Welcome to HollyFrontier Corporation's fourth quarter 2016 conference call and webcast. Hosting the call today from HollyFrontier is George Damiris, President and Chief Executive Officer. He is joined by Doug Aron, Executive Vice President and Chief Financial Officer. At this time, all participants have been placed in a listen-only mode, the floor will be open for questions following the presentation. If you'd like to ask a question at that time, please press star one on your touch-tone 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 Julia Heidenreich, Vice President, Investor Relations.
Thank you, Jack. Good morning, everyone, welcome to HollyFrontier Corporation's fourth quarter 2016 earnings call. I'm Julia Heidenreich, Vice President of Investor Relations. This morning, we issued a press release announcing results for the quarter ending December 31st. If you would like a copy of the press release, you may find one on our website, hollyfrontier.com. Before George and Doug proceed with their 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 securities 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 also may include discussion of non-GAAP measures.
Please see the press release for reconciliation. Also, please note that information presented on today's call speaks only as of today, February 22nd, 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, Julia. Good morning, everyone. Today, we report a fourth quarter net income attributable to HFC shareholders of $53 million, or $0.30 per diluted share. Included in the current quarter results were a non-cash lower of cost or market inventory adjustment that increased pre-tax earnings by $98 million and pre-acquisition costs related to our recent PCLI purchase that decreased pre-tax earnings by $13 million. Excluding these items, adjusted net loss attributable to HFC stockholders was $10 million, or $0.06 per diluted share. Fourth quarter EBITDA, excluding the inventory valuation benefit and acquisition costs, was $101 million, 37% below the comparable quarter last year due to lower crack spreads, narrow crude differentials, and higher costs associated with the RFS mandate. Fourth quarter crude throughput was 430,000 barrels per day versus our revised guidance of 440,000 to 450,000 barrels per day.
During the quarter, we experienced unplanned maintenance on our Navajo and Tulsa catalytic reforming units. During the Tulsa outage, which extended into the third quarter, we were able to accelerate maintenance originally planned for later this year and took the opportunity to upgrade catalysts, which will allow us to benefit from higher liquid yields and octane during the summer driving season. For the first quarter of 2017, we expect to run between 350,000 and 360,000 barrels per day of crude. Impacting rates in the quarter is a planned 40-day turnaround at Navajo. During this turnaround, we will also eliminate recycle streams in our operation, which will improve efficiency, allow us to increase crude capacity by approximately 5,000 barrels per day, and improve flexibility to run a lighter crude slate. We also have a 17-day planned outage in El Dorado on our vacuum tower.
Also, our Woods Cross plant is currently operating at reduced rates due to the Salt Lake City pipeline outage impacting crude deliveries. Our outlook for 2017 remains cautiously optimistic. We are encouraged by the new administration's energy plan and pro-growth economic policies and their potential to increase domestic crude production and demand for refined products. Combined with recent indications of compliance with proposed OPEC production cuts, these impacts should drive the reemergence of inland crude differentials and improved crack spreads. We are also optimistic that the flaws and inequities inherent with the RFS will be addressed. On February 1st, we announced the closing of our acquisition of the Petro-Canada Lubricants business, welcoming over 725 talented team members to HollyFrontier. We are now the fourth largest base oil producer in North America and the only North American producer of high-margin Group III base oils.
The Petro-Canada Lubricants business brings HollyFrontier industry-leading product innovation and R&D capabilities, a global sales and distribution network, and a strong brand portfolio recognized globally. Integration is off to a good start. We remain confident in our $20 million synergy target. There is also significant opportunity to increase Group III base oil production through feedstock optimization. Group III base oils enjoy an $80 per barrel margin uplift versus Group II base oils. PCLI is a transformative acquisition that advances our long-term vision and strategy and adds diversity to our earnings stream by providing a differentiated high margin business that generates more stable cash flows. Combined with our existing Tulsa specialty lubricants business, it creates scale, operational and financial synergies, and a strong platform for growth.
Although the current refining environment is challenging, HollyFrontier is well-positioned with a strong balance sheet, excellent liquidity position, and the additional stable cash flow from our lubricants business. Lastly, I want to thank Doug Aron for 16 years of service at HollyFrontier. He's been instrumental in shaping the company we are today. More importantly, he has been a great friend and valued colleague. We wish him and his family continued success and happiness. You will be missed and not forgotten.
Thanks very much, George. For the fourth quarter of 2016, cash flow provided by operations totaled $164 million. Turnaround spending in the fourth quarter was $21 million, and HollyFrontier standalone capital expenditures totaled $81 million. This took our full year capital and turnaround spend to just under $500 million at $497 million versus our $560 million guidance due to the deferral of some projects. We expect to spend between $400 million and $450 million of standalone capital in 2017, including the turnarounds and carryover spending from 2016. Additionally, we expect to spend $30 million of capital for HEP and $30 million for PCLI. As of December 31st, 2016, our total cash and marketable securities balance was $1.1 billion. During the quarter, we announced and paid a $0.33 regular dividend, putting our yield at 4.4% as of last night's close.
For the year, we returned approximately $367 million of cash to our shareholders through dividends and buybacks. In November, HFC issued an additional $750 million to our existing 5.857% senior unsecured notes due in 2026. A portion of the proceeds were used to repay the $350 million term loan, and the remaining amount was used to help finance the PCLI acquisition. Last week, HFC upsized its senior unsecured revolving credit facility from $1 billion to $1.35 billion and extended the maturity to 2022. As George mentioned, earlier this month, we closed on the acquisition of our Petro-Canada lubes business for $862 million. The $862 million purchase price was funded with cash on hand. As of February 15th, we have $1 billion of standalone debt and no drawings under our credit facility.
Our cash position after PCLI funding stands at approximately $208 million and puts our liquidity at a healthy $1.6 billion and debt to capital at a very modest 18%. I'd like to mention a few unusual items during the quarter. Fourth quarter earnings were impacted by $13 million in M&A related charges, a portion of which was an unrealized loss on the currency hedge related to PCLI. In conjunction with the closing, we have exited that hedge position, resulting in a net gain that will be realized in the first quarter and an effective purchase price for PCLI of $845 million USD. As a reminder, HollyFrontier owns 35% of Holly Energy Partners. That's 22.4 million common units plus a 2% general partner interest. HEP units continue to perform strongly with the current market value of the LP units at approximately $827 million as of last night's close.
Fourth quarter general partner distributions were $15.9 million, a 40% increase over the same time last year. For the full year 2016, we have received approximately $105 million in LP and GP distributions from HEP. A reminder that you can find our monthly WTI-based 3-2-1 indicators for our MidCon, Rockies, and Southwest regions posted on HollyFrontier's investor page. These regional indicators do not reflect actual sales data and are meant to show monthly trends. Realized gross margins per barrel may differ from the indicators for a variety of reasons. You can find that data on our investor page at www.hollyfrontier.com. Before moving to the Q&A portion of the call, I'd like to call out a few personnel changes we're making. First, I'm pleased to announce that Julia Heidenreich, currently VP of Investor Relations and well known to this group, has been promoted to VP Commercial Analysis and Pricing.
I'm sure you guys will agree with me that Julia has been an absolute all-star in the IR role and will be missed, but our loss is very much the commercial group's gain. I'm also proud to announce that Craig Biery has been promoted to Director of Investor Relations. Most of you have been working with Craig for a while now as he's been leading the IR effort for HEP for the last year. Finally, I'd like to say thank you to this group of analysts and our shareholders. When I started 16 years ago, only Paul Cheng and Fred Leuffer were covering our $250 million microcap refiner in Houston. Jeff Dietert, Paul Sankey, and Chi Chow started covering us soon thereafter, and I've enjoyed just about every minute of that ride.
Thanks to all of you guys for the support and the hard questions, but perhaps you can take it easy on us today so I leave with fond memories. Jack, I believe now we're ready to open up the line for questions.
The floor is now open for questions. At this time, if you have a question or comments, please press star one on your touch-tone phone. We ask that you please limit yourself to one question and one follow-up. If you have any additional questions, we welcome you to rejoin the queue. If at any time during the question-and-answer session your question has been answered, you may remove yourself from the queue by pressing the pound key. Thank you. Our first question comes from the line of Roger Read with Wells Fargo. Your line is open.
Yeah, thank you. Good morning. George, a lot of the policy stuff is still out there, and I know it's been beaten up on a lot of these calls, but can we get your updated thoughts on the RFS here and expectations now that the EPA head has been confirmed, and also maybe any updated thoughts on the border tax?
Sure. First on the RFS, I don't think there's a whole lot new to report there. We think we're optimistic, as we said previously. We view the confirmation of Scott Pruitt as being positive. I think he's not going to be as radical as some would paint him, but I think he's going to be much more receptive to discussion and debate on the intentions and the application of the RFS standard. Again, we're cautiously optimistic that something's going to be done to fix the flaws in the RFS. On the border adjustment tax, I think there's been more discussion in the investor community than there probably has been even in Congress on this one. We've definitely applaud the administration and Congress's efforts on tax reform.
As a full taxpayer, whatever can be done to reduce taxes so that just like individuals, we can bring home more of what we rightfully earn and deploy it to improve and grow our business. Having said that, the border adjustment tax, we have some serious concerns about it. The potential to increase gasoline prices by $0.30 per gallon in a $50 Brent environment cannot be viewed positively for the industry or for the American consumer. Again, we think it's very early in the process here. I don't think the border adjustment tax will go through, but that's just one man's opinion, and I'm not in the business of forecasting what Congress will or will not do.
Yeah, pretty dangerous thin ice to step out on there, for sure. I guess with the PCLI acquisition now closed, you've had it for, I think about three weeks. Anything that stands out now that you officially own it, you've been able to take a look at it, that either confirms your views or seems more optimistic or potentially more of a challenge in some of the transition?
I think it's still very early. Like you said, we're three weeks into this. We're getting to know the business and the people there better. We don't see anything that surprises us to the downside there. Most of what we're seeing only confirms and gives us more optimism on potential improvements and upsides on that business.
Okay, great. Thanks. Welcome back to H-Town, Doug.
Hey, thanks, Roger.
Your next question comes from the line of Blake Fernandez with Howard Weil. Your line is open.
Hey, guys. Congrats to everybody on the various movements. Basically, a follow-up on that last question. It sounds like operationally things are kind of moving in the direction you had expected. I think in the presentation you had outlined three different scenarios for the outlook and earnings accretion potential. Without explicit visibility on the margin environment, obviously overall refining has been weak. Can you confirm where we sit on those three scenarios in the current environment? I presume we're toward more of scenario one, which would be a lower earnings accretion potential.
Blake, I'm not sure I'm following the three scenarios you're referencing.
I think in the acquisition presentation, you had outlined three different scenarios where one would be a lower earnings accretion. I believe it was 3% all the way up to scenario 3, which was 22% accretion. I presume that had to do with various underlying EBITDA generation based on the margin environment. I'm basically trying to understand what the current lubes margin environment looks like.
I think it's safe to say with the middle case of roughly $150 million of EBITDA with upsides from there. Again, very early to call, stick with the middle case.
Okay. When do you think we can get a breakout of those financials separately?
I think we'll be reporting something at the end of the first quarter. We'll be showing PCLI as a separate business segment.
Okay. The follow-up I had, I know you covered border tax, but just to confirm, obviously those facilities are located up north of the border. I presume a lot of those products are actually sold into the U.S., but is that the case?
That's correct. About 40% of the product comes into the U.S., and border adjustment tax would definitely be a concern there.
Okay. That's all I had. Thank you.
Thanks, Blake. I just would add to that, Blake, I'm sure you've seen this, we speculate on whether there will be a border adjustment tax, if there was one, of all of the borders, that would be most likely to be friendly and seems like early indication is that commodities to and from Canada would be exempted. If we're putting a 20-some% chance on a border adjusted tax as the consensus, I'm saying that the likelihood that Canada wouldn't be exempted gets even considerably smaller from there.
Agreed. Thank you.
Your next question comes from the line of Jeff Dietert with Simmons. Your line is open.
Good morning.
Morning, Jeff.
Can you hear me? Oh, good. Doug, would love to wish you all the best. It has been a fun ride. I've thoroughly enjoyed it. All the best to Julia, Craig, and Rich as well. Could you talk a little bit about what you're seeing in the Permian, maybe the SCOOP/STACK and even potentially early in the Uinta, and what increased production in those regions, how that might impact your crude feedstock flexibility?
Sure. On the Permian, we're seeing the rig counts and the production levels increasing. I don't think there's any secrets there. A lot of that is in the counties that are right around our Artesia and Lovington refineries. We're pleased to see that increased production. That presents opportunities for both our refinery in Artesia, New Mexico, as well as HEP to participate in the midstream business around those assets. Having said that, there's still a lot of pipeline capacity out of the Permian to the Gulf Coast, so it's going to take a significant continued increased production to fill up those pipelines to lead to widening crude differentials between Midland, let's say, Cushing or the Gulf Coast. The SCOOP/STACK
Before you leave the Permian,
Sure
Any crude quality issues that you're seeing with the recent production adds?
Yeah, sure. Jeff, directionally, the incremental crudes from the shale production there are lighter. That's one of the reasons why we're pleased with this project that we're going to be doing during the turnaround to eliminate those recycle streams and allow us to increase our ability to run lighter crudes. There's no question there needs to be some solutions to placing these higher-gravity crudes into existing pipeline infrastructure. Again, this is one area where we hope HEP will be actively participating. Anything else on the Permian, Jeff, or is that good?
No, that's good.
Okay. On SCOOP and STACK, we're not experts in that area. We see it secondarily through the movement of that crude to Cushing. From what we see and know, the SCOOP and STACK is another much smaller play than the Permian, but comparable to the Permian, where, again, production is very active. Again, the incremental barrel tends to be lighter than your typical 42-gravity WTI. On the Uinta Basin, we're seeing some signs of production there by smaller producers. The larger producers like Newfield have other plays they're focused on, but we see smaller producers picking up the slack, and it's very early in that pickup. It's one of the last basins that we anticipate production increasing. For producers that don't have positions in the other plays like the Permian and the SCOOP and STACK, we're seeing interest in producing those barrels.
It's a much lower-risk play in that you know the crude is there. It's just a matter of financing the wells and having a market like us to put it in.
Great. On the Tulsa Naphtha splitter, I'm sorry if I missed it, did you provide an update or could you provide an update on the progress there?
That project is on hold for now. We continue to work the engineering and cost estimate. We're still optimistic about that project. It's going to be a good one for potential octane and Tier 3 solution, it's not something that we need for either. It's just an opportunity investment for us to further decrease our gasoline sulfur for Tier 3 and make more octane. Again, we can meet Tier 3 and produce our octane without that project.
Thanks for your comments, good luck to everyone. Thanks.
Thanks, Jeff.
Your next question comes from the line of Neil Mehta with Goldman Sachs. Your line is open.
Doug, Rich, Julia, Craig, congratulations to you all. My first question as it relates to the Rockies business and the path to improving profitability here. I was wondering if you guys could talk about what you're going to do to try to drive down the operating costs at Cheyenne and then also improve gross margin realizations at Woods Cross as you look into 2017 and 2018.
Sure. I think a couple of things on that, Neil. We have some initiatives that are based on or driven towards the OpEx, just the dollars perspective. We have some fixed costs that we need to drive out of the system. Maintenance being the biggest one. We also have a series of other smaller targeted cost reduction efforts. Water consumption being one that I can highlight. The biggest opportunity we have in the Rockies is getting throughput up. That's been our biggest challenge at Cheyenne. That refinery is rated at 50,000 barrels per day. It's actually 52,000, but it's tough for us to run at that. That's the crude capacity. The downstream isn't matched up to that rate. There's no reason we shouldn't be able to run that facility in the high 40s, 47,000, 48,000. We have reliability initiatives in place to go get that.
We've got constraints in coke handling and sulfur handling that we're addressing as well to allow us to not only increase the throughput, but also increase the percentage of WCS we run at that facility, which gets to your gross margin question. When you look at gross margin, that's our biggest ability to influence it is on the crude side of the equation. The product market is going to be what the product market is. The big lever there is increasing our WCS percentage in our crude slate at Cheyenne.
That's great, George. Sorry if I missed it, can you call out your 1Q throughput guidance again, could you talk about any pipeline outages in the Salt Lake area and how that's impacted the Rockies? I have a quick follow-up.
Neil, we guided 350,000 to 360,000 for the first quarter.
Okay, great.
Again, it's impacted by some turnarounds, the biggest one being at Navajo, where we have a 45-day outage that we're taking just about every unit in the refinery down in various stages. Then we have a 17-day outage at El Dorado, which will impact crude right there appreciably.
Thanks, George. My follow-up is on the gasoline markets, and how do you think we're positioning going into the summer? Inventories are elevated, we are going into the summer here. Do you think those product builds are more of a function of weak gasoline demand, as some of the statistics would imply, or it's just the industry running at elevated utilization right now?
Yeah. As far as builds, they're basically at the same level where they were last year. The good news is the build is less this year than last year, not significantly less, but less nonetheless. On the build side, I think there's definitely some questions on demand. I don't think the demand has decreased as much as some of the reports would indicate. When I see the demand decreases at 4%, that sounds very high to me, which suggests there might be some weather issues in the data or perhaps some issues with export data and how that calculates into a demand number. I still think that the majority of the build in refined products, especially gasoline, is more supply driven. I think we have more maintenance planned this year than perhaps last year. Hopefully with the turnarounds coming up, that'll decrease inventory levels.
Some of the inventory level was built in advance of those turnarounds. I know we did it at Navajo in advance of our turnaround there. We built inventory so that we could supply our customers during the downtime.
Appreciate it, guys.
Thanks, Neil.
Your next question comes from the line of Brad Heffern with RBC Capital Markets.
Hi, everyone. George, just as sort of a follow-on to the last question. You have the downtime in the first quarter, but it seems like the guidance is particularly weak. I was wondering if it includes any sort of economic run cuts at any of the facilities.
No. There's no economic run cuts. As you know, we have a pretty good product market locations that are net short product and with incremental barrel coming from somewhere else. We typically run our plants full out. The last time we had an economic run cut was about a year ago now. It was about 5,000 barrels a day, and it lasted for about a week till margins increased. The reason the number might look low is we have, again, the turnarounds at Navajo. It's 45 days. Basically half of the quarter, Navajo is going to be at significantly reduced rates. El Dorado is going to be down for 17 days. When the vacuum tower goes down, crude tower goes down with it. We have the Tulsa reformer that we mentioned. That downtime occurred in the fourth quarter and spilled into the first quarter.
I think one of the questions that Neil asked that I forgot to address was Woods Cross. There are issues with the Salt Lake City pipeline. That's the major supply pipeline into all the refineries in Salt Lake. We're running at reduced rates there, roughly in the ballpark of 30,000 to 31,000 barrels a day versus our high 30s that we've run since the turnaround, or since the Woods Cross expansion started up.
Okay. Thanks for that color. Another question on PCLI. Can you talk about what the performance was in the fourth quarter or if the final 2016 performance came in close to that 150 annualized number? Additionally, can you talk about what the margin trends have looked like? How things have looked in the first quarter versus maybe where we were in the fourth quarter?
Brad, on the first question, what I would tell you is that because this non-GAAP, non-audited results that we see and Suncor doesn't or didn't break those out, we can't give you an exact number, but would tell you that yes, we are very comfortable with the previous guidance and the 150 number you mentioned. Again, on a non-GAAP, non-audited basis, looks very close to exactly what we were expecting and what the actual results were. As to the margins, I'll let Rich or George, maybe Tom comment.
Sure. Hey, Brad, it's Rich. I think on the base oil side, the year started off a little bit soft, not unexpected seasonally, downstream of that, finished product margins remain strong. We, again, to Doug's point, feel very confident in our numbers and our guidance around PCLI.
Okay. Thanks, everyone.
Your next question comes from the line with Paul Sankey with Wolfe Research. Your line is open.
Yeah. Hi, good morning, everyone, and all to all, congratulations on your respective moves. Particularly Doug, it's been a pleasure. I was already a bit nostalgic looking back at HollyFrontier stock trading at $6 in 2004 before you started. The tearful tribute to those of us who've been covering the stock a long time, thanks for that. Without further ado, George, with these changes, we are in a little bit, I think, I feel, a little bit of a vacuum on your strategy. I know that you've announced it on various calls, I just wonder, are you planning an analyst meeting or a formal reset of the outlook, again, given the changes that have been made in personnel? Thanks.
I think we're planning an analyst day meeting later this year, probably in December.
Right. We can look forward to that as being a sort of, I don't know about strategic reset, formalization of where we are in terms of strategy. At the moment, we're sort of bouncing along with this doubling concept, which I think I'm still a bit unclear about. Could you give us your latest thoughts on that?
I think 2017 is going to be very focused on integrating and making the improvements we anticipate in capturing the synergies with PCLI. We're still going to be looking for other opportunities, our primary focus, again, is going to be on PCLI. That's obviously a huge acquisition for us. We think there's tremendous potential to integrate that with Tulsa and to use that for a platform for growth. There are other opportunities that we're still looking at, both in refining and for HEP, especially in the Permian. By far and away, our biggest priority is PCLI this year.
Understood. For what it's worth, that's very much what Doug was saying at our conference in January for you guys in 2017. That's cleared that up a little bit for me. Just to follow up, the Rockies results, you mentioned there have been issues with running the refineries at a higher utilization. Do you think there's also potentially a secular shift here in terms of Rockies margins, which have historically always been so relatively good? I'm just concerned that the market may have structurally altered. Thanks.
The biggest structural change in the Rockies is on the crude side again. At $50 crude, there's obviously a lot less production than at $100 crude. You see that across the entire domestic EMP sector, but you especially feel it in the Rockies. We've seen significant contractions or narrowing of crude differentials there, and that's the biggest change in the second half of last year, is that the crude diff that we typically enjoyed at Cheyenne, especially at Woods Cross, narrowed significantly in the last few months.
I guess the question is, do you expect that to continue?
I think it will continue until, again, production increases. That's going to be driven by crude price.
Thanks. Again, Doug, good luck.
Thanks, Paul.
Thanks, Paul.
Your next question comes from the line of Edward Westlake with Credit Suisse. Your line is open.
Yeah. Congratulations to everyone again. Thanks, Doug, for all your help over the years. Just a quick one on the Woods Cross pipe. Any issue into any sort of timeline in terms of when they get that fixed?
I think we're on a day-to-day basis here, working to get the permits and permissions we need to get in there and do the work. I think the work is well-defined, what needs to get done. Really, again, just the upfront work that needs to get done to clear the way for the fix.
On PCLI-
Go ahead, Ed.
I was going to say on PCLI, one of the aspirations of the synergies was to get some of the black wax crude up and to run that through and see if you can make Group III lubes and get the uplift. What sort of time would it take post-close to run those tests?
Yeah, I think the feed optimization is not exclusively the wax-crude gas oil. I think there's also feedstocks we can move from Tulsa, as well as third-party feedstocks that would all be conducive to making more Group III versus Group II. I think you should give us a little time and think about towards the end of the year to see some of that coming through.
Great. Then just coming back to RINs, obviously, the shifting the point of obligation is something that the independent refiners have argued for, and there have been a lot of other people on the other side saying we shouldn't. Maybe a little bit of color as you've gone through the comment period as to, maybe still early, as to which way you see the odds on that.
Yeah. Again, putting odds on things like this, Ed, is very difficult to do. I would put the odds at greater than 50% and less than 100. Picking the midpoint, 75%. I think there's no question there's a lot of people on the other side of this, the people that are on the other side of this are frankly the people that are realizing unintended windfall profits from this. We still believe we have right on our side. It was never the intent of the RFS to generate winners and losers to this magnitude and, again, to generate profit centers that were never intended to exist.
I would just add to that, Ed, that as George mentioned in the open, while the new chair of the EPA, Mr. Pruitt, he's not likely to be a radical. Our experience, having worked with him as the attorney general in Oklahoma with our ownership of the refinery there, is that he is of sound mind and a critical thinker and one that is certainly at least willing to understand both sides. Our view, as George said, is that there's a better than 50/50 chance that we get some movement there. Don't know until it's done, but again, our view is a better than an average chance.
I guess one last thought on this one, Ed, is the flaws in the RFS could never be better illustrated than what we've seen since the election. RINs were trading over $1, and right now they're trading for less than $0.50. There's no fundamental change in supply-demand balance for RINs. Again, it just highlights the speculation and how subject to manipulation the RINs market is, and how the misalignment between the point of obligation and the point of blending is causing this market to be highly distorted and it needs to be fixed.
Thanks very much.
Your next question comes from the line of Doug Leggate with Bank of America Merrill Lynch. Your line is open.
Thanks. Good morning, everybody. Congratulations to everybody. Doug, I guess we won't see you next week at our refiner conference, but good luck. I guess, George, if I could kick off the questions going back to M&A for a second. Obviously, the lubricants acquisition has a fairly meaningful impact on your outlook. What does the M&A market look like on the lube side as it relates to your expansion plans? I think we're all guilty of thinking refining, and I'm wondering if we're skewing our bias a little bit the wrong way.
Well, again, that's one of the reasons why we like the PCLI deal that, again, in combination with Tulsa, it gives us scale to basically have a full third leg to our growth story here. We think there's opportunities in the M&A arena for lubes, just like there are, again, like you said, on refining from the MLP side. We're, again, very early in the stages of tapping into that deal flow, but we see deals of varying sizes in the lubricants space that would be nice bolt-ons to PCLI. We don't have any specifics to share at this time, but we're encouraged by what we're seeing this early in the game and getting into that deal flow.
A related question, George, if I may. I think you said in your prepared remarks, outside of the synergies that you've declared on that acquisition, there's opportunities for expansion, volume expansion. Are you any further forward in those thoughts? Do you have any preliminary views as to what that could look like and what the capital allocation could be? Is there any color you can offer, or is it still too early?
Yeah, I think, Doug, we prefer to think of it as changing the product slate rather than a volume expansion. That facility makes 15,000, 16,000 barrels per day of base oil. Right now it's about 20% Group III and 80% Group II/Group II plus type of material. Again, very early stages of looking at what we can do with this feedstock optimization strategy, but we think there's the potential to increase Group III production by a few thousand barrels per day. Again, every barrel that's converted from Group II to Group III has an $80 per barrel uplift. We think we can get this done with no to minimal investment. We may need to make some pre-treating type investments, but we're talking something in the order of $5 million-$10 million.
Again, very early stages of quantifying both the potential and any potential costs associated with doing that.
I appreciate that. I thought most of it might be worth a go. Maybe I could squeeze one last one in. I guess it might be a Doug Aron question, actually. All the focus is on RINs and border taxes and so on, we don't hear too much talk on the refining side about corporate taxes, and obviously that's a big part of the Brady proposal, was to drop the corporate tax rate. I'm just curious, what would that mean for Holly? Would we see a real reduction on cash taxes? Maybe if I could layer into that, what is your latest thinking on priority of use of free cash, assuming that returns later in the year? I'll leave it there. Thanks.
Sure. Ed, thanks. On the tax side, certainly prior to our PCLI acquisition, HollyFrontier is the definition of a full U.S. taxpayer. We've been so and certainly through the early part of this decade paid a tremendous amount of U.S. tax. If you get a reduction to 25 or 30 or 20, all of that would be incrementally very positive for us. On the PCLI side, we do have a few structures that we think help us with taxes there. For the most part, again, a huge gain to us if we do get a change, and that would be great. Again, much the same with our comments on border adjustment.
I think our tax department views that even if you get to a consensus and something that gets passed at the very, very earliest, we'd be talking about back half of 2018 and perhaps later before you see something that's implemented. We'll keep our fingers crossed, certainly on that one. In terms of uses of free cash flow, we'd love to have that problem and have it start as soon as the second quarter. Really no change there. We've deferred some discretionary opportunity growth CapEx projects that we think are very high return, and I think that would be the first, as those tend to be one and a half to two year paybacks. I think share repurchase would be the next leg we'd look at, as that's really been a preferred method versus the special dividends or such that we looked at earlier, just after our merger.
I'm certain Rich looks forward to that problem and hope it begins the day that I leave.
I appreciate all the answers and congrats and good luck again, Doug. Thanks.
Your next question comes from the line of Paul Cheng with Barclays. Your line is open.
Hey, guys. Good morning.
Paul.
Doug, has been a long time. Best wishes for you, and also thank you throughout the years. 1999 seems like ages ago. It was really the Doug age back then.
Yes.
Rich, Julia and Craig, congratulations on your-- and best wishes in your new position. I probably have two questions, if I may. Just curious that, look like in the MLP sector that the prevailing wave is that everyone believe the GP and the LP should be collapsed, and that will allow the LP to have a better funding for their cost of capital. You guys have been one of the granddaddies, and the GP is already well in the 50% split. Is that something that you guys believe you should do and allow you to have a better vehicle to grow or that you do not believe yet apply to you?
That's definitely something that we're looking at, Paul. We do have our hands a little bit busy, like we've talked about right this minute with PCLI and closing the year's financial statements. We will definitely be looking at this. There's a lot of tax implications here that we need to really get into the details. As you know, the devil's in the details on that type of thing. We think it is something that could potentially be good for both HEP and HFC as the GP.
Based on what you just said, because you are going to focus the 2017 on the integration, so should we assume anything on the HEP structure probably is not a this year event, it happened?
No, I would not say that. I think if it's something that's going to be good, I think that's something we can figure out this year. If it is good for both sides, then I think it is something that potentially could be done this year. No guarantees, but again, I would think sooner rather than later on that.
Mm-hmm. Second question this time.
That's your third question, Paul, just so you know.
Well, I thought that that is just one question.
Well, I just want to side step here. I wanted to let you know.
The second-
Go ahead, Paul.
The second question is, typically that an independent refiner don't really want to get into a joint venture refining operation with another person. If the asset is right, is that something that you guys would consider, for example, not that you will do for that specific asset, like when you're looking at CITGO, I mean, 50% that would be claimed by Rosneft. If that's an opportunity, will you be willing to get into, or do you think that it will work for your strategy or your operation?
Yeah, I think the aversion to JVs is not limited to us or to refining in general. As you know, the issues with JVs is that even if both parties' incentives are perfectly aligned at the beginning, over time they can tend to drift and become misaligned. I think the Motiva venture is a good case study in that one. Again, initial alignment is difficult, and then maintaining alignment over time is again difficult. Having said all that, Paul, never say never. If there are enough incentives to enter a JV, especially on a refining JV where perhaps we bring something to the table from a marketing or supply perspective or operational perspective, gives us trading opportunities, sure, we would look at it. Going in with a very cautious eye.
Thank you.
Thanks, Paul.
Your final question comes from the line of Chi Chow with Tudor, Pickering Holt. Your line is open.
Okay, thanks. Hey, Doug, man, you make me feel really old with your comments going way back that far. I guess not as old as Cheng, though.
Sorry, man.
I appreciate that. No, it's been great working with you over all these years, as you mentioned, best of luck. Hey, do you guys have an estimate on the lost opportunity cost in both the fourth quarter and full year 2016 due to unplanned maintenance?
I think for the full year, Paul, it was about $90, $95 million, and for the fourth quarter, it was about $28 million.
Okay. Just seems like unplanned downtime continues to be an issue. What does it take to improve the reliability and uptime of your plants going forward here?
Sure. At the highest level, we agree with your statement. We're not pleased with where we are here. We're not meeting the objective that we set up in our business improvement plan. Having said that, at the risk of sounding like I'm making excuses, there are some extenuating circumstances on some of our downtime. For example, the Tulsa reformer that we highlighted in our prepared remarks. The issue with that downtime is primarily associated with the original conversion of that unit to a CCR that was done prior to HollyFrontier even taking ownership in that facility, and it's taken basically 10 years for that design flaw to show up. It's basically some support rings and tabs internal to the reactor that failed, and basically the internals for the reactor all sagged and moved out of place. Having said that, we are fully focused on operational improvements.
We've made significant investments in people and in our assets to improve reliability, especially in utility systems. We've got a team of 10 to 15 people here in Dallas at the corporate level, lending assistance to the plants to improve their reliability across the board. One of the best examples I think I can highlight is our RBMI program, where we've identified various pieces of pipe that had not been for this program could have failed, and could have led not only to downtime, but significant safety events at our facility.
Okay, great. Thanks, George. Appreciate that. On PCLI, just wanted to try to understand the cost structure a bit better there. What can you say about the % of fixed versus variable costs at the facility?
I think rather than get into a whole lot of detail here, Chi, we'll start sharing more of that information as we report our financials. At a high level, this is a very fixed cost-driven business As refining tends to be in general. Especially so in, again, this differentiated high-margin business in that we have a lot of pretty big sales and R&D staff associated with PCLI. Beyond the plant level, there's also a fixed cost associated with those capabilities.
Okay. I guess on product pricing, would you say the pricing is more elastic or inelastic to crude prices at PCLI?
I think it's less sensitive to changes in crude price than refined products definitely are. It's sensitive, much less so. I would say that also it tends to be more lagged than refined products typically are.
Okay, great. Maybe just one more question. Can you give us some idea of what sort of details you're going to provide when you report PCLI earnings? Are you going to give us volumes and margins by product category, or any comments on that end?
Hey, Steve, it's Rich. We've been on the ground for about three weeks now, credit to our accounting department, they've also been trying to wrap up a 10-K. It's really premature to go there. We'll have some detail, we will report this as a separate segment for the first quarter, I expect this will also evolve with time.
Okay. All right. Thanks a lot. Appreciate it.
Okay, Steve.
You have another question from the line of Paul Cheng with Barclays. Your line is open.
Hey. Hey, guys. Just a quick follow-up. The closing costs relate to the PCLI. Where did you guys put it? Is it under corporate or is it under refining? Do you have a number for the RIN cost in the fourth quarter?
Yeah. PCLI costs are in corporate and RINs for the fourth quarter, Julia?
75.
$75 million.
Right.
The total year was $240 million.
Also that one more. George, for Tier 3, can you tell us that how many of your refineries are currently in compliance, and what is the remaining schedule for the rest of your portfolio?
All our refineries can meet Tier 3 requirements. Our last plant was Navajo, and we have our Prime-G+ unit just completed there, and it's ready to start up if we need it. The other two plants are the smaller plants, Woods Cross and Cheyenne, and both of those have small refinery exemptions, push out the compliance till 2020.
Thank you.
Thank you, Paul.
There are no further questions at this time. I would now like to turn the call back over to Julia Heidenreich.
Thanks, everyone. We appreciate you taking the time this morning to join us. If you have any follow-up questions, as always, Craig and I will be available all day. Thank you very much.
Thank you. This concludes today's teleconference. Please disconnect your lines at this time and have a wonderful day.