morning. My name is Ella, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delekius Holdings Q4 Earnings Call. 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. Mr. Keith Johnson, you may begin your conference.
Thank you, Ella. Good morning. Would like to thank everyone for joining us on today's conference call and webcast to discuss DK's Q4 year end financial results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO Kevin Kremke, EVP and CFO and 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 and we are covering last segment and market information incorporated in the 4Q press release.
On today's call, Kevin will review financial performance and Fred will cover operations for the quarter before turning it over to Uzi to offer a few closing strategic comments. With that, I'll turn the call over to Kevin.
Thanks, Keith. We had a great quarter with record results and solid cash flow generation from our operations. As you can see on Slide 3, for the Q4 2018, Delek US reported net income of $121,600,000 or $1.48 per diluted share compared to net income of $211,100,000 or dollars per diluted share in the Q4 of 2017. On an adjusted basis for the Q4 of 2018, Delek US reported net income of $129,800,000 or $1.59 per diluted share compared to an adjusted net income of $47,600,000 or $0.58 per diluted share in the prior year period. Our adjusted EBITDA increased by 52 percent to $251,400,000 in the Q4 of 2018 compared to 100 $65,100,000 in the prior year period.
Our consolidated contribution margin improved to 285 $400,000 in the 4th quarter compared to $214,300,000 in the Q4 of the prior year. This was led by refining as it benefited from a wider Midland to Cushing crude oil differential that drove a contribution margin of $235,300,000 compared to contribution margin of $185,800,000 in the Q4 of 2017. Logistics also improved on a year over year basis. During the Q4 of 2018, our G and A and overhead expenses were higher by $30,000,000 on a combined basis, primarily due to the combination of higher expenses related to our incentive plan and refinery maintenance. We had great financial performance during the Q4 of 2018 and generated approximately $359,000,000 of cash from continuing operations as shown on Slide 4.
Taking into consideration our cash capital expenditures of $94,000,000 our free cash flow during the quarter was $265,000,000 This supported our ability to return $179,000,000 of cash to our shareholders. Slide 5 highlights our capitalization. We ended the 4th quarter with approximately $1,100,000,000 of cash on a consolidated basis and $704,000,000 of net debt. Excluding net debt at DKL of $696,000,000 we had net debt of approximately $8,000,000 at December 31. 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 alternative investment opportunities.
With the volatility in crude oil differentials and crack spreads, I wanted to highlight the potential EBITDA from our current operations. We have used variations of this slide in our IR decks in the past. Using a long term average of $2.50 Midland discount to Cushing and the crack spreads highlighted on Slide 6, our current operations have the ability to generate approximately $750,000,000 of annual EBITDA. Please note that this is before taking into account the Alky project at Krotz Springs that should be operational in the Q2 of 2019. We also included a potential benefit from the RINs waivers at our El Dorado and Krotz Springs refineries, which we have consistently received in the past.
That would bring our EBITDA potential to approximately $826,000,000 I'd like to note that the 5.32 ULSD crack spread used in this analysis is $15.65 per barrel. We've seen an improvement in crack spreads from the lows earlier this year. Current trading and the forward curve for March to December is similar to the long term average used in this case. As we complete our midstream initiatives, we should have the potential to generate approximately $1,000,000,000 of EBITDA before any IMO 2020 benefit. As we continue to develop our operations, our goal is to add less crack spread and differential dependent EBITDA over time through the combination of our midstream investments, the Alky project at Krotz Springs and our retail business.
On Slide 7, we highlight our disciplined approach to capital allocation that looks to balance returning cash to shareholders prudently investing in the business to support safe and reliable operations, while exploring opportunities for growth. We have discussed this in the past, but as a reminder, our goal is to use our financial flexibility to balance the different aspects of this program based on valuations of each opportunity and how it matches our strategic goals for the company, while factoring in market conditions and expected cash generation. As we think about different investment opportunities and the nature of the industry in which we operate, our goal is to maintain a strong balance sheet in an effort to provide flexibility through the cycles in this business as we focus on creating long term value for our shareholders. On Slide 8, I wanted to provide some guidance for modeling in the Q1 of 2019. We added a couple of items this quarter, including our estimated diluted share count, excluding Q1 of 2019 share repurchases and a market structure outlook.
We estimate based on the forward curve that our realized Midland discount and our gross margin would be in the range of $3.50 to $3.80 per barrel, which should help to continue driving cash flow generation from our operations. With that, I'll turn the call over to Fred.
Thanks, Kevin. During the Q4, our total refining system crude oil throughput was approximately 272,000 barrels per day. As shown on Slide 8, for the Q1 2019, we expect crude oil throughput in the refining system to average between 250,000,260,000 barrels per day. This takes into account the upcoming turnaround at the El Dorado refinery, which will begin on March 11, and downtime associated with the pump seal fire in El Dorado on February 6. The refinery was down for approximately 7 days following the fire and began operating at a slightly reduced rate on February 13.
It will remain at the lower throughput until the turnaround begins. During the Q1 2019, we expect the crude throughput at El Dorado to average between 37 1,000 42,000 barrels per day. On Slide 9, I want to highlight our capital spending and give you an update on a couple of projects. Our capital expenditures during the Q4 were $106,000,000 compared to $79,000,000 in the Q4 of 2017. For 2018, we spent approximately $317,000,000 Our 2019 capital expenditures are forecast to be $350,000,000 This amount includes $224,000,000 in our refining segment, dollars 18,000,000 in our logistics segment, dollars 18,000,000 in retail and $91,000,000 at the corporate level.
Spending on the Big Spring Gathering System is included at the corporate level for 2019 and is approximately $80,000,000 As I previously mentioned, we plan to begin the El Dorado turnaround on March 11 and the refinery is expected to be fully operational by around mid April. The expected cost is approximately $30,000,000 to $35,000,000 This is a shortened turnaround format that will allow work to be completed on the majority of the process units. During September, October timeframe this year, we have planned maintenance work on certain units to complete preparations to produce Tier 3 gasoline. Our alkylation project at the Krotz Springs refinery is expected to be operational in early Q2. We spent approximately $103,000,000 in total for this project through the end of 2018, and the expected total cost is approximately $130,000,000 Based on current market prices, the expected annualized EBITDA would be in the range of $40,000,000 to $45,000,000 As a reminder, this project should provide additional production flexibility across as it improves the ability to convert low value butane and butylene into higher value gasoline products.
The future EBITDA generated by the Alky unit will further reduce the portfolio's dependence on crack spreads. Progress continues on our Big Spring Gathering project. During 2018, we spent $79,000,000 and we expect to spend approximately $80,000,000 this year. This compares to our previous guidance of $125,000,000 to $130,000,000 for 20 19. The change is due to a number of factors, including optimization of routing and timing changes for some producers on the system.
Taking this into consideration, the expected total cost is approximately $170,000,000 compared to our previous estimate of $205,000,000 This system will still have the previously stated capacity of 300,000 barrels per day. Currently, we have more than 200,000 dedicated acres and expect this to continue to grow. This new business line has an expected annualized EBITDA in the range of $35,000,000 to $45,000,000 by 2022, including a crude quality benefit in our refining segment. Next, I'll turn the call over to Uzi for closing comments.
Thank you, Fred, and good morning, everybody. We had a great year in 2018. Our business generated record $854,000,000 of adjusted EBITDA for the year, which was 100 104% increase over 2017. We utilized the cash flow created by this performance to invest in our business, while returning cash to our shareholders. We laid out our strategy to grow our midstream business through organic projects with attractive multiples.
These projects should provide more diversity to our EBITDA over time. Our gathering system is progressing, and we continue to evaluate the potential combination of different pipeline projects. We believe this would create a more capital efficient and better utilized project for all our partners when it becomes operational. Also, a combined project should be beneficial to the supply takeaway balance in the Permian Basin. The combination of these initiatives grows our Permian Basin platform and along with other projects should help us achieve $370,000,000 to $390,000,000 of midstream EBITDA by 2020.
As shown on Slide 10, in 2018, total cash return to shareholders was approximately $445,000,000 or about 16% of our market capitalization on February 19. Our capital allocation program balances cash to shareholders with potential opportunities for growth. Currently, we believe our stock is attractive investment, and we intend to repurchase $50,000,000 of Delek stock in the Q1 of 2019. In addition, our Board of Directors approved a 4% increase in our regular quarterly dividend, which marks our 4th 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, Ella, we'll open the call for questions, please.
Our first question comes from the line of Neil Mehta. Your line is open.
Great. Yes, thank you very much. I appreciate the comments today. So, Luzhi, I want to start off on the PGC pipeline and the latest in terms of your commitment to developing that asset, it sounds like the message from the release and from the presentation today is you absolutely want to continue to grow the midstream business and logistics EBITDA as you diversify the business over time. But then what is the potential to farm out some of that stake or merge that pipeline with an alternative?
Well, we all first, good morning, Neil. We all know that in the past, and we've said it many times, in the past, not all announced pipelines will be built. We don't think that the situation is much different this time. We're working with our partners at PGC and also other opportunities to see if it makes sense to combine a few of these pipelines. We absolutely believe that our long term strategy, especially in light of the fact that our gathering is growing and growing faster than what we expected because of the trust of the producers in our gathering and the returns on the gathering.
You probably heard us say that we are expecting 4 to 5 times EBITDA on the Gathering as it grows. More and more barrels, we don't want to turn them away. So we are committed to continuing to grow this midstream asset or business, if you will, while at the same time, and we want to be very clear and balance the supply demand situation in the Permian Basin as we enjoy differentials as they get wide.
No, I appreciate that. And then Slide 6 was helpful in terms of framing out what your normalized EBITDA potential could be. Uzi, I guess the counterargument would be with just so much pipeline capacity coming online and and Plains moving forward, it looks like with their pipe as well. Is the $2.50 Midland WTI Midland a realistic base case? Or could we see a scenario where that differential actually inverts?
So your thoughts there. And then maybe if you want to combine that with your comments on it's not just about WTI Midland, it's about Brent Midland.
Exactly. And we heard other people, I'm sure some of your peers, Neil, will ask that question if we're cutting any production. And the answer is absolutely no. Because as you know, our company is not based on Midland Cushion. It's based on Midland Brent.
And that number, as of today, is little less than $10 So that $10 is a huge tailwind to our company and every barrel that we process, we make money. We are certainly preparing ourselves to the situation that the $250,000,000 is not $250,000,000 We don't think that there's a big chance that the premium will stay here for the remaining of 2019. It may do so. We just saw yesterday the numbers coming from the EIA saying that the production in January was 120,000 barrels more than what they expected before that and in February 150,000 barrels more than what they expected. So the balance in the Permian will shift again.
However, I want to be clear, we don't think that in 2020, we will see $2,050 and that's the reason we work other initiatives to compensate for this $2.50 The $2.50 are just an illustration for a differential over long periods of time and not a data point at any given moment.
I appreciate that. Thanks, Susie.
Thank you.
Our next question comes from the line of Manav Gupta from Credit Suisse. Your line is open.
Hey, guys. A quick follow-up on Neil's question. Uzi, I've known you a long time and you've never done a bad deal in your life. So we are basically seeing a little bit of an overcapacity here on the Permian. And I just wanted to know if you see these pipes which are coming on before you and for some reason they're not filled because another big E and P producers in Permian today announced a 17% CapEx guidance lowered.
And would you even consider the option of not going ahead with PGC if things don't work out the way you're thinking right now? Is that an option?
Manav, we do know each other for a long, long time. I don't think and we don't think that we should do any project that is not targeting 5 to 7 times EBITDA. So on the midstream side, obviously, the threshold, and Kevin laid it down on one of the slides here. So we certainly expect these returns, but that's our threshold to do a project 5 to 7x EBITDA. Now remember, these projects are long term projects.
They are not short term, but that's our threshold. And I don't think that we're going to change our mind in regard to any other project.
Okay. And looks like the Alon assets are actually outperforming the legacy Delek assets here in refining. So can you throw a little light of all the work that you're doing at Crocs as well as Big Springs that's allowing you to drive the beat over there?
Ati, do you want to take the question about Crocs?
Sure. So you can see with Crocs that we are continuing to run more a Midland type based crude, and this initiative paid off throughout the year. Also, as you remember, Krotz in the past was losing a lot of money because of its inability to sell its product in markets, and we are making progress on initiative to go to the wholesale market. And as you know, lower RIN prices really positively impacted us. And when you think about where we are today, RINs continue to stay very low, which is very helpful and supportive of the results of the quarter.
Okay. Congrats on the quarter, guys. And you just keep raising the dividend as you had promised to the investors. So great job over there. Thank you.
Thank you, Manav. Thanks, Manav.
Our next question comes from the line of Phil Gresh from JPMorgan. Your line is open.
Yes. Hi, good morning. I guess one more follow-up just on PGC. I guess has anything changed or do you have any maybe quantification around if you were to move forward with PGC, what kind of capital that would entail at this point? And if you're looking at these alternatives, I know it may be a little bit difficult to handicap because there's probably some moving pieces here, but order of magnitude, what you'd hope to save if you were to try to move forward with some other JV type of approach?
That's a great question. I understand where we're going from here. So let me be clear. We are just putting more numbers together as we understand the magnitude of every project. And I believe that in the next few months, we will be able to pin down the cost as well as what's the cost for Delek.
It depends on the how the it shapes up. However, I want to be clear, and I think Kevin was clear about that as well. We don't see us riding a big ship all of a sudden that prevents us from continuing doing the other things, especially returning cash to shareholders. We are very committed to that. So as we take into consideration the different projects, we also want to make sure that we are giving money or we are returning cash to our shareholders as we think that our stock is very attractive.
So if somebody thinks and I saw some analysts and we didn't respond to that, some analysts putting a check of $500,000,000 or $600,000,000 that we're going to put on the table and then all of a sudden there's no buyback over the next 2 years, let me just assure you and others that will not happen.
Okay. I think you just led into my next question, I guess, which is the buyback of $50,000,000 in the Q1, obviously, it's a step down from the Q1, but it's still, if you were to continue it, it'd still be a $200,000,000 run rate on a full year basis, which is not a small amount of your market cap. So is the idea here as the Midland diff has contracted that this new run rate is something you'd be comfortable with? Or how
should we be thinking about that? Phil, I'll tell I'll let Assi answer that one. He's much closer to that.
Phil, if you look at Page 6 of the presentation, we're showing here that with the ALK and some real waivers, we can achieve this year over $800,000,000 of EBITDA. When you reduce from that our CapEx of $350,000,000 and interest and taxes, we can actually generate close to somewhere between $270,000,000 to $300,000,000 of cash free cash flow this year, which is, as you can you're right there, it's more than 10% return to the shareholders. We are targeting roughly $80,000,000 in dividend based on the new dividend rate and the lower share count, which gives us about $200,000,000 of buyback. At current environment, and as you know, CRESPR has come up in the last few days. But in the current environment, we think that we can return this year roughly $200,000,000 in buyback, which makes up for the quarter roughly $50,000,000
Very helpful. And I was not on a DKL call because there was a competitor call, but is there any thought as to whether there might be some drop downs this year, some additional cash that could come from that? Or is that still TBD?
As we communicated on the DKL call, we are still on track to complete the drop down for by the end of the probably the third quarter between the second and the third quarter. And the EBITDA on that drop down is roughly $32,000,000 So if you're using even a 7x multiple, it will add over $200,000,000 to our cash balance, and it can fund projects and also buybacks. One thing we said and we will continue to say, we're not planning to leverage the company in order to do buybacks. We're planning to use free cash flow, which we have a lot of it to buy back stock.
Sure. Okay. Last one would just be on the OpEx. I've noticed a trend here, not just for you guys, but for others as well. But it's been trending a bit higher as 2018 progressed, particularly in the Q4.
So anything unique there for Delek that might step down again in 2019? Or how should we think about the refining OpEx?
Phil, we did highlight that in the prepared remarks. We have a combination of higher maintenance in the 4th quarter, which if you look at the guidance we gave, we're expecting that to be back in line for the Q1. And also, we have that was a great year for Delek US, big bonuses in the Q4. Other than that, Assi, do you want to add any more color to that?
Sure. So when you look at total OpEx for the company, we ended up the quarter with 165,000,000 dollars including that number reimbursement of $16,000,000 of the settlement we had, which mean our actually OpEx during the quarter was 181. When you look at the forecast that we have given for Q1, that number is lower by $6,000,000 to $16,000,000 below our Q4 run rate. And the difference the biggest number there, I would say, is a combination of incentive plan and unplanned maintenance, including some adjusting our accruals related to our OIL insurance. So overall, we do think that what we saw in Q4 is abnormal, and we expect Q1, if you could use the mid of the range, of $170,000,000 to be $12,000,000 below what we saw in Q4.
Okay. Thanks very much. I'll turn it over.
Thanks, Phil.
Our next question comes from the line of Brad Heffern from RBC. Your line is open.
Hey, good morning all.
Hey, Brad.
You mentioned in the prepared comments the 4 dividend increases in 5 quarters. Congratulations on that. I was just curious, what the trajectory looks like going forward? I mean, you have kind of been stepping it up over time and I think maybe that was just gaining comfort with the performance of Elan. But how do you think about the dividend longer term in terms of growth or sustainability versus the buyback and so on?
Yes. You said it right. We target it to be sustainable through the cycles of the business. And we also aim to stay in line with peers. And at 3.2% dividend yield, we're pretty much in line with peers now and we'll continue to look at that quarter over quarter.
So given the as Assi mentioned, the cash generation profile of the business for 2019, we feel comfortable with where we're at we'll continue to look at it every quarter.
Okay, thanks. And then a question on El Dorado. I noticed this quarter that the crude slate, the WTI crudes dropped pretty significantly and then the other crude line increased. So I was just wondering what that other crude is and what the dynamics were there?
We will need to get back to you with that. This is I'm not sure of anything abnormal in El Dorado with the crude slate.
Yes. Go
ahead, Dexter. We'll definitely follow-up with you.
I think they may have run a little bit of WTS in there that may have swung it around on what you were seeing. And of course, you see the operating rate here in the quarter as well. So that was probably playing a role on the percentage of breakdown that you're seeing on the crude slate.
I want to add you didn't ask, but I'll volunteer my opinion here, Brad. We do see WTI, WTS pretty much at par now. However, the price of the volume of the bread, the asphalt, especially in the El Dorado market, is actually close to gasoline, as crazy as it sounds. So we may heavy our slate a little bit after the turnaround.
Okay. Thanks.
Our next question comes from the line of Prashanth Rao from Citigroup. Your line is open.
Thanks. Good morning. Thanks for taking the question. First one, I just wanted to circle back. You guys have given some good color about how to think about cap allocation versus in terms of the buyback versus project.
But if there's some variability on the PGC in terms of pulling some capital out or redevoting it. I just wanted to get a sense of the balance of, on the one hand, the project that sort of the other alternative investments that you're looking at right now or evaluating versus where the stock is trading right now, which is at a historic discount, how would you think about if capital were to be freed up, just a sort of maybe more qualitative sense of how that apportionment would work in terms of those dollars that you free up? Is the project pipeline deep enough that that could all be recycled back into projects or would that free up some for incremental buyback?
I'll take that question. As you saw already in 2018, in the end, the free cash flow went to returning to the shareholders. And as we saw that through the very good Q4, we stepped up the buyback during the quarter to $170,000,000 almost $157,000,000 We don't have any huge project on-site at the the businesses and or the PGC pipeline. So I would say the idea of Delek is not to look for with the X money and just do project, but the investor is really in front of us, especially when the share price is trading when it's trading.
Okay. And guess it kind of leads me into my second question, which is on the forecast case EBITDA. I appreciate the walk you guys have provided here. I just wanted a little bit more color on the step up from the 826 to the 991, that's the long term midstream initiatives. Sort of a sense of how much of that is the big spin gathering?
How much of that is the long haul type? What's in that bucket? And sort of a sense of how much variability that could be or where that how that could show up during the year? Okay.
So let me take that one, Assi. As Fred mentioned in his prepared remarks, we were able to optimize our or to do a little better job with our gathering system. And I want to be clear, we have partnered with that system. The producers, obviously, are our partners. And I think the commercial team did excellent job putting it together.
We see more and more people coming to us as a point of interest when they come with new production. So that number of 1 placeholder of $150,000,000 may change as we get more and more producers into our system. And while we started that system a year and a half ago, we outgrown what we were expecting. And no reason to expect that 2019 is going to be much different than that. I know that many people think that this is a competitive market.
However, being the only refiner in the area helps a lot. So with that being said, and the returns, as we said, as Fred mentioned in his prepared remarks, the returns are 4x to 6x EBITDA, then we need to look and say what other projects give us that return. And that's the reason we put everything together as a placeholder versus breaking it down, if this makes sense.
Our next question comes from the line of Blake Fernandez from Simmons Energy. Your line is open.
Hey, guys. Good morning. If I'm
not mistaken We miss you, Blake. Yes, thanks. Good to be back. Welcome back.
Thank you. I'm probably not going to get very far on this, but in March, I believe you typically get your RIN waivers and biodiesel tax credits. And I just didn't know if there's any kind of update you had there or any thinking there.
Well, the shutdown of the government didn't help here. However, we think that we still have a good chance, and we mentioned that, to get the 2 waivers, the 2 refinery waivers. And we're working with the government. I actually think that there's some progress made around that. The BTC, the Bardisela Tax Credit, We're working with our partners.
We will update you over the next couple of months. But as Assi mentioned in his prepared remarks on Page 6, we just show the magnitude of these 2 waivers. We did not include the BTC waiver the BTC tax credit, which usually get it retroactive for last year.
Right. Okay. Fair enough. That's helpful. The second piece, this is a little bit, I guess, unconventional.
But in looking at your interest expense, you have in your general slide pack a waterfall and kind of uses of cash and your interest expense is about $120,000,000 which is basically in line with your growth CapEx. And I know your balance sheet overall on a net debt basis is very under levered, but you are carrying a decent amount of cash. And I guess I'm just wondering, it sounds like based on Assi's comments, you're not looking to dip into that in order to fund buybacks. So I guess I'm wondering, is there an opportunity to maybe delever a bit, get that interest expense down if you're carrying $1,000,000,000 or so of cash here throughout the balance of 2018 and into the future?
By the way, Blake, don't take $100,000,000 away from us. We work very hard for this $1,000,000 Why are you saying $1,000,000,000
Sorry to shortchange you there.
Okay. Yes, I mean, part of our capital allocation philosophy would look to potentially delever over time. I mean, sitting here at 0.8 times today, we're more than comfortable with the current leverage profile. And as you know, last year, we refinanced the entire balance sheet. And today, for example, the term loan DK is LIBOR plus 2.25.
So reasonably efficient cost of debt capital and the ABL bears even lower interest rate than that. But it's a balance of using cash to do share buybacks, delever, invest in the business. But I would say, in general, we're more than comfortable with where our leverage is today.
Okay, got it. Thank you, guys.
Our next question comes from the line of Doug Leggate from Bank of America Merrill Lynch. Your line is open.
Hey, guys. Good morning. This is Clay on for Doug. It seems like from your comments you have a goal of adding stable midstream cash flow to your portfolio and you don't have to look far for undervalued assets. I think you own some at DKL.
So my question is, how would you feel about buying out the LP similar to Bolero?
We've looked at the performance of the MLP market and specifically ours, and it wasn't extremely good in the last since actually 2015. With that being said, with the growth opportunities, the DK, the potential drop down, we still think there is a value, at least for now, in holding the EKL as a public company. With that being said, the Delek are not ignoring the fact that there is almost no equity available and the trading is very limited. So what we want to do is to make sure that we are developing a long term strategy for DKL. If we can execute it and we will get value for it, DKL will continue to operate as a public company.
Otherwise, we'll have to consider doing what Valero did.
No, that's not an easy one. So I appreciate your answer. My follow-up is just on your near term view for WTI Midland. Just wondering if you're optimistic for another dislocation prior to the year end pipeline starts.
I'll take that one. We watch that very carefully. And what we see now is similar to what we saw last year. And when prices went down to $45 $46 we saw a big slowdown coming from the producers. The idea of cutting CapEx, you probably follow that as much as we do even more.
However, we see activity picking up in the Permian Basin, And we won't be surprised if we will see $4, $5, $6 differentials coming back over the next couple of months as offtake capacity tightening up. However, and then the 3rd quarter, when we start seeing the 3 pipelines that are supposed to come, we expect this to narrow back. I want to be clear about one thing that we are checking very carefully. I don't know that the terminals at Corpus will be ready for the export once these pipelines come online. So that's a question that may even if the pipeline capacity comes online, which we expect it will, I'm not sure that we will have all that export all these wells exported day 1 because of the constraints in the terminal or the constraints in the terminals around the Corpus area.
Thanks, guys. I'll leave it there.
Thanks, Clay.
Our next question comes from the line of Matthew Blair from Tudor, Pickering, Holt. Your line is open.
Hey, good morning, Uzi, Aussie, Kevin and Fred.
Hey, Matt.
Hey, I just wanted to ask about the Q1 guidance for this realized mid cush discount of $3.50 to $3.80. It looks like that's actually narrower than what the market would show, which we found a little surprising. I think you're on FIFO accounting at 3 of your 4 refineries. There should be an extra lag going through. And normally, we would have thought that you would post a wider MidCush discount in a period of narrowing diffs.
And so I don't know, could you just walk through that? Are there hedge impacts rolling through that would contribute to this narrower diff here?
First, Matt, I was lucky enough to read your note this morning and I think even last night, and I saw that you spoke about the Delek accounting and the impact on the financials. What we posted here was the actual 1 month delay, not 2 months delay, as you suggested. And I will say that probably due to year end, the inventory impact and LCM, we think at this point that this is how it will show up. It may come up different, but right now, we are confident with the 3.5 roughly dollars of differentials for Q1.
Okay. Sounds good. And maybe could you also talk about just retail in the quarter, fuel margins really strong, but it looks like you were down on merchandise margins and merchandise sales. What were some of the headwinds on the in store side of retail?
Well, let me be clear. We weren't down. We weren't as high or we were expecting. So let's talk about the margins. We try to optimize our system.
And as we start introducing other programs, it eats into our margins initially, mainly the foodservice side, which we expect eventually to pick us up. That's one thing. 2nd, in terms of sales of inside sales, we didn't see something anything abnormal. So I wouldn't read too much into it.
Got it. Thank you.
The next question comes from the line of Jason Kedelman from Cowen. Your line is open.
Hey, morning, everyone. I just wanted to circle back on the Krotz Springs performance in 4Q. It's obviously very strong. I think it was one of the best margins you've guys posted for a number of years at the site. And I know you mentioned some of this was due to just running more Permian crew through there.
So I wonder if you could break down how much of the benefit was kind of a transitory impact seeing as the Permian discount has narrowed since the quarter ended and maybe you won't get that benefit at Crocs moving forward? And how much of it is due to maybe more structural things going on the ground? Thanks.
I'll let Assi answer the fact. I'm just going to tell you that don't be surprised if come second quarter and margins, of course, will improve even further just because of the fact that the ALK will come online. And as we said, that's $40,000,000 to $45,000,000 and we're at the final stages of this project. Assi, I don't know if you want to take to make few more comments.
Sure. So even in Q1 environment, when you think about it, when the Midland beef is roughly $3.5 With transportation costs, we could land in the crude in the Krotz Springs refinery. And this is the Midland one. It's even below WTI. And you think about the alternative for this refinery to run a less barrel that is trading $8 to $9 over WTI, there is still a lot of value running almost 60% of the crude as a WTI slate.
So as I want to say that it's still running midland is very beneficial for the refinery. As we all know, prices of crude came up during the Q1, and they are actually from when we finished them in the end of the year, which also provide us the ability to enjoy the product positive yield we have in the refinery. We actually produce more than what we buy due to the way the refinery works. So it's actually in the higher crude prices, we are doing better. So together with the algae, I think that a lot of the changes that we saw in the cost over the last year are permanent, and we are very encouraged by the fact that we have a WTI refinery located in the Gulf Coast.
Great. Thanks a lot. I appreciate the color. And then just quickly on the cash flow statement. It looked like cash from ops came in pretty strong, but also financing cash outflows were a bit higher.
Can you just provide some color? I don't know if there was a working capital impact and anything else for the quarter? Thanks.
Yes. So we did see a working capital improvement for the quarter. It's like all things working capital, it's a bunch of puts and takes. AR was an improvement of a little over $200,000,000 Prices were down, so that was a driver, but also Q3 ended on a weekend. So quarter over quarter, we picked up a couple more days of receivables.
And then the other big driver was inventory. And then with the LCM impact, we had, like at Tyler, for example, 700,000 barrels less inventory sitting on the books. And then Q4 over Q3 Midland prices were down about $2.25 or so. So big movers there. And then obviously net income favorability quarter over quarter was helpful.
Our next question comes from the line of Benny Wong from Morgan Stanley. Your line is open.
Hey, good morning guys. Just noticed your number of stores in the quarter kind of took a dip there. Just wondering if you guys sold some of your retail sites and if you did, is that part of the longer term strategy to kind of sell that down? Just looking for an update in terms of how you view that segment.
We did sell Benny, that's an excellent question. Good catch. We did sell a few stores in the Waco market. We exited that market. That's part of our strategy, and we were very clear that we will take underperforming stores, sell them, convert them to dealer and continue to sell fuel from the Big Spring refinery and take these means and use them to build our megastores.
Actually, we just opened a new megastore in Midland, the first one, and we have outstanding results. So the strategy will be all along, like we did with the macro stores, to get rid of underperforming stores and at the same time, take the money and build the mega stores, the new generation stores. And obviously, that's a long term strategy, but as we all remember, it paid off when we did the Merkru transaction.
That's great, Uzi. We really appreciate the color. This follow-up question is really to build upon the prior questions on the dividend. I know you guys want to set that at a level that can be maintained through the cycle. Just curious how you guys define that or look at it, particularly with your significant logistic growth over the next couple of years.
Is there a leverage target or a payout ratio that will make sense for us to kind of think about as we go forward?
Yes. We haven't really targeted a specific payout ratio necessarily. As we walked through the free cash flow earlier, so targeting $80,000,000 a year in dividends gives us $200,000,000 of cash available for share buybacks. And as we continue to buy back shares, obviously, the dividend burden becomes lower. So, with a lower share count, we'll potentially look at increasing the dividend further.
But as I said earlier, our intent is to stay in line with our peers.
And Benny, I want to add one more thing to what Kevin said. I'm sure you saw that on the sheet the guideline sheet or guideline slide that our number of shares are now expected to be below 80,000,000, dollars and we're working our way toward getting back to almost pre a loan transaction with the number of shares. So that's the strategy all along.
Great. Thanks guys. Thanks, Uzi. Thanks, Kevin.
Thanks, Benny.
Our next question comes from the line of Paul Sankey from Mizuho. Your line is open.
That you're circling for EBITDA. What are you thinking about IMO within that? And could you extend the commentary into the outlook for oil markets? I know you've sort of addressed this, but I was wondering if you think that sanctions will be imposed on Iran. Thanks.
So first, we didn't know we did not factor any IMO numbers into anything here. We do think that there will be a benefit from IMO, but that's not part of the numbers. That's the reason we think that there should be continued upside from these conservative numbers like we showed in this quarter or even previous quarter. That's one thing. 2nd, the sanctions on Iran, I think the combination of Iran, Venezuela and the OPEC cuts, as we all see in the marketplace, drive the heavy sour spread higher.
So if this continues, then our position as running light sweet barrels mainly not mainly entirely coming United States should pay off.
Okay. So you think you're a beneficiary of the current market environment? And do you have a sense for what impact IMO could have? Thanks.
In our internal modeling, we use sometimes $1, sometimes $2 for 18 months.
Of what?
Of bare crack space, 532 bare crack space.
On IMO? Yes.
All
right. Okay. Thanks, Susie. Hope you're well.
Thanks, Paul.
We have a follow-up question from the line of Neil Mehta from Goldman Sachs. Your line is open.
Yes. Hey, sorry to circle back. Really two quick questions here. Kevin, did you call out the working capital number in the quarter? When was it again?
The total working capital benefit, we didn't call it out, but it was somewhere on the order of a little over $200,000,000 Okay,
great. And then the follow-up is just El Dorado. Can you just talk about what happened at the asset and with the game plan to get it back online?
Greg? Sure. Hey, Neil. So we had a fire on a pump seal in one of the areas of the crude unit. Fortunately, that wasn't a critical area and it allowed us to be able to restart the refinery within about 7 days.
All of the damage that existed if we haven't already repaired it will be fully repaired at turnaround during March.
Great. Thanks guys.
There are no further questions at this time. I would now like to turn the call over back to the management for the closing remarks.
Thank you, Ella. I wanted to thank my colleagues around the table here for a wonderful, wonderful year. I want to thank you investors and analysts for your confidence and interest in our company. I'd like to thank my friends, to the Board of Directors for their continued support. But mainly, I'd like to thank our employees for making this company the great company it is.
Have a great day. We'll talk to you soon.
This concludes today's conference call. Thank you for your participation. You may now disconnect.