Earnings Call: Q2 2021

Jul 29, 2021

Good day, everyone, and welcome to the PBF Energy Second Quarter 2021 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the management's prepared remarks. Please note this conference is being recorded. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin. Thank you, Laura. Good morning, and welcome to today's call. With me today are Tom Nimbley, our CEO Matt Lucey, our President Eric Young, our CFO and several other members of our management team. A copy of today's earnings release, including supplemental information is available on our Web site. Before getting started, I'd like to direct your attention to the Safe Harbor statement contained in today's press release. In summary, it outlines that statements contained in the press release and on this call, which express the company's or management's expectations or predictions of the future, are forward looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we describe in our filings with the SEC. Consistent with our prior periods, we will discuss our results today, excluding special items. In today's press release, we describe the noncash special items included in our Q2 2021 results. The cumulative impact of the special items increased net income by an after tax benefit of approximately $200,000,000 or $1.65 per share. As noted in our press release, we'll use certain non GAAP measures while describing PBF's operating performance and financial results. For reconciliations of non GAAP measures to the appropriate GAAP figure, please refer to the supplemental tables provided in today's press release. I'll now turn the call over to Tom Nimbley. Thanks, Colin. Good morning, everyone, and thank you for joining our call today. As we to coming into this year, general market conditions are continuing to improve. Before providing comments on the market, I would like to address last week's decision by the Board of the Bay Area Air Quality Management District to implement stricter particulate emission standards related to fluid catalytic cracking units or FCCs. The Board has set a numerical standard and we have 5 years to meet it. Importantly, how we meet that standard is entirely up to us. They have not required us to install any specific technology, including a wet gas scrubber. As such, we will not have to incur the estimated $800,000,000 that this project would conservatively have cost. What we are doing is progressing a project included in our capital plan for this year that will get us below a 0.02 emissions level, which is a long way towards the 0.01 level established by the recent rulemaking. After that project is complete, we will have time to test our emissions and identify possible changes that could potentially reduce emissions further. Last week's rulemaking was another step in an ongoing process. We anticipated the outcome. We expect that the rule or parts of the rule will likely face legal challenges in which the California Environment Quality Act requires a mandatory mediation between all parties. We appreciate the support we see from the Building and Trade Unions, Western States Petroleum Association and other business partners in our efforts to present alternatives that achieve the mutually desired goal of improving air quality, while continuing to supply our products to one of the largest markets in our country. I want to reinforce the fact that we have many potential options and time to address the newly implemented standard. 5 years, which as one analyst noted last week is a lifetime in refining. Moving to the present, the refining market has improved somewhat as we expected over the course of 2021. The recovery continues. Inventories have fallen back within historical bands. Demand is improving. With gasoline and distillate at or above pre pandemic levels, jet demand has increased to 80% to 85% of pre pandemic levels, up from 65% earlier in the year. Benchmark cracks improved during the quarter, driven in part by rising gasoline demand, but the realized crack continues to be hindered by the high costs associated with RINs. We saw a softening of the gasoline market late in the quarter, which in part was driven by an increase in imports. More recently, we've seen an improvement in gasoline margins as European demand has improved and refinery issues in other regions have reduced transatlantic shipments. On the crude side, ongoing discussions and production limits by OPEC plus have kept global crude prices elevated and the light heavy spreads narrow. The European now is to be in agreement in principle that will allow the expected OPEX Plus output increase to proceed through the rest of the year. And we believe this could help maintain overall prices and provide incentives for more production to come to market. With the incremental crude being predominantly heavier, higher sulfur crude, we expect to see some additional lighting of the light heavy sweet sour spreads. Demand remains the key driver. Domestically demand continues to gradually improve and we see the next inflection point coming towards the end of Q3 as the nation's students return to school, which should allow more parents to return to normal work routines. We expect as this occurs going forward, we will also see increasing business travel, which should incrementally improve jet demand and margins. Internationally, the recovery has been less consistent, but we expect those regions to recover, which should set the stage for gradual but sustained growth in product demand globally. With that, I will now turn the call over to Matt. Thanks, Tom. As Tom mentioned, market conditions are trending in the right direction. Our aggressive efforts to improve PBF's competitive position should help accelerate the company's recovery. In regards to the rulemaking in California, and as Tom mentioned, and I will say again, big takeaway from the rulemaking is that we will not be required to install a wet gas scrubber that was infeasible from a land, cost and water use perspective. As part of the Martins acquisition, Shell agreed to pay for new reactors for the refinery's cat feed hydrotreater. These reactors are on schedule to be delivered towards the end of Q3 and we intend to install them during scheduled work in the Q4. The new reactors will reduce the sulfur and other particulate matter in the feed to the FCC. We believe that improved feed will directionally improve product quality and lead to a reduction in particulate emissions from our FCC to below 0.02. The installation of the reactors, which will amount to less than $20,000,000 was included in our initial capital planning for 2021 and represents 0 incremental spend. The reduction in emissions will begin to be realized in the Q1 of 'twenty 2. Once we've had the time to evaluate the results of this project on our FCC emissions, we've identified additional potential to continue to work with the refinery and the AQMD to reach the new standard. In the Q2, our refineries ran well at approximately 875,000 barrels a day of throughput. We expect to run similar volumes in the Q3. We are now completing turnaround work at Torrance. The bulk of the work occurred in July and should be complete over the next 10 days or so. This turnaround is included in our throughput and capital guidance. Earlier this year, PBF announced a potential renewable diesel project at our Chalmette refinery. Our project is intended maximize the benefits of Chalmette's strategic location on the Gulf Coast with its excellent access to water rail and truck logistics, as well as our synergistic California logistics footprint. We are progressing discussions with partners to develop the 20,000 barrel a day renewable diesel production facility, which would include a pretreatment unit. We've continued our detailed review of the project and expect that once we reach final investment decision, our project will be capable of coming on stream within 12 months at a significantly lower expected cost and similar announced projects. An important step in the process and in determining the economics of the project were the ongoing negotiations in Louisiana to secure state tax incentives to help bring this renewable fuels and economic development project to the region. We are pleased to announce that earlier this week, we received approval for these incentives. We work closely with the state and our neighbors in the St. Bernard Parish and wish to thank all those involved in advancing the project. With this necessary step accomplished, we look to finalize partner discussions and move to final investment decision in the coming months. In regard to RINs, I've said many times over the last 10 years, the program is broken. You can say, what does that mean? The program is not administered fairly and there are winners and losers on a massive scale. Furthermore, as currently administered, high RIN prices do not increase ethanol consumption. Simply put, the facts show that high RIN prices did not get the ethanol industry past the blend wall. Therefore, the program operates with an insurmountable annual shortfall. Now we come to the point where the program does not get fixed, it actually breaks. We are now more than halfway through the year and still do not have an RVO. If the RVO percentages are held constant in 'twenty one as they were in 'twenty, the Rinbank which has been depleting will actually run dry sometime and potentially as soon as the end of this year. RINs are effectively permits to sell gasoline. If not enough RINs are available to meet the mandate, refiners will be forced to sell domestic gasoline proportional to the RIN supply. If at that point, the program still goes unaddressed, RIN prices will skyrocket beyond the ludicrous levels they are today. Consumers will be forced to ration gasoline consumption and pay even more exorbitant prices for the fuel that is available. Refiners will be forced to export gasoline because of their insufficient RINs, the gasoline cannot be sold domestically. And obviously imports will be limited because there will not be enough RINs available. The EIA noted there was $800,000,000 deficit in RIN generation in 2020 compared to what was needed to meet the RVL mandate. This means there was an equivalent drawdown in the RIN bank, which according to EPA data likely puts the bank at around R2.6 billion as of the beginning of this year. If we look at current projections for demand and assume an RVO flat to 2020, '21 RIN the 20 20 one's RIN requirement is over 2,000,000,000 RINs more than what we're on track to generate this year according to EPA data. Say it differently, the current pace of RIN generation compared to the RBL will result in a $2,300,000,000 drawdown in the RIN Bank in 2021, leaving only R300,000,000 RINs remaining at the end of the year. That rate of both fuel demand and the RBL remained flat for next year, the market could quickly run out RINs sometime in the Q1 of 'twenty 2 or perhaps sooner. The scenario above yet again highlights the fact that the RFS is dysfunctional. While I am hopeful that we will have action by the current administration that will enable us to have a workable program in the very near future, I am virtually certain the issues will need to be addressed before 2023, which is the outside compliance date for 2021 RINs if you choose to exercise a deferral for the '21 program year. The EPA, Congress and the administration have created uncertainty in the market with continued delays in setting the 2021 RBL and risk economic calamity and consumer outrage if they let the above scenario unfold. At this point, given recent news, we know the administration is aware of the situation and believe they will take action to avoid the crisis. Now I'll turn it over to Eric. Thanks, Matt. Today, PBF reported an adjusted loss of 1 point dollars per share for the 2nd quarter and adjusted EBITDA of $2,100,000 Important to note, included in the adjusted EBITDA figure is approximately $298,000,000 of rent expense during the Q2. Consistent with our prior disclosure, this represents a full accrual of our expected RVO for the period plus the mark to market adjustment for our carrying value of credits. Consolidated CapEx for the quarter was approximately $79,000,000 which includes $77,000,000 for refining and corporate CapEx and $2,000,000 for PBF Logistics. For the first half of twenty twenty one, capital expenditures totaled approximately 140,000,000 dollars Consistent with prior guidance, we expect second half twenty twenty one capital expenditures to be approximately 250 $1,000,000 believe the 2nd quarter was an inflection point as we generated positive adjusted operating margin and we continue to believe the combination of an improving market backdrop and a more streamlined cost structure at PBF should continue to generate incremental positive cash flow. Our liquidity position remains consistent with more than $2,600,000,000 of total liquidity, including approximately $1,400,000,000 of cash at the end of the Q2. We continue to prudently manage our balance sheet and financial resources to provide flexibility for the near term. Our full financial statements were released this morning, and I would like to take a moment to help navigate one item in particular. In looking at our balance sheet, included in our accrued expense footnote, PBF reported accrued renewable energy credit and emissions obligations of approximately $1,100,000,000 This figure includes roughly $400,000,000 related to our current and future California environmental credit obligations and roughly $700,000,000 related to RINs. Related to our California environmental credit obligations, we expect approximately $250,000,000 of working capital outflows during the 4th quarter should satisfy more than $290,000,000 of the $400,000,000 accrual. Important to note, this payment represents in a 3 year compliance scheme. The $700,000,000 RIN related accrual consolidates our 2020 and 2021 compliance years. As we have previously mentioned, we currently expect to satisfy in full our 2020 obligation by the compliance deadline in January of 2022. In order to achieve this target, we expect to use approximately $200,000,000 in net cash through the remainder of the year. In addition, our RIN accrual includes an incremental $100,000,000 in fixed price commitments that we expect to cash settle throughout the remainder of the year. Having said that, the RIN market is dynamic and depending on how the market moves, there may be opportunities to take advantage of market dislocations to improve our position. Important to note, the 2021 proposed RVO has yet to be published and this is a key factor in determining our overall strategy. As currently available under the program, we can defer some or all of our 2021 obligation to March of 2023. Operator, we've completed our opening remarks and we'd be pleased to take any questions. Our first question comes from the line of Roger Read with Wells Fargo. You may proceed with your question. Yes. Thank you. Good morning. Morning, Roger. Just to come back, I think first off on the macro, Eric, you made the comment about it seems like you hit an inflection point in Q2. And then you talked, Tom, earlier about crude diffs probably opening up with OPEC Plus putting more oil in the market. 3rd quarter started a little weak, but has really improved in the last couple of weeks. Do you see something that is fundamentally better as we're progressing? Or would you attribute this to the typical volatility we see in margins? And I recognize there's a whole bunch of things that affect what's going on a daily basis. But I was just curious if things look a little bit better as you're paying attention to inventories, as you're paying attention to imports and then the guidance you put out in terms of volumes for Q3? Yes, Roger, there is a lot there, but you are spot on. We do think it's gradual. I wish it was a little bit faster, but there's clearly improvements in the market from a variety of reasons. We're basically below historical averages on all major clean products, a little bit higher on jet, but not much within the 5 year band. Certainly, they are on gasoline and distillate. Distillate is below the 5 year average. When we look at the cracks, they have been improving. We believe that's associated clearly with demand recovering. And as I said, distillate has been holding up all year. And in fact, even last year, it held up stronger than anything else as you're well aware. And in fact is above pre pandemic levels for this time in 2019. Gasoline is just about at that level and demand continues to improve. And that's the key, to be honest, that is absolutely a key in that if jet does not improve, that will keep the ability for the refiners to run more limited because of the jet limitations. That being said, the industry is running at 91% utilization. So we have this demand getting back to levels of 2019 and we have over 1,000,000 barrels a day less capacity than we had in that period of time. And that's why utilization is at 91%. So demand looks like it's recovering. Certainly the inventories are in control. If you look at the light heavy spreads, sweet, sour spreads, compare them to the beginning of the year, mostly that heavier, higher sulfur crudes, Maya, Arab medium, Kirkuk, all of the crudes that have higher sulfur have moved out about $2 a little more than $2 from the beginning of 2021 to now. And as I said, when you start bringing on 400,000 barrels a day more crude each month, it's all going to be incrementally basically medium, heavy, higher sulfur crude, which should work to the advantage of high complexity refiners like PBF. Okay. Thanks for that. And then, I know this is not something that gets answered in any one question, but as you think about the RFS and the RINs program, there's what you want and there's what might be achievable from a political standpoint. And thinking about what has happened with previously with the Obama administration, they did at times tweak the RVO, the Trump administration more of the SREs, which seems a little tougher solution here politically given some recent legal issues and pushback from the RFA and all. But I was just curious, what do you I kind of get it, if you get rid of the program, you're happy, but that's not happening. So what is it you think would be reasonable within the political framework maybe to see the EPA do between now and year end? Is it as simple as simply resetting an RVO for 'twenty 1? Or is the deficit that you highlighted for the RINs Bank potentially so large that it has to be a step out kind of decision, not a tweak, but a rework? Hey, Roger, I would say a couple of things. In regards to a solution, there are many solutions and there are many easy solutions. But the first thing they need to do is make sure that the scarcity of RINs doesn't exist. So the simplest solution and one that has been talked a lot about is simply setting the RVL at a level where RINs do not become so scarce. And it's that's something that they could do with a snap of a finger. There's opportunities they can do to rework the program. Indeed, we're sort of engaged in all fronts with our partners with represented workforce. I think you alluded to it. There's no question about it. The Trump administration completely failed this program. They took away SREs, but were reallocating the volume. So it was sort of a double damning event. They granted E15 year round waiver, which was just overturned by the courts. And so I think the ethanol industry is scratching their heads saying, hey, how do we come to a workable solution now that Trump administration has gone. So I think there are other aspects of the program they can change, but the most simple one is setting an RVO that works for all the stakeholders. And I think they understand that. And we just need to get through the political process on that. Our next question comes from the line of Phil Gresh with JPMorgan Chase. You may proceed with your question. Hey, good morning. Eric, thank you for all the color around the accrued expenses piece. Just a quick follow-up or 2 on that. One is, it looks like it's $550,000,000 you're talking about in the second half of the year. And that number sounds consistent with the last quarter call, I believe. So I guess, should I just infer that in the second quarter? I think there was an initial plan to maybe pay some of that in the second quarter. Was it just pushed to the second half? And then related to that, I guess what you're implying is that about $500,000,000 of the RINs is for 2021. Just wanted to confirm that number. So 2 quick responses on that. I think folks should assume if we think about we had an overall RIN expense of almost $300,000,000 during the quarter. We did ultimately spend a little north of $150,000,000 on RINs throughout the course of the second quarter. At the same time, I think we've been fairly vocal. We've been active in the RIN market. And so ultimately, there are incremental purchases that are made to cover certain forms of compliance. And on a go forward basis, I think the key message is we today included in the $700,000,000 there's about 400 that ultimately is floatingfixed non fixed price commitments, right? So that's a mark to market adjustment. It's going to fluctuate if rents get cut in half, that $400,000,000 goes down by 50%. The $300,000,000 is what's remaining on the books fixed price commitments, dollars 200,000,000 of which we've allocated to our 2020 compliance. That is our first priority at this point is to ultimately show up at the end of January 2022 with our full RVO turned into the EPA. The remaining capital that we know we have earmarked through the remainder of the year involves the $250,000,000 of AB32 related compliance credits that we have a repurchase obligation that will ultimately hit in the 4th quarter. Okay, got it. And I guess could you give us an update, Eric, on how you think about operating cash levels? I in the past you've given a $500,000,000 number. I just wanted to see if that's something that would still hold in this current oil price environment? I think anywhere again, price of crude oil will be a key determinant in what we feel comfortable carrying from a cash perspective. I think today, absent anything that we're dealing with in terms of coming out of the recovery following the pandemic, yes, I think $500,000,000 is a more than reasonable number. And quite frankly, in a similar historical period, we've probably operated with between 2.50 $500 of operating cash. So I think that's a reasonable number though given the current market environment that we have for crude price in and around kind of a $70 $75 a barrel number. Okay, got it. That's very helpful. One last one, this will be for Matt. I think last quarter you were hoping perhaps to have a bit more color on renewable diesel on the progress of the project, I think, by this point. I guess, you got the approval this week for the incentives. So how much of that do you think was, I guess, a factor in the next steps of this process and the willingness to have partner step in versus say other things like feedstock or other issues you're still trying to figure out? It's a big project that has a lot of work streams that are simultaneous, obviously working with the state of Louisiana and bringing economic development potentially to that region. We are working that. We're working all aspects of it, not only the engineering coming to final costs, working with potential partner and doing the diligence around potential partner as well as them doing the diligence around us in addition to all the engineering work that you have to do on the front end to make sure that your project is going to be as viable as you think. So we continue to work it on all fronts. And quite honestly, I would characterize it sort of being right on schedule where we expect it to be. There's no big delays or anything. We're going to have to assess the market and decide to go forward and that should be done in the very near future. Okay. Thank you. Our next question comes from the line of Theresa Chen with Barclays. You may proceed with your question. Good morning. Tom, I'm curious to hear your view on what's happening in the East Coast currently. At this point, summer driving season is in full force and facilities in that area have rationalized capacity, including capacity at one of your own plants, though the quarter was noisy due to Colonial being shut down for 6 days and imports and such. Looking past all of that, can you talk about what is happening on a capture front or your expectations going forward on a normalized basis since there has been capacity rationalized and demand has rebounded and yet we are in the midst of working through the volatility of imports from Europe and elsewhere and that seems to have subsided at this point with the maintenance issues going on there. But just looking forward, what are your expectations for the East Coast? I think you are spot on and that there has been a lot of choppiness, particularly on the East Coast and that was once you get past the fact that certainly a lot more mobility in the East Coast as there is in the country. We're seeing that a lot more cars on the road, people are returning to work. And we do expect, as we said that even after we get past Labor Day and the traditional slowdown in the driving season might be countered by the fact that there will likely be more school buses on the road and more people coming back to work because their children have returned hopefully to a more normal life. The big thing on the East Coast in PADD 1 has clearly been the fact that there's been such a huge off between Northwest Europe and the Mid and North America and particularly the East Coast. Let's see, 2 weeks ago, we had imports of 1,400,000 barrels a day, significantly higher than we had in 2019. So I think one of the things that we're really looking for and hopeful on is in fact that Europe gets control of the pandemic or make strides and they seem to be doing in that area and their business environment improves and that is clearly happening. Cracks have moved up in the mid in Northwest Europe by several dollars a barrel. They're not where they need to be. But certainly, the imports, it will go down. And last week, yesterday's numbers were still elevated, but on a go forward basis, it appears as though they will be dropping off. That in combination with what we said about continuing increasing in demand, we expect the cracks to continue to improve. I will say that we are pleased with how the East Coast reconfiguration is done specifically in our environment. It does appear to be working as we intended. We effectively took the strengths of 2 refineries and kept them and eliminated some of the weaknesses, and particularly in Paulsboro on the fuel side of the business. So we hopefully will see continued improvement in PADD 1 and on the East Coast. Thank you. That's great color. And then maybe turning to the West Coast, in light of the commentary that you gave on the Bay Area Air Quality Management District's new standard and the projects and developments under contemplation to potentially meet that. And it seems like that in itself is a moving target given the arbitration process on coming. So just curious, in addition to the reactors that should decrease the particulate emissions below the 0.0 2 level. What other projects are you looking at that can further reduce that? Now let me just back up for a great question, talk about the project itself that we are implementing. As Matt said, that was a project that was basically contemplated and negotiated as part of the acquisition itself. And what we're doing is Shell has purchased these reactors and these reactors are going to operate at a higher operational severity than the current reactor. So they'll be able to run at a higher pressure, higher temperature. And the reason we wanted to do this project initially and importantly is that by increasing the pressure in the reactors and the temperature in the reactors, it increases the amount of sulfur, nitrogen, aromatics and metals that you take out of the feed to the cat cracker, which results in a higher yield pattern and a higher volume expansion across the FCC. It improves the quality of the cat feed. As a result, it also is the sulfur nitrogen metals contribute to particulate matter. So by taking it out in a Cat B hydrotreating, you reduce the particulate matter that is being emitted from the cat cracker and that's how we can get down below 0.02. There are myriad ways of trying to make additional changes, including feedstock changes, using additives to try to see if you can inject additives to reduce the particulate matter further, operational changes, many things that we have already been contemplating, but we want to see what we can get and prove that we can get at least below 0.02, but we think we're going to be able to do better than that with this project and then that will allow us to take the time, work with the agency. This is going to be mediated and I remain confident that we're going to get an acceptable outcome on this. Thank you. Our next question comes from the line of Doug Leggate with Bank of America. You may proceed with your question. Hey, guys. Tom, you gave a fairly thorough view as to how you're going to respond to this issue in the West Coast. But I just wonder if you could kind of spell it out for us. You've got a reasonable amount of near term flexibility to get below 0.02. What happens if the action as stated is truly in force, what does that mean for you guys then in terms of potential additional spend? Well, as I said, we actually think there's not going to be a huge amount or a material amount of additional spend. This project will get us, we say it's going to be below 0.0 2. We think it's going to be better than that. The agency itself has modeled this reactor improvement and it kind of agrees with that. But we have to demonstrate that. So we got to get the project online and see what our new baseline is. If it is where we think, we think that we're going to get very either there, maybe not there, but very close to there with the operational changes and maybe use of additives as I said. We're not going to be putting in a very large project. That's clear. But we have to first see what we get from this project and in the negotiation process or the mediation process, which is almost inevitable because some people are going to maybe even us would litigate this. We have to first see what we can get from the project. And I don't think we're going to wind up being in a bad position on this. Doug, it's important to note, we're replacing 50 year old equipment with these new reactors. And to Tom's point, there's a lot of computer modeling that's going on today, but until the full installation and implementation is concluded, we've got a lot of different knobs that we can turn. Folks need to understand these are very complex machines that we're operating out on the West Coast. And again, we feel confident that we're going to be making some progress, but let's get through the 1st part of 2022 when again we have a real live baseline and then can start changing different things and testing and going through the process that really needs to be concluded. Well, fellas, my follow-up is also related to this, because obviously one of your large competitors out there was talking about, they don't maybe have as good a solution as you guys might have and they're talking about north of $1,000,000,000 of potential capital. I'm just wondering if you could offer any thoughts as to how you see not so much how Chevron situation plays out, but how you see the risk or upside to balances, product balances in that market if they don't get their situation resolved? I'll leave it there. Yes. We don't know what Chevron is going to do. Right now, the supply demand situation, the balances as you refer to in California, it looks for the immediate next several years reasonably good. And that's principally because we have Martinez, the former Avon refinery that's already been idled. We have Rodeo at Santa Maria for P66 that's in transition. And frankly, he's already shut down one of the hydrocrackers in Rodeo and turned it into a renewable project. So there's been a fair amount of capacity that's been taken offline. We see the California market being constructive once and demand has come back. It really has come back. The last week's yesterday's numbers were strong. So we see the market being constructive. Now, if obviously there was some additional steps taken either because somebody decided to take equipment offline or one of the ways you can effectively reduce particular emissions is to reduce rates. So if that became the case, you would obviously have some more capacity or throughput be reduced and that would be further constructive to the marketplace. Appreciate you offering those perspectives. Thanks, Charles. Our next question comes from the line of Paul Chang with Scotiabank. You may proceed with your question. Hey, guys. Good morning. Good morning, Paul. Tom and Matt, not that it will happen, hopefully not, but if every atopic similar standard as Bay Area here, Is Torrance have a similar elegant solution as what you see in Matinsa or that wet gas scrubber is the only real solution for tolerance? That's not even been put on the table. Obviously, we just Exxon replaced the electrostatic precipitators after the explosion and are in compliance. There are no issues. This has not been contemplated in the South Coast. The Bay Area has been working on we've been working for how long with this in the Bay Area? Whole year, yes, since we took over. Since we took over. So that's been a work in progress. The same situation doesn't exist down there with the new precipitator. We're in full compliance and there's no discussions in this regard at this time. Okay. And just curious that, I mean, this year your CapEx is about $400,000,000 to $450,000,000 How long that you can spend just at this level, let's say, over the next several years, if the market condition did not move in the right direction as we hope? Well, obviously How do you go even lower that for a couple of years or that this is really the bare minimum? We're going to respond to the market conditions in our spend. There's no doubt about that. But there will become time that some of the units, units talk to you. And at some point, you can defer turnarounds, but you might have to either take a squat. And these are things we're looking at, what do I mean by squat, instead of doing a 45 day turnaround, you might have a piece of equipment that is saying they need some help, you shut that piece of equipment, fix that down, restart the unit and then run it a little bit longer. But to your question, we've had a low spend. We're continuing to have a low spend. We're continuing to put do everything we can to reduce CapEx with some of the best practices we put in place. But this equipment ultimately is going to be need to get first and foremost, we have to run a safe, reliable, environmentally responsible operation. So we will have to maintain spend to maintain the units in the correct operator, operable condition. So we would expect to see some increase in CapEx go forward. Yes. And Tom, I think before the pandemic at one point, what considered sustaining or maintenance CapEx for you guys is about 600, I think, to 650. Is that still a reasonable number in a normal market condition? Actually, Herman, what would you say that the sustaining CapEx is? Just plain sustaining, probably close to $500,000,000 So you heard that falls up sustaining is about 500,000,000 dollars and then of course you have got some we might be spending some money on return projects and things of that nature, but that is going to be a function of what the market is. And talking about that, I know you are still you haven't sanctioned the project, but renewable diesel plant that you talked about, any preliminary CapEx that you can share? I'm sorry, Paul. CapEx. What do you mean share? CapEx in regards to the project, we have not published or spoken about it just because it's being actively worked. What we can say and what we have said is the project from a capital perspective and quite honestly from an OpEx perspective appears to be a top quartile project. So when you compare it to the other projects that have been announced, the project looks very, very good. We benefit because we had a 9 old hydrocracker, quite frankly, that was preserved in a professional manner. And so that gives us a tremendous leg up. And then on the operating cost side with the project, we directly benefit or we would directly benefit from the fact that you have synergies with the refinery. So all the ancillary sort of services you would need to do if you are a standalone business, you get the benefit of of reduced OpEx being connected to the Chalmun Refinery. Two final questions for me is for Eric. Eric, don't know if you can give us some idea, sense that how is the current debt market? What's the opportunity if you need to raise additional debt in the near term? Is it doable? And secondly, I think in the Q1, you were hoping by now that you will be maybe turning the page and will become positive free cash flow. So just curious that, I mean how that looked and whether you guys from a cash flow standpoint in July whether you breakeven in the cash flow? Thank you. So in reverse order, I think we're a bit disappointed with the Q2 because we didn't get to the level in the June timeframe that we were really shooting for. Unfortunately, the market didn't deliver the economics that we wanted and the continued pressure from RINs did not allow us to generate enough free cash flow from operations to cover essentially our CapEx and interest. However, it is important to note, we have seen a relatively steady recovery overall since the Q1. So if we go back over the course of the past 12 months, the refining industry, obviously, everybody's lost a lot of money. And so the first step for us was getting the positive operating contribution or operating margin. We feel very confident we've gotten there. And now the next step will be what is the incremental operating margin that we ultimately need to generate. And if we think about overall costs, right, we've got roughly $25,000,000 a month in terms of interest, if we think about a circa $300,000,000 a year interest burden. And for our guidance that we've provided for the second half of the year, we're going to have $45,000,000 to $50,000,000 a month in overall CapEx. The actual cash itself is relatively lumpy simply because we do have fixed income payments that come not every month and the CapEx is also not ratable. But if we think about that over kind of the next 6 months, I think again what Tom pointed out on the front end from a macro standpoint is what we're seeing today. One of the things that needs to be settled near term is what is the near term 2021 RVO, so we can put this RIN issue behind the entire industry and move forward. That's going to be a critical point in understanding exactly where this market is going to go. The macro is the macro for us. And so I think we continue to operate in the balance where we feel comfortable. Our CapEx numbers are increased for the second half of this year. That is in anticipation of continued economic recovery coming out of the pandemic. I think on your debt question, to be completely honest with you, we have 0 plans to go into any type of debt market and have not spent a lot of time talking to where our fixed income securities trade. Today we have more than ample liquidity. It's going to fluctuate as commodity prices fluctuate. But overall, our key focus internally is maintaining safe, reliable operations to be able to get to the point where we're covering all of our fixed costs across the board. Clearly, the cash expectations that we laid out, we have exceeded those through the end of June. A lot of that, however, is driven by working capital. I think we've tried to be very transparent in terms of how that working capital is ultimately going to flow through the second half of this year, so that we remain in compliance with our AB32 RIN programs for calendar years 2020. Thank you. Our next question comes from the line of Neil Mehta with Goldman Sachs. Eric, I just want to build on that. Obviously, the credit markets are what the credit markets are, but the unsecured has been under a lot of pressure. And as if to say that there are liquidity issues at the business, but one of the things that was, I think, incremental in today's release is that you're up to $2,600,000,000 of liquidity. So can you just put a bow on a lot of the comments that you made over the last 50 minutes of why you feel comfortable about the liquidity position that the company is in and summarize that for us as we look out over the next year? I think the key piece being we know what our dedicated uses of cash are from a working capital standpoint through the remainder of the year. We've provided some CapEx guidance for everyone. We know what our interest burden is. And ultimately, we believe that this industry is going to continue to recover and margins will be there for us to be profitable. If they're not, then ultimately there are other steps that the industry overall is going to have to take. And so again, just taking a very, very high level view, it is hard to imagine that the refining industry over the course of multiple years will consistently lose money. That has never been the case historically and every time there has been a recession, there has been a recovery coming out of it. The pandemic was recession on steroids. And so ultimately, a lot of things will need to be addressed over the next 12 months. But directionally what we are seeing in terms of macro recovery, everything is trending in the right direction. Thanks, Eric. And the follow-up here, this one might be for Tom, but it just strikes us that the industry in the Q2 was running at an elevated utilization. Demand has come back very nicely ex jet, but margins until recently have not followed. Do you think that industry discipline in the refining space is still intact? And ultimately, will the industry let demand run a little ahead of utilization as we go into the shoulder to enable the margins to perform a little better? Yes, I think certainly that's the key, right. We have absolutely the industry did a spectacular job during the pandemic and actually rationalizing capacity and not letting the inventory situation degrade even further because of the destruction in demand. As the I think there was a feeling that when we got down to very low case rates and hospitalization rates and mortality rates that perhaps this is indeed and we will open it up the country. Okay, this is it. We've got no on the freeway and let's see what happens. But I think 2 things. 1 is in fact variance, you got to watch the variance. Obviously, we're going through a spike in cases now. Hopefully, the fact that was high percentage of the population has been vaccinated, it won't result in a huge amount of step change in hospitalizations, etcetera. But we have to watch it very closely. And I think the industry will watch it very closely. And in fact, the until we get jet demand completely or get close to full recovery, there is a governor on this. As I said, you cannot run higher than we're running. I think the 91% is about it from a jet limitation. And we just watch the inventories and if the inventories start building, I've said a 1000 times over the last many, many, many years, putting running to put product in the tank and hold it is a fool's errand. So we would have to cut back and reduce our production to make sure that we don't let the inventories get away from us, which of course that would result in obviously a decrease in the cracks. Thanks, Tom. Our next question comes from the line of Paul Sankey with Sankey Research. You may proceed with your question. Good morning, everyone. Good morning. Very specific question, Tom, while I've got you is there's been some reports that there's shortages of jet fuel around the country. I didn't really understand it given where jet fuel inventory is. I wondered if you had a perspective on that. A follow-up would be on the way crude inventory is acting. It's just interesting that Cushing is coming down the way it is. And I was wondering, as regards to the very, very low Saudi imports, whether that was purely a function price differentials or whether there's actually a limitation on availability of Saudi crude and any other comments on heavy is also is always interesting from heavy light differentials is always interesting from you guys. Thanks. Okay. I'm going to take the first part and then maybe a little bit of the second part. And then I think we have Tom O'Connor, our Head of Commercial, who's on the phone. I'll ask him to weigh in and give some thoughts on the crude jet, there's as everybody is aware, a lot of things have happened that have caught industries by surprise in the supply chain. So when you even the airline industry, it appears as though demand, the number of people that are wanting to fly is being restrained by the fact that the airlines don't have enough people to put them in the air. So they've got to get more pilots back. They've kind of held up on that. Similarly, reports on the jet shortages, regional jet shortages are some in some ways supposedly due to a lack of drivers that are getting jet fuel from wherever they're lifting it on the rack and getting it to the airport. So there's a supply constraint and the government came out this morning and said they were going to intercede and try to see what they can be done to help that. And that's being done at the same time recently We've had these fires on the West Coast and parts of the country. And there's a lot of there's been a rather significant increase in cargo planes that have been flying around trying to deal with that issue. So you've had an increase in demand associated with that event. At the same time, it appears as though there's a supply chain restriction that is impacting the ability to get the jet fuel from say a refinery to a terminal, but ultimately to an airport. So I think that's what's going on. On the gas side and the crude situation, I've made my comments. Tom, are you on the line? Yes, I am. Paul, I mean, in regards to that, I mean, throughout the Q2, as we looked at forward balances, basically, I mean, the Cushing market ultimately had to get to a price where it was basically incentivizing crude to stay domestically. And we've continued to see that in terms of you've got the narrow differentials taking place in terms of where the Houston market is because effectively the market got so strong domestically that it basically it is starting to weaken and is balancing in terms of the ARBs. It is starting to weaken and is balancing in terms of the ARBs are starting to soften a touch. In fact, the market's gotten potentially close to where we were talking about or the industry would be talking about tank bottoms. And it appears that that initial concerns may be alleviated as we basically have approached peak runs and then we'll be heading in to the seasonal decline in terms of also increased turnaround activity in the Q4. So in terms of overall crude avails, I mean, we are starting to certainly see more barrels available sort of across the fleet between different areas, particularly in the fuel oil market, which is moved from very stubborn single digit differentials in the first half of the year to starting to expand a little bit. And based on everything you've just said, I've seen that SaudiMiddle Eastern oil is basically SaudiMiddle Eastern oil is basically priced out of the market? That continues to be the themes. I mean, I think we'll start to see, I mean, also dating back on that, right, is that we've had obviously a lot of issues to sort out through the month of July in particular as the UAE issues regarding around their base lines have been sorted. So I think we'll get better clarity of that as we start to move forward and start to see where the OSPs and volume metrics start to proceed. Brilliant. Thanks. And if I could, sorry, ask a follow-up maybe for Mr. Lucey. Is there some can you highlight any catalyst moments going forward or timeframe going forward for when we sort out this stupid RIN thing? Is there something that you're looking for some next series of data points perhaps or are we just going to continue drifting in a vague leave it to Washington kind of mode? Thanks. I'll leave it there. I actually think we're in a window, Paul. There was some paralysis because the Supreme Court has now passed us by and obviously, Holly prevailed on that. But as I said before, that sort of becomes a moot point onto itself because it still leaves SREs at the discretion of the administration. But you have a window now where, first of all, they're required to put out an RVO. And Secretary Regan has been around the country talking about they feel need to be transparent. And unlike the previous administration put out an RVO on a timely basis, they haven't lived up to that promise yet. But statutorily, they're required to do that. And I expect we always dance around with paralysis and with the politicians. But I will tell you, we've had excellent representative workforce that we work with every day, and they are speaking as loudly as they can to the administration because they understand the threat to their livelihoods and what it means to them. And so next year, you get into election in the in the near future, we're going to have more clarity. And in the worst case scenario, if it all plays out, as I described, I was sitting with the governor of a reasonably sized state in the not too distant past. And I sort of laid this out to him. He said, well, they're not going to let that happen, are they? And I said, I presume you're right. And so the EPA and the administration can move as quickly or as fast as anyone in the world. And but I expect that we're going to have a window here in the not too distant future where there'll be more clarity. Okay. Thanks a lot. And your final question comes from the line of Matt Blair with Tudor, Pickering, Holt. You may proceed with your question. Hey, good morning, everyone. You mentioned you're in advanced discussions with partners on the RD project. Would any of these partners provide you with access to advantaged deeds? Or should we think about this as more like a financial partner? Entering this process, I probably have said this in the past, we've been focused on partners where we think that they're going to be additive to the project, and that can come in multiple ways. Obviously, money is a commodity that's fungible, but we've been much, much more focused on partnering with someone that can improve the dynamic of the project to make it even more compelling than it already is. So that's where our focus is. I'm not going to get in on specifically what types of partners, but we've been pleased with our discussions in that regard and we continue to progress it every day. And then this might be a tough question to answer now, but any early thoughts on the end geographical markets for the Chalmette RD project? Do you expect place volumes into California or do you kind of see it as more like a New York, Canada, Europe end market for you? We are merchant refiners and as such, one of the things you learn in refining, you want as many options you possibly can because the reality is we don't know where the bell is going to ring and when it's going to ring. And so you want to have complete optionality that goes for feeds, but also access to product markets. It's one of the reasons that we think Chalmette is uniquely positioned from a location standpoint, not only for sourcing feeds, but optionality to go to California, to go to Western Canada or go to Europe or quite frankly anywhere else where it becomes the most attractive product market for that renewable diesel product. So we think Chalmette being having access to water, rail and truck gives us the greatest amount of flexibility and we'll be able to deliver very competitively into whatever market presents the highest netback. Great. Thank you. We have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Tom Nibley for closing remarks. Well, thank you very much for attending the call today. We look forward to meeting with you at the end of the Q3 and hopefully demonstrate that we have in fact seen the inflection point and turned the corner and have gotten through positive cash flow. Have a great day. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the