Good day, everyone, welcome to the PBF Energy fourth quarter and full year 2018 earnings conference call and webcast. At this time, all participants have been placed in a listen-only mode, the floor will be open for your questions following management's prepared remarks. You may register to ask a question at any time by pressing star 1 on your telephone keypad. Please note that today's call may be recorded. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.
Thank you, David. Good morning and welcome to today's call. With me today are Tom Nimbley, our CEO, Matt Lucey, our President, Erik 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 website. 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 quarters, we will discuss our quarterly and annual results, excluding certain after-tax special item charges of approximately $483 million and $256 million, respectively, which are primarily comprised of a non-cash lower of cost or market, or LCM, adjustment. As noted in our press release, we will be using certain non-GAAP measures while describing PBF's operating performance and financial results. For reconciliations of non-GAAP measures to appropriate GAAP figures, please refer to the supplemental tables provided in today's press release. I will now turn the call over to Tom Nimbley.
Thanks, Colin. Good morning, everyone, thank you for joining our call today. This morning, we reported the results of another good quarter where we ran our assets well and delivered a solid financial performance. Adjusted earnings for the fourth quarter were $126 million, or $1.03 per diluted share. Our strong fourth quarter results highlight the benefit of having a geographically diverse, high-complexity, multi-asset refining system. During the quarter, our Mid-Continent and East Coast refineries were able to benefit from lower-cost Canadian crudes. The wider Canadian differentials were largely driven by high inventory levels, takeaway capacity constraints, and high PADD II maintenance activities. The differentials have since narrowed, in large part due to the mandated production cuts by the Alberta government, but are expected to widen back out as the underlying takeaway capacity issues have yet to be solved.
Globally, refineries ran at very high utilization during the fourth quarter, taking advantage of a well-supplied crude market and strong distillate margins to maximize outputs. High utilization through the quarter set the table for above-normal seasonal builds in gasoline. On top of this, currently the market is experiencing extraordinarily narrow differential between light and heavy crude oil. This is due to a well-supplied market for light crude oil and a significant number of heavy crude supply constraints, starting with OPEC, non-OPEC supply cuts, the Alberta curtailment, and Iranian and Venezuelan sanctions. Any one of these issues is digestible by the market, but the confluence of the constraints has led us to where we are today. I've been around this business for a long time, and I will say that both gasoline margins and crude differentials this narrow are not sustainable.
We have a weak margin environment that is primarily driven by narrow feedstock differentials. Demand remains good, and as history has demonstrated, the supply constraints will get solved. We are entering maintenance season with planned maintenance globally projected to peak in March. In a challenging crack environment, high levels of maintenance combined with a series of weather-related disruptions across the industry should translate into lower utilization. We believe this will improve the market for refining margins and particularly gasoline going forward. Fundamentals are strong with global demand continuing to support product markets. Distillate inventories are down globally as days of cover is tracking well below the five-year average, and that is with the global refining system in a max distillate mode. Gasoline economics, on the other hand, are effectively at breakeven levels at the moment. While it may seem unusual, a large part of this movement is seasonal.
We seem to frequently have conversations in the beginning of the year about the weakness in gasoline markets. We believe this situation, as in the past, will correct itself. Lower gasoline prices should also have a positive impact on demand. On the supply side, as we enter spring, we will see increased maintenance activity, which should further decrease the amount of gasoline being supplied. The switch to summer-grade gasoline will also help in this regard as the amount of butane blending decreases. We will continue to watch both the crude oil and product markets going forward and adjust our operations accordingly.
Looking forward toward the latter half of the year and beyond. As Matt will discuss in a moment, we are making some changes to our plans for 2019 in order to put our high-complexity refining system in the best possible position for the upcoming marine diesel fuel standard shift with IMO 2020. We believe that there will be an increased demand pull on the distillate markets as the move towards cleaner fuels continues, and that higher sulfur feedstocks will see differentials as a result of IMO. In closing, the economy is still growing and we are encouraged by the environment we see for 2019 and beyond. Our strategy in this environment, as always, is to put our assets in a position to succeed by running them well and being a safe, reliable, and environmentally responsible operator. By executing this strategy, our assets will be profitable and our employees and shareholders will benefit.
I'll now turn the call over to Erik to go over our financial results for the quarter.
Thanks, Tom. As previously mentioned, PBF reported fourth quarter earnings of $1.03 and $3.26 per share for the full year. Fourth quarter EBITDA comparable to consensus estimates was approximately $311 million and $1.1 billion for the year. PBF's effective tax rate for the quarter was approximately 27.5%, which was impacted by state tax rates and certain discrete items. For modeling purposes, please continue to use an effective tax rate of 27%. Included in our fourth quarter results was $27 million of rent expense, which resulted in a full year total of approximately $144 million. At the current price, we expect full year 2019 rent expenses in the $175 million-$200 million range. Consolidated CapEx for the quarter was approximately $265 million, which includes $177 million for refining and corporate CapEx, and $89 million incurred by PBF Logistics, including the acquisition of the East Coast terminals.
Our quarter-ending liquidity was more than $1.9 billion, with approximately $1.6 billion at PBF Energy and $360 million at PBF Logistics. The year-end consolidated cash balance was approximately $600 million, and our net debt to cap was 27%. Importantly, we repaid 100%, or $350 million, of the outstanding balance on our ABL credit facility. We are pleased to announce that our board has approved a quarterly dividend of $0.30 per share. Finally, we are pleased to announce that PBF Logistics and PBF Energy reached an agreement to eliminate the IDRs currently held by PBF Energy in exchange for 10 million PBFX common units. This is an important transaction for the companies because it strengthens the alignment between the GP and the LP, simplifies the structure, and improves the cost of capital at PBF Logistics. This transaction demonstrates our commitment to the partnership while positioning both companies for growth.
I encourage you to listen to the PBFX earnings call later this morning. Now, I'll turn the call over to Matt.
Thank you, Erik. Despite a declining market over the quarter, our assets ran well with total throughput averaging over 840,000 barrels per day. As Tom mentioned, we will adjust our system in response to the market. Our East Coast and MidCon systems benefited from advanced barrels and delivered very strong results. In other areas, we adjusted operations to account for weaker product margins and other variables outside of our control. We remain intently focused on the aspects of our business that we can control. We are committed to our efforts to reducing operating costs across the system. There were some seasonal spikes in energy costs during the quarter, particularly in natural gas in Torrance, but overall expenses were in line with our annual guidance. In our press release this morning, we lowered throughput guidance for the first quarter.
The reduced run rates are reflective of both the current market as well as ongoing maintenance and turnaround activities. Additionally, in order to strategically position the company for the later part of 2019, we have elected to accelerate the previously announced 2019 turnarounds at Delaware City and Paulsboro. The Delaware City coker turnaround will now occur in the March to April timeframe, and the Paulsboro crude unit turnaround, originally planned for the third quarter of 2019, will now occur in the second quarter. By moving the turnarounds forward, we will complete approximately 65% of our turnaround work by the end of Q1, and 90% by the end of Q2. In addition to the turnaround work, we are also conducting repairs on piping and instrumentation associated with the pre-flash tower located at Del City. The equipment was damaged during an incident last week.
It is important to note the refinery's crude unit was not damaged and has been returned to service. As previously disclosed, PBF Energy is continuing to invest in its assets to improve the strategic flexibility of our system going forward. We are progressing with the restart of the idled 12,000-barrel-a-day coker at Chalmette Refinery and the installation of a new hydrogen plant at Del City. Both projects are on schedule. We expect that the coker will be in service in late fourth quarter, and the new hydrogen plant, which is being built and will be owned and operated by Linde, will be in service during the first quarter of next year. We plan to continue to put our refineries in positions to benefit from the tailwinds that we see driving the refining sector and PBF. Operator, that concludes our remarks, so we'll be happy to take questions.
In a moment, we'll open the call to questions. The company requests that all clients limit each turn to one question and one follow-up. You may rejoin the queue with additional questions. If you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind that you may remove yourself from the question queue at any time by pressing the pound key. And your first question comes from Roger Read with Wells Fargo. Please go ahead. Your line is open.
Hey, good morning.
Morning.
Good morning.
I guess, Tom, let's dig in a little deeper on the guidance and on gasoline. Seasonally, I think everybody agrees with you, things should get better. As you could expect, market's a little bit nervous that it won't. I was just wondering if you could maybe give us an idea of some of the other things you're seeing, either on the demand side or some of the supply changes that always occur, and maybe put some numbers on that in terms of thinking about your system alone, just how much easier it is to make gasoline, say, in February than it is in May.
Well, yeah, great question, and I commented on this in prepared remarks, but let me really dive a little deeper. One week does not make a trend, but if you looked at the EIA data yesterday, DOE data, utilization dropped almost 5% week-over-week, 85.8% refining utilization. That is a combination of a number of things. Make no mistake about it's a combination of a number of things. There's economic run cuts. PBF actually took some economic run cuts because of the poor gas crack in the quarter, particularly not running our cat units full. In addition, there were unplanned outages, as I alluded to, because of the polar vortex and the significant extreme weather conditions that we had in the Midwest, and there are still some refineries struggling as a result of that in the Midwest and even in the Northeast.
Frankly, the incident that we had at Delaware City, which we were fortunate did not have severe damage, was a weather-related event. When you add to those things and talk about the accelerated turnarounds, we are not the only ones doing that. It just makes common sense. You don't have good coking economics right now, why not move your turnarounds up? That's what we're doing, as Matt mentioned, in the Delaware coker. We're also moving up the bigger crude unit, the lube crude unit in Paulsboro. That we're also doing because we're going to fix a problem that is impacting our ability to produce lubes. It's a margin play for us as well. We're entering the heavy turnaround season. We have a continued incentive to crack distillate, if you believe the projections for IMO, that trend will continue throughout the year.
It'll be interesting to see what happens with the product yield shift, if indeed that is the case. Butanes are coming out of gasoline. They've already come out of gasoline. We've made the transition or are in process of making the transition in California. The rest of the country will sequentially come behind it. Frankly, you can buy gasoline in Morristown, New Jersey for $2.10 a gallon, in a large portion of the country for below $2 a gallon. I actually think that we're going to see a bounce in demand as a result of that elasticity. Of course, when the prices come back, there may be a pushback. The final comment I'd make about the data yesterday. It was interesting to me that gasoline built 400,000, but PADD I, PADD II, and PADD V drew gasoline.
The main build was in the Gulf Coast of the U.S., and some of that was impacted by fog-related difficulties in shipping material out. Time will tell, I believe we are in a process of turning the corner.
Great. Thanks. I can confirm we've had a lot of fog down here on the Gulf Coast. Changing direction a little bit here. Erik, the cash flows in Q4 had a big CapEx number come through. Can you give us an idea of maybe the change by accelerating the turnarounds, how you think about managing cash flow, I guess, first half of the year versus maybe full year?
Quite honestly, I think it's probably going to be very similar to the trajectory we saw in 2018, where a lot of our work was going to be front-end loaded during the first half of the year. Cash management, as we've always said, is one of our top priorities here. Ultimately, between the turnarounds, some maintenance, as well as the strategic projects for the coker and the hydrogen plant at Chalmette in Delaware City, ultimately, we should see probably close to three-quarters of our CapEx spent during the first half of this year.
Great. Thank you.
Our next question comes from Brad Heffern with RBC Capital Markets. Please go ahead. Your line is open.
Hey, good morning, everyone.
Good morning.
Tom, I'll also ask you to dig in a little more on your opening remarks just around the mediums and heavies being so tight. Can you just talk about how crude sourcing looks in the short term and the medium term? Is there difficulty just finding barrels, where are you getting them from and so on?
Let's deal with Venezuela since that's obviously a living, breathing, moving target right now. We have continued to be able to get some cargoes through third parties, but basically, we're not worried about Venezuelan ability. We can source other crudes and have been successful in doing that. The problem is not getting the crudes. Of course, the problem is that those crudes have tightened up and the spreads are narrow. As others, we have the ability to basically swing probably 50% of our system to lights. We'll do some of that. We don't believe that this is going to be a sustained event. I do think it was exacerbated significantly by an ill-advised move by the Alberta government to go ahead and force mandated cuts. The law of unintended consequences has played out perfectly here.
There was a time, as you all well know, not only could you no longer economically rail crude to either the East Coast, the West Coast, or the Gulf Coast, you couldn't have pipeline economics in the money when WCS moved to below $10 versus WTI. We see indications now, some of that's with some other things going on. Obviously, we're now about $20 under Brent, and it appears as though that is starting to unwind and move in the right direction. At least there's chatter that perhaps those cuts will be undone quicker. The last comment I'd make, and it's going to be a question of time. The Saudis, the Russians, all the people who are cutting back right now and are cutting back medium and heavier crudes, which is exacerbating this problem. E&P companies get paid to produce oil.
Again, I just don't think that they're going to be able to sustain this. You can actually make an argument, and I've made this argument, but a lot of what we're seeing right now is simply due to the fact that there's too much crude out there. That's shale crude from North America and the U.S., as well as we've had some companies in from Canada here recently have told us their growth projections for the next three or four years. There's a lot of reserves, there's a lot of crude, and there's going to be a lot of crude on the marketplace. At the end of the day, if you're a refining company and there's a surplus of crude, that's a good thing.
I do think we're going to have some time here that we're going to have to work through the Iranian sanctions, the Venezuelan situation. Even there, ultimately, and it may take a year, may take 18 months, I have no idea. There's perhaps promise for the Venezuelan people. There's an ability to then rebuild that industry. It's going to take some time. Longer term, certainly I'm bullish. With IMO coming the second half of the year, and I do believe it's going to come, we're going to see, again, a three and a half million barrel stream that disappears, and there's going to be some stranded feedstocks associated with that. Next couple of months, your bet is a little bit as good as mine, but it could very well be like it was last year, a tale of two halves.
Okay. Thanks for the detailed answer. I guess maybe for Matt, on the ACE Pipeline that PBFX is participating in, can you talk about the potential benefits for Chalmette?
Yeah. For the benefit of everyone else, we announced an open season with our partners at Phillips 66. Harvest, it is an interesting project, not only on its own, but you obviously have captive refineries that are part of the sponsors of the project. It opens up St. James. We believe it is economic and there's not too much I can say about it other than Chalmette will be a shipper on the pipeline, and we think it'll bring more advanced crudes to Chalmette. We think the project is a good project for PBFX and is in line with what PBFX announced a year ago in developing organic projects. This is one of many projects that they've been working on.
Okay. Thanks, all.
Our next question comes from Manav Gupta with Credit Suisse. Please go ahead, your line is open.
Hi, Erik. Can you comment on this line item, early return of railcars, which was expensed. Are you actually cutting back on your crude by rail runs from Canada?
Ultimately, if you go back to Q3, we experienced probably close to $40 million hit in terms of expense associated with early return of railcars. It's simply rationalizing the fleet to make sure that we're using all the latest and greatest cars and that ultimately we had some idled cars that didn't make sense to use anymore. I think ultimately what we've seen is absolutely we'll see a decline in some crude by rail through part of the first quarter, just simply driven by economics as we shift back to more waterborne economics that are better for the refinery on the East Coast. Longer term, I think I'd probably echo what Thomas mentioned in response to a previous question that ultimately we think that crude by rail is a long-term viable strategy for heavy crude out of Canada.
A quick follow-up. What was the working capital headwind in the fourth quarter?
We probably, overall, used about $125 million nominally of working capital during the fourth quarter.
Thank you, guys. Thanks for taking my question.
Our next question comes from Blake Fernandez with Simmons Energy. Please go ahead. Your line is open.
Hey, guys. Good morning. Erik, just going back on CapEx. I know you said about three quarters or so, maybe two-thirds, would be spent in the first half. I think on the previous call, you had gone through some kind of general ranges, which, if we did our math right, would kind of land for full year spending around $600 million to $750 million. I didn't know if you could maybe help narrow that or just kind of confirm that that's a good number for this year.
Absolutely, Blake. Those are still good numbers. Just high level, what we would say is order of magnitude turnarounds are about $300 million for the year. I think Matt commented on when we're going to have maintenance downtime, and ultimately that we're going to be through the bulk of that during the first half of the year. We've got another call it between $200 million and $250 million of maintenance-related expense. That's going to be a combination of regulatory spend, environmental spend, and just general maintenance. We obviously have about $150 million of, call it, strategic projects, discretionary CapEx related to the coker and ultimately the hydrogen plant. That's probably got a longer runway in terms of overall CapEx outlay through the course of the year.
The coker is expected to be up and running by the fourth quarter of 2019, and the hydrogen plant during the first quarter of 2020. That CapEx outlay is going to be spread over, call it, through the remaining three and a half quarters of the year. Ultimately, the bulk of the turnaround in maintenance, that 75% is probably going to be, call it, between $500 million and $600 million during the first half.
Perfect. Thank you so much on that.
The goal, I think the key message here is that ultimately we understand the decisions made to accelerate a few of these turnarounds and bring maintenance forward. Ultimately, yes, there will be a use of cash, ultimately we will have a very clean runway as we look towards the back half of the year.
Understood. If you could, maybe just spend a quick minute on the IDR simplification. I think this should be viewed as a positive step, just does this change anything? Is there anything imminent, maybe drop-down potential, self-funding? Just any kind of general comments you might offer.
I think ultimately our view for both PBF Energy and PBF Logistics is this is a transaction that worked for both parties. We've shown pretty significant sponsor-related partnership and growth here associated with support that ultimately comes through in the form of, we still have the drop-downs that are out there, our real focus is on organic projects and third-party acquisitions at PBF Logistics. This was clearly something that the investment community was pushing for. We are all for and very supportive of a lower cost of equity. At PBF Logistics, we've always said that logistics and energy should work in tandem, ultimately, the plan would be this streamlining of the structure should ultimately help both companies continue to grow. We have not provided guidance in terms of what's coming next in terms of drops or anything else.
There's clearly been significant strain and stress in the MLP equity market, although we are starting to see pretty significant movements there. There obviously is a new fund that was raised earlier this year. We have been successful in essentially self-funding over the past couple of years. We brought in a strategic equity partner in Tortoise during the middle part of 2018. Our long-term view is this is a viable strategy. It's a way for both of these companies to grow, we still firmly believe that for discrete projects, accretive transactions, there will ultimately be access to capital. It may just come in a form that's slightly different than what we've seen in terms of the old regular way, MLP equity fundraising from the 2014, 2015 timeline.
That's great. Thank you, guys.
We'll take our next question from Neil Mehta with Goldman Sachs. Please go ahead. Your line is open.
Hey, thank you very much. Appreciate you taking the question, guys. I guess my questions are a little bit more tactical in nature. I guess the first one is, at the forward curve, do you see PBF generating cash flow from operations that exceed the capital spending levels and the dividend? The reason I ask that is if there is a funding gap, we're just trying to figure out is there a risk of incremental debt issuance? Do you work down cash balances, or how do you think about the need for incremental equity? You guys really effectively timed the last equity issuance. I just wanted to see if any thoughts on whether you'd be willing to tap the equity market again if there is a funding gap.
As we sit here today, Neil, quite honestly, I don't think we have any comments around potential equity raises. We feel very confident. Look, we just repaid $350 million on the ABL. That is exactly what that ABL credit facility is there for, in terms of if we're going to be building some inventory during the course of turnarounds to then run it as we're coming out of turnarounds, or if we have some strategic opportunities related to crude and we want to store crude for a period of time, and then as we're coming out, ramp up runs. I think we'll do that.
As we sit here with the forward curve. Tom provided a lot of color on the distress in the gasoline market, and while we think that ultimately things will rebound near term, and I think this is consistent with what we heard from our peers over the past couple of weeks, ultimately, this is unsustainable, but it's not very much fun at the current point in time. Ultimately, yeah, we'll probably burn some cash throughout the first quarter and potentially into the second quarter. We feel very good with the liquidity position that we have today. Don't anticipate any type of equity fundraising related to needing to fund anything at PBF.
Okay, that's helpful. Then the follow-up on PBFX, that you guys have taken a different approach than some of your peers with MLPs in the sense that you're leaning into the business this morning, and it feels like, if anything, you're saying it's a very core part of your strategy. When we look at the MLP-eligible EBITDA that sits at the PBF level, what is the best way to monetize that, given the challenges in the drop-down markets right now from a capital markets perspective? How do you best get credit for the midstream and logistics assets that sit up at the parent?
I think it all depends on what the prevailing market is. When you say we're leaning into the MLP, we work very hard internally here to strike the right balance. Clearly, IDRs were going by the way of the buggy whip or other things that have left. There's clearly a trend, and something that we talked quite a bit about. If the MLP works, it is a sort of a perfect sidecar for our refining business because there is certainly the crossover between midstream assets within the assets that we own. Then you have a cost of capital differential that you can provide investors with different investment classes that work for both. It's all a function of the MLP market working and being open.
One thing that PBF is not interested in is simply dropping down assets if the markets aren't open and taking back equity. To the extent the markets are open, we firmly believe we can grow the business and are quite comfortable with the growth projections we've put out there. That's not only from drop-down assets to which we have a large inventory of drop-down assets, but all the different projects that we're working on. As you saw in the fourth quarter, we also bought a terminal from Lindsay Goldberg. Our growth strategy is there and ready, willing, and able. It's going to require the markets to be open, and only time will tell on that.
All right. Thank you, guys.
We'll take our next question from Paul Sankey with Mizuho. Please go ahead. Your line is open.
Morning, all. On the accident, the initial headlines read pretty bad. It seems like it wasn't that bad. Could you just talk a little bit more about what happened with the understanding that there was an injury? Thank you.
I'll just make a couple of comments, Paul. We still have an investigation underway, and as always the case in this thing, one of the things I've learned through my career is don't believe the first 10 things you hear when you have an incident like this. We can say, I absolutely have to give a tremendous thanks to our emergency responders, the firefighters inside, and the mutual aid people who responded, because we had a pretty good fire there. We're honing in now exactly on what happened, but we're not quite done. Because they were able to get water and foam onto the area that the fire was burning, and because there wasn't that much equipment in that area, it was really just a fair amount of instrumentation damage that occurred.
As we mentioned, we were effectively able to get that unit back up seven days after the fire occurred. Again, I think it was testimony to how well our emergency responders handled that situation.
Sure. Tom, thank you. It's tough, as you mentioned, the current environment looks like it'll eventually recover, given the shortage essentially of heavy crudes. From a planning point of view, how are you thinking about timings and how to respond in so far as it's extremely difficult to know? I guess we can say that the Canadian crudes will come back into course logically, it seems that Saudi may have stepped down to a structurally lower level of production with a view to $70 oil, it seems like Venezuela isn't going to recover anytime soon. Are you sort of planning on an outlook of very tight over what timeframe? Your comments suggested you expect a re-widening in due course. Thanks.
Certainly do expect a re-widening, of course, this is in due course. We do believe that Canada will lead the pack, that this curtailment simply did not work. I mean, it worked in terms of narrowing the spread, you may have seen that one very large company who was railing north of 100,000 barrels a day of crude has indicated they will be railing zero. When you're transportation limited, that perhaps becomes more of a problem. We believe that we're already starting to see the Canadian differentials
widen up. I think you hit the wild card. To me, some of this is circular. We've seen this movie before. The price gets too low, Permian growth is high, OPEC, non-OPEC says we got to come in and balance the market. They cut back their crudes, effectively had then to get faced with the price might go up, their market share may be getting diminished. At the end of the day, I go back to what I said.
I actually think there's plenty of crude out there, plenty of heavy crude, medium crude and light crude. That will ultimately play out in our favor, but it certainly is going to take a little bit more time to get the Venezuelan situation and the Iranian situation behind us. It is going to be a function of what the Saudis and frankly, the Iraqis, there's a lot of crude in Iraq that could solve this problem if they would open it up.
Paul, also just low prices affect low prices. As the U.S. complex refining system pushes back heavies and sours and starts running lights with crude, that will have an impact unto itself.
Yeah, sure. Just, Tom, it seems that you're pretty much expecting Iranian sanctions.
Well, I wouldn't rule it out. Certainly, this administration is very aggressive. I'm not in Washington, D.C., I try not to be in Washington, D.C. The fact is, there's a high probability that he's going to continue to do some of these things. I just want to amplify what Matthew Lucey said. Just simply, you all know this, when you have the type of heavy, medium crude differentials that we have, that tight a differential. When you have No. 6 oil, 3% No. 6 oil in New York Harbor trading at a higher price than gasoline, notionally call it break even with Brent, and you've got a $15 or $16 diesel crack, you don't have good coking economics. Clean dirty spread is not wide enough. What happens?
People will start pushing back those crudes and try to lighten up to the extent you can, and it will fix itself over time.
Great. Thanks. Look forward to seeing you all in Napa in April. Thank you.
Indeed.
We'll take our next question from Doug Leggate with Bank of America Merrill Lynch. Please go ahead, your line is open.
Thank you. Good morning, everybody, and I'll plug our refinery conference as well, Tom. We're looking forward to seeing you guys in a few weeks. Tom, I wonder if I could just get your updated thoughts on IMO, and it's really more high level, given the timing of everything that's going on with heavy oil, because it seems if this does roll through, let's say, next year or so, that kind of coincides with the timing of when one was anticipating otherwise weakness on sour crudes. Any updated perspective, please? I've got a question on gasoline. Thanks.
Yeah, I think our view is a lot of the concerns about IMO, which were particularly on the supply side for the compliant fuel, I've come down to think that is not going to be an issue. The reason I say that is everybody assumed that it was going to be ultra-low sulfur diesel, and it may be ultra-low sulfur diesel on a margin that meets that new demand for this 3.5 million barrels a day or 3 million barrels a day, pick your number, of a 0.5 fuel. A lot of that can be supplied by just frankly hydrotreated gas oil in a refinery. If you had a situation, and you're going to talk about gasoline next, where gasoline remained under pressure, frankly, you can just take gasoline out of the cat cracker that's already compliant fuel.
It's below 0.5 in many of our refineries because we take the sulfur out before it goes into the cat unit. I think the ability to supply the fuel is going to be there for the industry. The industry is ready to do that. Obviously, you might be on a margin doing that with the higher light sweet crudes or whatever, and that will impact price structure. Personally, what I am more interested in or waiting to see how it plays out is there's a significant amount of distillation capacity, crude capacity in this industry, mostly in other parts of the world, that run medium and medium sour crudes, and that where they go with it is into the international bunker fuel market. That market's going away.
That becomes 3 million barrels of stuff that if you continue to run the crudes, you've got to figure out where they're going to go. Where's the home? You can try to put it into asphalt. There's not enough coking and resid conversion capability. Does it go on a margin into the power generation system? Can you lighten up, sweeten up? I will tell you, the U.S. is probably darn close to being able to process oil, as much light crude as it can until you get some of these investments that are being talked about. Our view is IMO is going to come, and in fact that it's going to be good for companies like PBF, who basically run a kit that is very high complexity, and that's why we bought the refineries in the first place.
I appreciate the long answer. I'm afraid my second one is also a micro issue, given how much time you spent talking about gasoline weakness, and it's really just to get your perspective on some structural changes or whether you agree with this or not. I'm just trying to get our head around what happens next. I remember the good old days of seasonal strength and gasoline, and we're trying to figure out if, with all the windfalls behind us, we're just getting back to that very simplistic view of the world. What I'm referring to is the fact that the U.S. is running the highest API slate in its history currently. Obviously, storms aside, when you don't have a storm, it seems that we end up with very weak gasoline in the winter.
Do you see that as a structural repeating cycle now, or do you think there is a little bit more to it than that?
I think it's a little bit more than that. I will agree with you that certainly, worldwide, the gravity of the crude inputs worldwide has increased. It certainly has increased in the U.S. I suspect, I did say that I think absent additional capacity coming on, you're going to get pretty close to being able to absorb as much of the shale as that is being produced in the U.S. before you start running into production cuts or operational problems. I think that you will see the seasonality will continue. You will also have some knock-on effects. One of the things about some of the shale oil crude is it's got a higher cut of straight run naphtha. Therefore, there's more gasoline yield.
At the same time, the octane component of that stream is lower than normal, and frankly, you have pretty good octane spreads in the harbor that will probably benefit as we move forward in the summer.
You guys are responding, and we like that, Tom. Thanks. We'll see you in March.
We'll take our next question from Prashant Rao with Citigroup. Please go ahead. Your line is open.
Thanks. Good morning, thanks for taking the question. I wanted to ask specifically on some IMO 2020 preparations and sort of the opportunity pipeline now that we're getting closer towards the implementation. There's some recent news about your contract with Maersk in the East Coast for providing the marine fuels for compliant IMO 2020 marine fuels for, I think it was 10% of their fuel needs coming out of the East Coast. I'm wondering if we could get a little comment on that. Then sort of the greater opportunity set and storage and providing those fuels. What does that pipeline feel like in the next few months? Should we expect to see more of these deals, the size of those? Then, what does it say about how close we are to in terms of progress of putting a standardization of a new low sulfur fuel oil blend?
On the Maersk announcement that came out this morning, of course, that is a PBFX announcement. PBFX bought the old Crown Point terminals. I think we refer to them as the East Coast storage assets. We bought the assets with this transaction sort of being worked as we did. It is a toll processing deal for the MLP. It is a direct result of IMO, it's good business, for sure, for PBFX. A big reason why we are going to be able to create synergies with those East Coast assets and our PBF refining assets is you have millions of barrels of heated dirty storage. We believe the opportunities are going to be many. We've been reached out to by counterparties that don't have the complexity or the coking capacity that we do.
I think there are a number of companies that are running a more simple kit that, quite frankly, are making money today because of some of the perverse differentials that are in the marketplace, are staring down the barrel of what could be a very challenging time. I think we're well-positioned for it. The deal with Maersk, it just enhances our returns on the Crown Point acquisition. We think it certainly makes a lot of sense. We're excited about the transaction and working with them over the next number of years.
I'll just add very quickly. That tankage that Matt referred to, obviously we have large coking operations in our East Coast facilities. We do believe there's going to be opportunities with people, not to run crude, heavy crude, but people who are saying, we have this potentially stranded stream called high sulfur resid. That 3 million barrels of tankage can allow us to bring that in and move it either to Delaware or to Paulsboro.
Okay. Thanks very much for that. I guess stepping back, the next question I had was on broader macro. Tom, we've seen numbers out there. I think the IEA MR was out yesterday with them repeating the 2.6 million barrels per day of incremental capacity adds 2019. I think there's some skepticism around that number. It's back half loaded some of those projects. It remains to be seen what the progress is. I was wondering if we could get your big picture thoughts on what seems more likely if we were to haircut that and what are some of the risks to the downside that might help us to maybe come to a more balanced market versus incremental product demand? Maybe sort of a sanity check on that would be great.
Yeah, I think 2019, I wouldn't expect to see none of that high, maybe 0.5 million less than that. At least that's what I've read. I'm just reading some of the information that's put out there, PIRA and others who say that that's probably overstated. When you look at a 3-year look ahead. Frankly, many people say you're going to have, assuming there's no recession, and with $1.3 billion day growth numbers in demand or north of that, almost a balanced situation. Longer term, when you see things like Exxon adding capacity in the U.S. because of the integrated model that they're going to have with the Permian, that's going to be something that the whole industry is going to be looking at and factoring in. I'll leave it at that.
Thanks. Thanks, Tom. Just one very quick detailed question, if I would, before I turn it over. We've gotten a few questions, given the cyclical industrials are kind of slowing a little bit on transportation, not necessarily hitting contraction, but just maturation in the industrial cycle. Some questions on demand for jet fuel. Jet cracks have been great for the last couple of years. With IMO coming up, it's asked about a little bit less, but seems like there'll definitely be some support for wider jet cracks. On balance, though, you could see a little bit of slacking in demand or maybe slowing down in demand growth.
Wondering how you're thinking about the knock-on effect to jet fuel specifically from IMO 2020 as we get closer and you're thinking about how you're going to run your kit and configuration and options once we start to get closer to January 1. Will that be sort of a dislocation that's similar to other middle distillates, more pronounced or less pronounced? Any thoughts there would be great.
Yeah, it's really a great question, because when I said our views or my views have morphed a little bit on what might happen on the product side. It is really, everybody assumed that it was going to be a 3 million-barrel pull on ultra-low sulfur diesel or a very high component of that. I think it's 3.5 million barrels a day of light products. That either could be you unmake gasoline by taking gas oil out of the cat cracker, as I mentioned earlier. Deconvert the jet, take jet fuel and put jet fuel. It's a compliant fuel. I think the reality is IMO, on a product side, will give some underpinning and support to all light products, jet, gasoline, and diesel. We'll see. There may be a drag, certainly, economically, where we are mature in the cycle.
IMO should be a nice boost.
Okay. Thanks very much for the time, guys. We'll turn it over.
Thanks.
We'll take our next question from Benny Wong with Morgan Stanley. Please go ahead. Your line is open.
Yeah, thanks, guys. Just wondering if you can give us your outlook of product exports for you and as well the industry. Just wondering what's happening in Mexico, how much is that going to affect it? The second part of that question, as it relates to IMO is, as it approaches and refiners start changing behavior slightly, do you have any early thoughts on how product flows or even crude flows would change or evolve?
Just on exports, we made some investments down in Chalmette over a year ago, our exports out of that facility have been fairly consistent. Actually, in the fourth quarter, there were some opportunities to make some exports out of the East Coast, which we did, and it just speaks to our optionality of being able to deliver products out of different refineries on the coast. Then we're developing a project that is about to take hold in Toledo, where we're going to be exporting finished products into Canada starting almost as we speak, over the next couple of weeks. We have, as a company, a base level of exports that are not dependent on Mexico per se.
It is a big driver in the U.S. refining bull case in that the U.S. refiners are providing fuels to the rest of the world because we have the most complex kits, we have access to attractive crude, we have cheap natural gas, and we have the best workers in the world. It's a good combination, and it certainly makes our market more buoyant because the U.S. is then competing with products with the rest of the world.
On the feedstock side, if you will, and what might happen with flows and trade patterns, et cetera. I'm going to be fascinated by how this all plays out. As I said, there's over 4 million barrels a day of distillation capacity that has low complexity, and there's significantly more than that that doesn't have coking capacity. On paper, if you lose the outlet for your high-sulfur fuel oil bunker block and that stream is still there, personally, I think you're going to see an opportunity or a shift away perhaps from filling your cokers on the margin from crude and filling your cokers on the margin from somebody else's stranded feed stream. We'll have to see how it all plays out.
Certainly, we're positioning ourselves as a company with the tankage in the East Coast that we've got to be ready to be able to have the catcher's mitt to take somebody's stranded oil and not necessarily just fill the cokers with crude.
Those are helpful thoughts, guys. Thanks.
We'll take our next question from Phil Gresh with J.P. Morgan. Please go ahead. Your line is open.
Hey, good morning, guys. This is John Royall sitting in for Phil.
Great.
I know you've spoken about wanting to get bigger on the Gulf Coast and the West Coast, would you ever consider expanding your refining footprint into Eastern Canada? How do you think about that market from a competitive advantage perspective?
Let me answer it this way. We'll consider anything, our priority is going to be trying to get an asset, obviously, at a reasonable price and fits the model in PADD 3 and PADD 5. If there was a great opportunity, we would look at it in Canada. One of the things we're very conscious of is going into a foreign company and becoming an operator has a little bit of a bandwidth issue with it in terms of management's attention span. It would have to be a very good opportunity, otherwise, we're going to keep the strategy, which obviously, we've got it as a strategy, it all is dependent upon the bid ask to try to grow. We intend to grow and to do it by having an additional asset in those two pads.
Great. Thank you. It looks like one of your peers in California is shutting an FCC. What impact do you think this is going to have on the West Coast product market?
Yes. It's already shut. That was done, that was Tesoro, now it's MPC. Obviously, with the takeover Andeavor. When Tesoro had acquired the two plants in Southern California, Carson and Wilmington, they undertook a project to try to hook those plants up and make them more synergistic between the two plants. They did ultimately get a permit to allow them to do that. A condition of the permit was to shut down, what's that Matt, 40,000? 42,000 barrel a day FCC. L.A. is short gasoline, by and large. Even when the California's balanced, there's a net movement from the Bay Area or Pacific Northwest down to L.A. to supply that market. There's going to have to be more supply that gets down there because that is now shut down, that unit.
Thank you.
We'll take our next question from Paul Cheng with Barclays. Please go ahead. Your line is open.
Hey, guys. Good morning.
Hey, Paul.
Just curious that, Tom and Erik, when you're looking at PBFX, does it really have a cost advantage on a capital cost or any other funding cost related to PBF? From a strategic standpoint, how important it is for you to have that as a subsidiary? Also that from a valuation standpoint, quite frankly, I'm not sure that it would add to really that much value to the C Corp anyway. It's pretty small.
I think, Paul, we've obviously had a fairly strategic announcement this morning related to the IDR conversion into common units. We are believers in the MLP strategy as we go forward, but obviously, we need to see how things unfold here over the next few years in the equity market. Clearly for the MLPs to grow, we need that equity market to rebound in some way, shape, or form. For us, we've run the math a couple different ways, obviously, with the IDRs coming out, lower cost of equity should be a real benefit for PBF Logistics. We still have a couple different things in the market where there is enough arbitrage between where refining companies tend to trade and where MLPs trade, that we think the math works.
Ultimately, today's announcement is extremely strategic for us, we're going to need to see how the market responds to what we think is overall a very positive message. We feel like PBF and PBFX came to a very reasonable agreement between the two parties that ultimately, Matt mentioned that, as a sidecar vehicle, these two companies should be working in tandem to continue to help grow both the refining business as well as the logistics business.
PBF by itself would not be able to have acquired the East Coast storage assets, going back to Plains assets. Those are very good deals for PBFX, and they bring with it synergies with the parent. Markets go up, markets go down, and they've certainly been sideways in the MLP space. We've tried to position as well as we can. To the degree that's well-received and the market's open, we think it makes a lot of sense.
Torrance, the fourth quarter margin realization seems to be a bit stronger than we would expect comparing to the market indicator. Any particular reason why that may be the case?
I think ultimately, Paul, it's just a combination of things over the past two years. We've clearly spent a lot of time, a decent amount of capital, and the team has continued to develop. Combination of all those things we think will continue to lead to performance coming out of Torrance that's consistent with what we laid out on the front end.
When you run well, it saves a lot of discussion. The refinery has run well, and they continue to make improvements and optimizations around the assets. I think the quarter's performance evidence that.
I'd add.
The operation of the refinery has improved. There's still work to be done there. OpEx has gotten down. The commercial activity in Torrance has been impressive. What I mean by that, getting into new markets, getting into asphalt market, running the marketing system at very high rack numbers. I think the business unit, and I mean the business unit, commercial, logistics, and refining itself, is continuing to make improvements and strides.
Tom, can you share how much is the marketing contribution in Torrance, in the fourth quarter? Is it a big number?
You know what? We really don't necessarily break that out, Paul. I can tell you, we're moving a lot of barrels.
A final question. Whether you guys will be willing to share what is the benefit in the fourth quarter from the different crude differentials? I mean that Exxon have said year-over-year from four Q17 to four Q18, the better crude defense have captured about $1.2 billion after tax. If Exxon willing to share, curious that whether you guys will be willing to share.
I'm sorry, what was the question?
The question is that how much is the crude benefit, crude oil price differential benefit that you received in the fourth quarter? I'm saying that as to everyone's pleasant surprise, Exxon actually gave out a number saying that from the fourth quarter 2017 to the fourth quarter 2018, the much wider crude defense or what they capture in the downstream is $1.2 billion after tax. I was just joking saying that if Exxon, that the most ultimate that don't want to share information, will be willing to share, and hope that you guys will be willing to share also.
Well, I commend Exxon for their willingness to share, that's not something we're splitting out today.
Okay. Will do. Thank you.
We'll take our next question from Matthew Blair with Tudor, Pickering, and Holt. Please go ahead. Your line is open.
Hey, good morning, everyone. Thanks for squeezing me in here. I'm not sure if I missed this, but could you share your WCS crude by rail volumes in Q4 2018 as well as your outlook for Q1 2019? Are you receiving the full economic benefit of these barrels in Q4, or are there any fixed price contracts or hedging that might have limited the upside?
Basically, we ran north of 70,000 barrels a day, I think, through the fourth quarter, by rail. We captured, by and large, all of the benefits from the distortions in the marketplace in the fourth quarter. That wasn't true throughout necessarily the whole year, but in the fourth quarter. As we move into the first quarter, I think for the month of January, we probably have continued to move somewhere around 60,000 barrels a day by rail. That is coming off, as Erik said, and others have said. Right now, we think that we're probably going to bottom out somewhere around 30,000 barrels a day in the March-April timeframe. Remember, there's a big lag in this system. Based on what we're seeing now with the spreads widening out, they were up over $20 now versus Brent.
We would expect to be ramping up in the second quarter.
Yeah, we absolutely believe, as Tom said, that that market has bottomed out. We did, and we will be able to evidence that we responded with the differentials shifting from being the cheapest crude in the world to being the most expensive on an economic value. We responded, and that all goes to the markets sort of fixing itself. We'll decidedly ramp up as the crudes become more attractive.
Sounds good. Thanks. Turning to your RIN guidance. Looks like guidance is up approximately 30% year-over-year for 2019. If I look at year-to-date ethanol RINs, about $0.21. In 2018, ethanol RINs averaged about $0.30. However, biodiesel RINs are up year-to-date. Could you just talk about what's really driving the year-over-year increase in your RIN expense? Does it have to do with the biodiesel side?
There's an element of the biodiesel side, and quite frankly, there's probably an element of conservatism in there, just based on what we've seen in the market thus far, where things have traded over the past few months. I think that's something that we'll continue to update as we go. We'll obviously, as the year progresses, we will have booked a certain amount related to RINs for both ethanol as well as the bio component. Ultimately, there's probably some conservatism built in there.
RINs will be what they will be, although, we're entering Kabuki theater, for I don't know what number this is. The acting secretary is going to try to get confirmed by the Senate. I think he received a letter from five senators this past week, voicing their concerns over the RIN market and the impact to the manufacturing base in this country. He no doubt is hearing from the powerful corn lobby, it's just, again, it's a snapshot of why big government can have a whole bunch of unintended consequences. I'm actually comfortable, certainly with the administration, that they recognize high RIN prices not only affects the consumer, but can absolutely damage the manufacturing side and the refining side, and have done a reasonable job of keeping RIN prices in check. I expect that will continue.
Thank you.
We'll take our next question from Jason Gabelman with Cowen. Please go ahead. Your line is open.
Yeah. Hey, guys. Thanks for taking my question. Firstly, just on PBFX organic growth, I know you have that $100 million EBITDA target out there. How much of that was realized last year, and is this Maersk deal that you announced today, it doesn't seem like it was embedded in the East Coast acquisition EBITDA target. Is it part of this organic growth target? Thanks.
No, I want to shy away from giving forensic accounting on $100 million. We invested a fair amount of money last year, and we continue to invest money this year on projects. I mentioned the Toledo export facility. That's part of it. I think by this year, we'll have $10 million of run rate EBITDA as a result of those investments. In regards to the Maersk, I would not characterize that as an organic project. It is absolutely incremental to the economics that we shared when we acquired the facility. It's something that's been in the plans for some time. We identified it as upside. This is the first time that the market's learning of the upside. Like I said, it is definitively incremental to the business.
All right, great. Thanks. Just a quick question on IMO 2020. I just want to go back to your comments about potentially blending vacuum gas oil into the marine fuel pool. There's been some industry chatter that there could be some issues with blending. I'm not sure if you guys are running tests to sanity check that or what your expectations are on the vacuum gas oil blending. Just to follow up from that, I understand you still expect IMO 2020 to be positive for PBF, but is the magnitude of the benefit that you're expecting in 2020 the same magnitude that you were expecting, say, six or eight months ago? Thanks.
Second piece of that. I think it will be. Frankly, certainly on the feedstock side and the stranded side, I don't see anything that's changed that outlook in terms of scrubber penetration or people figuring out what they're going to do with these streams. The whole key there is, if indeed you tip in on the margin that you are going into the power sector, then you're going to wind up with these $30, $40, $50 clean dirty spreads, which will push coking economics to be very attractive. I think on the blending side, make one other comment after that, we're going to leave that to the Exxons, BP, and Shell of the world. They are actively working through trying to do formulations and blending with a variety of different sourced, what would be compliant from a sulfur standpoint, fuels.
I can assure you, every one of those companies has the ability to do a lot of hydrotreating on their gas oils and turn that gas oil. It's a higher density fuel than diesel because obviously, it's got more BTUs in it. We're going to wait and see. We're not doing any of our own formulations. Recognize, though, that we're burning 0.1% sulfur in all of the ECA zones around the world, there's not been real issues with that. Now, gas oil, we'll find out what they do. I would say, I suspect that this industry, on the product side, will figure out how to solve this problem with less of a problem than was originally forecast.
It may be that you'll get an initial pop that will be the same as what was thought, but I suspect that on the product side and the availability of the fuel, that will be solved in a short to midterm, and the longer implications might be on the stranded feedstocks and wider for longer heavy crude, sweet sour crude differentials.
I'll now turn the call back to Thomas Nimbley for closing remarks.
Thank you everybody for joining us today. We look forward to talking to you in our next quarterly call.
This does conclude today's program. Thank you for your participation, and you may disconnect at any time.