Good morning. My name is Prince, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Earnings Call for Delek US Holdings Incorporated. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I'd like to turn the call over to Keith Johnson. You may begin.
Thank you, Prince. Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss DK's Q2 2019 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO Assi Ginzburg, EVP and CFO Blake Fernandez, SVP of IR and Fred Green, EVP and COO as well as other members of our management team. Presentation materials we'll be using on today's call can be found on the Investor Relations section of Delek US' website.
As a reminder, this 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 GAAP, we report certain non GAAP financial results. Investors are encouraged to review the reconciliation of these non GAAP financial measures to 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 as we are covering less segment and market information that is incorporated in the 2Q release.
On today's call, Assi will give an overview of results, Blake will review financial performance and then Fred will cover operations for the quarter. Then, Uzi will offer a few closing strategic comments. With that, I'll turn the call over to Assi.
Thanks, Keith. We had great financial results this quarter during the period of lower Midland crude oil discount. As you can see on Slide 3, on an adjusted basis for the Q2 2019, Delek US reported adjusted net income of $90,600,000 or $1.17 per diluted share compared to an adjusted net income of $78,900,000 or $0.92 per diluted share in the prior year period. Our adjusted EBITDA increased by 10% to $204,900,000 in the Q2 of 2019 compared to $106,100,000 in the prior year period. As Fred will discuss in a few minutes, we continue to develop our mid-twenty initiative with the announcement of our participation in the Wink to Webster JV, ongoing efforts to expand our gathering system and DKL's acquisition of Red River JV.
Our balance sheet gives us the flexibility to evaluate option to finance at least 75% of our Wink to Webster JV investment. This could include project financing or expanding our existing credit facility, which should allow us to preserve cash on hand. Now I will turn it over to Blake to discuss the financial performance for the quarter.
Thanks, Ozzie. Delek US reported net income of $77,300,000 or $1 per diluted share compared to net income of $79,100,000 or $0.89 per diluted share in the Q2 of 2018. This was led by an increase in market conditions, including crack spreads, contribution from new investments, including the alkylation unit at Krotz Springs and Red River JV, along with continued commercial execution. As mentioned in the press release, prior year results were reduced by approximately $21,800,000 related to a mark to market of RIN's inventory position. On Slide 4, we provide a cash flow waterfall.
In the Q2 of 2019, we generated approximately $102,000,000 of cash from continuing operations. I should point out that this includes a negative impact of $44,500,000 from working capital movements. Strong underlying cash flow combined with solid financial position supported investing in the business with cash capital expenditures of $76,000,000 along with returning approximately $80,000,000 of cash to our shareholders between buybacks and dividends. Of note, overall investing activities in the quarter include equity investments, including the Red River acquisition. Slide 5 highlights our capitalization.
We ended the 2nd quarter with approximately $951,000,000 of cash on a consolidated basis and $965,000,000 of net debt. Excluding that debt at Delek Logistics of $835,000,000 we had net debt of approximately $130,000,000 at June 30, 2019. On Slide 6, I want to provide some Q3 guidance and a few data points that may be helpful for modeling purposes. We estimate based on the forward curve that our realized Midland discount and our gross margin would be in the range of $1 to $1.20 per barrel. Secondly, G and A was elevated in the Q2 due to bonus accrual, stock based compensation and legal expenses.
Our Q3 G and A is expected to be in the range of 63 to $68,000,000 which reflects bonus accrual and stock based compensation stemming from strong financial performance. Thirdly, a portion of the contribution from commercial activities, mainly hedging, is allocated to the corporate and other line item. This explains the increase year over year. Finally, I think it's important to point out that the Red River pipeline is expanded in the first half of twenty twenty. Our increased access of 65,000 barrels a day creates an option to displace Midland barrels with Cushing barrels should that arbitrage exist.
While our annual earnings sensitivity of $75,000,000 for every $1 per barrel change still exists to the upside, theoretically, this sensitivity would be reduced to about $50,000,000 per dollar a barrel change on the downside. Hopefully that is useful. And with that, I will now turn the call over
to Fred to discuss operations. Thanks, Blake. During the second quarter, our total refining system crude oil throughput was approximately 263,000 barrels per day. As shown on Slide 6, for the Q3 2019, we expect crude oil throughput in the refining system to average between 270,000,280,000 barrels per day. On Slide 7, I want to highlight our capital spending.
Capital expenditures during the Q2 were $86,000,000 compared to $55,000,000 in the Q2 of 2018. Our 2019 capital expenditures for the full year are forecast to be $396,000,000 This amount includes $239,000,000 in our Refining segment, dollars 9,000,000 in Logistics, dollars 21,000,000 in our Retail segment and $128,000,000 at the corporate level. I should point out that CapEx excludes JV Investments at both Red River and Wink to Webster. The spending on the Big Spring Gathering System is included at the corporate level for 2019 and is approximately $123,000,000 We now have over 250,000 dedicated acres in our gathering system. We continue to target $40,000,000 to $50,000,000 of annualized EBITDA by 2022, including the crude oil quality uplift in our refining segment.
We've continued to move forward with our midstream initiatives. As shown on Slide 8, we've taken a 15% interest in the Wink to Webster pipeline. We anticipate our net investment in the range of $340,000,000 to $380,000,000 This project has multiple potential benefits, including attractive returns, integration, additional service to producers through our gathering system and more stable earnings over time. This pipeline is underpinned by a significant volume of long term commitments. Moving to Slide 9.
In May, DKL announced the acquisition of a 33% interest in the Red River pipeline. Upon completion of the expansion of this system in the first half of twenty twenty, we expect adjusted EBITDA of $20,000,000 to $25,000,000 on an annualized basis. Next, I'll turn the call over to Uzi for closing comments.
Thanks, Fred, and good morning, everybody. As illustrated on Slide 10, we've taken strategic actions over time to unlock value and high grade our portfolio. This is starting to be reflected in our performance with resilient result in the first half of the year even in a compressing Midland Differential environment. The alkylation unit at Krotz and the Red River JV are already contributing to bottom line performance and we continue expanding our midstream footprint. We are pleased to announce participation in the Wink to Webster JV with such a strong set of partners.
We've been working on this for some time. This is a great investment that should generate a return well above our 15% targeted return for logistic projects. As shown on Slide 11, our portfolio of midstream assets including Wick 2 Webster, Red River and Big Spring Gathering, all progress us toward our goal of achieving $370,000,000 to $395,000,000 of annualized EBITDA by 2023. As shown on Slide 12, cash return to shareholders remains a priority. Over the last 12 months through June 30, we have returned $439,000,000 or about 14% of our market cap to investors.
Our capital allocation program balances cash to shareholders with potential opportunities for growth. We intend to repurchase $40,000,000 of Delek stock in the Q3 of 2019. In addition, our Board of Directors approved a 3.6% increase in our regular quarterly dividend, which marks our 5th consecutive increase since the Q1 of 2018. We remain focused on trading long term value as we balance returning cash to our shareholders, investing in our business and exploring opportunities to develop the next stage of our company. With that, Prince, could you please open the call for questions?
And we have our first question from Manav Gupta from Credit Suisse. Your line is now open.
Hey, Uzi. A quick question on Wink to Webster. If I'm doing my math right, your EBITDA from that project could be about $65,000,000 to $70,000,000 on an annualized basis. So if you could confirm that number and what I'm trying to understand is that tells me that you got into this pipeline at about 6x, 6.25x versus generally people pay 9x to 10 times to get into the pipeline. So I'm trying to understand the leverage Delek has so that you could get in at a much lower multiple versus paying 9 to 10 times.
Well, that's a great question. First, I'm not going to comment about the numbers. I'm just going to say that our threshold is 15% is well above that 15% threshold. That's one thing. 2nd, this is on unleveraged basis.
So Assi will talk about the financing of the pipeline shortly, but this is a straightforward return. We just need to remember, we were very vocal about it in the past. We don't believe that all the pipelines that were announced will be built. And many people choose to join Wink to Webster and the returns are fixing to be pretty good. So for us, it was only natural and it fits us very well with a footprint to join that project.
Assi, if you could comment on the project financing?
Sure. So as we stated in our press release and we already discussed it in the script, we believe that we can finance above 75% of it either through project financing or through our own credit facilities. We have a Term Loan B that we can expand like we did in May. And we think that this can be done through the time of the construction. So we will be able to preserve cash on hand at a very low interest rate cost.
Okay. And a quick follow-up on the overall strategy of paying shareholder returns. I think if I'm right, from 4Q 2017, your dividend has gone up 90%. So I'm trying to understand, would the strategy be to continuously raise the dividend to get to a very competitive yield? Or would you actually be putting buybacks in front of the dividend hikes in the near term?
We got lucky with every quarter we get lucky, and this was another one. And we continue to buy back stock. So if you look at the total increased cost to DK from the increases dividend, it's actually nominal and in the last few quarters it's coming down. So overall, the our ability to pay $80,000,000 of dividend a year is pretty easy with our excess cash flow. And therefore, we think we can continue and increase the dividend as we continue to put good results.
Thank you, Assi. Thank you, Lucie.
Your next question comes from the line of Roger Read from Wells Fargo. You may ask your question.
Yes, thanks. Good morning.
Good morning.
And I'll say congratulations to Mr. Blake Fernandez, who escaped the sell side for the greener pastures of the corporate life.
Thank you, Roger. I appreciate it.
You may want to recruit you, it depends on the software performance.
Well, we'll see what happens. Future is always open. Anyway, I just wanted to hit on the crude differential flexibility, the Red River JV pipeline there and then understand maybe how quickly you can switch if we think about the ARB going one direction or the other? Is this the typical 30 to 60 days? Or do you think you can move quicker given both operational and consumer sides of this transaction?
Well, the flexibility between Midland and
Roger, if you're on speaker, we'll give a little bit of background.
Yes. We have a background noise there.
Sorry, is that better?
Much better. Thank you.
Okay. Sorry about that.
Our ability to switch between Midland and Cushion is pretty imminent. So probably a nomination of 1 month, if you will. And that allows us the flexibility to move between Midland and Cushing.
Okay. So pretty standard, not really a change in terms of timing, just really when the arb opens, your ability to jump will be as good as or better than anybody else?
That is correct.
Okay. And then since it's been our little favorite topic coming into earnings seasons Tier 3, kind of give us an idea of how you're set up. I know the Alky unit at Krotz Springs had a good quarter obviously and that's a key component going forward. But I'm just curious, you look across the other three units, how you're set up and how things have been running year to date?
Hey, Roger, it's Fred. So I'll take this one. Of the 4 refineries, 2 can already meet the 10 PPM level. Big Spring and Tyler can already do it without any significant change in our ability to supply the market with premium gasoline and octane instruction. Krotz Springs and El Dorado can both get close to the 10 PPM, but we do plan to spend roughly $28,000,000 in the next year to allow them both to get well below $10,000,000 and continue to preserve octane.
So not a huge amount of money and not much complexity in the scope, but we believe we're in pretty good position.
Okay, great. Thank you.
Next question comes from Patrick Flan from Simmons Energy. Your line is now open.
Hey, guys. Thanks for taking my question. I was hoping you could give us an update on your latest thoughts around the small refinery exemption process and any other regulatory issues that have been outstanding recently?
Well, these are 2 different questions, I think. So I'll take the small refinery exemption first. We continue to work with the government and we continue to believe that some of our refineries qualify for the small refinery exemption. And we'll see what happens in the near future. I think the administrator said that they are planning to issue a decision over the next few weeks.
I think publicly said it last Monday. We'll see what happens. We are pretty optimistic around that area. Around the BTC or biodiesel credit, that's another area that we believe that the House and the Senate will work hard. And we believe that in the first I shouldn't say, maybe the first opportunity that they have, they'll pass that one.
The value for these 2 is excess of $100,000,000 for us. And if you need to mean to gauge our prospect, I would say that it's likely that we will get both of them.
Okay, great. That's very helpful. I guess kind of as a follow-up there, your thoughts around RINs expense and where you expect that market to go in the near future? I know it's definitely tied to the small refinery exemptions piece as well, but any other thoughts you can give us to frame that up?
Well, it's around $0.20 as you know right now. We believe that it will continue to move around that number. I don't see a spike of $0.90 and at the same time, I don't expect this to go to 0 point 0
$5 Okay,
great. Thanks very much.
Next question is from Neil Mehta from Goldman Sachs. Your line is now
open. Good morning team and congrats to Blake as well. Welcome on board Delek there.
Thank you, Neil.
Hey, the first question that I had was just on some of the hedging gains and corporate and commercial initiatives that showed up in the quarter. Can you guys flush that out a little bit more? And how should we think about those? Should we think of them as non recurring items? Or is there an element of this that we need to carry forward?
Well, I think I'll let Avigal, our Chief Commercial Officer, take that one.
Great. Daniel, good morning. How are you? Great. Thank you.
So as we discussed last Anil, we think about the commercial initiative as a toolbox. And I will give you example, right? It's wholesale, lease buying, hedge paper, physical inventories and others. Our goal in the commercial group is to apply the right tool to the right market conditions. So it might vary between one quarter to another.
But we are looking that as a toolbox as a general rule.
And in terms of the because the hedging gains did look very substantial and the commercial gains look very substantial in the quarter. As we think on a go forward basis, which what if this is recurring versus non recurring? Any guidance here?
So Neil, what you don't see is the first, this is Assi. Good morning. What you don't see is that the refineries actually in the refinery itself, there's a $25,000,000 of inventory losses and they were offset by what you saw in the corporate because we're doing what we call a system wide hedging to offset some of the inventory losses. So in the Delek U. S.
Q2 results, we don't see anything that it's a one time in nature when talking about inventory or hedging.
I appreciate it. And then Uzi thanks, Asahi. And the follow-up for you, Uzi, just kind of a big picture question about consolidation. You've made the comment in the past you've made a couple of comments around the M and A. One is there could be advantage in consolidating the Mid Con, but at the same time, the only refiner that Delek wants to buy is its own stock price back.
But so just curious on your thoughts in terms of consolidation and the role that you see Delek playing in that.
Well, as we all know, CVI was very loud around their desire to be purchased or sold. And we are not participating in that game with CVI. We will need to see what happens with CVI before we consider other consolidation in the market. But I do expect more consolidation to come over the next 3 to 5 years.
I appreciate it, Udi. Thank you.
Thank you, Neil.
Next is from Phil Gresh from JPMorgan. Your line is now open.
Yes. Hey, good morning. Good morning, Phil. First question would just be as we think about looking ahead to the 2020 CapEx picture, realizing that you still would want to try and figure out the project financing opportunity. If there were no project financing and we think about the gathering project and this potential spending for the Wink to Webster.
Generally speaking, what kind of ballpark should we be thinking about?
Phil, this is Assi. So first, let's talk about the number excluding the Wink to Webster. We see a slight uptick in CapEx excluding Wing to Webster for next year. This is, as Fred mentioned earlier, we have some Tier 3 investment, and we continue to invest into the gathering. Of course, the gathering will generate more EBITDA.
2nd, on the Wink to Webster, as we mentioned, the total investment needed is $340,000,000 to $380,000,000 We do believe we have access to credit facilities. We can even borrow on our current revolver that is basically only utilized for $75,000,000 this quarter. So we have no issues of doing it with at least 75% debt. I actually thought it will be higher. Uzi asked me to be conservative here.
I think we can do even more than 75% on that one.
Okay. So basically take kind of the midpoint of the $360,000,000 and the vast majority of that we hit in 2020 with mostly debt financing. Is that reasonable?
Part of it will already be in 2019, and it will be through not through CapEx, it will go through JV investment. So it will not show up in the CapEx line. It will all be JV investment. And as you're right, the financing will go alongside with it. We expect to finish the financing in the next probably 2 quarters.
Okay. Second question would just be, you've continued to talk about dropdown opportunities, crops. I presume perhaps Wink to Webster would be another consideration for a dropdown. Is that reasonable? And how do you think about the potential timing of dropdowns?
Is there still something under consideration in 2019 at this point?
At this point, the right way to drop the JV long haul is probably after we completed the construction and there is already a cash flow being generated from the business. As of the drop of the Krotz Springs, I don't think we'll do it this year as the leverage at DKL is slightly higher and we have a great project inside DKL that's generating a lot of cash flow. As you can see in our presentation, we expect right now $20,000,000 of EBITDA from Wet River once we complete the project. So right now, I don't see a drop for 2019.
Okay. And then just in terms of the terms of the $150,000,000 of the midstream EBITDA opportunity between the Gathering Project Wink to Webster, I guess it sounds like you've now kind of lined up or you have line of sight to the vast majority of that 150, I guess. Is there are there more things you're thinking about here in terms of potential spending to hit the $150,000,000 over the next 1 to 2 years? Or do you think that this is kind of what you have in hand is what you're focused on?
Phil, this is Uzi. We say we were very vocal that this is going to be by then by 2023. We are well ahead of our plan. And if anything, we may up these numbers in the future. For example, we're evaluating the Pay Line pipeline expansion idea and creating another hub at Longview.
That is not in the numbers as well as other means that we are looking at. So I we feel good, especially in light of the fact that both Gathering and the Wink to Webster meet handsomely our threshold of minimum 15% unleveraged that we will achieve this $370,000,000 to $395,000,000 and even add the number in the future.
Okay. And last, I suppose, somewhat philosophical question, Uzi. I mean, obviously, you guys have been buying back stock, a decent amount of stock here. And you can keep doing that or even buy back even more stock if you didn't do the project at a 5 times multiple or you could build a project pipeline at 5, maybe 6 times and drop it and get some uplift there. But I guess philosophically, is the idea here that you feel like you can just get a better multiple for the company by moving more into midstream as opposed to just buying back stock?
Well, let's be clear. Let's talk about Wink to Webster. Asi was very vocal about that. We are saying that we are well above our 15%. This is unleveraged.
We think that the project financing is feasible. So this is an area that if we're doing that, the return is enormous if we look at the leverage. That doesn't prevent us from continuing buying the stock. We believe that what we're doing and we were again very vocal about it. Even in an environment that the Midland differentials were $1.70 or so, in the quarter, we produced above $200,000,000 EBITDA.
And this is in a quarter
that we had
turnaround. So let's just not lose sight that the free cash flow that is coming from the company is substantial. So there's no reason to believe that we won't do gathering Wink to Webster and continue to buy shares.
Fair enough. Okay. Thanks.
Thank you.
Next question is from Silvio Micheloto from Mizuho. Your line is now open.
Hi, everyone. It's Paul Sankey, actually.
Good morning, Paul.
Can you hear me okay? Sorry. Yes, I thought maybe if I put Sylvia's name and I would be asked to ask a question earlier. In all seriousness, guys, Blake, welcome. I was just wondering, nowadays, best practice is to have a structure for cash return, some kind of a formal structure for cash return and maybe an idea about CapEx and it's always difficult.
First of all, the question was really, can you give us an idea about long term CapEx and how you think about it? And then secondly, have you thought about putting in a structure for how much cash return you want to generate? I like to ask you comment about being lucky every quarter, but maybe something a little bit more mathematical.
So, would you direct for me to take that question? I will take it. Good morning, Paul.
Hi.
Had we put your name, maybe we would have put you earlier. So we're sorry for that and we apologize.
You'll have an opportunity to shoot Keith.
We see ourselves somewhere right now between $900,000,000 to $1,000,000,000 of EBITDA company. That's what we've been generating. That's our run rate, and that's what we're able to do in the last 2 years. And we expect to do so also in an IMO environment and also after that when the pipeline will come on. On the $900,000,000 to $1,000,000,000 we think that our CapEx, including some growth, shouldn't be more than 30% of that number.
So overall, I will say that around $300,000,000 and that will include some growth CapEx and one turnaround a year for the refineries. As you can see, that will leave us with a lot of free cash flow on hand. And that's why when you look at us in the last year, we have bought basically together with the dividend close to 14% brought 40% yield, which is extremely high. I don't know if we can do 14% every year, but even you look at this year, we are tracking to do a buyback of $200,000,000 based on the $150,000,000 we have bought so far for the year, plus almost $100,000,000 of dividend gets you to around 10% yield for 2019. So we want to be on the high end of our peers when you add buybacks and dividends, and we want to be somewhere in the mid when we are of the dividend, just the dividend yield.
We are lowering on the dividend yield. That's why we've been increasing inked every quarter since 2017.
Yes, understood. That's helpful on the 30%. Thank you. And Uzi, I was surprised that you said, well, I wasn't surprised, but your view of consolidation, did you mean that you expect more refining consolidation? I understand that there's a couple of bits and pieces around there, but it feels like the industry now is reaching terminal consolidation really since marathon endeavor?
Well, when I said that, yes, I thought that there would be a couple of 2, 3 more deals in the next 3 to 5 years to consolidate our industry. I did mean refinement.
Yes. Okay. And then just finally for me, any observations on demand? It's obviously a very controversial subject right now, but I just always appreciate your perspective. And I'll see you later.
Thank you, guys.
Well, obviously, demand in our area is very strong because of the drilling and the growth in our areas. We don't have good visibility right now to the Northeast, which we used to have, but we don't see a big issue in our areas.
Thank you very much, guys.
Thank you.
Next question is from Doug Leggate from Bank of America. Your line
Let me add my congrats to Blake. Without the volatility, Blake, you may hang on to that fine head of hair a bit longer. But anyway, congratulations.
Thanks, man.
So I'd like my first question, Uzi, if I may, is just to kind of wrap a couple of the things that have been asked already, but wrap them into a kind of more concise framework. You've obviously raised slightly the midstream target today, but at the same time, the buyback remains the dominant part of the share return strategy. So what I'm really trying to understand is, I guess, first of all, what line of sight do you think as a percentage of that $373,000,000 to $95,000,000 target do you think you have visibility on today? Maybe not everything disclosed, but in terms of what you think internally you've got visibility on? And then as that evolves, is there a target payout ratio that we should think about in terms of the balance between the dividend and the buyback as your earnings stabilize more towards that midstream over time?
So kind of a part midstream, part dividend question and then I've got a quick follow-up please.
Well, I'll take the first part of the question and I'll let Assi answer the second one. I think the first question was about visibility of the $370,000,000 to $395,000,000 When we put a number out, we always create a set of projects and set of ideas that are more than just ideas, not because we just made up a number. So to answer your question, absolutely, we have visibility to $370,000,000 to $395,000,000 And as I said, as we progress, we may even up that number as we get more clarity about other projects that we work on. That's the first part. The second part, the combination between buyback and dividend, I'll let Assi take it.
So Doug, as you look at this year, so far we had $450,000,000 of EBITDA and if you're analyzing it, annualized it, it's going to be close to $900,000,000 We are on pace to basically pay almost $100,000,000 of dividend plus $200,000,000 of buyback. So that will basically give us roughly a 30% payout from the EBITDA perspective. And that's in the year when we are investing heavily in our gathering business. So this is something I think we can sustain, especially when we expect CapEx over the years to reduce as we don't expect every year to have such a heavy investment in gathering. Also, it's going to be much easier to pay equal dividends to a much higher level when the EBITDA will come from logistics versus refining.
And that will enable us over time to be extremely competitive on our dividend yield.
Yes. I guess what's at the back of my mind, Assi, is there's always a lot of controversy over how we should be valuing the sector in light of the inevitable volatility and dividend discount modeling has become something of a fashion, I guess, in this sector. So just any visibility you can offer in future in terms of how you're thinking of that strategically, I think, would be quite helpful. But I appreciate the answer. My follow-up is really just a quick one.
It's on the Red River comment in the release. And I'm not sure who wants to take this one, but this comment about the incremental 65,000 barrels increases optionality in the event that Cushing becomes more economically attractive. By inference that implies that Midland is less attractive, which would be a bit of a change from, I guess, the perspective you've offered in recent years. So are you now concerned that Midland could end up trading at a premium to Cushing?
Well, we were very vocal about the idea of Midland trading at premium to Cushing. In order this to happen, there should be 900,000 barrels that are flowing now between Midland and Cushing to be reversed. We don't see that happening so easy. However, the Red River gives us the optionality, if it happens, to change our crude slate. At the same time, the Red River together with the Paline pipeline creates optionality between cushion and the growth.
So if we look today at WTI versus LLS, obviously, we're making money selling it at the Gulf. So that deal allows us to move from different markets or different hubs, right, crews from different hubs depends on the market conditions.
Understood. I guess, Uzi, the thing that was at the back of my mind was we saw Epic announce the rate fell below $2 last week. So obviously, there's a lot of questions around this issue as well. But guys, I appreciate you taking my questions. Thanks again and congrats again Blake.
Thank you, Doug.
Next question is from Paul Cheng from Scotia Howard Vail. Your line is now open.
Hey, guys. Good morning.
Good morning. Good luck, Paul.
Thank you.
You know, everybody that works at Howard Weil is a candidate for us one day. So, yes, be careful now.
Well, Brady, just want to say congratulations first.
Thank you.
I wish you the best of luck over there.
Thank you, Paul. Tell my friends hello for me, will you?
Absolutely. I have a number of short questions. First, El Dorado, maybe Fred, you can help with me. Margin seems to be extremely strong given the downtime. Is there anything unique in this quarter in terms of why the margin capture would be so strong?
We came back from turnaround. And as a result, there was some change in inventories that were very positive. And that's why we made so much money in that refinery. It was offset by the other refineries like Big Spring that have negative inventory impact. So it's just a play between the refineries and inventories the way they impacted each refinery.
I see. Yousi, can you ask, can you tell me how big is the inventory benefit in El Dorado?
We don't allocate during the call for each refinery, but I think we'll be ready to discuss it later.
Okay. Secondly, on the Webster, the 15 percent return, is that just purely on the tariff that you're going to receive? Or there's also true other integrate benefit or trading opportunity that you foresee?
First, there are trading opportunities. They are not in the when we say well above 15%, that doesn't include commercial initiatives.
So it does include commercial initiatives?
It does not. It does not.
And you said does it include any kind of yin degree benefit as I think that was mentioned earlier?
I'm sorry, I missed the question. Yes, great.
Does it include any of the integrated benefits within your system?
No, no, no, no.
Is the 15% is clearly based on your share of whatever is the 10% that you will receive?
They're well above 15% is purely the project itself.
Purely the project itself. And is your commitment is equal to your in terms of the shipping volume equal to the 15% of your working interest?
We never disclosed commitments, and that's something that we are not going to disclose now.
Okay. On the Red River, the incremental 65,000 barrels per day, in the event if you take that optionality, what is your corresponding transportation commitment related to your midland crew? Is there any amount that you have to continue to pay?
Paul, can you repeat that question just real quick?
Let's assume in the event that you decide to take the optionality that the option to run more of the Kuzheng Ku instead of so back away from the Midland. Now the crude purchase, the nomination is only 1 month in terms of the commitment. But in terms of the transportation arrangement, is there any longer term commitment that you have to continue to pay if you decide not to run the midline crew?
So let's start with the fact that there are long term commitment for us even if we're not running the Midland crude for mostly for El Dorado and Tyler. With that being said, when we're going to move more barrels on Red River or on a pay line, these are our pipeline basically. So there will be no additional tariff for the system. You're just going to see an uplift in gross margin.
No, I understand. I'm just saying that for the but the commitment is all in your own system to El Dorado and Tyler?
No, that's the 3rd party.
Right. So I guess my question is that can you share with us that how big is that commitment that roughly if you decide that not to run that 65,000 barrels per day of the Midland crude?
As you know, we do have 207,000 barrels a day that we can run Midland. Of that, it's roughly 75,000 barrels a day in Big Spring. And then as you know, we are moving to the Enzal pipeline up to 40,000 barrels a day to Krotz Springs. So those are part of our day to day business. The remaining big portion of it is commitment on the West Texas Gulf pipeline.
Okay. I will take it offline. On the UC, have you looked at the CECO asset? Seems like that one of the accretive is trying to push it through the bankruptcy.
As we were very vocal, we say that the best refinery to buy is our refinery nowadays. So we haven't looked at any refineries lately.
I see. Final one, Arce, can you tell me how much is the reanalyzed hedging gain?
$38,000,000
$33,000,000 $38,000,000 Do you have a split between the different refineries?
We do not provide split between the refineries, but you can see that there is a big piece that is actually the corporate level, dollars $20,000,000
in the corporate life. And so the other $28,000,000 is in the refining segment?
Yes, that was offset completely by the inventory losses.
I see.
Okay. Thank you.
Thank you.
Next question is from Matthew Blair from Tudor, Pickering, Holt. Your line is now open.
Hey, Assi, you mentioned the Big Spring Gathering business. Are you willing to provide an EBITDA number for 2Q? And can you just talk generally about the ramp for this project through the back half of the year and into 2020 2021?
Sure. So, so far the EBITDA is very minimal. We just started to see the volume coming in. We expect the volume this year to be around 60,000 barrels a day. And by 2023, it's going to be basically 3 times that amount.
As we mentioned, for 2023, we expect EBITDA to be somewhere from $40,000,000 to $50,000,000 But right now, it's quite minimal.
Got it. Thanks. And then could you talk a little bit more about the Big Springs margin capture in the quarter? It just seems a little low. Obviously, Midland diffs came in, but cracks really improved.
It sounds like was there like an inventory impact that also flowed through Big Spring?
So when you look at Big Spring this year versus last year, there's actually inventory in Midland impact of $2.70 and that was negative in Big Spring. On the other hand, in El Dorado, we saw an uplift and that's what I mentioned that we are not allocating inventories between the refineries. But overall for Big Spring compared to the same time last year, it's $2.70 and that's why you see a lower capture rate.
Great. And then final question, Asi, can you just remind us what is the, I guess, the max leverage limit for the consolidated entity?
There is no max leverage for DK. With that being said, we are always targeting it on the long term when you look at the net debt to EBITDA no more than 1.5 times.
Great. Thank you.
I'm showing no further questions. I'd like to turn the call over to management.
Thank you, Prince. I'd like to thank my friends around the table here. I'd like to thank my colleagues, to the executive team, like to thank the Board of Directors for their continued support and you investors and analysts for your interest in our company. Mainly, I'd like to thank each one of the employees who make this company the great company it is. Thanks.
We'll talk to you soon.
This concludes today's conference call. Thank you for your participation. You may now disconnect.