Good morning, and welcome to the Delek US Holdings Incorporated Second Quarter 2021 Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Blake Fernandez, Senior Vice President of Investor Relations. Please go ahead.
Thank you, and good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' Q2 2021 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO Ruben Spiegel, EVP and CFO and Louis Lavela, EVP and President of Refining as well as other members of our management team. Presentation materials used during today's call can be found on the Investor Relations section of the Delek US website. As a reminder, this conference call may contain forward looking statements as that term is defined under federal securities laws.
Please see Slide 2 for the Safe Harbor statement. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, we report certain non GAAP financial results. Investors are encouraged to review the reconciliation of these non GAAP financial measures to the comparable GAAP results, which can be found in the press release, which is posted on the Investor Relations section of the website. Our prepared remarks are being made assuming that the earnings release has been reviewed and we are covering less segment and market information than is incorporated into the Q2 release. On today's call, Reuben will review financial performance, I will cover capitalization and guidance, Louis will cover operations and CapEx and then Uzi will offer a few closing strategic comments.
With that, I will turn the call over to Reuben.
Thank you, Blake. On an adjusted basis for the Q2 of 2021, Delek US reported a net loss of 65,200,000
or a loss
of $0.88 per share compared to a net loss of $121,700,000 or a loss of $1.66 per share in the prior year period. Our adjusted EBITDA was $2,000,000 in the 2nd quarter compared to a loss of $100,000,000 in the prior year period included in adjusted results. Page 10 of the release provides a breakdown of inventory hedging impacts and Page 14 provides other inventory impacts in the quarter. Separate from these items, multiple factors impacted operation during the quarter, including residual effects of the Q1 freeze and fire as well as the Colonial Pipeline shutdown. While we cannot know what our EBITDA would have been, these events caused us trade recoveries, which will be recognized in the coming quarters.
On Slide 4, we provide the cash flow waterfall. In the Q2 of 2021, we had positive cash flow of approximately $169,000,000 from continuing operations, which includes a working capital benefit of $227,000,000 With that, I will turn it over to Blake.
Thanks, Ruben. Slide 5 highlights our capitalization. We ended the 2nd quarter with $833,000,000 of cash on a consolidated basis and excuse
me, dollars 1,410,000,000
of net debt. Excluding net debt at Delek Logistics of $927,000,000 we had net debt of approximately $485,000,000 at June 30, 2021. I would note during the Q3, we received a full tax refund of approximately 156,000,000 Moving to Slide 6, which provides Q3 guidance for modeling. 3rd quarter operating costs are forecasted to be in the range of $145,000,000 to 155,000,000 dollars
With that, I will turn
the call over to Louis to discuss operations and CapEx.
Thanks, Blake. During the Q2, our total refining system crude oil throughput was approximately 267,000 barrels per day. This was impacted by turnaround activities and the fire at El Dorado, lingering freeze impacts at Big Springs, Crop Springs and El Dorado and the curtailment at Crop Springs due to the Colonial Pipeline outage. In the Q3 of 2021, we expected crude oil throughputs to average between 280,000 to 290,000 barrels per day or approximately 94% utilization at the midpoint. We are currently back to normal operations at all 4 of our refineries and have no major planned downtime for the remainder of the year.
On Slide 7, capital expenditures during the Q2 were $66,000,000 reflecting turnaround activities and fire related repairs at El Dorado. The 2021 capital plan is expected to be $175,000,000 to $185,000,000 including turnarounds and net of estimated insurance proceeds. Next, I will turn the call over to Uzi.
Thanks, Luis, and good morning, everybody. Multiple factors impacted operations in the first half of the year and between insurance claims and tax refunds, we expect meaningful cash benefits over the coming quarters. At the same time, we are actively pursuing small refinery exemptions. Our company has a long history of being granted SREs and this would go a long way in positively impacting the economics of our facilities. Moving to operations, we're pleased to resume a growth in the retail segment with 2 new to industry stores in the planning phase.
New stores to market will complement our existing branded portfolio, which have been resilient throughout the pandemic. Finally, logistics performance recovered from depressed levels in the Q1, and we expect that business to remain stable for the balance of the year. DKL continues its long history of distribution growth with 33 consecutive increases. With that, operator, will you please open the call for questions?
We will now begin the question and answer Our first question comes from Manav Gupta with Credit Suisse. Please go ahead.
Hey, Uzi. I had a question on SREs. If you look at the history, you did get them for as many as 3 refineries. I think 2 of your refineries are definitely eligible. There is a Supreme Court ruling out supporting the SRE.
So just trying to understand how confident are you or your opinion, how strong of a legal case you have that Crocs and El Dorado should get the SREs? And if you could help us a little bit quantify given where the current rent price is, if you do end up getting it, what's the benefit to you?
Yes. I'll let good morning, Manav. I'll let Todd answer the quantifying thing. I'm just going to give you some color around what we think and the confidence level that we have here. So over the last years or past years, we applied 7 times for each one of the refineries.
Out of the 7 times, Crocs got it 6 times, El Dorado got it 5 times and Tyler got it 4 times. So our and that was including Trump era and of course Obama era. So we think that we are entitled to the grant. We are actively pursuing and have discussions with the administration around the situation here. Now you probably ask yourself what the timeline is.
So I'm going to give you a little color around that because it's pretty clear what they need to do unless they change the law. The time to turn in the 2019 wins is by the end of November this year. So they need to make a decision over the next couple of months unless they change the ruling, which I don't expect it to happen. The time to turn in the 2020 is January of next year, I. E.
5 months from now. And the time to turn 2021 is by the end of March 2022. So over the next 6 to 7 months, there is time to 3 years, 2019, 2020 and 2021. With that being said, you have some maneuvering, not the EPA, but companies when to turn and what to turn in terms of rents, which it's technical and there's no need for us to get into it right now. Now you asked about the amount.
So remember, we're talking about 3 years here. Todd will cover that. But in general, we're talking about 100 of 100 of 1,000,000 of dollars in today's prices. Todd, go ahead.
Yes, sure. If you go and you look at some of our public filings from 2019 2020 and look under the production line item that we list for on road fuels and use that with, let's call it, a rounded number of $1.50 a RIN, you can come up with a number that's somewhere north of $300,000,000 per year, per year and that's with 3 plants.
If No, that's okay.
Yes. And if you do the same for 2020, you get the same thing. The only other thing I would point out, I know in your question you mentioned the fact that you believed we'd only ever been granted 3 waivers. In fact, there have been 3 years where we've actually been granted waivers for all three of the plants. So I just wanted to point that out as well.
Okay. No, that's fair. It seems like a meaningful amount, pretty big. Just the second question is during the quarter, a lot of one times fire, this and that and looks like you're pursuing some insurance claims. Again, if you could give us some timeline on that, your level of confidence, what's going on with these insurance claims, which could be an additional $40,000,000 $45,000,000
Well, first, don't assume $40,000,000 to $45,000,000 We actually think that it's more than that because there was some damage in the Q1. We didn't quantify it for the Q1, but it's in our mind, it should be well, we think it is more than $40,000,000 to $45,000,000 We're obviously not in discussion with the insurance companies. I'm going to tell you that some of the proceeds we're already getting them as we speak in the 3rd quarter. So the claims themselves are in the process of being approved by the carriers. The fact that we got money or we're getting money means that they approved these claims.
And we expect this to happen over the next couple of quarters, but some of the proceeds are in already in the 3rd quarter. So I don't want you to think that it's $40,000,000 to $45,000,000 You can probably see what happened and calculate the normalcy in the Q1 and come to a number as well. But it is a higher number than $40,000,000 to $45,000,000 $40,000,000 to $45,000,000 is only 2nd quarter, and we feel confident that we will start or actually, we already did getting profit around these claims.
Uzi, thank you. And my very quick last question is, it looks like you are still you want to grow the retail business, you have new stores coming in. I think in the past you have said these could potentially double your earnings. So know there was an attempt for you to sell your retail business and you've always said, I'm open to it, but I won't do it in a hasty manner when the right time is here. So I just want to know if anything has changed on that front.
Manav, you see the cash flow. We ended the quarter with $830,000,000 SREs, we are in active discussion with the administration around getting some of the exemptions. The insurance proceeds are coming in. There's no need to do that unless it fits the business more. And at this point, having retail fit our Bismol.
Obviously, if an offer comes and it makes sense for the shareholders, we'll sell it. But at this point, I see a very low chance of selling it just because of how comfortable we are with the cash position.
Okay. Thank you so much, Uzi.
The next question is from Roger Read with Wells Fargo. Please go ahead.
Yes. Thanks. Good morning.
Good morning, Roger.
I guess I'd like to maybe follow back up on the SRE thing because there's a lot of moving pieces here, Uzi and team. First off, we don't have an RVO for 2021. Secondly, when SREs have been granted, we've typically seen the price of a rent fall, right? There's a supply demand aspect to it. So as you step back, Uzi, and look, I know the timeline you gave for when the rents are due, but the whole program has been pretty mismanaged almost from the get go.
What would be the right way to think about it from a I think you've given us the high, but kind of really how you would sort of game plan this out over the next, say, 6 to 9 months?
Roger, we have a company to manage here. It doesn't mean that we hold all the rims at this point. So we didn't turn the RINs just yet. Do we have a liability on the books? Absolutely, it's in the P and L.
But we can maneuver with the physical wins, as I mentioned earlier to Manav. We can you have some rules that you can actually maneuver with that. So I'm not going to disclose the strategy here around how to how we manage the program. But you're absolutely correct on one side that if all these waivers will be granted, prices of risk will come down. I'm just going to remind you that we did not turn the RINs just yet.
So the liability is sitting on the books at the price at the current price right now. So the P and L will be impacted at the current price as it sits right now. Now cash flow, we will see how to we are not going to disclose it today. Cash flow, we'll see how we're going to move around it. Now do I think that the risk will stay at buck 50?
Not really. Are they going back to $0.10 I don't think that the administration will grant the will grant 30 waivers. I don't think that the majors will get them. I think only small guys like us have a good chance of getting them, actually very good chance of getting them. So I don't expect RINs prices to go back to $0.10 Do I think that they'll go down of about $0.50 Absolutely.
Now you mentioned the RVO. RVO is unrelated to the time that you need to turn 2019, 2020. You're talking about only 2021. And if you remember, during the pandemic, they pushed the time to turn the 2019, 2020 to November January. Unless they do it again, the deadline is coming regardless of the RVO.
And I was a little technical here, but I hope it was clear enough.
No, I appreciate the clarity. I'm just trying to understand all the implications. Let's drop that one for now. If you look operationally, obviously, the industry has had a tough last 4 to 6 quarters. And we think about Delek and a lot of the inland refiners, it's all about crude diffs.
Just curious, with some of the pipelines that you're involved in the startup of Webster to excuse me Wink to Webster, how you're seeing the diff situation? And is there anything you've been able to do in terms of changing your crude streams such as to take advantage of any localized crude diff advantages?
Yes, Roger, it's Todd. Over the last couple of months, we've actually seen a bit of a deterioration in the crude differential situation. Midland was previously trading at a kind of $0.50, dollars0.60 premium relative to TI. That's come off and is now trading negative relative to TI. LL has also seen a relatively large move from up in the $2 range to down around the $0.50 range.
So I think those things are positive. At the same time, we're always constantly looking at optimizing our crude slate. We're looking at blending opportunities in Cushing. We're looking at various other grades that might become available as balances shift around in the Mid Continent. And I think we're ideally positioned, given our footprint and our partnership with DKL, to continue to do that.
And Roger, I would just quickly add. We know through our gathering business in the Permian, the nominations should ramp up toward Q4 certainly into the beginning of next year. So to the extent that prevailing commodity prices is where it is, think there's a chance production could start to accelerate a bit, and that maybe provide a little bit of a tailwind. I don't think we're going back to double digits by any means, but that may help a little bit.
I appreciate the clarification. Thanks, guys.
The next question is from Ryan Todd with Simmons Energy. Please go ahead.
Good. Thanks. Maybe one on M and A. There's been a pretty significant amount of recent activity over the last 12 months, including among some of your peers within the refining space. And just wanted to get your views on what the environment is in the market, bid ask spreads, your interest in adding scale and whether scale is likely to become an increasingly defining competitive trade amongst the group?
Good morning, Ryan. Well, obviously, we also what the deal that HFC just cut with Sinclair, I thought that it made sense. I don't know much about the numbers, but according to what strategically it makes sense for these small companies to come together, I do think that Delek is part of being that group of small refiners that need to continue to think of how to get bigger. I think that this obviously, it needs to be the right opportunity and we are very patient, especially in light of the fact that we expect some of the SREs to be granted because we really think that we're entitled to several of them. So if this is the case, then the situation of both El Dorado and Crot is dramatically different compared to what it is today just because of the fact that all 4 refineries will be in good position to continue to operate.
And that for itself will help maybe looking at other opportunities. I don't think that long term, 5, 7, 10 years from now, these small refineries or these small companies, Delek included, should be should continue to be as small. Scale is very important, and I'll leave it to that. There's nothing imminent right now. I don't want you to think that we're talking to that there's anything imminent, but just I think that like Harley thought that they were too small and they made the right strategic move, I think other companies will do the same thing.
Okay. That's helpful. And then maybe a question on your throughput target for the 3rd quarter, a pretty high level of throughput there, obviously, little maintenance in the second half of the year for you guys. But I think it's maybe the highest range that we've seen since 2018 from you. Obviously, a different refining operating environment than we see right now.
Can you talk a little bit how you're thinking about utilization rates versus margins right now as the industry is still kind of walking that fine line on the recovery here?
Yes, Ron. This is Louis. Yes, we're looking at like 92% to 96% utilization going into Q3. I'm happy to say that we're all back to normal after the freeze, the turnaround, the fire event. So it's really stabilizing and showing what the refineries can do and optimize.
And to be able to truly optimize, you got to run and run stable. So that's our outlook going into Q3.
Great. And the margin environment is, I guess, in your regional markets is supportive of those types of rates?
Yes. I'm going to repeat what I just said, Ryan. The door is open for SREs. And we need to think how to run the refineries assuming that we get SREs or don't get SREs. And that's a risk that we need to think about and we weigh on a daily basis, on a weekly basis because if you add BAK 50 to Crotch, you need to run it wide open.
Now obviously, that's these are the things that we need to consider as part of our program.
Okay. Thanks, guys.
The next question is from Theresa Chen with Barclays. Please go ahead.
Good morning. Thank you for taking my questions. Uzi, maybe if we can just revisit this SRA situation and just put a bow around it. Just boiling it all down, when I think about your upward bound of the $300,000,000 per year using the $1.50 per RIN price. Does that mean that you have roughly 200,000,000 RINs between Crops, Aldo and Tyler between 2019 2020, RINs you have on hand that you can sell into the market since the deadline to turn those in has not come up?
Teresa, you asked several questions. First, let's stick to the numbers, Todd, because you have the numbers in front of you. Just stick to the numbers and then I'll give an explanation about the how we go about it.
Yes, absolutely, Teresa. So you are correct in roughly $200,000,000 RIN number for that calculation that we're doing.
We want to be clear. It's not $200,000,000 It's $200,000,000 RINs per year between the 3 of them. Dollars 200,000,000 RINs per year for 3 refineries.
Got it.
And so So now you ask how you go about it. Obviously, we own many wins because we didn't want to be exposed in case the Supreme Court comes with something different. But now that we know that they did and according to the history we had with the SREs and some discussions we had with the administration, We are looking at it as a whole program, how to balance between turning them in or not holding them. We obviously, the liability is sitting on the books. The P and L is already not assuming.
The P and L is not assuming any SREs and it reflects the $1.50 or $1.60 it is today. That's the P and L. That's what you see in terms of the EBITDA. But now we need to manage the cash around it and we need to manage the situation because there's some uncertainty about different things. With that being said, as I said, the deadline is coming.
It is not 3 years from today that somebody can make a decision. And we turned the 2019 applications 2 years ago. And recently, we turned the 2020 and in the near future, we'll turn 2021 applications. So we and the deadline for turning the wins, as I said, for 2019 is November 2020, January of 2022 and 2021 March of 2022 as well. So for me, the time for decisions is coming and that's what investors are trusting us to do, to balance between these applications, the waivers themselves, when to turn wins, how many wins to keep and how to manage that risk versus the reward.
I'll leave it to that because I don't want to get too technical here.
Got it. And just thinking about the rationale for why Croft and El Dorado were able to receive the SREs even during the last Democratic administration. Can you talk about the drivers of that? Is it lack of lending capability? Any puts and takes as to why you think that this is pretty for sure?
Well, there are actually almost 10 criteria, if you will. And again, I read the applications myself several times. Just I'll just go by the different categories, the multi point one. First, all these refineries are in small communities that the impact on them is pretty big. 2nd, quarter, we all know, is a pipeline refinery and El Dorado, for the most part, is a pipeline refinery.
So both of them are suffering. They have no opportunity to blend for the most part any gasoline. The third part is that we the acceptance of ethanol in these areas is according to the rules. And probably some others that if you want, you can go to the EPA website and they say all the criteria, but and then they score it. And we know already that some of it was some of them were scored in the past by the DOE.
So I and especially in light of the 2019 I'm sorry, the 2019 situation 2 years ago and 2020 because of the pandemic and 2021 because of the pandemic, then we think the situation got even worse rather than what it used to be in the past.
Thank you.
The next question is from Phil Gresh with JPMorgan. Please go ahead. Mr. Gresh, your line is open on our end, perhaps you have it muted on yours.
Sorry, user error. Can you hear me, Izzy?
Hey, Phil. Good morning.
I'll try that again. Renewable diesel, I guess, I know it's not your project per se. I'm just curious how you think about what mile markers would matter for you in terms of the investment opportunity? How you think about this? Is this a 6 to 12 month opportunity?
Or is this still wait and see?
Phil, it's Blake. I'll take it. I mean really, the reality is it's a 90 day pre look once the facility is operational. Going on the global clean energy time line, it's supposed to be in early 'twenty two type of time frame that we're dealing with. And so we're really just kind of in a holding pattern, wait and see at this point.
And once we have the opportunity to get in there and make a decision, that's kind of when we would do it. So nothing has really changed on that front a lot, but that's kind of the time line we're on.
Okay. Got it. Second question, just around DKL, Uzi. The value of your ownership in DKL appears to exceed the value of where DK is trading at this point. So I guess how do you you've talked a lot about various cash opportunities between SREs, tax refund, business interruption proceeds, a lot of things coming in the door.
If you get some of that cash in the door, is buying back in DKL a consideration? Are there too many tax ramifications? Do you think it's an area of value unlock or no?
Well, so first, Phil, you touched and Reuben mentioned that we touched the situation with the tax refund. We actually guided already during the Q3, so it's in the books as we speak. So as you said, if the plan goes or if it goes according to our plan, there's a tremendous amount of cash coming our way. That actually doesn't change much as part of process about DKL, because we continue to think that DKL is an engine that we want to grow. Now we are not in the business of owning 80%, but we're not also in the business of paying 9% return.
So at this point, we're just comfortable where we are. If the situation continues that we will continue to pay 9%, then we probably need to look at it very carefully in the future and to say strategically what we want to do with it. Regardless, 80% is not the right number. It's either we need to bring it in or to sell down some units. And we'll see according to the changes in the market over the next 2, 3 quarters what to do with it.
Got it. And in terms of the growth potential, I guess you'd be in the right environment, you'd be more inclined to grow and potentially do further dropdowns if the valuation made sense?
That is correct.
Okay. All right. Thanks, Susie.
Thanks, Phil.
The next question is from Cole Sankey with Sankey Resources. Please go ahead.
Hello, Uzi. Cole Sankey here with Sankey Resources. Uzi, I'm trying to make some sense of the near term as a low grade question. So if we look at Q3, we've got the tax refund. How are things going?
I mean, obviously, there was very specific weather issues in Q2 and the rest. Are we now at a situation where everything is running well and margins are looking good, which what seems to be the case as far as margins go on upgrades? Thanks.
Well, so as Luis mentioned, we are first, Paul, great to hear from you, and again, good luck with your new endeavor.
Thank you, sir.
2nd, as Luis mentioned, we're running pretty much wide open, 280,000 to 90,000 barrels, so 92, 93%, 94% utilization. It makes sense to run these barrels. It will make sense even more when we get some answers around SREs. And but for the most part, we're running as no.
So essentially, the SolarWinds thing is holding you back on how much you're running just to avoid the incremental cost. And if you could continue, I might be way out of date here, but I always remember Krotz was a jet fuel type refinery. But are you more or less exposed to the weakness in jet or the lack of demands that we still see? Or is that improving too, if we just go to the underlying story? Thanks.
Yes, Paul, it's Todd. We've really done a great job in conjunction with the folks that Lewis has at the plant in optimizing the product make around the downturn in jet fuel. So we've really minimized what we have. We have a knob that we can turn pretty much instantaneously to get back in the jet business. And in fact, we are seeing demand come back in that localized market.
Our contracts are not as exposed as you might believe I'm assuming what you're referring to is just the outright Gulf Coast dip. So we're actively watching that and we'll continue to optimize the system. And as jet demand returns, we'll continue to increase that if it makes economic sense.
Understood. And then Uzi, if we could do a strategic one, and I think you've addressed a big part of this with the answer to Phil. But it's very striking that Greek government debt yields are negative and debt is very cheap. And you've mentioned, DKL, for example, has pretty high cost of equity. And the world is kind of confusing with rates falling when we thought they would be rising, etcetera, etcetera.
You're the kind of guy that can actually take quite rapid advantage of the shifts that we see and make a view take a view perhaps against consensus on where things are heading. So I just wanted an update on how you see this crazy world how that affects your view the best way forward for Delek? Thank you.
Well, I'm not sure first, thanks for the compliment. I'm not sure I'm smart enough to think how the world will behave. However, I do think that the world is a little tired of the pandemic and people will find reasons why to go back to some kind of normalcy. If this is the case, then we'll see inflation going up and then rates will go up with it. I think that we just took advantage of locking in a note of decal until 2028.
And I do think that there is a risk of inflation and risk of high rise or rising interest rates. If of course, the printing continues like usual everywhere and the amount of money that is chasing return is just crazy. And eventually, that will catch up with us, the amount of money that is being moved around. Just one person's opinion.
So I mean basically, strategically, you've taken advantage of the low rates, but essentially everything you're trying to do remains more or less. I mean I guess for example historically you've run as little debt as possible. I just wondered if maybe it would be an idea to run higher debt in this environment while you can take advantage of it. But
I think, Paul, SREs is a big portion of the strategy here. I think that the market underestimate what the amount of cash that SREs can bring to a company like Delek. And if this is the case, then our situation, our cash situation, which we have now $830,000,000 and that's before the tax refund and the insurance. And of course, SREs, the strategy may change rapidly for Delek over the next 1 or 2 quarters with the potential cash coming in.
And does that imply that you think there'll be a resolution on it? I mean, I know it's just impossible and it's a nightmare. But do you think there'll be a resolution to this nonsense within any kind of a reasonable time frame? What would you say?
I don't know much about the policy because I think this is at the highest level within the White House. But I think that the SRA situation and the fact that Supreme Court said specifically that companies are entitled to get SREs, I think the administration will grant some waivers. This is a pure guess, my guess. And I think that we are very much top of the line over there in getting these SREs.
Agreed. Thank you. It's great to hear you.
Thanks, Paul.
The next question is from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.
Hey, good morning, everyone. The $40,000,000 to $45,000,000 from operational disruptions and the fire in the freeze, could you talk about exactly where that flowed through your financial statement?
Hey, Matthew, it's Blake. It's kind of spread throughout all the refineries. We haven't quantified specifically, but I will tell you, of that about $10,000,000 is operating cost related and the rest would be business interruption, which I guess you could argue through margin and throughput. So $10,000,000 of it's in operating cost. And just as an aside, while you're on the topic, we outlined in the second paragraph, a wholesale contract fee, which was about $8,000,000 That's in the operating cost of the Corporate and Other segment, in case that's helpful to you as well.
Thanks, Blake. And then Uzi, on your modeling, are El Dorado and Krausz cash flow positive in a mid cycle environment if they do not get SREs?
Can you repeat the question, Matt?
Sure. Do you think that El Dorado and Krotz Springs are cash flow positive if they do not get SREs? Are they dependent on SREs to be cash flow positive to your system here?
I understand the question. Well, it depends on the day. Obviously, if rains are $1.70 then it's when they are $1.64 right now, they are marginally cash flowing, but they are not in they are not rocking and rolling. If RINs would go back to $0.20, dollars 0.30 even in today's crack I'm sorry, today's cracks are very, very good. If they go to 2,030, then you're talking about 100 of 1,000,000 of dollars EBITDA without the SREs.
So these 2 refineries are and that's the reason they were granted these waivers in the past, because the program was initiated and designed to deal with the refineries like El Dorado and Crocs. I didn't run the LP, I haven't looked at it in the last 2, 3 days, but the fact that we're running them 280, 290 means that we are in the green here. Great. Thank you.
The next question is from Neil Mehta with Goldman Sachs. Please go ahead.
Good morning, Uzi. Hope you're doing well.
Hey, Neil. Good morning. How is your family, by the way?
We're doing great. Thank you so much for asking, Uzi. So two quick questions for me. First on Wink to Webster, can you just talk about where we stand from a construction standpoint? And the related question around that is, just talk about how you see the pipeline situation in the Permian.
We were clearly in a position of pipeline undersupply in 2018, twenty nineteen. But we've seen a lot of these big pipes coming online that's eating away at the differential. How do you work through that excess pipeline capacity beyond just production growth? Do you think the Permian will rationalize supply pipeline to enable better utilization?
Okay. So I'm going to refresh your memory, Neil. I know that you remember that better than I do, but I'll say just because I enjoy talking to listening to myself. So Wink to Webster is supposed to come online Q4. I think there is a delay of 2, 3 weeks.
But in general, we are in line with this coming online by the before the end of the year this year. Obviously, as we said, it's a fully supplied pipeline, I think 95% with the woke up shipper of another 5%. That obviously will bring the situation in the Permian to overbuild of pipelines. I think that companies that are not fully subscribed and run half empty, if you will, pipelines. We'll start thinking what to do with these pipelines, especially in light of the fact that natural gas is in shortage around the Permian natural gas pipelines is in shortage.
I think there will be rationalization of pipes. And the market always we always think that the market doesn't have a way out and finally we are surprised and by the end of the day we are surprised with how the market reacts to different things. Do I think that differentials will go back to minus 5 anytime soon? No. But probably, we are over the next 2, 3 years, something will happen with several of these pipelines, and we'll get back to normalized differentials.
And then, Uzi, remind us what do you think the incremental EBITDA associated with Wink to Webster is for Delek? And how good should we feel about the economics? Are they locked in or is there any variability in the way we should think about that?
Neal, it's Blake. I'll take it. So from the last part of your question, I mean, it's take or pay, right? So there shouldn't be a tremendous amount of variability. We haven't disclosed specific EBITDA, but I think I can help you do some arithmetic.
If you just kind of think about our net investment somewhere in the $360,000,000 range in order to sanction a project in the midstream, we need a 15% rate of return. So you can apply that, Matt. And the only other piece of the equation I should mention to you, we've said publicly, is we did do project financing and the interest expense associated with that is roughly $10,000,000 or so per year. So whatever, Matt, you come up with on the EBITDA, you technically may want to take 10 $1,000,000 off for interest expense.
Thanks, Blake.
Yes. The next
question is from Doug Leggate with Bank of America. Please go ahead.
Thank you. Good morning, everybody. Uzi, you've walked through a lot of the moving parts on what could happen. I'm just curious, we obviously have a new administration. They haven't been rushing to offer SREs despite the Supreme Court ruling.
So I'm just curious, have you given any consideration to the possibility that wins or the SRUs are not granted? In which case, what are the major capital requirements across the system that might prompt a more strategic decision? Or does that go into the equation as it relates to potential closing 1 or more of these smaller assets?
Doug, good morning and happy to have you back. Really, we missed you. So thanks for joining the call. You asked a great question. What if you don't get the SRE?
So obviously, the liabilities and the wins are on our books right now. So it's not that we are sitting here not doing anything. We are taking care of by the end of the day, companies like us need to manage mostly our cash. That's what you see on the balance sheet. We're managing our cash very carefully.
We got all that cash coming in. Eventually, the market will change and the demand will come back. I don't I said it all along, I think you and I spoke about even when I said that 2021 won't be a great year. I think 2022 is going to be an awesome year. And we just look at it and work through the situation.
Shutting down any of these refineries at this point is not on the table. I think that SREs, you mentioned that the deadline there is a deadline to that. It's for 2019, it has been on their desk for 2 years.
And Doug, if I could just chime in, I think maybe to your specific question, as you well know, turnaround activity typically is a capital event that drives a lot of these closures. And we have just finished turnarounds at both Cross and El Dorado. So that's behind us at this point.
Okay. So you got some running or not. That's what I was looking for. Thank you very much indeed. I didn't go anywhere, Uzi.
I'm not sure where I've been, but I'm still here. Anyway, my follow-up, Uzi, is your point on the return to maybe a better year in 2022. So to kind of cut through all the moving parts of the Winklevverster and what's going on with DKL and all the other bits and pieces you've talked about, what would you frame for us perhaps as your view of the mid cycle EBITDA capacity of the portfolio you have today? Just so we can kind of benchmark what we think fair value of our portfolio could look like. So under mid cycle conditions, however you define that, what do you think the mid cycle earnings per and cash flow per portfolio is today?
I'll leave it there. Thanks.
I'll let Blake do that because he does the modeling day in, day out, and it's above my pay grade. So Blake, go ahead.
Doug, I'll try and piecemeal it together for you, and maybe at the end of the day, you apply some sensitivities on your end. But think about logistics, that's a pretty ratable business. Let's just be conservative and call that $250,000,000 a year of EBITDA. The retail business has proven very resilient even through the pandemic. We say it's about $50,000,000 So collectively there, you got $300,000,000 of EBITDA that's from very stable businesses.
And then that takes you to the refining piece of it, which as you know is very volatile and has been a drag on the overall portfolio. We've said publicly, we think $9 or $10 Gulf Coast 5.32 crack, assuming a normalized rent environment, not where we are now, would be about a breakeven level. So for every dollar per barrel, it's about $75,000,000 of annual EBITDA. And if you look historically, that mid cycle has been $15 or $16 So technically speaking, if we can move from a net RIN environment today of about $9 or $10 up toward $15 dollars you're looking $400,000,000 $500,000,000 from refining. So that on top of $300,000,000 I mean you get to some lofty numbers.
But obviously that's not the environment we're in with the rent environment where we are today. So hopefully
that's helpful. It's really helpful. Neither do we expect this to continue. Just for clarity, Blake, what are you assuming is the TI Brent spread in there?
Well, that's a WTI based crack. So at the end of the day, it's just kind of a normalized call it we're not Doug, we're not looking for a big expansion in the spread. So call it $2,000,000 $3
Okay, great. Thanks guys. I appreciate the clarity. Thanks.
The next question is from Paul Cheng with Scotiabank. Please go ahead.
Hey, guys. Good morning.
Mr. Cheng, we couldn't wait for you to show up.
Several questions. Can you remind me in the past when you received the SRE, did you get the full SRE in order to plan or some of them just have partial SRE?
No. When you get a waiver, it's a full waiver.
So you get the full waiver because I mean that in some cases, some refineries that they get maybe a quarter of the wage in the RBO and some get 50%. So I just want I just don't remember whether you get 100% in your facility.
We did.
Okay, great. And for the $40,000,000 $45,000,000 saying that does not include any of the property damage, is all BI?
Paul, there's an element in there of both. So there Do you have
a breakdown between the BI and the property damage?
Yes. And again, this is just the 2Q component, but $30,000,000 is BI, dollars 10,000,000 is property damage.
Now Paul, remember, we mentioned that earlier and I'm sure you heard it, but we'll say it again, that's only Q2. There's some damage for Q1 that is not in the $40,000,000 to $45,000,000 No,
I understand. We're just trying to understand on a going forward basis, if we use the 2nd quarter as a base, because BI in theory that once you fix it, then it should come back, right? So with the same market condition, what we should add back as a baseline? Yes. I'm just curious that I understand for the last two quarters, whether it's the winter storm or that the colonial pipeline outage, there's nothing you can do.
So reliability that gets tougher on that. But in general, what when you're looking at your portfolio, I mean excluding those 2 incidents, are you happy with your overall reliability of your operation? And if not, what the initiatives that you guys are taking?
Well, the bad guy used to be El Dorado. El Dorado is now after turnaround and after fixing a lot of units in El Dorado. So El Dorado, knock on wood, is running very well over the last couple of months. We have over there a new plan manager that is doing tremendous work. We'll see we don't want to declare victory just yet, but we're hoping to see El Dorado continue to perform the way it is.
Obviously, Greens at Buck 60 are weighing on both El Dorado and Croats, but we believe that BAC 60 is not sustainable regardless of how the administration will go about it. And we'll see how it's going to be dealt.
And just curious that do you guys participate in the Solomon survey? And if you do, how El Dorado and Corus Pain, how they rank on the unit profitability and the reliability in that survey? Today in the middle of the pack, in the second quarter or in the 4th quarter, any kind of number you can share on the inside?
Well, we usually don't share Solomon study. We are we do get that for each refinery. Actually, if you remember, Solomon is doing it every 2 years, every other year. We're actually doing it with them every year because we get we want to get better. I'm just going to tell you that you can look at the utilization at El Dorado over the last 2 years before the turnaround and it wasn't great.
So the results weren't great. Croats actually is performing operationally pretty good.
Two final questions. 1, just curious that if there's any insight you can share about on the Southwest market demand and also that you guys have a big gathering system. What do you hear from your customer of their operating plan, particularly on the private operator?
Do you
get from there that the activity level is going to moving aggressively higher or that is more gradual pace? So that's the first. And then the final question. I think in the last, say, 6 to 12 months, you start to talking you may not want to make any further acquisition in the refining side? Do you think that at the settlement, there may be just the one you will be more focusing on?
And but you in the answer of the earlier question, you're also talking about how to improve the economy of scale. So from that standpoint, is that still include refining this potential area of acquisition or that refining is not something that you want to expand further?
Okay. Let me take each one of them. First of all, E and P, as you know, are still disciplined. The product demand in our areas, it is down. Margins are very strong, but the gallons, especially of diesel in the southwestern region, it is down.
And as you know, we gather from a lot of producers. So for the most part, it is flat. We don't see the growth just yet. You know it, you hear it from every E and P company that they will be disciplined and they want to be free cash flowing. So for me, that's just an evidence on that.
We do see other companies coming in. We signed several new producers to the gathering over the last couple of quarters. I thought that Todd and his team did outstanding job in getting that done. In terms of the M and A, and I said it in the past that we want to make sure that the energy transformation we want to understand what energy transformation means before we move on any other aspect. So that's the reason we thought that we should probably sit on the sideline and wait to see where things are going.
With that being said, regardless of where energy transformation is, I think companies by the size of Delek should be bigger, not in the near future. There's nothing imminent right now, but going forward, I thought that what HFC did with both acquisitions was outstanding to get bigger. And I think there was more to come from the market. And I'm not being specific about Delica. I was very clear that there's nothing that I'm aware of that is imminent.
Right. But that's including refining, right? So in other words, when you say getting thicker, it's including also getting thicker in refining?
Refining is the part of energy future, yes.
Okay. We do. Thank you.
The next question is from Jason Gabelman with Cowen. Please go ahead.
Yes. Hey, guys. I wanted to ask first on OpEx and SG and A costs. I know last year you were talking about I think an $80,000,000 reduction from 2020 levels. If I look at 2020, it was about $800,000,000 OpEx in SG and A.
That's about where the annualized run rate is guided to for 3Q. So can you just discuss what's going on there in terms of those reductions? Do you still expect those to come through?
Hey, Jason, it's Blake. I'll take it. So there's been a lot of moving pieces since we gave original guidance, part of which is operational in terms of fire, freeze, etcetera. Keep in mind too, when we gave the guidance for 2021, the original Krotz was not running and that has since restarted. So, I think the last public commentary we gave is that we thought on the underlying quarterly run rate, it would be about $139,000,000 to $140,000,000 And what I would just tell you, you can see the 3Q guidance is a bit above that, somewhere about 150,000,000 dollars There's 2 things to point out in there.
1, we have some onetime work that's going to occur in the Q3, some unplanned sorry, not unplanned, but it's some work at KSR, Krotz Springs and boiler repair at Big Spring. So that's $5,000,000 that will come off into 4Q. So I think without giving hard guidance on 4Q, I think $145,000,000 should be the range. And the only other thing to point out that's in there that's leading to some upward pressure is natural gas prices. And the sensitivity on that annually is about $20,000,000 per dollar per Mcf.
So we have seen an upward pressure in that for gas, and that's adding about $5,000,000 to the 3Q guidance. So a lot of numbers. I hope that answers your question.
Yes, that's really helpful. And just 2 other quick ones for me. First, like you just discussed, the puts and takes on working capital being a benefit in 3Q if that's going to reverse? And then lastly, just on the global clean energy fuels project, I know you're limited in what you can say, but as I understand, there's, some priority given to creditors in terms of cash flow before Delek would receive any material cash from that project. So I guess the question is, if you do invest in that project, when do you expect that to be a material cash contributor to Delek?
Thanks.
Jason, it's Blake. I'll take the second part of the question and then Ruben can answer your working capital question. So we haven't disclosed an outlook. Obviously, we're not in the project. But conceptually, I think you're describing it correct.
We said all along that there are multiple layers of interest expense, mezzanine financing, whatever arrangements Global Clean Energy has. The way I would characterize it is that we have an option to participate in 33% of the project's free cash flow. So in other words, once all of those obligations are satisfied, we would take our share of the free cash flow. So I think that answers your question.
Yes. And let me complete the part about the working capital question. So the increased crude prices, of course, corresponding increase accounts payable and inventory and supply offtake. However, we still need to settle some expenses related to the El Dorado turnaround and other expenses along with some RINs obligations. So it will unwind in the Q3 and some of the positive working capital.
That was in the second.
Thanks.
This concludes our question and answer session. I would like to turn the conference back over to Uzi Yemin for any closing remarks.
Yes. That was a long one. I've done many of these calls. That was probably one of the longest. So I appreciate everybody's interest on the call.
I appreciate the confidence that investors have in us. I'd like to thank my colleagues around the table. I'd like to thank our Board of Directors for their continued support and trust in us. But mainly, I'd like to thank each one of the employees of this great company, and that couldn't be what it is without them. Thank you, and we'll talk to you soon.
Have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.