on the modeling-related questions. Again, like I said in the prepared remarks, we had some downtime in the second quarter that impacted production. As we learn more about the plant, we're finding where some of the soft spots are in the plant where they've been under-invested in recent time, especially as the previous owners prepared this asset for sale. We're taking the time to fix and improve what we're seeing as we learn about the plant. The second comment, Blake, is although the base oil indicators that we publish are stronger quarter on quarter, I think it's important to remember that this is an integrated business that takes the base oil and sells it to finished product.
Those finished product pricing is a lag versus the base oil, which itself is a lag versus crude oil price movement. There are lags in the system that don't necessarily catch up to the base oil pricing that you saw in the change in our indicators from quarter to quarter. Rich, I don't know if you want to say anything.
No. Blake, the only thing I would say is the benefit of having an integrated business is that we're closer to the customer. The downside to that is this is not like selling gasoline. You don't change the price every single day.
Without getting too far ahead of our skis here, would that suggest 3Q maybe you have some upward momentum given the move from 1Q to 2Q?
I think we'd hope so, we'll see what base oil markers do and everything else.
Got it. Okay. The second piece is on CapEx. I don't think it looks like you're falling too far out of line with guidance, based on my numbers, you've done about $223 first half of the year when you include turnarounds. If you extrapolate that just forward, it seems like maybe there's a chance you go below, especially given that you don't really have any downtime until November. Is there any downward pressure on CapEx that you can see or any color there?
No. Blake, we feel comfortable with the range. There's obviously timing of turnarounds is a big part of it. We also completed some big capital projects early this year, which inflated our first half capital spend.
Right.
Again, we feel good with the range at the end of the day.
Okay. Well, thank you, guys.
Yeah.
Our next question comes from Justin Jenkins from Raymond James. Your line is open.
Yeah, thanks. Good morning, everybody. I guess maybe if I could start on crude differentials and maybe your crude slate in the quarter. It seems like the
was pretty similar to what we've seen recently. I guess it's a bit different than what your peers have been saying. Is that just a function of running more volume through the Rockies or any color maybe on mix of crude utilization going forward?
Yes, that's probably right. We did have a little bit of a change. I think we ran more black wax at Woods Cross. By and large, we do have crudes in long-haul pipelines that we have to run off in inventory or try and regrade it at Cushing.
Okay, perfect. That's helpful. Then maybe moving over to Navajo here. I know we talked last quarter about some operational uplift to get more Delaware crude in, but maybe just curious on what you're seeing today in terms of opportunities out there and how the barrel quality is trending in your system.
Yeah, I think directionally, the incremental barrel is lighter due to the shale source of the crude oil. Again, we did make some modifications to the plant in our second quarter turnaround to allow us to run more of those lighter barrels.
Perfect. Thanks, guys.
Thanks, Justin.
Our next question comes from Paul Cheng from Barclays. Your line is open.
Hey, guys. Good morning.
Morning, Paul.
I actually have one request and maybe a couple of questions. The request is that, Rich, in the future, if you can include a table on the special item by segment and by line. When we're looking at this quarter's impairment, your goodwill and asset impairment in your income statement show $19.2, but you say it's $23.2, we have about $4 million. We don't even know where we should put it. It would be extremely helpful that if you can help us out to maybe break it down in the table so that we know where to take those special item out.
Yeah, fair enough, Paul. Just to clarify that the missing $4 million, if you will, is in the MidCon segment.
We don't even know that. In MidCon, is it in the cost of goods sold? Is it in the G&A? That's why I'm saying that.
That's in the G&A line.
It would be extremely helpful that if you help us so that we don't have to just keep guessing. George, just wondering, I understand what you say about in this quarter that that didn't change. More importantly is that if the differential remain narrow, in terms of your configuration, your capability, how much you can shift from heavy into light if the differential stay at where we are for an extended period of time?
Well, I think we have flexibility, but we still have economics, even at these narrow differentials, to run heavy crude to fill our cokers.
Even at today's differential, that you're still better off to run heavy in your system?
Exactly. Up to the point at which we fill our cokers, then from there, it becomes an economic trade-off between heavy and light. Directionally, we are switching from heavy to light at this type of differential once we fill the cokers.
Not at today's level. Today, you are still better off. Most of your peers seems to suggest that at today's level, that they're better off to switch into light already.
Again, there's a certain increment of volume at both Cheyenne and El Dorado that we will switch from heavy to light. Again, we'll fill the cokers first, even at today's differentials, like we said, Paul, we're still going to run that heavy crude to fill the coker.
It's after the coker is full, the next increment will switch from heavy to light.
Okay. The second question is that at the time of your acquisition, that one of the maybe big prize you're looking at is how you will be able to integrate and move the feedstock from maybe Tulsa up in Canada so that you get upgrade into a Group III, or that you move the feedstock maybe from, or not feedstock, but the crude slate into Tulsa to help you into maybe moving into a Group II or the other. Just curious then, after the last five months, is there any update you can provide on that?
Okay. It's still very early there. We have run some initial trials. They've been short in duration. The initial results are encouraging, but there's still a lot of analytical work that we need to do to test the product that's been made to see what exactly it looks like and what exactly we can do with it in our downstream businesses and sales in the base oil market. We don't have enough results that we feel comfortable sharing them at this point in time.
Again, everything is encouraging from what we've seen to date.
Okay. All right. Thank you.
Thanks, Paul.
Our next question comes from Phil Gresh from J.P. Morgan. Your line is open.
Yes. Hi, good morning. A couple clarification questions. First, just in terms of the lubes EBITDA of $150 million, did you say you're still expecting to achieve that for this full year, or is that more of a run rate basis?
Run rate, Phil. Obviously, we're going to end up owning the asset for 11 months of the year.
Okay. How much would you say in the second quarter you called out the maintenance? Was that a meaningful impact on the results? I'm just trying to think about how we should be generally thinking about the second half of this year.
I think our LPO, our lost opportunity in the lubes business, is probably around $20 million for the five months that we've owned it due to the operational issues we've had.
Okay, that's helpful. Just another clarification just on the RINs expense. What did you say? The second quarter was $83 million excluding the benefit. Is that what the number was?
Correct.
Okay. I know in the last call you didn't want to get into too many specific numbers, but is that the right way to think about the second half of the year? Or just how should we be thinking about that with where RINs are today and more broadly?
Yeah. Phil, if you run rate the current set of prices, yeah, it's probably pretty reasonable. You tell me what RIN prices are going to be, right, Phil?
Yeah. Okay.
I think that's a reasonable ballpark, yeah, today's market.
Okay. A broader question on the RINs. Obviously, the D.C. Court of Appeals had a ruling late last week, and I didn't know if you had any comments on that or how we should think about any impacts that might happen to these 2016 standards. Is it meaningful for you guys if something changes there?
Yeah, I think there's still lots to be learned about what exactly this ruling means and what the EPA is going to do as a result. I think maybe taking a little step back here on this RFS, I think this is something we still continue to work hard. We're impressed with how eager this administration is to learn about the RFS and their desire to discover the truth and to do what's right, which is obviously a refreshing change from the administration. I think it's important to remember these people are new in their roles. They're still trying to get up the learning curve on this complicated topic that we've all had the benefit of studying for over 10 years. We take for granted that the 15 billion RVO is above the blend wall. A lot of people in Washington are still learning about that fact.
They're still learning about the fact that the biodiesel RVO is above domestic production. They're certainly still learning about this unicorn biofuel called cellulosic that doesn't even exist. I think although the changes in the recently announced RVO are relatively modest, you did see some modest movement down in the advanced and cellulosics. I think there's no coincidence there. I think they also mentioned they were interested in a possible reset of the RVO going forward. I think that's a long-winded way of saying that there's a refreshing change with this new administration, and they're going to try to do what they can within the confines of the RFS to fix this problem.
Got it. Okay. Thanks, George.
Our next question comes from Neil Mehta from Goldman Sachs. Your line is open.
Good morning, team.
Morning, Neil.
Morning. I just want to start on the refining gross margin in the Rockies. Obviously, very strong results there. Want to confirm the $19.47 that's in the release, that's got to include the one-time gain? Then the bigger picture question around the Rockies is just the sustainability of the captures that you saw there. Anything that you could provide that would help us think about that go forward?
Yeah, Neil, you're correct. The gross margin reported includes the benefit of the Cheyenne waiver. Broadly speaking, as far as capture is concerned, you think we should normalize that, if you will. We feel very comfortable with where we're at and the sustainability of that going forward. The team has done a great job so far. There's a long way to go, though. They're going to continue to work hard, I'm sure.
Is that improvement in capture more of a reflection of the ability to source more favorable crude barrels, or is it a reflection of your ability to run the assets more optimally, driving better performance? Just trying to understand the DNA of that capture.
Mostly it's reliability at the end of the day, Neil.
Okay. Cool. Follow-up question is just, George, you've talked in the past about growing scale across each of your three business lines, and just latest thoughts in terms of being an asset or for that matter, a corporate acquirer. How is Holly different, your thinking about the opportunity set that's in the market?
Again, I wanted to reiterate, our primary focus is on optimizing what we have, integrating PCLI, and improving our reliability of our existing fleet. We are seeing assets available across all three of our business lines that are attractive to us. Within the priority of, again, optimizing what we currently have, we're continuing to look at and work opportunities to acquire something.
Is there any business line in particular that seems to be a focus? Should we look at what you did with PCLI as an example of the type of things that are potentially on the board going forward?
Yeah. Again, I think we're looking at opportunities across all three businesses, refining downstream or midstream and lubes. I think PCLI would be a good example of the types of things we're looking at, where it's accretive and it positions us well for the long term.
Awesome. All right. Thanks, guys. Congrats on a good quarter.
Thank you, Neil.
Our next question comes from Paul Sankey from Wolfe Research. Your line is open.
Hi. Good morning. Just a couple from me, please. Firstly, can you talk a bit about the market as it regards the performance Petro-Canada business? Rich, when you were in here the other week, you were talking about Pearl GTL. I wondered if there was some dynamics there that you might just highlight if there was anything worth highlighting. Secondly, a bigger question. Do you have a specific target or something that we can think about for improved operational performance? I just wondered if there's some aspiration that you have after this quarter that we can look forward to. Thanks.
Paul, let me grab the first one just on, obviously we saw strength in base oil in the second quarter. Particularly, frankly, in Group I, which is at Tulsa and those benchmark indicators. Pearl has had some issues. I don't think that hurt the market, but I wouldn't call anything out beside that.
Okay.
Yeah. Then as far as the second question, as far as the target, Paul, I don't think we have a specific number we want to share, I think we've shared this example, at El Dorado, where we're running about 150,000 barrels a day in a refinery that had historically run about 138. I only use that as an example of the type of things we're focused on doing at El Dorado, is not only improving the reliability at our base levels, but finding those areas that are the next bottleneck. If we can overcome it, leads us to running more crude or more intermediate through the downstream units. Again, the classic process engineering of finding the constraints and relieving that constraint till we find what the next constraint is downstream of that.
Okay. Thank you.
Okay.
Our next question comes from Brad Heffern from RBC. Your line is open.
Hi, everyone. I'll start by trying to ask Doug's question again. Rich, on the cash flow number, the 513. It just seems like even if you take out that $80 million number that you called out, it still just seems out of line with how the business has been performing at these earning levels of late. I think you have to go back to 2012 when WTI was the spread was $20 to get a number like that. With the addition of PCLI, has the cash generation just changed? Can we think about it $0.66 of earnings, the business generating $500 million of cash a quarter going forward? Just any more color you can give me to help there?
No, again, Brad, what I'd say is, look, the working capital benefit we caught in the second quarter was over $200 million. Now, we had a pretty significant drag in the first quarter. This is fairly predictable from us seasonally. What I'd tell you is effectively the first quarter cash from operations is understated, if you will, on a run-rate basis, and then you get the flip of it in the second.
Okay. Sorry, I missed that working capital comment. I guess, secondly, on the Cheyenne exemption, has that facility received an exemption in the past? I don't remember hearing about it.
No. This is the first time.
What was the change there? Has it just been performing at a low enough level that it's now eligible when it wasn't in the past?
I think that's a good characterization, and that's why we're focused on the reliability there.
Okay. Got it. Just finally, any update on the process, looking at the HEP IDRs?
No update, Brad. We're continuing to work that, but nothing to announce or report at this time.
Okay. Thank you.
Our next question comes from Ryan Todd from Deutsche Bank. Your line is open.
Good. Thanks. Maybe just a quick follow-up. I'm not sure if I missed it earlier. Did you say what the throughput was at Cheyenne on the quarter?
No, we're not going to go to that level, Ryan.
Okay. I guess generally from an operational point of view, it seems you got a couple consecutive quarters of improved performance out of the Rockies there. I know it's been touched on to varying degrees over the course of the call. How close are you at, I guess, at Cheyenne specifically, at being where you would like it to be? How sustainable do you view the improved performance there?
Yeah, I think we've made good progress, but we still have a lot of runway to go there. As with every improvement initiative, you're going to have fits and starts. We have periods where we run really where we'd like to be, and then we backslide a little bit and figure out what it's going to take to get. Again, it's getting to where it can be sustainable performance rather than just periodic performance. That's really where our focus is. Again, we hit where we want to be, but it's a matter of sustaining that type of level for a protracted period of time.
Okay, thanks. Maybe back over to PCLI. Maybe as a follow-up to you talked about some of the test batches that you run on the feedstock optimization. I think previously you had talked about the possibility that would be something that we might be see signs of the numbers showing up towards the end of the year. Is that still a reasonable timeline to see potential impact of some feedstock optimization? Then maybe just at a broader sense of PCLI, you've had a few more months with it now under your belt. Any thoughts evolving on the growth opportunities that you see there in the business over the next few years?
Yeah, I think what we've said in the past, Ryan, or at least what we meant to say in the past, is we'd start working on it towards the end of this year. I think you've seen that in the test trials that we just talked about. We'll have some more test trials between now and the end of the year. I think as far as really starting to see it in the numbers from both a synergy and a feedstock optimization perspective, I think you should think more towards 2018 than the second half of 2017.
Okay.
To your second question, the more we get into this business, the more we confirm our going-in assumptions and feel comfortable that the value that we think we can add to this business and the value this business can add to our Tulsa business can be realized. There's nothing that concerns us from what we've learned. If anything, we are more confident and think more upside than what we've talked about in the past.
Okay, thanks.
Our next question comes from Roger Read from Wells Fargo. Your line is open.
Yeah, good morning. I guess I'd like to come back a little on the operational performance, obviously solid in the quarter. Your guidance for Q3 is a little bit lighter. Is there anything you've seen quarter to date that makes that, are we just trying to be careful? Maybe Q2 was a little bit on the high side for total throughputs.
Roger, I'd just say, once you're talking about trying to get this down to a percentage point of accuracy, you're cutting it pretty fine. We obviously have higher guidance in the third quarter than we had in the second. We view this performance as sustainable, and we're very excited about it.
Okay. George, you've talked before about, as a bigger organization and consolidating operations across the units, putting a core group in charge of reliability. You've talked obviously about that on the call so far. Where do you think you are in terms of that performance? Are we, the old baseball analogy, halfway through here in the fourth or fifth inning? Are you in the third? Are we pretty well through that process? What's sort of your take on that?
I think we're probably in the middle third of the game. We're seeing some positives. We have plenty of runway left.
For the remaining part, presumably the low-hanging fruit first, are the things that you need to do going forward capital consuming, or are they more, as you said earlier, process-oriented?
I think it's more process-oriented. Again, we're hitting rates that we'd like to hit, but sustaining those levels for a protracted period of time, that's where our focus is. We don't need the capital because we are hitting those rates for periods of time. It's sustaining those levels, which is again, gets back to more of the operational processes.
Okay, thank you.
Thanks, Roger.
Once again, if you do have a question, you may press star one on your touch-tone phone at this time. Our next question comes from Chi Chow from Tudor, Pickering, Holt & Co. Your line is open.
Great. Thank you. Just back on the Cheyenne RIN situation. Rich, what exactly does the $30 million represent? Is that an elimination of an accrual, or was there an actual cash impact flowing through?
It represents the refund of our 2016 RIN obligation at Cheyenne at cost. The cash impact will be effectively not needing to purchase those RINs this year. We'll have an avoided cost, cash cost at the end of the day.
Okay, got it. I may have missed it earlier, but do you have an estimate on your RIN expense for this year?
Well, put it this way, Chi, it was $83 million for the quarter, excluding that benefit. If prices were to hold exactly where they are today, I think that's a pretty reasonable run rate. Again, we've got to make the price call more than anything.
Have you applied for an exemption for 2017 again at Cheyenne or any of your other refineries?
Yeah. Thanks. I think, Chi, we're going to stay away from that question for any applications for the future.
Okay. Back on PCLI. Can we circle back to how this whole pricing dynamic works? With the increase in the base oil crack that you show on your website, was that a function of crude prices coming down, or was it actual increases in pricing for the base oil?
Increases in base oil pricing.
Okay. Going forward, I guess, how impactful is the quarter-to-quarter change in crude prices on your margins versus should we be looking at base oil pricing as the most impactful factor rather than changes in crude prices?
Chi, again, it's like a crack spread, right? There's base oil on the product side, and there's vacuum gas oil on the input side. VGO is effectively 70% gasoline and 30% diesel, but it's got its own market and dynamic. It is traded on the Gulf Coast. You can find quotes for it.
Okay. Maybe one final question.
Sorry. It closely correlates with crude, but not exactly.
Yeah.
It typically trades at a differential to crude oil. We're talking about VGO now. That differential does change from day to day.
Right. Okay. One final question. George, you mentioned a $20 million opportunity cost in your comments earlier. Just to clarify, was that just for PCLI or was that a figure related to refining?
No, that's just at PCLI.
Really? Okay. Okay, thanks a lot.
Thanks, Chi.
Our next question comes from Paul Cheng from Barclays. Your line is open.
Hey, guys. Rich, I just want to make sure I get it right. The 450 to 460,000 barrel per day third quarter guidance, is that crude or is the total throughput?
Crude.
That's crude.
Yes, sir.
Okay. That's actually is really not that much lower than 2017 second quarter. Do you have the effective tax rate you're willing to share, that guidance for the second half?
I think it's the same as the first half. We're talking 36%-38% ballpark. From a book perspective, no, we see no change.
Okay. A final one for George. On the Rocky Mountain, that's the only region you are still running at less than 80% utilization rate. Given the size of the market over there, over the next couple of years, should we assume that this is probably as good as you can get? In other words, that the utilization rate is constrained by the market, or you're still constrained by the processes over there?
It's not constrained by the market. I think there's more potential for us to run more crude slate. Gets back into our reliability. I think the last comment I have on here is, I think our capacity is overstated slightly. Take Cheyenne, for example. I think our stated capacity at Cheyenne is, like, 52,000 barrels a day. I think that might be overstated by a couple thousand barrels a day.
Okay. If you have the processes, get everything right, what is a more realistic target you have in mind over the next couple of years you can get the utilization way up to for this region?
Let me take this question a little bit differently. I think we can get crude throughput in the Rockies into the 80s.
Into the 80s?
80,000 barrels a day.
Okay. Will do. Thank you.
Thanks, Paul.
There are no further questions at this time. Craig, I turn the call back over to you.
Thanks, everyone. We appreciate you taking the time to join us on today's call. If you have any follow-up questions, as always, reach out to investor relations. Otherwise, we look forward to sharing our third quarter results with you in November.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.