Delek US Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 15 speakers on the call.

Operator

Good day, and welcome to the Delek U. S. Third Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Rosie Zuklic, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to the Delek U. S. 3rd Quarter Earnings Conference Call. Participants On today's call will include Abigail Thoric, President and CEO Joseph Israel, EVP, Operations Ruben Spiegel, EVP and Chief Financial Officer Mark Hobbs, EVP, Corporate Development. Today's presentation material can be found on the Investor Relations section of the Delek U.

Speaker 1

S. Website. Slide 2 contains our Safe Harbor statement regarding forward looking statements. We'll be making forward looking statements during today's call. The statements involve risks and uncertainties that may cause actual results to differ materially from today's comments.

Speaker 1

Factors that could cause actual results to differ are included here as well as in our SEC filings. The company assumes no obligation to update any forward looking statements. I will now turn the call over to Abigail for opening remarks.

Speaker 2

Thank you, Rosy. Good morning, and thank you for joining us today. We delivered strong 3rd quarter results. All segments performed well. Our team remains focused and drove improvements across our businesses.

Speaker 2

I thank each member of our Delek team for their contribution. From a macro perspective, during the quarter, we saw a significant volatility in the markets. Gasoline crack weakened. Diesel crack remained strong driven by inventory levels continued at 5 year lows. Given our higher distillate production relative to our peers, we are at a competitive advantage.

Speaker 2

The refining segment ran well. We achieved a record total throughput during the quarter. Joseph will provide more details on our refinery operation in his remarks. In Logistix, We are investing in continued growth of our business. We benefited from our favorable Permian location, Which led to another record quarter.

Speaker 2

Given our strong portfolio performance, we are confident in DKL's ability To exceed $100,000,000 in quarterly EBITDA run rate by the Q4 of this year. Moving to Slide 4, reflecting on my 1st year as a CEO of Delek. We have much to be proud of. When I return to Delek, I outline my focus areas: safe and reliable operations being shareholder friendly and having Strong balance sheet, unlocking the sum of the product value and improving the efficiency of our cost structure. We are very focused on these objectives.

Speaker 2

Our dedication to see each one of them to completion has not wavered. We have made progress in all of them. On the operations side, we enhanced our team with experienced talent. Together, we streamlined the structure and process throughout our operation. This has led to a strong safety resource.

Speaker 2

We achieved a total record throughput in our refining system. Earlier in the year, we successfully Completed the Tyler turnaround with 0 recordables on time and on budget. Post turnaround, The refinery is performing at higher yield and most importantly record capture rates. On financial and shareholder returns, over the past year, our logistics business achieved record EBITDA quarters. In Q3, retail achieved its highest EBITDA since COVID.

Speaker 2

We continue to be shareholder friendly. Through October, We repurchased $85,000,000 of shares and including the latest increase raised the dividend 5 times in a row. We improved our financial position by using our strong cash flow to reduce our net debt By $476,000,000 during the year. From a strategic point of view, our $100,000,000 cost reduction effort Are well underway, and we are seeing early results. On unlocking value from some of the parts, We have a clear strategy and we are well on our way to meet our objectives.

Speaker 2

As you can see, we have been consistent. This resulted in tangible progress. Importantly, the achievements I just outlined position us well for the mid cycle market environment, both from an operation and financial standpoint. In closing, we are pleased with our strong quarter. We will continue to drive further improvements and unlock value from our business.

Speaker 2

Now, I would like to turn the call over to Joseph, who will provide additional detail We're now operational.

Speaker 3

Thank you, Abigail. Moving to Slide 5. In the 3rd quarter, Our team processed a record high 306,000 barrels per day of total throughput. The focus on people, process and equipment helps us to build a solid organization to support safe and reliable operations. In the Q3, the combination of favorable market conditions and strong operations performance Led to $286,000,000 of adjusted EBITDA contribution by the refining segment.

Speaker 3

In Tyler, Total throughput in the Q3 was approximately 76,000 barrels per day. Production margin in the quarter It was $23.66 per barrel, reflecting improved reliability, Yield recovery and a strong capture rate of 73%. Operating Expenses were $4.74 per barrel, including elevated utility cost at approximately $0.50 per barrel Due to high demand for electricity in the state of Texas late in the summer. In the Q4, the estimated total throughput in Thailand is in the 73,000 to 76 1,000 barrels per day range. In El Dorado, total throughput in the quarter was approximately 84,000 barrels per day.

Speaker 3

Our production margin was $12.57 per barrel. Operating expenses were $4.36 per barrel. Estimated throughput for the quarter For the Q4 is in the 81,000 to 84,000 barrels per day range. In Big Spring, Total throughput for the quarter was approximately 65,000 barrels per day, driven by maintenance work, But still well within our guidance range. Our production margin was $15.92 per barrel, including an estimated unfavorable $3.50 per barrel impact from the maintenance activities.

Speaker 3

Operating expenses in Big Spring were $8.37 per barrel, including approximately $0.80 per barrel Of the unplanned activities and an additional $0.70 per barrel related to the elevated utility cost. In October, we completed a planned outage to replace the reformer catalyst in a couple of reactors. As a result, the estimated 4th quarter throughput in Big Spring is in the 61000 to 64000 barrels per day range. We are very excited with our progress in Big Spring Refinery. We have the right leadership team in place And we are pushing operational excellence to the next level.

Speaker 3

In the Q3, we already improved throughput capture And OpEx compared with the Q2 and going forward, we are planning for the following improvements at the controllable level. Throughput up approximately 5,000 barrels per day from our year to date 66,500 1,000 barrels per day performance level. Capture up 15% to 20% from our year to date 52.6 percent level. We are expecting to realize 65% of the improvement in 2024 And the remaining 35% in 2025. In Krotz Springs, Total throughput was approximately 81,000 barrels per day.

Speaker 3

Our production margin was $12.45 per barrel And operating expenses were $5 per barrel. Plant throughput in the 4th quarter is in the 77 At about $35,000,000 for the refining segment earnings Compared with $80,000,000 in the 2nd quarter. These results are outside of our reported margins At each of the refineries and their associated capture rates, wholesale marketing contributed about $20,000,000 Down from approximately $60,000,000 in the 2nd quarter. And asphalt marketing contributed Approximately $15,000,000 compared with about $20,000,000 in the 2nd quarter. Contribution of both businesses was impacted by rising oil price, but more importantly, Allowed us to pull inventory even with record high throughput for our refining system.

Speaker 3

The resilient demand in our niche markets and the access to rack blending are a significant strength With regards to the Q4, our refining system plant throughput Is in the 292,000 to 305,000 barrels per day range. We are well positioned to capture Strong distillate margin environment with our 42% distillate yield capability. As a reminder, No major turnaround is planned until the Q4 of 2024 in Krotz Springs. In DKL, The team delivered another record quarter under operational excellence, focus and growth. I will now turn the call over to Rosie for the financial variance.

Speaker 1

Thanks, Joseph. Starting on Slide 6. For the Q3 of 2023, Delek U. S. Had a net income of $129,000,000 or $1.97 per share.

Speaker 1

Adjusted net income was $132,000,000 or $2.02 per share and adjusted EBITDA was $345,000,000 Cash flow from operations was $433,000,000 On Slide 7, we provide a waterfall of our adjusted EBITDA by segment from the Q2 to the Q3 of 2023. The increase was primarily from improved results in refining, driven by higher throughput and cracks in the 3rd quarter. Logistics had a record quarter of at nearly $97,000,000 And Retail had another strong quarter with EBITDA of $16,000,000 Corporate segment costs increased compared with last quarter, largely due to bonus accruals. Moving to Slide 8 to discuss cash flow. We built $80,000,000 in cash during the quarter, ending the 3rd quarter with a balance of $902,000,000 The $433,000,000 in cash flow from operations reflects the strong performance of the quarter.

Speaker 1

Included in this amount is $177,000,000 in favorable working capital. This was largely from improved inventory management. Investing activities of $59,000,000 is mainly for capital expenditures. Financing activities of $294,000,000 primarily reflects pay down of debt and return to shareholders. This includes $176,000,000 of debt repayment, dollars 25,000,000 in buybacks, dollars 15,000,000 in dividends And $10,000,000 in distribution payments.

Speaker 1

On Slide 9, we show capital expenditures. Year to date, total company, we have spent $302,000,000 We estimate the full year CapEx to be in the range $380,000,000 to $390,000,000 before any reimbursement. We expect to receive approximately $20,000,000 Of insurance proceeds, growth CapEx partially funded by producers as well as other reimbursements. Including this, net capital expenditures for the year is in the range of $360,000,000 to $370,000,000 Net debt is broken out between Delek and Delek Logistics on Slide 10. During the quarter, We built $80,000,000 of cash and paid down $176,000,000 of debt, ending the quarter with a net cash position.

Speaker 1

Slide 11 covers outlook items for the Q4 of 2023. In addition to the throughput guidance Joseph provided, we expect operating expenses to be between $210,000,000 $220,000,000 G and A to be between $65,000,000 $70,000,000 D and A to be between $90,000,000 $95,000,000 and net interest expense to be between $80,000,000 $85,000,000 We will now open the line for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Manav Gupta with UBS. Please go ahead.

Speaker 4

And then as it relates to Big Springs, was it just a turnaround and we shouldn't be worried that when you actually Running hard in 4Q, some of the issues you saw would be behind you. So if you could talk about those things?

Speaker 2

Hey Manav, it's Avigal. Thank you for the question. And yes, you're right. We see big improvements both places and that we can address for a few areas. On Tyler, it's a lot of work that's being Done over the turnaround.

Speaker 2

We see the fruit of it, both on the product mix and the yield. Obviously, we are very fortunate with the Tyler market over We see the city growing and our ability to deploy product is just great. So that's a very solid market. In El Dorado, to be honest, El Dorado is a great asset with capabilities, Hydrogen plant, Reformer and other great assets that we are just starting to tap into what we can make out of it, And we are very optimistic about it as well. I think that Joseph touched a little bit on Big Spring in his prepared remarks, but I will allow Joseph to finish the answer.

Speaker 3

Yes, thank you. We are very excited with our PUM list. So when you look at Tyler, Our 45% distillate yield is a big plus, especially end of the Q3 going to this quarter and For the future curve side, obviously, the lower RVO price And the battery margin environment also supported our capture both in Tyler and El Dorado. With regards to Big Spring, we are very, very happy with the progress now. We have the right management team.

Speaker 3

We feel that things are under control as we implement best practice. And we are very confident to share with you Our plans in Big Spring rise increasing throughput and expecting A much higher capture rate. And to answer your question, we are not worried about the turnaround being about 2 years from now, we feel good about the mechanical integrity and our ability to operate it at a higher bar. So Excited.

Speaker 4

Perfect. My quick follow-up here is as it relates to supply, marketing and other, It was formerly your trading and supply, a big swing quarter over quarter. I know behind the scenes Rosy has been working very hard in trying to explain to The Street What are the metrics that drive that performance? But if you could help us understand some of the reasons there was such a big swing in this Segment quarter over quarter.

Speaker 2

Yes. Thanks, Manav. And obviously, in that line, there would be a bit more volatility than other lines. And Joseph, I know that you have a lot of passion around F. I, why don't you give a more wider view?

Speaker 3

Okay. So we provided information About the asphalt and Wholesale Marketing results, asphalt made $15,000,000 and Wholesale Marketing made $20,000,000 Both are Lower than previous quarter results due to oil price increase and you know that lag in pricing Provide always a headwind for this type of businesses. The other component In supply and marketing results is the inventory management and the derivative to really mitigate

Speaker 4

Thanks guys. Congrats on a good quarter and good to see pay down of debt. Thank you.

Speaker 2

Appreciate it, Panav. Have a good

Speaker 4

day.

Operator

Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 5

Yes. Thank you and hope everybody's family is doing okay back home, Avigal in particular.

Speaker 2

Thank you for the

Speaker 5

warm welcome, Walt.

Speaker 2

Appreciate it.

Speaker 5

Thank you. Awesome. Hey, Soak, again, a very good quarter there at Tyler. We just love your perspective on the markets right now. We see this big dislocation And cracks between gasoline and distillate and how does this play out as we move into 2024?

Speaker 5

How much of the weakness in gasoline is just seasonal Given the weakness in gas lead through yield switch. So just talk us through the product markets and how they evolve as we set up into 2024.

Speaker 2

Yes, Neil, I would love to do that. Obviously, ULSD, as you can all see, is in the 5 year low in terms of inventories That's determined the majority of the crack that the way we see it on the distillate. Obviously, we don't really know what the winter in Europe is going to yield, But that's another upside if it's going to yield for a colder winter. On the gasoline side, obviously, we have seen and we said that in the prepared remarks, we've seen a weakness. Some of that, as you mentioned, is seasonal and some of that I think most of it is seasonal.

Speaker 2

We believe that the demand for gasoline is solid. Our markets are pretty much resilient for demand. You can see another testimony that we were able to deploy our To reduce inventory, while other companies had a problem to deploy products. So that's another testimony to our market resilience and this is more micro than macro, but that's another something to note. [SPEAKER JOSE RAFAEL FERNANDEZ:] The demand in the U.

Speaker 2

S. As we see it is still very solid and I think the market is going to correct itself. I think that we See more supply going off the market, as I mentioned a few times, during COVID versus the change in demand. So overall, we think it's

Speaker 5

The follow-up is just on How we're thinking about unlocking some of the parts value, you have a go spend a bunch I'm talking about this as you stepped in. How do you transfer some of the value that fits at DKL and accrue it to the DKL at the parent level? Talk about the different strategies that you're approaching this with and what inning are you in, in terms of actually unlocking that value?

Speaker 2

Yes. So, Neil, you know that I said it many times and that's my our commitment. We're going to make it happen. We're going to make the right thing happen for Both shareholders and we didn't change our mind or went in the other direction That's going to happen. I will start and then I know Mark wants to have a lot of energy on that and wants to say a few words about that as well.

Speaker 2

But please remember that while we are still Working on that very hard, we came up with a cost reduction, which is a great thing for mid cycle if it presents itself. The safe and reliability initiative yields in a higher throughput, and we obviously have an EBITDA reduction, Neil, In order to enhance the balance sheet and I'm very proud of Ruben and his team being able to be at net zero debt on the TK level. Saying all of that, some of the part and allowing the value to be on the the DK to be on the Delek side is And maybe Mark, you want to say a few words around that?

Speaker 6

Yes, sure. Thanks, Abigail, and thanks, Neil, for the question. As I've mentioned on Prior calls and discussions that we've had specifically, we've evaluated a myriad of options and alternatives that are available to us. And we have strong conviction around the actions we need to take and what we would like to achieve through some of the parts. And as Abigail mentioned in his prepared remarks, We're working very hard towards those objectives.

Speaker 6

I don't want to say anything specific and I would love to be more specific around timing. But at this point in time, we don't have anything that we feel that we can tell you other than our focus is on preserving our ability to Perform well through the cycle through all the steps that Abigail and others on the call I've mentioned and the other thing that we're really focused on is in anything we do preserving Significant amount of liquidity across our business so that we can take advantage of accretive growth opportunities that we truly believe are in front of us going But look, I would just finish with just saying, look, we are committed to extracting value across our businesses

Operator

Our next question comes from Ryan Todd with Piper Sandler. Please go ahead.

Speaker 7

Thanks. Maybe a question on CapEx for you as we look into 2024. I know that you had said From a maintenance point of view, you don't have another major turnaround until Crops in the Q4 of next year. Can you maybe talk about how you would think about some of the moving pieces on capital as we look into 2024 and how we should think about a run rate there in the next year?

Speaker 2

Yes, Ryan. Thanks for the question. And Ryan, we are very disciplined about capital deployment. We've demonstrated over and over Both on the shareholder and debt, so that's the puzzle. We are working on that every day, all day.

Speaker 2

Regarding 2024, specific to your question, I don't want to be ahead of myself. We We are still finalizing our plan for 2023 for 2024, but directionally, we are looking on a lower number than 2023.

Speaker 7

Okay. Perfect. Thanks. And then maybe Just a follow-up on your comments. Obviously, you're at a 0 net debt balance sheet position there Delek on an unconsolidated basis.

Speaker 7

How should we think about your priorities here? You've been paying down debt. You've been Buybacks and shares. Is there further work on the balance sheet that you want to do? Or should we expect a shift towards an increase in share Of cash flow directed towards shareholder returns.

Speaker 7

So maybe high level, how are you thinking about that as we think about the coming quarters?

Speaker 2

Yes, absolutely, Ryan. And I will provide more kind of overview about the way we think about capital allocation. So first of all, We increased dividend 5 times in a row, as you can see. And our intent is to be able to maintain dividend towards cycle. So that's We said that many times.

Speaker 2

Regarding debt and the return to shareholder, we took a very balanced approach between the 2. Obviously, when we have opportunity to give back to investor, we will not shy. We are aggressive with that and that's going to be the approach going forward. But we have a balanced approach, and we're still going to do that. Executing in some of the parties, it's top priority.

Speaker 2

We're going to do that and that's going to play a big role in that equation as well. So stay tuned.

Speaker 7

Okay. Thank you.

Operator

Our next question comes from Doug

Speaker 8

Also offer my thoughts for you guys and what Neil said earlier. I would like to A housekeeping point first, if I may, which is I think Rosie mentioned the working capital move in the quarter. And I think you said better inventory management and worse of that effect. Is that will that reverse? Or are we now looking at A permanent downward reset in working capital.

Speaker 2

Hey, Doug. Good morning. I will let Ruven Talking about working capital just a little bit. Hi, Doug. So the short answer is it will not revert itself.

Speaker 2

The longer answer that we

Speaker 9

have been working on a zero based budget initiative that included a few components. One of them was the Reduction initiative and the other one was also changing our process about how we manage inventory. That process Change was tested, and that's why we did not execute on it until this quarter. But after it was tested, We executed on the new process this quarter, and that helped us to reduce inventory by roughly 2,500,000 barrels. Now there will be some fluctuations going forward, but we're not going to revert back to the old levels of inventory.

Speaker 8

So we can treat that additional cash flow then as permanent?

Speaker 9

Most of it, yes.

Speaker 8

Okay. Thank you. My follow-up is really on the reliability improvements. And I'm wondering, I mean, obviously, one of the key things we think about Is what the free cash flow capacity of the portfolio looks like at mid cycle. And a key input to that is obviously operating costs and capital, Sustaining capital costs.

Speaker 8

So I'm wondering if you can just give us some guideposts on both of those things. To achieve the higher reliability, What does it mean for OpEx? What does it mean for sustaining capital?

Speaker 2

So Doug, I will start and I will let Ruben or Joseph chime in. On the OpEx side, You remember, Doug, when the margin were at all time high pretty much, we started the program that cost reduction. In the beginning, no one really understood what we are why we are doing what we are doing. But we wanted to be to have a long runway in order to do it right. We didn't want to rush into that.

Speaker 2

And that's obviously going to improve our cost base both on the OpEx and the G and on a relative basis versus what we start. Obviously, going to always going to have a fluctuation in OpEx and GN based upon APN performance and based upon electricity, power and etcetera, like Joseph outlined. But that over time, Power and etcetera, like Joseph outlined. But that over time make us or making us very much ready for the mid cycle That might present itself. That's on the Joseph, any want to add on that?

Speaker 3

I will only add by reminding everyone that In previous earnings call, we discussed the $1 per barrel of additional OpEx in Big Spring just for the 2nd half of this year, so it will include the 4Q to really address Integrity, reliability opportunities that are giving us those fruits. So not much more than that And really nothing on the CapEx side that we need to accomplish to get all the benefits that we discussed earlier.

Speaker 2

So that gives you the kind of a more overview, Doug, on the P and L initiative we started ahead of time. Obviously, the balance sheet, as Sven said, is the Working capital in some of the parts. So for us, it's we were ahead of the game preparing ourselves and not waited for the clock to turn.

Speaker 8

Great stuff. Thanks so much and also look forward to seeing you next week.

Speaker 3

Great. Good to see you.

Operator

Our next question comes from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.

Speaker 10

Hey, good morning. Joseph, you outlined some big expected improvements in Big Spring Refining margin capture, could you talk a little bit about what's driving that? Does that involve any sort of commercial efforts to perhaps Increase your exposure to Arizona or is this more on the refining side in terms of reliability and yield improvement?

Speaker 3

But at this point, it's really the fundamentals. And this is the low hanging fruits, no rocket science there, and this is the beauty of it. By putting the right leadership team out there and really implementing the best practice and the Fundamentals on the process side, on the refining side will improve reliability. And as you know, with better reliability comes the Capture in the OpEx side, what you are talking about is really my Phase 2 and 3. When it goes to commercial and Good selection and logistics and other opportunities, it will really start to be fun.

Speaker 10

Looking forward to it. And then on the wholesale and asphalt contribution, I believe it was $35,000,000 in the 3rd quarter versus 80 In the Q2, what is like a normalized either quarter or year for this business?

Speaker 3

Yes. We provided guidance, I think, in the previous quarter when we opened up that supply and marketing line For you guys tomorrow, so asphalt is seasonal. As you know, 1st and 4th quarter is about $5,000,000 Contribution in average, not including oil price changes. And then in the second and third quarter during the season, it's Going to be more like $20,000,000 per quarter. Wholesale is more stable.

Speaker 3

It's going to be between $20,000,000 to $40,000,000 a quarter.

Speaker 10

Sounds good. Thank you.

Speaker 3

Thank you. Thank you.

Operator

Our next question comes from Paul Cheng with Scotiabank. Please go ahead.

Speaker 11

Hey, guys. Good morning. Good morning. May I first, I just want to end my best wishes for everyone that

Speaker 2

I have

Speaker 11

I have a quick question that Ruben, that in the Q3, is there any meaningful impact On the benefit of mark to market on the RBO due to the much lower wind prices?

Speaker 10

No.

Speaker 11

And that maybe this is for Joseph. In the Q4, we have in the gasoline market, we have from a margin standpoint, have some opposing forces. The built in branding and the lighting that the branding economy are extremely good. On the other hand, that the gas earnings crack So when we combine that, how your gas and then yield in the 4th quarter versus the 3rd Historically, I think the industry probably see a couple of percent increase sequentially, but Given the dynamic we see that what is your operating plan currently suggesting?

Speaker 2

So you're absolutely right. So the butane is going our favor, but the crack is going the other way. Also the RVO It's a tailwind other than headwinds for us. So big picture, gasoline gas spread still low versus what we've seen Last year, but it's not off the charts on a 5.3, 2 basis golf course versus historical at Q4. So we remain very optimistic about the future.

Speaker 2

And I don't know, Joseph, if you have anything to add to that.

Speaker 3

Yes. Just to wrap it up. So Other than Krotz Springs, which is producing light products to the Colonial Pipeline, Really the rest of our system is rack sales based and this what provides us the access to blending and Gives us the opportunity versus our average peer to participate in this opportunity. So we are definitely looking on Different things in the Q4 on butane blending like you say and then the sour heavy spreads will Motivate us to look at the lower cost grades on the crude side as we're going into it and Take the advantage from it.

Speaker 11

Joseph, do you expect the 4th quarter gasoline yield going to be higher than the 3rd quarter?

Speaker 3

I don't think so. We are in distillate mode and we will probably be as close as we can to 42%.

Speaker 11

Okay. So Ethan, with more built in branding and all that, you're not expecting the yield going to be higher?

Speaker 3

Agreed. It's not going to be enough unless there is a significant change in gasoline distillate economics later in the quarter, which hard to believe.

Speaker 11

Okay. A final one for me. Once that you sort of fixed up Brick Spring, what's the longer term normal refinery run that we should It can cost under, let's call it, say, dollars 4 Henry Hub. Any kind of guidance that you can give us? And what is the

Speaker 3

Yes. I'll start with the Big Spring throughput. So In our plan, we're basically going back to where Big Spring was in the past. We're not trying to reinvent the wheels. And fortunately, most of it again is low hanging fruit.

Speaker 3

So we gave very precise estimates We were looking at things. So 66.5 is the yield to date throughput. We spoke about adding 5,000 barrels per day. And I'm talking about calendar type of throughput. I'm not talking about peak.

Speaker 3

So you're looking at 71 Low 70s, really on the ongoing as a new routine. And we're talking about starting really in 24, 25. So this is not something for the long run. It's really coming. And With the 71, we're still leaving the normal 4%, 5% downtime for potential Surprises, right?

Speaker 3

So we're going to run it in the normal industry utilization rate. Can you please repeat your way, Henry Hub, please.

Speaker 11

Yes. I'm just looking at not even just on Big Spring, but your total system Yes. For facility, that what is a normal average And you know it's one way we can assume. And then also under that status, If we assume Henry Hub around $4 what will be a normalized annual cash operating cost in your refining system? And what is the sustaining CapEx we can assume for your refining system?

Speaker 3

Our quarter, our OpEx was $5.48 per barrel from the system. And this happened with steel issues in Big Spring. We spoke about the several things that affected us. $0.80 for the unplanned maintenance, dollars 0.70 for the elevated utility cost and the dollar We gave for a reliability. What I'm trying to say, Big Spring is probably more like $550,000,000 going forward The 837, so you're looking at overall OpEx for the system under $5 per barrel.

Speaker 3

And we think that this is a will happen even with the long term and we have pricing for Natural gas and energy costs.

Speaker 11

Okay. How about sustaining CapEx?

Speaker 2

So obviously, it's a bigger question because there is with turnaround and sometimes without turnaround. The question The scope of the turnaround, so I don't think it's going to we are going to do a good service by just giving a number without context. So going back to our my earlier comment about The capital our commitment is to be very disciplined with capital deployment Like we demonstrate and that's what we're going to do, but it's very hard to say to pin to a number. I hope that

Speaker 11

you appreciate it.

Speaker 2

Okay, good

Speaker 3

to you.

Speaker 11

Yes, understand. Thank you.

Speaker 3

Thank you,

Operator

Paul. Our next question comes from Roger Read with Wells Fargo. Please go ahead.

Speaker 12

Yes, thanks. Good morning. Good morning. Apologies for joining a little late. So if I'm asking a Question that's been asked, please let me know.

Speaker 12

But maybe digging a little deeper into Big Spring and juxtapose that with the performance at Tyler this quarter. Joseph, I know you were brought in to kind of improve operations. Is there a takeaway from what we see at Tyler coming out of the turn Brown versus what you'd like to do at Big Spring in the coming, let's call it, months, quarters, years until its next scheduled turnaround?

Speaker 2

Roger, with your permission, I will start and then Joseph will add some comments around it. Tylenol is a good way to see How good operation become after turnaround in terms of both TIRR and TBS And also capture, and that's something that we obviously can take from one turnaround to another and improve As long as the time goes by. Joseph has a lot of energy around Big Spring, and maybe you want to add around that Big Spring. I think we spoke about it, but

Speaker 3

Yes. In China, I think the turnaround scope was excellent. It was right. And beyond just maintenance, The team improved the vacuum tower bottoms and allowed a better quality of VGO going to the FCC providing us with better yields and catalyst replacement on the reformer was exactly what we needed And we see the results. The rest for the system and mainly for Big Spring is just all about the fundamentals.

Speaker 3

And it's about the focus on the right things and it's the culture and it's the right people in the right place that we're leading it And the processes and the procedures, these are not costly type of investments, but The efforts are bringing us fruits and allowing us to commit on a much better performance, especially in Big Spring going forward.

Speaker 12

Okay. And then just as a follow-up, Curious with Krotz Springs in terms of its product yield, I know it's historically had a little less of a Clean diesel yield relative to its total distal yield. Any changes there or anything you're seeing in terms of how that product [SPEAKER JEAN FRANCOIS

Speaker 2

PRUNEAU:] Generally speaking, KSR is a refinery that basically is on the Colonial. So that's the deployment. That's the distribution channel we have. We had some improvements we did, But nothing that was a meaningful discussion. We're obviously seeing the fruits of our hard labor and the great We have great operation and a great safety record Great yield.

Speaker 2

So we are very pleased with KSA and we see the improvement over time. So More to come.

Speaker 3

Yes. The one thing to remember about Krotz Spring, even though it's a high sulfur diesel, you're still in the Gulf Coast area and you have Plenty of customers that they see a lot of value in this product in different uses. And the other thing, The crude unit configuration is very special with almost 20,000 barrels per day of jet fuel In the crude unit, all in all, distillate yield in Krotz Springs is in the high 30s and Which will allow them to compete long term. Okay. Thank you.

Speaker 3

Thank you, Roger.

Operator

Our next question is from John Royall with JPMorgan. Please go ahead.

Speaker 13

Hi, good morning. Thanks for taking my question. So my first one is a follow-up on the capital allocation question. You're sitting today at 0 parent net debt, which you've spoken about, which is a great spot to be in. And I'm wondering how capital allocation could be impacted by a lower crack environment.

Speaker 13

And if you're willing to lever up a little from here, should the environment deteriorate just in the interest of keeping capital returns at a strong pace?

Speaker 2

So, John, thank you for the question. We're going to remain disciplined. Obviously, there is once we feel first of all, we want to maintain dividend towards the cycle. That's one thing we need to check the box. If we believe that Allocation capital to buyback, we will not be able to we will not be shy to do so like we did in the past.

Speaker 2

We'll do that again. And we're obviously looking at the opportunity that present itself themselves in the market. So we have all the toolbox To deploy on the right opportunity and keeping good return to shareholders is a very high priority for

Speaker 13

Great. Thanks, Abigail. And then last quarter, you had mentioned just very broadly, you had some very high Turning and presumably relatively quick hit projects in refining that you may think about for next year. And I think you touched on it again on this call. And Can you maybe just give us some color around what those projects are and just expand on those opportunities a little?

Speaker 2

Yes. So we again, we don't want to get ahead of our And to give exactly because we didn't finish the planning process around it and approving them with our Board of Director. But we definitely have some very Encouraging project on the table and we'll disclose them once we can. But again, Number one thing about capital is discipline, right? Disciplined and return to shareholders.

Speaker 2

So we maintain very disciplined about the way we deploy capital And want to be good stewards of our shareholders. Joseph, you want to add around that? Yes.

Speaker 3

I would just say that they are all a low cycle return type of projects That fund themselves in less than 24 months. They are all about liquid yield recovery And this is the type of project you will expect us to look very closely.

Speaker 13

Great. Thank you very much.

Speaker 2

Thank you, John.

Operator

Our next question comes from Jason Gabelman with Cowen. Please go ahead.

Speaker 14

Hey, morning. I just wanted to extend my thoughts and hope everyone's families are safe. I wanted to ask first about the supply and marketing line item. And I know you provided some Incremental guidance around that new line item last quarter to help us forecast something that was perhaps more ratable. It's been A bit volatile last quarter to list quarter and not necessarily in line with what was forecast.

Speaker 14

And I'm wondering How much of that is just around trading? And it seems like, I think, 2Q was a stronger trading quarter in that line and 3Q was weaker. So Should we expect to see that in this new line item where the trading impacts kind of offset quarter to quarter and the underlying results Trend in line with what you've guided to? I have a follow-up. Thanks.

Speaker 2

Yes. Thank you for the question and thank you for the warm word. First of all, we all understand that Rosy changed the world of marketing and not trading because of a reason. We are looking at on that as a risk reduction tool and not adding risk to the table. So we need to remember that.

Speaker 2

Obviously, when oil prices goes up, there is a bit of a volatility to reduce risk and take risk off the table. And as Joseph mentioned a few times on the call, wholesale has a volatility and especially asphalt With prices goes up. So we are looking on that line how to reduce risk and how to deploy product and how to get as long as A sustainable income as much as we possibly can. It's going to be more volatile than pure capture it, as you can imagine, But we are not deploying just a huge trading position into the market. We are trying to see how we can reduce risk.

Speaker 14

Okay. And to be clear, it's not necessarily that the derivative impacts in 1 quarter will tend to reverse in the subsequent quarter because that's what Seem to happen in 2Q to 3Q.

Speaker 3

Right. So when we talk derivatives, we talk about Edging what is outside of the natural inventory range, right, above or under. When we haven't been reliable, Like in the Q3 in Big Spring, we spoke about the outages and the fact that we are fixing it The future will be much better there. What happens is when you build inventories and oil price is going up, We are having very good dynamics on the cost of goods side, right? We are making money on the physical side.

Speaker 3

The hedging are there to keep you on the crack of the day. This is what we are asked to do by our investors. And this is not the type of derivatives. And I'm sure it makes sense to you, right?

Speaker 14

Yes. All right. Yes, that's really helpful color. And my follow-up is, sorry, I'm going to go back to the strategic Unlock of value. If I look on your slide, you say you have a clear strategy and on plan to meet our objectives.

Speaker 14

When I think about what your objectives were when you put the strategic unlock forward, it was primarily around Deconsolidating DKL's debt, is that still the objective as we sit 1 year later? And when you say you're on Plan, it's been a year since you laid out kind of the plan and Just wondering, it implies perhaps there is some time line that you have in mind. So I just I'm going to push again to see if You can elaborate on what you're thinking in terms of time line. Thanks.

Speaker 2

Yes. So You're absolutely correct. That's the goal, and we're going to achieve it. I'm not going to commit to the time committing to the time I impact the deal, And you don't want me to do that. You want me to make the right deal on the right timing and to bring value to shareholders.

Speaker 2

There is no we are not just going to rush for a deal, but we are decisive. So our state of mind is not wavered, and we're going to make it and we're going to make it right.

Speaker 14

Yes. Okay. Understood. I wasn't asking quite to commit to a time as much as it says you're on plan, which implies there is some

Operator

This concludes our question and answer session. I would like to turn the conference back over to Abigail Zurich for any closing remarks.

Speaker 2

Yes. Sarah, thank you for leading us today. I want to thank my colleagues around the table here for a great quarter, to our Board of Directors you so much. Have a good day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Delek US Q3 2023
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