Good day, welcome to the Delek 2020 third quarter conference call and webcast. All participants would be in a listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After the presentation, you will be enabled to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Blake Fernandez. Mr. Fernandez, the floor is yours, sir.
Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' third quarter 2020 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President, and CEO, Reuven Spiegel, EVP and CFO, and Louis LaBella, 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 the term is defined under federal securities laws. Please see slide two 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 our website. Our prepared remarks are being made assuming that the earnings press release has been reviewed and we are covering less segment and market information than is incorporated into the third quarter release. On today's call, Reuven will review financial performance, I will cover capitalization and guidance, Louis will cover operations and CapEx, then Uzi will offer a few closing strategic comments. With that, I'll turn the call over to Reuven.
Thank you, Blake. On an adjusted basis for the third quarter of 2020, Delek US reported a net loss of $74 million, or a - $1.01 per share, compared to net income of $77 million, or $1.01 per diluted share in the prior year period. Our adjusted EBITDA was $22 million in the third quarter of 2020, compared to $184 million in the prior year period. The second paragraph of this press release highlights $31 million of after-tax benefit, or $0.42 per share, of items included in adjusted results. I would like to highlight the table on page 13 of the release, providing other inventory impacts by refinery in the quarter. This may be helpful in terms of modeling the refining segment. On slide four, we provide the cash flow waterfall.
In the third quarter of 2020, we had a negative cash flow of approximately $77 million from continuing operation, which includes a working capital detriment of $40 million. Cash capital expenditure in the quarter was approximately $5 million. Finally, during the quarter, we announced the elimination of the incentive distribution rights and conversion of the 2% general partner interest in DKL into a noneconomic interest in exchange for 14 million newly issued DKL units and $45 million in cash. This brings the ownership of DKL up to 80%. With that, I will turn it over to Blake.
Thanks, Reuven. Slide five highlights our capitalization. We ended the third quarter with $808 million of cash on a consolidated basis and $1.7 billion of net long-term debt. Excluding net debt at Delek Logistics of $1 billion, we had net long-term debt of approximately $666 million at September 30th, 2020. I would remind you that we expect a federal tax refund of approximately $165 million the first half of 2021. Moving to slide six, we provide fourth quarter guidance for modeling. We remain on track to exceed our cost reduction targets of $100 million for the year. Through a combination of workforce reductions and tactical initiatives, including Krotz Springs, we anticipate another $80 million reduction in 2021 versus 2020 levels. This is comprised of $70 million in operating costs and $10 million of G&A.
Lastly, during the quarter, the Wink to Webster project achieved mechanical completion on the main segment connecting the Permian Basin to Houston, Texas. The main segment of the pipeline system was commissioned with Permian crude oil from Midland to Houston in October. Service is expected to be available to shippers in the fourth quarter. As a reminder, we own 50% interest in a financing JV that has a 30% interest in the pipeline JV. Additional segments offering shippers further service are expected to be in place in 2021. With that, I will turn the call over to Louis to discuss our operations and CapEx.
Thanks, Blake. During the third quarter, our total refining system crude oil throughput was approximately 280,000 bbl per day. In the fourth quarter of 2020, we expect crude oil throughputs to average between 225,000 bbl-235,000 bbl per day, or approximately 76% utilization at the midpoint. This assumes Krotz Springs throughput of 20,000 bbl-30,000 bbl per day. In light of difficult macro conditions, we elected to perform turnaround work at the Krotz Springs refinery that will be conducted on a straight time basis beginning in November. This will allow us to continue running the reformer and the alky unit and should help improve economics toward a break-even level.
The cost to perform this work is estimated at $10 million and is included in our CapEx program. After this work is completed toward the end of the first quarter of next year, the facility will be capable of moving back to full utilization should the macro environment improve. On slide seven, I want to highlight our capital spending. Capital expenditures during the third quarter were $5 million. We remain confident that we will achieve or come in below our full year 2020 capital guidance of approximately $249 million. The 2020 capital program is broken down by segment as outlined in the slide. For 2021, we expect CapEx to be approximately $95 million lower than the 2020 levels, with the guidance for the full year of $150 million-$160 million, including turnarounds. Next, I will turn the call over to Uzi for closing comments.
Thank you, Louis, and good morning, everybody. We're taking aggressive steps to improve the cash flow profile of our company with visibility toward $200 million of collective improvements next year. This will be achieved through a combination of CapEx reductions, decreased operating costs, and G&A expenses, optimizing of Krotz Springs refinery operations, as well as other initiatives. Our board has suspended dividend payment at this time to maintain a flexible balance sheet, given the macro environment. Based on market conditions, share repurchases would be given priority over a resumption in the dividend or growth capital as we see a significant disconnect between the value of our underlying assets versus the equity market. Lastly, I would like to encourage you to review our new sustainability report published in September.
Delek has long recognized its responsibility to the community and our stakeholders, and we are pleased to share our ESG journey, including disclosing year-end 2019 statistics, detailing actions the company took in 2020, and describing some of the steps we are planning to take in the future. With that, operator, would you please open the call for questions?
Yes, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using speakerphone, please put on the handset before pressing the key. If you want to withdraw the question, please press star then two. Again press the star then one to ask a question. At this time we will just pause momentarily to sum our rosters. The first question we have will come from Neil Mehta of Goldman Sachs. Please go ahead.
Good morning, Uzi. Good morning, team. Uzi, the first question is just around capital allocation. Today you're making the decision to suspend the dividend to repurchase shares. I guess the question is, implicit in that is a view that you think the stock is attractively valued here despite some of the refining headwinds that we're seeing right now. Talk about the calculus, the math that goes into why you think it's time to be buying back stock, and then also talk about timing and sizing, given the uncertainty in the market out there, recognizing you have some cash inflows coming in next year.
Appreciate the question, Neil. Let's start with something a little different, and then we'll answer that directly. If you look at what we said, we said that between OpEx, CapEx, and other initiatives. That with the other initiatives being fee-based, we're talking about $100 million coming in. If you look at CapEx, fees coming down around $95 million, call it $100 million. It's going down to around $150 million-$160 million. Let's talk about the free cash flow of the company once things normalize a little bit. If we look at 2018, 2019, the total OpEx and G&A in 2018, 2019 for DK was somewhere around $920 million-$930 million. That was the number. If you go ahead and apply what we just gave you guidance for the OpEx and G&A for 2021, we are around $730 million-$740 million.
You see around $200 million of savings compared to what used to be 2018, 2019, which you may call at that time elevated or normalized, whatever the definition is. That's first $200 million. The second is if you look at $100 million of DKL improvement because of all the investments that were done in 2017, 2018, and 2019 in the midstream. DKL today is $270 million, used to be $170 million in 2018, 2019. If you take the $200 of savings plus another $100 million, $200 savings of OpEx and G&A, another $100 of DKL, now you're at a $300. The normalized CapEx in 2018, 2019, was around $350 million, $370 million. Today, we're telling you $150 million- $160 million. That's another $200 million. All in, you're talking about $500 million. I'm not talking about the crack spread for just one second.
I know that crack spread are much lower. Midland benefit in 2018, 2019 was $4 a bbl. If you take it times 75 million bbl, you're talking about benefit of $300 million. The $500 million that we are showing is more than offset all the Midland benefit we had in 2018, 2019. We feel that we achieve our goal to overcome this Midland overhang. Going back to your question. Knowing all that in what goes to our head. We feel that we are starting to generate free cash flow. Generate free cash flow, not from the tax return, but actually generate free cash flow under the assumption of $120 million of interest and $150 million of CapEx. We start generating that at around $8.50 crack to $9 crack. Let's just call it $8.75. Today we are around $7.
Once we see that, we think that we are starting to generate free cash flow. Because of the cushion we have, the $800 million that we have, the tax return that is coming back, and the fact that DKL continues to perform and W2W is coming online, that will be something that you should expect us to approach very quickly. I hope I answered your question. That was a long answer.
No, that was great. You did the modeling for us. Here's the follow-up around that. When you talk about an $8.50 crack is where you get to free cash flow, sort of break even, and free cash flow positive, at which point you're repurchasing shares. When you talk about that, are you talking about like a benchmark crack, like a Gulf Coast 3-2-1 Brent plus a WTI Brent spread or a Midland spread on top of that, or just trying to understand the parameters there?
We assume Midland zero, and we assume Part 32 Gulf Coast WTI crack.
Okay. Embedded in that calculus is Wink to Webster as well.
Part of the other that we mentioned is related to commercial agreements around Wink to Webster, that the first phase was completed a few weeks ago. The $30 million of other is mainly that part. You get only benefit of $30 million at this point. Obviously, Wink to Webster will be fully completed by the end of next year, and then you'll start seeing the full benefit.
Great. Thanks, Uzi. Thank you.
Next we have Brad Heffern of RBC Capital Markets.
Hey, good morning, everyone. Just to follow on Neil's question about the dividends. You called it a suspension, so is the likelihood that the dividend comes back at some point once the market normalize, or is this more of a deferral, and until maybe the equity performance gets much better, more in line with where you think it should trade the cash will continue to go to the repurchase rather than some reinstitution of the dividends?
Okay. Brad, thanks for the question. I'll go by the history. If you look at 2018, 2019, our market cap today is $800 million. If you look at 2018, 2019, I just walked Neil through the numbers, why if crack spread normalized, our situation will be very even with Midland being zero, because we don't count on Midland anymore. That was our strategy all along, to go to Midstream to offset the benefit of Midland, because we never thought that Midland should stay at $4. If you go back to 2018, 2019, we returned a combination of buyback and dividend. We returned $700 million during these two years to shareholders. Today, our market cap is $800 million. If we can get crack spread that is normalized, call it $12, $13, $14, you should expect similar numbers coming.
Obviously, you need to play between how much you are actually buying the shares, because at $11, obviously, it tilts completely towards buyback. If the shares or the stock price recovers, you go back to dividend. For us, the biggest or the most important thing is the free cash flow that we think once we have some kind of normalized crack spread, and I just mentioned $8.50 is where we think that we are going to start generating free cash flow, it depends on the share price. Lower share price, more buyback. Higher share price, more dividend. I hope I answered all your question.
Okay. Yeah, that's very clear. Just on Krotz. I guess first of all, can you talk about how we should think about modeling it during this time period where it's just the alky and reformer running? Is it to just sort of take the octane spread and multiply by the capacity of those units? Beyond that, is this kind of the minimum level of activity that you would ever expect at Krotz, just because there's a lot of value in those two units, or is there a chance that if the market stays like this for longer than we expect, that Krotz could ultimately be closed?
Krotz is a good asset. In today's market, it doesn't make money. We, being nimble, being a small company, we have our disadvantages, but we have a couple of advantages being quick. We sat down, and we said: What are we going to do? We knew that next year there was supposed to be a turnaround. We said: Let's take this straight line turnaround or straight time turnaround over the next three months. We don't expect price to recover to a level that it makes sense to run the entire refinery. At the same time, both the reformer and the alky have a value in them, and also other activities that we're doing in that refinery. As we said in the press release, from modeling standpoint, you should expect Krotz to be toward breakeven, even in today's environment.
This is after you take into account the reduced OpEx. Comes February or March, if things recover, then obviously we'll flip the switch because we just completed turnarounds, which cost only $10 million. Obviously, normal turnarounds usually cost much more than that. We go back to normality. If it's not, we'll continue with this operation. I honestly don't see a situation at this point that Krotz is being shut completely.
Brad, just to help you from a modeling perspective, if you're needing help to get toward that breakeven level of that $70 million of OpEx reduction that we articulated, about 40%-45% of that is associated with Krotz . Basically you can shave your operating cost there to help you move towards that breakeven level. That's helpful.
Okay. Thank you everyone.
Next we have Ryan Todd of Simmons Energy.
Thanks. Good morning. Maybe if I could follow up on one of the earlier questions. Uzi, I appreciate the thorough run through on a lot of the moving pieces on the cash and the cost side. Clearly, with Delek's market cap below its valued holdings in DKL. The market seems to be pricing the refining business will destroy value over some period of time. You've done a tremendous amount to lower the cost structure there going forward. Maybe can you talk about how much flex is there any flex left in the budget for next year? And maybe as we look forward, the sustainability of cost savings, both CapEx and OpEx into 2022, how much of it is sustainable, as we think about the longer-term value of the refining business?
Okay. First, Ryan, I think you asked two questions. I'll try to answer both of them, and if I miss something, please follow up. The first question is how sustainable, in my mind what you ask is how sustainable the OpEx, G&A, and CapEx. Let's start with the easy part. CapEx. If you look at the history, that was all along our CapEx on normalized basis without growth and without special projects. We are just not going to do any growth projects in this environment. It doesn't make sense. In that number, there are two turnarounds. One at Krotz that was moved up, and the other one is the El Dorado. You knock down two turnarounds in the same $150 million, $160 million. It's absolutely sustainable in this environment. Just remember, we invested hundreds of millions in each refinery.
We feel from a reliability standpoint, as we can demonstrate, that we are ready to run the refineries at very high utilization, because we just invested all that money in the past. I think that's the first question. The second question was OpEx and G&A. Again, if you look at what we're trying to do in this environment, there's not much that we want to do besides returning cash to shareholders. At $11, there's no growth project or no study or not many things that you should do that bring value, more than the share price being at $10 or $11. It just doesn't make sense. We just said it. That's why if you listened to us a year ago, two years ago, and we had all these discussions, we felt at the time that we needed to invest money in physical assets, which we did.
That's why DKL is now at, like you mentioned. It flipped. It's $1.3 billion, $1.4 billion versus DK being $800 million, which again, doesn't make sense. The third component of you asking the question is refining is for free. Actually, we think that refining, if you do some of the parts, is negative. I find it hard to understand why the refining assets for DK are negative when we have other refining assets in the market, and these companies are not trading at negative value. There's a disconnection which we aim to correct by the move of shifting from dividend and growth CapEx to buyback. I hope I answered all these questions.
Yeah. Sorry, didn't intend to ask so many at the same time. Maybe one separate unrelated follow-up. Can you remind us about your option on the potential Bakersfield renewable diesel facility? Maybe how that project is progressing from what you've been told. Maybe remind us what the buy-in would entail, whether there's any capital involvement, and whether you'd be able to offset your RVO obligations after that.
Ryan, it's Blake. I'll take that. I would defer you to Global Clean Energy, who is operating and constructing the project. We have an option to participate with a 33% interest. I think it's a 90-day window after the facility is operational that we can execute that. At this point, we're basically in standby mode. We can see how the macro unfolds. We have not disclosed what the capital commitment would be. I think by and large, I would just tell you it would be fairly de minimis. It's an absolute dollar amount. It is not a percentage of the total construction cost of the project. I believe the timeframe is toward year-end 2021, maybe early 2022. That is basically our optionality for renewable diesel at this point.
Great. Thanks, Blake.
Yep.
Next we have Manav Gupta of Credit Suisse.
Hey, Uzi. Can you help us explain a little more technically what exactly are you doing at Krotz that will help you lower the break-even, bring the refinery to profitability? Is that something that you can take across to Tyler and El Dorado if there is a need to do similar work over those two refineries to make them a little more profitable?
As usual, Manav, you always ask smart questions because we have done exactly what you asked. We sat down. Let's go one by one. Krotz, we're cutting expenses, like Blake said, by several million dollars, which already happened. A portion of it you will see in the fourth quarter, then the full benefit next year on the OpEx side. We are taking the other units that were scheduled to have turnaround by the end of next year and do turnaround here. That should get us close to break-even at Krotz. El Dorado, because of the asphalt, and you can see it in the numbers, is actually making good money even in this environment. There's no reason to do it in El Dorado.
There will be, though, a turnaround in the first quarter in El Dorado that we're planning to do, and this is part of the $150 million. Big Spring, as you know, there's little noise in the numbers this time. As you know, especially with the RINs and the niche market at West Texas, and buying below Midland and no shipping, Big Spring is one of the best refineries that exists. You shouldn't touch Big Spring, especially in light of the fact that now you have in DKL, the gathering system, as well as Wink to Webster portion is coming online, and then in the future there will be more income coming around the hub of Big Spring, which is not just a refinery. Tyler, you are very familiar with Tyler. You've been there many years.
When we bought, you know that this facility, even in today's environment tends to make money. Shouldn't touch it besides tweaking the expenses, which we tweak expenses across the company. I think I answered it one by one.
No, perfect. A quick follow-up here is, when you look at Delek, there are two parts which are working perfectly fine. Logistics, which is actually doing great, and retail, which is actually doing very well, and then refining, which is not doing so well. When you're lowering your CapEx, you're also lowering your growth projections for the retail businesses. At one time, Uzi, you were very bullish about building bigger stores, getting more sales in, getting more merchandise sales. I'm just trying to understand, as you pull back on the CapEx, which is fine on refining side, are you pulling back a little too hard on the retail side? Your retail business was actually doing very well even until date. The question is on the retail expansion front, sir.
That's a great question, Manav. Look again, capital allocation, it's hard. It's something that we need to look every day. That's why I'm being paid. You look at the share price, which is $11. You do some of the parts and you have a market for DKL, and DKL reported another record quarter. As we told you, all these investments over the last few years will continue to bring more and more dollars to DKL. DKL is doing very well because of the investment. Retail is doing very well, but the share price of DKL is $11. In terms of capital allocation, you say to yourself, "Where should I put my chips?" The chips should go towards more buyback, in our mind, at this very moment. Obviously, if stock price goes back to $50, then capital allocation should change towards growth project.
That's a very fair interpretation. Thank you for taking my question.
Thanks, Manav.
Next we have Roger Read of Wells Fargo.
Yeah, thank you. Good morning. How are y'all doing?
Good, Roger.
Hey, Roger.
Hey, Uzi and Blake. Two questions for you. One on the kind of financial balance sheet side. Seems to me the OpEx thing's been beaten pretty good here. The other is going to be on market fundamentals and so forth. I'll hit that one first, come back to the balance sheet. If we look at Cushing inventories, they obviously spiked pretty high back in the spring, came down, and then they've been steadily increasing, yet we haven't seen any real widening in the, either MEH or LLS differential. I was curious, how do you think about the market structure out there, given that a lot of times we hear about tank tops. We're not hearing about that right now. Whether or not we may see some of that, in coming months or quarters.
I'll leave it with that and then come back on the balance sheet, if that's all right.
Hey, Roger. How are you today?
Good.
It's a great question about the differentials. Obviously, most of the pipeline and the infrastructure in the U.S. is overbilled. With that come some level of stability in the differentials. We see that there's stability coming all along since Q2, both on the LLS and for sure on the MEH. Cushing is giving, as you just said, but we don't see the time spread of CMA open as quickly as it was before because it's more manageable than in the past. Doesn't mean that it cannot be opened here in the next future, but it's not going to be as extensive, as rapid as everyone was in Q2 because of the panic that hit the pandemic. Does that make sense?
Okay. Yep, it does. The other question I had, again, kind of just thinking about the balance sheet in slide five in the presentation. I think some of the reasons we've seen a little depression in the stock is obviously, and this is true across the space, net debt has increased. I was just wondering, Uzi, as you've talked about what you would want to use excess cash for, how do you think about using excess cash to de-lever, recognizing that some of that debt, maybe even a significant portion of the increase, is in DKL, so it's not necessarily debt you either need to de-lever or can de-lever on. Just how you think about it overall as a structure of interest expense as a call on cash, total debt to cap, debt to EBITDA, that kind of thing.
Roger, I'm sure you remember, our mid-cycle target is very simple. For DKL, for logistics, and yeah, of course, the leverage goes up because the assets of DKL and the EBITDA of DKL is going up. At the same time, the market cap of DKL goes up as well. If you look at logistics, we target 3.5-4.5, even though the covenants we have or the max leverage, n ot covenants, but the max leverage according to our credit facility is 5.5. We are in the middle of the range. We're at $3.9 billion in that area. The second part, which we are not there obviously today, we thought that the entire rest of the business between retail and of course, refining should be not more than one time EBITDA.
Right now it's around $600 million. The EBITDA doesn't exist in refining, as we know. We believe that with the steps we are taking, we're preserving the cash, and we're protecting the balance sheet. Not that it needed protection to start with with $800 million and the tax we think coming sometime early next year. The mid-cycle, we prefer to be one time. This is for your modeling thing.
No, that's helpful. We'll just, I guess, wait on market conditions as to when kind of all that comes together.
You asked that question. I think the first step will be when a vaccine is being found, but full recovery is when people feel safe to go back. I think we're talking about between 12 months- 18 months from now. I do not expect to see full recovery to $15 crack before 2022.
Okay, thanks. That's helpful.
Next we have Phil Gresh of JP Morgan.
Hey, good morning.
Hey, Phil. Good morning.
First question, is just related to unlocking value, which others have kind of pointed at. One of your peers has a big midstream business, retail business, and refining company. They sold retail to unlock the value. You've done it in the past. I think you've indicated more recently that these retail assets are more important to you. Is this something, as you look at your stock price, that you consider?
First, we should look at everything in this environment. Retail, as you know, is around $45 million EBITDA. Based on one of our peers selling their portion, it's, I don't know, 10x, 11 x, whatever the number is. The question, what we are going to do with the money with market cap of $800 million, we don't need CapEx. We don't have CapEx. That's a good question. When you say to yourself, market cap is $800 million and retail is $500 million, you can buy the entire company for retail. It's tempting to look at it. At the same time, retail is not maturing just yet. We have a ways to go, and we think we can get more value. Manav asked a question earlier about being in store. Some of the stores that we built are doing very well.
At this point, I don't see us jumping on the wagon with retail, just to add more cash to the balance sheet for a company that the market cap is only $800 million.
Okay. Second question, if you could just remind me with the startup of Wink to Webster, is that something that exists at the parent company level that gets dropped to DKL? Or is the ramp-up of Wink to Webster directly at DKL?
No, it is at DK.
And are you-
There was no benefit to that until now. There was nothing in it.
Right. It's at the DK level. Are you thinking about a potential drop? Do you feel like you have the capacity to do that, or you just keep it at the DK level for now?
We need to be patient, Phil. You always said that it's a transition story. We feel the transition story is unfolding. Obviously, the environment, it is what it is. We are where we are with the environment. It didn't change the strategy of continuing to grow logistics. W2W, as we said all along, there is a ramp-up period. We will need to make a decision at what point that a drop-down, if it makes sense, at what point we should do it.
Got it. Okay. Just to clarify on the buybacks, I guess at this point in time, you're assessing buyback potential, but you don't feel comfortable doing it now. Opportunistically, you'd rather wait, just to clarify that? Thank you.
I said very clearly that we believe that once we start generating free cash flow, which according to our models, it's around $8.50, we shouldn't wait. When I say $8.50, the market, the 5-3-2 is $8.50.
Yeah. Okay.
When I say free cash flow, I mean after interest and after CapEx.
Yep. Okay. Very clear. Thank you.
Yeah. Next, we have Jason Gabelman of Cowen.
Yeah. Hey, morning.
Morning, Jason.
Two questions. First, just a clarification on the $25 million on other initiatives. I'm not sure if I heard you right, if that's mostly the Wink to Webster contribution or if that's something else. Secondly, kind of a more strategic question. It seems like it's a unique opportunity where you could take a step back, and you've pulled back spending across your assets and kind of assess what you want the future of the company to be, and moving forward, deploy capital as you see fit. I wonder, as you're looking at your portfolio, when you think about increasing spending again, if you're thinking about deploying it in new business segments, maybe segments that generate higher multiples than refining historically has, given that energy demand in the U.S. and globally seems to be changing. Thanks.
The answer to the first question is yes. The answer to the second question, we absolutely need to look. That's the reason we have the biofuels, and that's the reason we invested or we have the option to invest in that 1/3 asset in California in Bakersfield. I've been doing it long time. I've been CEO of this company 19 years, probably too long. I've seen its ups and downs, and every CEO is expected, that's why I'm being paid, I said it earlier, to allocate the capital based on the best returns at the time. For sure, we needed to fix our refineries in the past, and we invested hundreds of millions, if not billions, in our refineries. Now they are in good shape.
We do need to look at the future and say, "What is next?" Is investing in these refineries the right thing or doing something different? That's what we're actually doing. Once we have a clear path for the three to five years, we'll notify the market.
Got it. Thanks.
Thank you.
As a reminder, if you'd like to participate in today's Q&A, please press star then one on a touchtone phone. That is star then one to ask a question. The next question we have will come from Kalei Akamine of Bank of America. Please go ahead.
Hey, guys. Good morning. Filling in for Doug here. I've got two questions, they're both on Krotz. First question, Krotz is about 45% of the $70 million savings. It sounds like some of this is related to lower utilization. What I'm trying to figure out is whether this OpEx is mainly coming from 1 Q when the plant will be offline for an extended period of time for maintenance, and whether there's any sustainable cost savings that we'll be able to see once the plant comes on normally.
Kalei, Blake, at the end of the day, we're going to start the turnaround work here in November, and that will spill through into March. Really, there's going to be no utilization of the crude unit or the FCC. We'll be running the alkylation unit and the reformer. At the end of the day, the OpEx savings will be embedded in 1Q. What I would suggest to you from a modeling standpoint is to just keep that OpEx removed for the year. If the margin environment improves and we feel we can offset the operating cost reductions with improved cash flow from the margins, we'll restart it. At the end of the day, the cash generation will be there in some form or fashion. Does that help you out?
Got it. That makes sense. The second question, also on Krotz. Have you guys explored operating the plant as maybe a terminal, and whether that would be value accretive? I guess what I'm thinking about is the aversion of maintenance capital. Maybe asked another way, what is maintenance CapEx today, and what does that look like ex Krotz?
Usually, maintenance CapEx in a refinery by the size of Krotz is around $15 million-$20 million a year. It's not $100 million. It's not $200 million. Please remember, we build the alky. Maintenance CapEx is not outside turnaround. Obviously, we're doing the turnaround now on straight time, so we take advantage of not so good environment. In terms of modeling, it's $15 million-$20 million. It's not $200 million. I think that's the question, Blake, right?
Indeed. I appreciate the answers, guys. Thanks.
Well, at this time, we're showing no further questions. We'll go ahead and conclude our question and answer session. I will now return the conference call back over to the management team for any closing remarks. Gentlemen?
Well, thank you, Mike. Thanks for hosting us this morning. I'd like to thank my friends around the table, my colleagues. I'd like to thank you listening to us this morning. I'd like to thank the great employees of this company. We have been through a lot here together, and they are great to work with. I'd like to thank the board of directors. These are not easy times, but we're taking the right steps. Thank you, and have a great day.
We thank you also, sir, for your time today and to the rest of the management team. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care, and have a wonderful day.