Good day, ladies and gentlemen. This is your conference operator. At this time, I would like to welcome everyone to the Q1 Earnings Call for Delek US Holdings, Inc. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Session. Thank you. I would now like to turn the call over to Keith Johnson. You may begin your conference.
Thank you, Lori. Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss DK's Q1 2019 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO Assi Ginzburg, EVP and CFO Danny Norris, CAO Fred Green, EVP and COO as well as other members of our management team. The presentation materials we'll be using during today's call can be found on the Investor Relations section of 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 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 1Q press release.
On today's call, Assi will give an overview of results, Danny 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. Great to be back in such a great quarter. We had a great financial performance this quarter as we continue to return cash to our shareholders while investing in our businesses. As Fred will discuss in few minutes, we completed the Alky project at Krotz Springs and the turnaround at El Dorado in April. As you can see on Slide 3, on an adjusted basis for the Q1 2019, Delek US reported net income of $121,200,000 or $1.54 per diluted share compared to an adjusted net income of $21,500,000 or $0.26 per diluted share in the prior year period.
Our adjusted EBITDA increased by 126 percent to $237,500,000 in the Q1 of 2019 compared to $104,900,000 in the prior year period. Now I will turn it over to Denny to discuss financial performance for the quarter.
Thank you, Assi. Delek U. S. Reported net income of $149,300,000 or $1.90 per diluted share compared to a net loss of $40,400,000 or $0.49 per basic share in the Q1 of 2018. Our consolidated contribution margin improved to $333,800,000 in the Q1 of this year compared to $152,300,000 in the Q1 of 2018.
This was led by refining, which generated contribution margin of $294,300,000 compared to a contribution margin of $133,200,000 in the Q1 of last year. This increase was driven by more favorable Midland Brent crude oil price differential, lower RINs expense, sustainable commercial performance and the benefit from an active inventory management strategy during a period of rising prices. In the prior year period, refining results included approximately $90,900,000 related to REEAN's waivers and $24,600,000 of income from a biodiesel tax credit. During the Q1 of this year, results did not include any benefit from regulatory decisions on 2018 RINs waivers or the biodiesel tax credit. We continue to work with the government on both of these matters.
There was approximately $61,000,000 on a pretax basis of inventory benefit net of the lower of cost or market adjustment in the reported and adjusted Q1 2019 results. I do want to note that the inventory benefit in our reported and adjusted results was primarily offset partially offset by approximately $9,000,000 on a pretax basis of cost related to an asset disposal and emissions allowance cost in the refining segment. Our performance during the Q1 of 2019 generated approximately $133,000,000 of cash from continuing operations as shown on Slide 4. This cash flow combined with our solid financial performance supported investing in the business through cash capital expenditures of $124,000,000 and returning approximately $67,000,000 of cash to our shareholders. Slide 5 highlights our capitalization.
We ended the Q1 with approximately $1,000,000,000 of cash on a consolidated basis and $771,000,000 of net debt. Excluding net debt at Delek Logistics of $700,000,000 we had net debt of approximately $72,000,000 at March 31 this year. The financial flexibility provided by our balance sheet should allow us to fund our midstream projects with 60% to 70% debt depending on our cash generation and alternate investment opportunities. On Slide 6, I want to highlight our EBITDA potential from our current operations. We have used variations of this slide in our IR slide presentations in the past.
Using the long term average of $2.50 Midland discount to Cushing and the crack spreads highlighted on the slide, our current operations have the ability to generate approximately $900,000,000 of annual EBITDA. Please note that this includes the alkylation project at Krotz Springs that is now operational and a benefit from commercial initiatives such as improved crude sourcing and netbacks across our refining system. It also includes a potential benefit from RINs waivers at our El Dorado and Krotz Springs refineries, which we have consistently received in the past. As we complete our midstream initiatives, we should have the potential to generate in excess of $1,000,000,000 of EBITDA before any IMO benefit. As we continue to develop our operations, our goal is to add less crack spread and crude differential dependent EBITDA over time through the combination of our midstream investments, the alkylation unit at Krotz Springs and our retail business.
On Slide 7, I want to provide some guidance for modeling in the Q2 of 2019. We estimate based on the forward curve that our realized Midland discount and our gross margin would be in a range of $1.30 to $1.50 per barrel, which should help to continue driving cash flow generation from our operations. I do want to note in the Q2 of 2019, we expect a $12,000,000 headwind from the combination of rebuilding inventory levels following the El Dorado turnaround and timing of realized hedging losses. During the Q2 of 2019, crack spreads have continued to improve, averaging $16.30 per barrel through May 2 compared to $13.02 per barrel in the Q1 of 2019 based on the 5.32 WTI Gulf Coast crack spread. In addition, the Midland Cushing discount has widened for May June crude oil purchases.
This should benefit our refining operations in the 3rd quarter, taking in consideration an inventory timing effect. Now I'll turn the call over to Fred to discuss our operations.
Thanks, Danny. During the Q1, our total refining system crude oil throughput was approximately 250,000 barrels per day. As shown on slide 7, for the Q2 2019, we expect crude oil throughput in the refining system to average between 260,000 and 270,000 barrels per day. This takes into account the turnaround at El Dorado. Turnaround began on March 11 and was completed on April 24.
The refinery is now back to normal operations. Total capital cost for this turnaround was approximately $45,000,000 During the Q2 2019, we expect the crude oil throughput at El Dorado to average between 5,055,000 barrels per day. This was a shortened turnaround format that allowed work to be completed on the majority of the process units. On Slide 8, I want to highlight our capital spending. Capital expenditures during the Q1 were $128,000,000 compared to $70,000,000 in the Q1 of 2018.
Our 2019 capital expenditures are forecasted to be $394,000,000 This includes $223,000,000 in Refining, dollars 12,000,000 in Logistics, dollars 18,000,000 in Retail and $142,000,000 at the corporate level. The spending on the Big Spring Gathering System is included in that corporate level number for 2019 is currently forecasted $131,000,000 I'm pleased to announce that our new alkylation unit at the Krotz Springs refinery was operational in early April. Based on current market prices, the expected annualized EBITDA contribution will be approximately $50,000,000 As a reminder, the Alka unit should provide additional production flexibility at Kratz as it improves the ability to convert low value butane and butylene into higher value gasoline products. Our future EBITDA generated by the ALC unit will also further reduce the portfolio's dependence on crack spreads. Progress continues on our Big Spring Gathering project.
During 2018, we spent $79,000,000 we expect to spend approximately $131,000,000 in 20 19. This compares to our previous guidance for approximately $80,000,000 of spending in 20 The change is due to a number of factors that include the addition of more production areas and an increased number of producers, along with additional storage capability and connections to support future growth of this system. Taking this into consideration, the total expected cost is approximately $210,000,000 compared to our previous estimate of $170,000,000 This new business line has an expected annualized EBITDA in the range of $40,000,000 to $50,000,000 including a crude quality benefit in our refining segment, which should be fully achieved by 2022. As a reminder, our capital expenditures for this project may be further adjusted as we develop the system to support our producers' growth plans. Next, I'll turn the call over to Uzi for
his closing comments. Thanks, Fred, and good morning, everybody. This was a great start to 2019. Operational improvements that have been implemented continue to increase our EBITDA in our business. These initiatives include the improvement in Krotz Springs Refinery as well as commercial initiatives that continue to improve the refining system capture rates.
These were factors in our Q1 performance and should benefit us going forward. Also, the WTI linked crude system that we have built benefited from a wider Midland Brent differential. In addition to the initiatives in place, we should benefit from the new Alkya unit at Krotz Springs. As we enter the Q2, market conditions have continued to improve. The crack spreads have increased and the Midland Brent differential is currently at $11 per barrel.
This remains an attractive environment for our business model. The gathering system is progressing, and we continue to work with our producers to add acreage dedications. The increase in crude oil price since the beginning of the year should support drilling activity in the Permian Basin. During the quarter, we exited the proposed PGC partnership. This allows us to explore more favorable options to participate in one of the announced long haul pipeline projects.
As shown on Slide 9, the combination of these initiatives along with other projects should help us achieve 3 $50,000,000 to $370,000,000 of midstream EBITDA by 2023. As shown on Slide 10, total cash return to shareholders was approximately $67,000,000 in the Q1 of 2019. Over the last 12 months through March 31, we've returned $400,000,000 or about 14% of our market capitalization. Our capital allocation program balances cash to shareholders with potential opportunities for growth. Currently, we believe our stock is an attractive investment and we intend to repurchase $60,000,000 of Delek stock in the Q2 of 2019.
In addition, our Board of Directors approved 4% increase in our regular quarterly dividend, which marks our 5th consecutive increase since the Q1 of 2018. We remain focused on creating 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 growth. With that, Laurie, can you please open the call for questions?
Certainly.
Your first question comes from the line of Manav Gupta from Credit Suisse. Please ask your question.
Good morning guys and congrats on the big beat somewhere in the mediocre beats of 1Q, we were all hoping there would be a big hidden beat, a PSX like beat. And I'm very glad to see you guys deliver it. What was really good about this one was also the fact that last quarter you had Bricks, Pings and Crocs delivering the beat and this time it was Tyler and El Dorado, so the entire portfolio is working. My question is more on the midstream side. Uzi, when we look at the Big Springs gathering project, management and investors both see an eye to eye on it, right?
It's a great project. Everybody loves it. The views on PGC were always a little divergent. Delek management made a very strong case for it, but investors really never fell in love with it. And that's why when it did not proceed, the stock actually outperformed.
What I'm trying to understand is how do we ensure that the next midstream project, which replaces PGC, looks more like the big springs gathering project or project which investors like right away versus management being forced to make an extra effort to bring investors on board? Any comments you could offer on that in that direction?
Well, first of all, thank you, Nuna, for the kind words. The team really worked really hard here over the last few months to make these initiatives happen. So and I'm very proud of what we achieved. Vis a vis your question, the long haul strategy is something that we need to clarify and we probably didn't do a good job last time with PGC about the long haul. Our intent all along is to use the excess barrels that we get from our gathering to utilize and to move these barrels both to Midland and to some other places.
Obviously, we don't want to destroy our own market. So we don't our commitment and all along it was our commitment that we will not enable new projects. Also, we want to make sure that we are supporting our producers and the long haul project should be at least 5 to 7 times EBITDA. And that's on a fully fund project. Obviously, as we mentioned in the past, we're looking at project financing as well, which if we do it at 60% or 70%, the return if we you take the 5 to 7 times EBITDA, the return will be pretty healthy.
Lastly, I want to emphasize what we just said that there are several announced projects. We are looking at a few of them and we will make a decision about them when the time due and we'll notify the market.
Thanks, Fotaz. And Uzi, a quick follow-up. DK leases pipes from HEP and has an agreement with HEP that expires somewhere in 2020, if I'm correct. Any comments if you plan to renew it?
Well, the HEP agreement was something that we got from Alon. It expires, I believe, by the end of this year. We did work with several prospects how to go about it. And we are very, very close to making a decision to go with one option and we'll notify the market once we do so.
Thanks, Susie, and congrats on the beat again.
Thank you.
Your next question comes from the line of Neil Mehta from Goldman Sachs. Please ask your question.
Hi, good morning. This is Carly on for Neil. Thanks for taking the questions. The first one is just on Midland spreads. I think the expectation is still for Midland diffs to narrow as we move through 2019 as more pipes come online.
But we've seen those widen more recently. So can you just talk about what you think has driven the recent moves in the diffs and then how you expect Brent Midland to trend in 2019, 2020?
Well, Carly, thanks for taking the time to ask the question. The dip in the second quarter and probably early Q3, why? Because we are balanced now. As we get more pipeline, we expect the diff to narrow in Midland. However, I want to emphasize something here.
That's all dependent on one big thing, the offtake capacity at Corpus. And I'm not sure that the situation in Corpus is clear. And if the terminalling in Corpus and the docks in Corpus are ready to take some of these barrels. So we may see another wider dip going to the Q4 and the Q1 before things will sort themselves out with the corporate situation. The corporate situation is pretty much convoluted situation at this point with several pipelines trying to connect to very few active terminals.
That's one thing. Now it doesn't change the fact that in our mind, in the long term, that's our strategy. In the long term, the situation of being close to the barrel and as we know the gathering system in Big Spring and we saw how good it did, this quarter, the gathering system in Big Spring will allow us to enjoy the quality of the barrels. And by the end of the day, all these barrels need to be exported not to the Gulf, but somewhere in Europe or Asia. So by the end of the day, the dip that we are looking at is much more impacted by the Midland brand versus Midland WTI.
That's great. Thank you. Appreciate the thoughts on that. And then the follow-up is just around cash flow, looked quite strong this quarter. Just wondering, 1, if there was any working capital impact to call out in that number?
And then also just wondering if you can talk about views on capital returns for the rest of the year following another strong quarter on both the buyback and the dividend here.
Sure. Good morning, Carly. First, I'll start with the cash flow. There was some headwind to the cash flow. We built roughly 800,000 barrels of inventory in the Tyler refinery.
So that was basically offsetting the great cash flow in the quarter. With that being said, even with that, it was a very strong quarter for Q1. As of capital return, as you know, we are committed to return excess cash to shareholders, and this quarter was no different. As a result, it came stronger than even what the market anticipate, materially stronger. We upped the buyback this quarter to 60,000,000 dollars And on top of it, we also increased the dividend.
So no change in our direction there.
Great. Thank you.
Your next question comes from the line of Phil Gresh from JPMorgan. Please ask your question.
Yes. Hi, good morning. A couple of follow-up questions or I guess clarifications. One would just be on the long haul pipeline. I know it's already been asked about.
I'm just trying to think a bit maybe mathematically about this. In your slides, you're implying $150,000,000 of midstream EBITDA improvement, about $50,000,000 or so of that is the big spring gathering. So it would be $100,000,000 I think still embedded in there for the long haul pipeline. You mentioned a 5 to 7 times build multiple, but you're also talking about potentially getting in on an existing pipeline. So would it be your expectation that you'd still be able to achieve something like that?
And would that be the order of magnitude of cash we should be thinking about? You also mentioned project financing. So I'm just trying to tie this all together. Thanks.
Good morning, Phil. There's one missing point in your question, which is the growth in the gathering system. We just need to remember that the gathering system continue to grow. And we upped the EBITDA this quarter to $40,000,000 to $50,000,000 slightly. But we have more and more producers coming to us more and more acreage dedication.
So I wouldn't assume that the EBITDA coming from the gathering system will stick to $40,000,000 to $50,000,000 That's one thing. We see more acreage and more barrels coming our way than we expected. By the way, the growth in the Permian Basin is a little bit than what we expected at the beginning of the year. We thought 700,000 barrels, we probably think now closer to 800,000 barrels this year, maybe even a little more. That's one thing.
2nd, about the long haul. The long haul, we were very clear in the past and we said not more than 5 to 7 times EBITDA. And that's without the project financing, obviously, that's fully funded. And the we still need to make a couple of decisions here, how we go about this because we certainly don't want to enable a new pipeline. And also, we want to make sure that we are picking the right people to go with.
Right. Okay. Second question on the quarter. Obviously, very strong quarter. If I look at El Dorado, for example, the gross margins there were just well in excess of our expectations.
And in your press release, you talked about being able to run full amounts of Permian barrels despite the downtime there. So was there an element of reselling Permian barrels in the quarter? I'm just trying to make sense of such a strong result despite the downtime.
So first, as we enter into the quarter, we did manage our inventory slightly different going into the turnaround in the El Dorado refinery. We basically lifted some of the hedges around the J. A. R. One agreement.
And as prices come up throughout the quarter, we hedge them internally. So there is a profit taking there from managing the inventory, as we mentioned on the cover of the press release. 2nd, we did sell during the quarter products that we produced in the prior quarter, and that provided, I will say, a tailwind to the quarter. And as Keith suggested, during the script, Uzi, Keith and Dennis suggested during the script, some of it will be reversed in the next quarter, roughly $12,000,000 But overall, if you look at the amount of crude we ran in the quarter, almost the majority of it was WTS, Midland and local crude, and we bought basically no WTI, which we supplement sometimes the refinery. So that was the ability to run fully and utilizing all of the 200,000 barrels a day that we have across the system.
So I can't say that we sold barrels, we just ran the right barrels, enjoyed inventory benefit. And of course, a very low RINs environment, as you know, the prices of RINs came down to at least the ethanol RINs to almost $0.12 to $0.14 a rain towards the end of the quarter, which really benefited the refinery.
Okay. Thanks. I'll turn it over.
Your next question comes from the line of Matthew Blair from Tudor, Pickering, Holt. Your line is now open.
Hey, good morning, everyone. Hey, Matthew.
Asi, it sounds like there's a few moving parts on the inventory picture. You had the LCM benefit of $52,000,000 You sold some inventory for $61,000,000 But I think there might be a 3rd portion here. What about the FIFO benefit at El Dorado, Big Spring and Krotz? Was there a positive tailwind here on margins in the quarter? And if so, can you break out the FIFO versus LIFO impact there?
Thanks.
Sure. So let's start with the effects. We had inventory benefit on the actual results, not the adjusted results, of $112,000,000 Of that, dollars 52,000,000 was LCM, lower cost of market, which we adjusted out. So we left with roughly $60,000,000 of FIFO gain FIFO or LIFO gains across the system, and we actually called it out in the press release on the first on the second paragraph. So results were benefited basically from 62 the adjusted results from $60,000,000 on inventory.
And basically, historically, all of Delek inventories were hedged at El Dorado, Krotz and Big Spring with J. A. Ron. Towards the early Q1 of this year and late last year, we lifted some of those hedges with J. A.
Ron and then we put them back across the year as we manage our inventory. So that was a very good benefit, and that's part of what we call the inventory management. I will point out though that even when you take out the $60,000,000 results are still extremely favorable. And as we mentioned in our bridge in the slide, commercial did an excellent job during the quarter by basically getting better netbacks across the board, buying cheaper barrels across the board and on top of it, we're able to renegotiated some intermediate product that's really benefited our quarter. And as you can see, we're now comfortable saying that in a much different environment today, I would say less crack spread, lower middle and beef, we can generate grossly $900,000,000 of inventory.
So I think the missing part is actually how commercial acted this quarter.
Okay. Sounds good. And then the $61,000,000 I guess inventory gain, are you able to split that out by refinery?
We have that between the refineries, but I think it's better that we'll report it separately. I don't want to go into specific detail this quarter at this point.
Okay. Sounds good. Thank you.
Your next question comes from the line of Doug Leggate from Bank of America. Your line is now open.
Hey, guys. Good morning.
This is Clay on for Doug. Just have one question on the Permian Basin. Obviously, demand there for fuels is very strong. Wondering if you can talk about the supply demand balance for that market and whether any impact is expected as peers extend their reach into Central Texas?
Are you talking about the product balance or the crude balance? I assume product.
Yes, the product balance.
Yes. Obviously, it continues to be very strong. As we know, a couple of companies that or actually one project was announced to expand to bring, I believe, 20,000 barrels or something like that, 25,000 barrels to the region. That will happen sometime in 2020, middle of 2020. We are not as concerned and I'll be clear why.
Still bringing it to the from the Gulf is $0.09 So at any given moment, dollars 0.08 or $0.09 So even somebody signs that take or pay or T and D and you look at it as a sum cost, there is the other portion of the part that people need to pay $0.08 to $0.09 to bring it up. So I do believe that we will continue to see very strong margin because we basically have long term agreement with different people. We have wholesale branded system over there that we don't expect people to change. And that if anything that we need to be comfortable with is the big spring netbacks.
That's awesome. Thanks for answering my question.
Your next question comes from the line of Brad Heffern from RBC Capital Markets. Please ask your question.
Hey, good morning, everyone. Good morning. Uzi, I just wanted to beat the dead horse a little bit more. But on the pipeline, can you just clarify what exactly the opportunity set is for that? You mentioned that you don't want to support another new build pipeline.
And so are you talking about buying into one of the projects that's currently in flight? Or are you talking about buying into an existing pipeline that's already online?
We have several options. And since we are in the middle of thinking about that, I would leave it to the comments we made earlier. I'm sure it would be it will clarify itself over the next few months.
Okay, sure. And then you guys talked last quarter about progressing a new DKL drop with the Krotz Springs assets. Can you give an update on that? And maybe more broadly just your thinking on the MLP in general right now?
Assi, do you want to take that one? Sure. For the
Crocs dropdown, we continue to look into the best way to do it, taking into consideration the agreements and the type of the assets, and we'll probably be able to discuss it with the market, at least on our decision, sometime next quarter. We still think we'll be able to accomplish the drop by year end. As of the MLP market, the market is still not as favorable. With that being said, we were very encouraged by the ability of our peers to access the capital markets in the last few weeks. So we do see some, I will say, strength and appetite from investors to buy into those units.
Okay. Thank you.
There are no further questions at this time. I will turn the call over to the management. Do you have any closing remarks?
Yes. Thank you, Laurie. I want to thank my friends around the table here, you analysts and investors for supporting us over the last quarter. I'd like to thank the Board of Directors of Delek US Holdings for helping us making it happen. And by the end of the day, without their support, we couldn't do it.
But mainly, I'd like to thank every employee of this great company that contributed to this another wonderful quarter that we just had. Delek US has a bright future. We'll talk to you soon. Thanks.
This concludes today's conference call. Thank you everyone for your participation. You may now disconnect.