HF Sinclair Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 17 speakers on the call.

Operator

Welcome to HF Sinclair Corporation and Holly Energy Partners 4th Quarter 2022 Conference Call and Webcast. Hosting the call today is Tim Goh, Incoming Chief Executive Officer of HF Sinclair. He is joined by Atanasov, Chief Financial Officer Steve Ledbetter, EVP of Commercial Valerie Pompa, EVP of Operations and Matt Joyce, SVP of Lubricants and Specialties along with John Harrison, Chief Financial Officer of Holly Energy Partners. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. We ask that you please limit yourself to one question and one follow-up.

Operator

Additionally, we ask that you pick up your handset to allow optimal sound quality. Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Beard, Vice President, Investor Relations. Craig, you may begin.

Speaker 1

Thank you, Jack. Good morning, everyone, and welcome to HF Sinclair Corporation and Holly Energy Partners' This morning, we issued press releases announcing results for the quarter ending March 31, 2023. If you would like a copy of these press releases, you may find them on our website at hsinclair.comandhollyenergy.com. Before we proceed with remarks, Please note the Safe Harbor disclosure statement in today's press releases. In summary, it says statements made regarding management expectations, judgments Forward predictions are forward looking statements.

Speaker 1

These statements are intended to be covered under the Safe Harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. The call also may include discussion of non GAAP measures. Please see the earnings press releases for reconciliations to GAAP Financial Measures. Also, please note any time sensitive information And with that, I'll turn the call over

Speaker 2

to Tim

Speaker 3

Goh. Good morning, everyone. Today, we reported Q1 2023 net income attributable to HF Sinclair shareholders of $353,000,000 or $1.79 per diluted share. These results reflect special items that collectively decreased net income by $41,000,000 Excluding these items, adjusted net income for the Q1 was $394,000,000 or $2 per diluted share compared to adjusted net income of $176,000,000 or $0.99 per diluted share for the same period in 2022. Adjusted EBITDA for the Q1 was $705,000,000 an increase of approximately $328,000,000 compared to the Q1 of 2022.

Speaker 3

In our Refining segment, 1st quarter 2023 EBITDA was $544,000,000 compared to $208,000,000 in the same period last year. This increase was primarily driven by higher refining margins in both the West and Mid Continent regions as well as a result of steady demand, tight supply and favorable crude spreads. Crude oil charge averaged 499,000 barrels per day in the first quarter of 2023 compared to 525,000 barrels per day in the Q1 of 2022 due to heavy turnaround maintenance during the period. Of the 3 refinery turnarounds we conducted in the Q1 of 2023, I am pleased to report We successfully completed all 3 on time and on budget. While this is a significant accomplishment in itself, We also addressed many of our end of cycle reliability issues on the refinery equipment that was available during these downtimes.

Speaker 3

Our drive to improve our operating reliability is built around the maintenance strategies that we execute during these turnaround cycles. In our Renewables segment, we reported adjusted EBITDA of $3,000,000 and total sales volume of 46,000,000 gallons for the Q1 of 2023. We continue to work to increase utilization at our renewables facilities and expect to achieve normalized run rates in the second half of twenty twenty three, which will allow us to optimize Advantage Feedstock from our pretreatment unit. Our Marketing segment reported EBITDA of $6,000,000 and total branded fuel sale volumes of 328,000,000 gallons, representing a $0.04 per gallon margin in the Q1 of 2023. We continue to see strong value in the Dyno brand as the marketing business provides a consistent sales channel With margin uplift for our produced fuels and we expect to grow our branded sites by 5% or more per year.

Speaker 3

Our Lubricants and Specialty Products segment reported EBITDA of $99,000,000 for the Q1 of 2023 compared to EBITDA of $145,000,000 for the Q1 of 2022. This decrease was largely driven by the positive FIFO impact from consumption of lower priced feedstock inventory in the Q1 of 2022. We continue to be pleased with the strong performance of our Lubricants and Specialty Products segment and continue to focus on sales mix optimization of our base oils and finished products. HEP reported EBITDA of $88,000,000 in the Q1 of 2023 compared to $73,000,000 in the same period of last year. This increase was mainly driven by contributions from the Sinclair Transportation assets, which were acquired in March of 2022, as well as higher revenues from our Woods Cross Refinery Process Units, partially offset by higher interest expenses.

Speaker 3

Overall, we returned $334,000,000 in cash to shareholders through share repurchases and dividends during the Q1. As of March 31, 2023, we have $420,000,000 remaining on our share repurchase authorization. We remain fully committed to our long term cash return strategy of returning 50% or more of our net income to our shareholders, while maintaining a strong balance sheet and investment grade credit rating. This morning, HF Sinclair made a non binding proposal to acquire all of the common units of Holly Energy Partners LP, Not already owned by HS Sinclair, pursuant to a stock per unit merger transaction that would result in HEP becoming an indirect wholly owned subsidiary of HS Sinclair. We believe the proposed transaction simplifies our corporate structure, Reduces costs and further supports the integration and optimization of our portfolio.

Speaker 3

Please refer to the separate press release for specifics related to this proposal. Looking forward, as I make the transition to CEO of H. S. Sinclair, I'd like to take this time to share with you my near term priorities for the company. First, we must continue advancing our operations excellence.

Speaker 3

This means improving the safety and reliability of our plants, which we believe will result in higher utilization rates and lower operating expenses. This is our top priority and we have recruited many reliability subject matter experts over the last few years We are implementing our operations excellence management system to guide us through this journey. But as I mentioned earlier, It will take time working through our turnaround cycles to make the necessary improvements to our equipment. 2nd, We have completed a number of transformative acquisitions and we continue to focus on the integration of those assets into our portfolio with the goal of capturing more operating efficiencies and margin opportunities across our asset base. We already realized annual run rate synergies of roughly $100,000,000 from the Sinclair acquisition, and we believe there is more to capture from this acquisition as well as in our lubricant and specialty products segment.

Speaker 3

3rd, I'm focused on free cash flow And I'm committed to continuing our cash return strategy that I mentioned earlier. Returning excess cash to shareholders over the long term and positioning the company for future success. With that, let me turn the call over to Athas.

Speaker 4

Thank you, Tim, and good morning, everyone. Let's begin by reviewing H. S. Sinclair's financial highlights. Net cash flows provided by operations for the first quarter of 2023 totaled $178,000,000 which included $164,000,000 of turnaround spend in the quarter.

Speaker 4

HF Sinclair's standalone capital expenditures totaled $92,000,000 for the Q1 of 2023. As of March 31, 23, HF Sinclair's total liquidity stood at approximately $3,000,000,000 comprised of a standalone cash balance of $1,360,000,000 along with our undrawn $1,650,000,000 unsecured credit facility. As of March 31, 2023, we have $1,700,000,000 of standalone debt outstanding with a debt to cap ratio of 16% and net debt to cap ratio of 3%. HEP distributions received by HFCN Clear during the Q1 of 2023 totaled 21,000,000 HFC Sinclair owns 59,600,000 HEP Limited Partner Units, which following the acquisition of Sinclair Represents 47 percent of HEP's outstanding LP units at a market value of approximately $950,000,000 at last night's close. Let's go through some guidance items.

Speaker 4

With respect to capital spending for full year 2023, We still expect to spend between $250,000,000 to $280,000,000 in refining, dollars 25,000,000 to $35,000,000 in renewables, $35,000,000 to $50,000,000 in lubricants and specialty products $20,000,000 to $30,000,000 in marketing $50,000,000 to $80,000,000 in corporate and $530,000,000 to $630,000,000 for turnarounds and catalysts. At HEP, we expect to between $25,000,000 $35,000,000 in maintenance and $5,000,000 to $10,000,000 in expansion and joint venture investments. For the Q2 of 2023, we expect to run between 550,000 to 580,000 barrels per day of crude oil in our refining segment and we have planned turnaround schedule at our Navajo and Harco refineries during the period. And lastly, as Tim mentioned, please refer to our separate press release we issued this morning for specifics related our proposal to acquire the outstanding HEP public units. As negotiations are currently ongoing, we are unable to speak to And with that, let me turn the call over to John for an update on HEP.

Speaker 5

Thanks, Atnus. HEP generated solid first quarter earnings supported by safe and reliable operations and strong volumes in both Attributable to Hollys Energy Partners was $58,000,000 compared to $50,000,000 in the Q1 of 2022. The year over year increase was primarily attributable to earnings related to the Sinclair Transportation assets as well as higher revenues from our Woods Cross Refinery Processing Units, partially offset by higher interest expense and operating costs. HEP's Q1 of 2023 adjusted EBITDA was 108 compared to $85,000,000 in the same period last year. A reconciliation table reflecting these adjustments can be found in HEP's press release.

Speaker 5

HEP generated distributable cash flow of $84,000,000 and we announced a 1st quarter distribution of $0.35 per LP unit, which is payable on May 11 to unitholders of record as of May 1. Capital expenditures during the quarter were approximately 8,000,000 including $4,000,000 of expansion, dollars 3,000,000 in maintenance and $1,000,000 of reimbursable CapEx. $2,000,000,000 revolving credit facility. For 2023, we are focused on safe and reliable operations while we negotiate the proposal from HF Sinclair. We are now ready to turn the call over to the operator for any questions.

Speaker 3

Certainly.

Operator

The floor is now open for questions. If you have additional questions, we welcome you to rejoin the queue. Comes from the line of Roger Read with Wells Fargo Securities. Your line is open.

Speaker 6

Yes. Thank you. Good morning, everybody. And Tim, welcome to the lead role here.

Speaker 3

Thanks, Roger. Appreciate it.

Speaker 6

So, I guess, One question for me, starting with the proposed HEP consolidation. Why now? And can you give us a little bit of the back and forth between the two entities in terms of determining the right Value here and the decision to go all units excuse me, all stock for units instead of a combination of things?

Speaker 3

Yes. Roger, as Agnes mentioned earlier, we just put the proposal out last night. We're not able to talk about it

Speaker 2

as just because it's a

Speaker 3

public negotiation. But what I can tell you is, we believe this proposed transaction simplifies our corporate structure. It reduces our costs and it further supports the integration and optimization of our portfolio. It also provides an opportunity to unlock cash that is currently being held at the MLP level for LP distributions and debt reduction. This cash will become available for DYNO's long term capital allocation strategy.

Speaker 6

Okay. That's helpful. And then my unrelated follow-up, you mentioned renewable diesel should be at full run rates 2nd half of this year, obviously, Q1 was a little bit of a bump in the road to say the least. What The factors talked about before were the hydrogen issue, as well as just the startup kind of challenges. I'm curious between where you are today and where you'd expect to be mid year onwards, how do those two items get solved?

Speaker 4

Yes, Roger, thank you. This is Atmos. First of all, I think we're pleased with the performance of our renewables Segment in the Q1 on an adjusted EBITDA basis, we were positive, which is which we're pleased with. With respect to some of the challenges that we've talked about in the past, a couple, one of them has been reliability, the second one has been Hydrogen availability. So with respect to operational challenges, we've made very good progress in the Q1.

Speaker 4

We've helped improve yields in some of our Particularly in our Cheyenne assets and we continue to work on a longer term solution for our hydrogen problem. So Working on the process optimization as well as the long term solution on hydrogen are 2 important priorities for us. With respect to run rates, I think we have made steady progress, but we're really looking at that second half of the year where we're looking to Achieve normalized run rates. With respect to the Q2, I would also point to your attention to the fact that we have Would impact run rates in the Q2, but that also gives us an opportunity to really continue to work on addressing operational issues and Come out really in better shape after these turnarounds.

Speaker 3

Yes. And Roger, I'll just chime in as well, just for some color. We're not happy with the results of the Renewable Diesel business yet, but we are happy with the progress. And so showing positive adjusted EBITDA this quarter is Evidence that we're moving in the right direction. As Agnes mentioned, we had several turnarounds this quarter.

Speaker 3

We have a few more here in the second quarter That will continue to improve the hydrogen infrastructure and the rest of the utility infrastructure that is around these renewable diesel plants As well as what Agnes mentioned, just our better understanding of how to run these plants better is going to contribute And help us deliver in the second half the run rate that we're expecting.

Speaker 6

Yes, fair enough. Could I just ask the one clarification? Since the hydrogen, obviously, is a long term solution, if you're going to run at higher rates, does that imply you do have a Short to medium term solution in place then?

Speaker 4

Well, I think the medium terms The short and medium term solution is just continue to optimize the operation of the assets and we like I said, we've seen good progress there. But Really the longer term solution is hydrogen supply, supplying hydrogen. Another thing is As we look at our just conventional diesel cracks, sometimes we obviously have to make decisions around economics and that's part of the optimization equation.

Speaker 3

Yes. We think our short term to get to our normalized run rate in the second half, we have solutions that we can And then of course, we are working long term solutions to our hydrogen supply issues that we're not ready to talk about today, but are in the process of being worked.

Speaker 6

Appreciate that. Thank you.

Operator

Our next question comes from the line of Matthew Blair with TPH. Your line is open.

Speaker 7

Hey, good morning, everyone. Tim, I was hoping you could elaborate more on the opportunity to improve refinery operations. You mentioned for the 3 planned turnarounds in Q1, you addressed some, I think it was end of cycle issues. Could you talk about and provide any examples of the problems that you're finding and what you're doing to fix them?

Speaker 3

Yes, Matt, this is Tim. I'd be happy to. I've mentioned before that you've got Resource and capability opportunities to improve. You've got systems and processes to improve. But The 3rd leg in the triangle is we've got to improve the equipment itself, right?

Speaker 3

I like to say, equipment doesn't know we're talking about it until we actually do something with it. And during the turnarounds, we have the ability to take that those maintenance strategies and actually affect the equipment That's usually not available except for turnarounds. So, let me turn it over to our new EVP of Operations, Valerie Pompa. She has over 30 years of operating experience, and we're really glad to have her on our team. Val, you want to talk a little bit more about turnaround?

Speaker 8

Sure. Our Q1 turnaround, so some examples going back to hydrogen Navajo specifically, we've spent A significant amount of our scope and effort are on hydrogen improvement projects, really gained at improving reliability around our hydrogen And so our strategy that goes from an equipment strategy that Tim mentioned aimed for reliability are Short term PM programs and PM program improvements. And then during the turnarounds, that gives us opportunities to upgrade whether it be Exchanges, specific equipment that has reached a point where it's time to change it upgrade And focus really on just getting our utilization and availability up higher To meet our demand.

Speaker 3

Yes. I think as a summary, Matt, Val has been doing a great job Driving these improvements, we implemented over 15 risk reduction projects during the turnarounds and over 3 very large yield improvement projects during the turnaround. So we're expecting improved operations as we start to run conditions here.

Speaker 7

Sounds good. And then on the lubricants side, was there a material FIFO impact in Q1 2023. And could you talk about the factors that supported better lubricants profitability quarter over quarter even though your index declined? Thanks.

Speaker 4

Yes. Hi there. I'll take this one. This is Atmos. So with respect to our FIFO impact, there was an FIFO impact was about $14,000,000 but even with that in mind, We're still very pleased with our results.

Speaker 4

When you look at the profitability of the business, there's really a couple of notable drivers. One of them is the favorable product mix. The second one is really strong margins And our Group 3 base oil that go into a lot of higher end Higher value end uses. And the third one is really continued strength in the finished products market. So when you take all of those three Together that really accounts for the successful quarter that we've had in that business.

Speaker 4

But Products mix and margins are really the 2 main drivers.

Speaker 3

Yes. And Matt, let me chime in to the FIFO impact that Atmos mentioned It was a $14,000,000 headwind for this quarter. This is the Q1 of 2023. Without that, Our ex FIFO number would have been higher than what we reported and was actually a quarterly record for us Last year, which is what you asked, we had a sizable FIFO tailwind, as you mentioned, and it was something closer to $49,000,000 something in that range. And on an ex FIFO basis, it would have been lower

Speaker 9

than that.

Speaker 3

But it gives me the opportunity to introduce another new member of our leadership team, Matt Joyce, who has nearly 30 Years in the base oil and lubricants industry, we're really glad to have him. Matt, you want to Any other color on the lubes business?

Speaker 10

Yes, sure. Thanks, Tim and Matt, nice to meet you. Building on what Atnes mentioned, The team has really positioned us well focused on key objectives where we're going after certain end use markets that are higher value Markets and we're well situated in those today. We enjoy a presence in many of those markets, off highway construction, mining, Natural gas, we've introduced some new products into that space and we're seeing some really good results. And further to that, we've We've seen some geographic expansion into targeted markets, that's been successful.

Speaker 10

And very finally, the product mix That Atmos mentioned and Tim has mentioned in prior earnings calls, that's by design. That is something that was intentional. That's not just stumbling into it. We have purpose to get in there and make our value Story and our value proposition to our end user customers is robust as possible and as a result get the returns that you're seeing And continue to trend at this higher than mid cycle range and we're really excited about that.

Speaker 7

Great. Thanks for all the commentary.

Speaker 4

You bet.

Operator

Our next question comes from Paul Cheng with Scotiabank. Your line is open.

Speaker 2

Thank you. Good morning. Two questions, please. Tim, since that you're saying you're going to The turnaround expense is going to be higher than usual. And if that's the case, do you have A range that you can provide, how that look like over the next 2 or 3 years?

Speaker 2

And second question is, I think in the past that the company has said the lubricant in the long haul So wondering if that is still the view? And if that's the view, what will be the peak condition

Speaker 3

Okay, Paul. Thanks for your Questions. Let me ask Val to comment on the turnaround.

Speaker 8

Yes. So our turnaround spend

Speaker 3

is This

Speaker 8

year has really been driven by the acquisitions. We acquired several, as you know, new sites. Those It came with refineries ready for turnaround. We've implemented all of those and we spent really this last year, We're working towards an optimized turnaround schedule. So that I'll call this kind of our catch up year to really Bring all those acquisitions in, address the reliability concerns that we saw and now get us on a run rate for turnaround.

Speaker 4

Paul, let me take the second question on lubricants.

Speaker 2

Actually, Anders, before that, And you have a range of what the turnaround expense may apply over the next several years?

Speaker 3

No, Paul. We've told you that this year was a peak turnaround spending year and we still believe that's the case. The next year's remember, we had The Parco and the Puget Sound and the Casper turnarounds, all three new assets land on this 1st year of running the full portfolio. So this was a high watermark, if that's the right word to use, On turnaround expenses, we believe future years will be lower than that. And we have guided in the past to kind of a run rate Total capital kind of guidance in the $700,000,000 to $800,000,000 range, and we still believe that's the right level.

Speaker 2

Okay, we do. Thank you, Hill.

Speaker 4

Thank you, Tim. Yes, Paul, just back to your questions On lubricants and we continue to view this business as very valuable to our portfolio. Obviously, very pleased with the operations that we Over the last couple of years, especially the last 12 plus months, we are running the business as a fully integrated Specialty Lubricants Business and some of the preconditions that you asked about That could possibly lead to determining that someone is a better owner of this business All boils down to valuation. Currently, we believe that this business is vastly undervalued within our portfolio. We're not given any credit for it.

Speaker 4

It throws a lot of free cash flow at the moment. And we have and we still believe that there is so more meat on the bones, so to speak. We have done a lot of good work over the last couple of years in integrating the assets in Europe, in petroleum, Pennsylvania as well as Mississauga. And we believe that there is still more synergies that could be gained over time. That of course will accrete further value into the overall valuation.

Speaker 4

But again, when you look into the specialty lubricants business, there are some markers out There that is significantly higher in terms of multiples that are double digit in some cases. And so When this type of compelling valuation presents itself, we will not shrink from Testing the market, but for the moment in the near term, we're focusing on leveraging and extracting more of those synergies And over the midterm, perhaps test the market.

Speaker 3

Yes. And Paul, you have rightly asked me in the past, what evidence Can we show you and the rest of the shareholders that we are making progress in our execution and our improved Our ability to deliver results and I point you to the Arludes and Specialties business. Over the last 3 years, We have really made we focused on it and really made a big change in the way we've operated And in the way we've delivered value to our shareholders, we hope that the shareholders will continue to see that and continue to give us better value for it, as But the catalyst would be as we continue to improve the business and if the share price doesn't accurately reflect the value that it Fine. Then we obviously have to look at ways to give the maximum shareholder value and that could involve other things than holding in our portfolio.

Speaker 2

Thank you.

Operator

Neil Mehta with Goldman Sachs. Your line is open.

Speaker 11

Yes. Good morning, Tim. Good morning, team.

Speaker 3

Good morning, Gail.

Speaker 11

Good morning, sir. My first question is related to return of capital. And just could you provide your latest thoughts in terms of the share repurchase program in a lower margin environment than where we were and the latest thinking in your ability to repurchase those shares bilaterally from the Sinclair family as opposed to seeing these come through in the open market.

Speaker 4

Neil, thanks for your questions. This is Atmos. I'd like to start with, first of all, that we're Capital return business, both return of and on capital. And we're committed to our long term capital return strategy as well as our Payout ratio as Tim indicated, while we're still committed to this Strategy, while our transaction with HEP is ongoing, that could impact PACE and we don't guide on pace, but we remain committed to that strategy and there's really no change there.

Speaker 3

Yes. You look at our Q1, Neil, and we returned 14% cash return through our dividends and our share buybacks. 85% of net income is what that translates to. So we are on a good pace. We feel like this year is going to be another strong year for us.

Speaker 3

We've done direct buybacks with the family, as you pointed out, and We've done purchases in the open market. We believe that over the long term, we'll just continue to do similar things as opportunities arise. But as Adnan mentioned, we don't comment on pace and amounts.

Speaker 11

That's fair. And then we haven't spent a lot of time talking about the refining macro on this Calls, Tim, maybe you and your team can just share your perspective on some of the volatility that we've seen, what do you make of it and How do you think about the progression of margins for the end

Speaker 2

of the year?

Speaker 3

Yes, we're obviously a lot of volatility. We were expecting More demand from China and more impact from the Russia embargoes. But I will tell you that we always thought That the Q1, we would see the most exports from China. And then as the country opens up over the course of the rest of this year, That the increased local demand in China will soak up those higher barrels and we'll see less of that coming into the United States. We still believe that's true.

Speaker 3

So in the Q1, we definitely saw some additional imports. But again, we expected that to peak and now we believe as China continues to open up, it will demand will or supply will stay in the China area. We think we're excited about the summer demand that we normally see, especially in the Rockies and in the West. You didn't specifically ask about demand, but I know that question always comes up. So I'll just mention, Q1 versus last year, Our gasoline demand, we believe, is about 102% of what we saw last year.

Speaker 3

Diesel was about 101% of demand in our areas. And that has been higher demand diesel demand, but we still think It's strong and it was higher than last year. And really the surprise was jet. Jet demand was 8% higher in the Q1 of this year versus last year. And that's continuing to drive some of the distillate areas as well.

Speaker 3

We've always said that there's a macro basis out there and we're seeing Asia and Europe Starting to get closer to breakeven in terms of their macroeconomics. Some of the run cuts that we're starting to see are expected as you look at the cost curves And kind of where the marginal capacity is in the world. We still believe that the U. S. Has a $6 to $8 advantage over the European Refining margins and then we've talked about this before, but we think HS Sinclair's portfolio, which is often overlooked, Has an advantage over that.

Speaker 3

When you look at especially in our West region, the Rockies, the Southwest, where we believe we're seeing Even higher advantages in product differentials than what you see, for example, in the Gulf Coast and certainly in the East Coast. And we saw that this year Sorry, this quarter with the demand in Phoenix and the demand in Denver that continues to drive our Profitability in our West region.

Speaker 11

Great color. Thank you, Tim.

Speaker 4

Our next question comes from

Operator

the line of John Royall with JPMorgan. Your line is open.

Speaker 9

Hi, good morning. Thanks for taking my question. So my first one is just a follow-up on the turnarounds in refining. So I'm more interested in the quarterly cadence. You've mentioned that 1Q would be peak maintenance and the guide for 2Q throughputs is certainly higher, but I think still kind of low to mid-80s to utilizations with some additional turnaround activity.

Speaker 9

So Can you guys give any thoughts on utilization run rates in the second half? And should we expect a minimal amount of maintenance following 2Q and running relatively full?

Speaker 3

Yes, John, thanks for the question. We've got 2 turnarounds in the 2nd quarter, 1 at Parco, I am pleased to report that the Navajo turnaround is complete and we have started up. So that's gone very well on time and on budget. The Parco turnaround we're in the middle of and everything is going very smoothly there. So After we start up at Parco, we anticipate to be able to run-in the low-90s utilization.

Speaker 3

We think that will carry through the rest of the year. We do have a couple more turnarounds in the fall, but we still think we're going to be able to maintain that kind of level of utilization for the rest of the year.

Speaker 9

Okay. Thank you. That's helpful. And then, I know it's not the most material of your segments, Marketing came in right around breakeven and on EBIT basis and coming off a big quarter in 4Q. So Any particular drivers there that you would call out of the weakness in 1Q?

Speaker 4

Yes, John, this is Atmos. Thank you for your question. What you noticed in our results as you referred to as weakness is really I'll point a couple of things. First of all, there's a seasonal component to this business, this being the Q1. And number 2, in markets Such as Denver and Phoenix, where we've seen tightness of supply, that Sometimes results in a dislocation between the unbranded and branded pricing, which could result in a temporary And that's why you're seeing that $0.04 margin.

Speaker 4

But over time and over the year, we feel very good about our The view on this business and I'll turn the call over to Steve Ledbetter, who is our new Executive Vice President Commercial, Steve, if you'd like to add some more color.

Speaker 12

Yes, absolutely. Thanks, and it's John. Thanks for the question. We're still very excited about the Sinclair brand, which as you know was one of the things we were excited about during the acquisition and interestingly something I was very I made the decision to join the HS Sinclair family. We think the value proposition is strong and will compete well in our markets, And we look to take advantage of that full integrated value chain in those markets where we operate.

Speaker 12

We see a lot of interest In the West, in the Rockies, in the Southwest, and are looking forward to growing our wholesale branded business. And we're We're on pace to meet the targets that we suggested between 5% 10% growth of the wholesale market marketing branded business year over year.

Speaker 9

Thank you.

Operator

Our next question comes from the line of Doug Leggate with Bank of America. Your line is

Speaker 13

open. Hey, good morning, guys. This is actually Kalei on for Doug. A couple of quick ones So first one on the capture rate on the West, it came in a little bit better than we had expected. Just want to get a little bit more detail there and maybe you can help us And what a good estimate for capture rate is going forward for that region?

Speaker 3

Yes, Clay, this is Tim. We were pleased with our capture rate in the West. Obviously, we had some stronger crude diffs that helped us. The Denver shortages also helped us with capture as well. But quite honestly, with turnarounds Going on also in the West that hurt us on a capture rate standpoint.

Speaker 3

So we do think there is room to continue to improve, especially as the summer season comes through. We also think that during the 1st quarter, we built some intermediate inventories associated with the turnarounds, and we think we're going to be able to draw down those inventories In the Q2, so we think there will be improved capture there. But we don't guide on the actual capture rate itself. Those are just some factors that we think we're going into as you

Speaker 13

I appreciate that. My second one is on HCT and I know you guys can't talk about the negotiation, but This is a bit more mechanical in nature. Post merger, you guys are requiring the HCP balance sheet. So I'm wondering what the consolidated leverage Target is going forward.

Speaker 4

Yes. This is Atmos. Thanks for your question. First of all, I'll remind you that Currently, folks like the rating agencies and everyone look at HEP as consolidated within Sinclair because we consolidated And on a go forward basis, as now, we're looking at around one turn of leverage.

Speaker 13

Sorry, that includes ATP?

Speaker 4

Yes.

Speaker 13

Awesome. I appreciate that. Thank you.

Operator

Our next question comes from Manav Gupta with UBS. Your line is open.

Speaker 14

Hey guys, first question, it's been over a year or so since you have acquired Puget Sound And quite some time since you acquired Sinclair, help us understand what were the positive upside surprises from these particular assets. So something which came in better than what you expected when you decided to acquire them?

Speaker 3

Yes. Manav, it's a good Question to reflect back on, we just really celebrated the 1 year anniversary of Sinclair a few weeks ago. And then, obviously Puget Sound had their 1 year anniversary last November and we celebrated that as well. So very, very pleased With how those have gone, I'll just say, we, of course, talked about the $100,000,000 of synergies that we captured really faster Never thought we would. And so I think that would be a surprise.

Speaker 3

I think things like the ability to have Backup supply, we've got refineries now that are able to back each other up to help improve our customer Reliability in terms of making sure we keep our stations wet, I think that's been a very pleasant surprise. Some examples of some of the synergies. We were short octane at our Parco refinery. We were long octane at our Woods Cross Refinery. So we were able to combine those 2 pools together and back out some higher cost components in order to optimize our operations there.

Speaker 3

I think on a heavy crude standpoint, it was we HollyFrontier had extra heavy crude line space that Sinclair was short of. And so we were able to increase heavy crude into the Parkdale Refinery by call it 10,000 barrels a day on day 1. So that was another pleasant surprise that we had to deal with. Another one that we don't talk much about is asphalt. Parco makes a lot of asphalt components.

Speaker 3

We have an asphalt business That's basically in the Southwest. And we were able to integrate those two businesses basically consuming all of the Parco asphalt production into our asphalt business. And I think that's been very surprising and very profitable for us. So those are some things That we found right away, but I'll tell you Manav, we think there's a lot more opportunity out there and we're going after it. I wouldn't I have a number for you today, but I would tell you that we believe there is plenty of opportunities.

Speaker 3

One of the remits that We have speed here for as the EVP of Commercial is to actually take that process that we just in terms of synergies with the Sinclair assets and expand that now to our overall portfolio. And to look at Puget Sound, look at the Southwest, look at the Mid Con and try to do kind of the same thing we just did with the Sinclair assets with the whole portfolio to look for margin opportunities and capture improvement projects.

Speaker 14

No, thank you for that. This is super helpful and Those were very good transactions for you. Since you announced the news in the morning, we have got repeatedly One question and I'm so going to ask this because a lot of investors are asking us this question and that is that we understand the logic of you trying to acquire HEP, But why not pull the trigger when your stock was $60 Why pull the trigger today? This is a repeated question we have got from investors. Yes.

Speaker 4

Hi there. This is Admis again. One thing to keep in mind is that we were focused Almost 100% on the integration of Sinclair and which took a lot of time, resources, efforts, Back office, front office and obviously being able to achieve the $100,000,000 of synergies has taken tremendous effort Across the organization, but our focus was primarily on the integration. So that was a matter of priorities. And As that integration is almost complete, we're pointing our attention to this more strategic with HEP.

Speaker 3

And I would just say, Manav, that again, we just started negotiations with HEP. And so obviously, We've got to be careful what we say, but we firmly believe this is a good time to go and that's why we're going.

Speaker 14

Makes perfect sense. Thank you so much for your answers. Thank you.

Operator

Our next question comes from the line of Ryan Todd with Piper Sandler. Your line is open.

Speaker 15

Thanks. Maybe, sorry, one last follow-up on the ATP question before we leave it. For a number of years, I think the long running position of the company was that you wouldn't take out the HEP shares until the

Speaker 4

This is Atmos. As Tim indicated and I indicated earlier, we're not going to comment on the specifics of the transaction as we've just made the offer And it's under, obviously, under negotiation, but we believe that over time it will create value to our shareholders. And Also, I will point you that as Tim indicated in his remarks, cash flow is a consideration for us as well.

Speaker 3

Yes. Ryan, I would just mention, I put out 3 near term priorities in my prepared remarks. We believe Mine in the HEP business addresses all three of our priorities and are consistent simplifying, integrating and cash flow. That's why we're doing this.

Speaker 15

Great. Thanks. And then maybe just one On a different side, as you look ahead to 2024, any comments on how the startup of the Trans Mountain pipeline Could impact crude access or economics of your Puget Sound Refinery, does that improve access to additional Canadian crudes or change the dynamics up there at

Speaker 3

Yes, Ryan. It does change the dynamics. We're looking right now at maybe a Q1 of 'twenty four start up. Obviously, as they do the line fill on the pipe before that, it will change Some of the supply demand, we do think that WCS, WTI, sorry, Spread will tighten as that line fill goes in. We think early on the first couple of years That WCS WTI diff will stay tighter because of the extra takeaway capacity that the TMX line provides.

Speaker 3

But over the long term and we think that's 2 to 3 years later, we do think production in Canada will increase and once again exceed the takeaway capacity and that we'll be back into Having said that, keep in mind that our Puget Sound refinery Can also run 100 percent A and S crude from the water that we are one of the few refineries In that area, they can do that. So we have the ability to switch back between A and S and these Canadian crudes, which gives us extra flexibility to take advantage of this volatility that we'll no doubt see over the next couple of years. And so As today, it makes more sense to try to bring in as much of the Canadian crude as we can. But In the future, it may make sense to bring in more A and S, and we can do that and optimize our portfolio. I

Speaker 15

mean, as some of those Canadian volumes probably make their way down to California, do you think that, that may soften up the A and S market? I guess There's a follow-up there.

Speaker 3

Yes. There's no doubt that, that will put pressure on the A and S market. The barrels are going to go to Westridge. The Far East. But yes, that will play dynamics in the A and S market, which again gives us that advantage since we are able to run Either crude and can arb between the 2.

Speaker 15

Great. Thanks, Dan.

Operator

And our next question is from Jason Kabelman with TD Cowen. Your line is open.

Speaker 16

Hey, good morning. Thanks for taking my questions. I wanted to go back to shareholder returns for a second. Two kind of related questions on that. First, I know the Sinclair family still owns a decent chunk that Gives them 2 Board seats.

Speaker 16

Any indication if they want to hold continue to hold the 2 seats or 1? And how you think about buybacks with that with those levels of ownership that they would need? And then somewhat related to that, you have previously guided to a 50% payout ratio of cash Starting in 2Q, does that still hold in this environment? Or are you thinking about that differently? Thanks.

Speaker 3

Thanks, Jason. Let me take your first question on the family. Obviously, we can't speak for the family. We don't know what their And we wouldn't be able to speak for it.

Speaker 2

But what I can tell you is this has

Speaker 3

been published in the documents that When or if their share count drops all 15%, their 2 seats on the Board goes down to 1 seat on the Board. So just So you know that is built into the deal. And I'll turn it over to Anness to talk about the capital return question.

Speaker 4

Yes, Jason. I guess the short answer is we still endorse our capital return strategy with our payout ratio target of 50%. We don't guide on pace, obviously with this transaction ongoing and under negotiation, there are periods where we're blacked out, but no change to our overall And go up 50%.

Speaker 16

Okay. And then my follow-up just on refining dynamics. You noted a couple of plants coming back online in the Rockies region. Have you seen that impact Product price premiums you're getting there. And then separately, what's your outlook on Brent TI?

Speaker 16

We've seen that come in a bit here. What's driven that? And do you expect it to remain tighter going forward? Thanks.

Speaker 3

Yes, Jason. We've seen Plans coming back online both from planned and unplanned events in the Q1. We definitely see In the markets, I mean, for example, in Denver, as everyone has been watching over the last several months, The cracks there went very high, and those cracks have come down from the very high levels. But I'd tell you, they're still attractive and they're still Certainly stronger than Gulf Coast cracks given that regional premium that I mentioned earlier. And I'll point out the same thing with Phoenix.

Speaker 3

Phoenix has seen very strong cracks and actually we're seeing very strong cracks still Right now in Phoenix, while there's a lot of still planned and unplanned downtime occurring in that area. So we're very pleased with that. We still think Even with all the plants running this summer, Jason, that these rocky Markets and the Southwest markets will continue to be very, very strong and very attractive for us. As you can see in the latest Margin indicators that we published here at the beginning of the

Speaker 2

month, we still see the West

Speaker 3

gross margins as being very strong. On Brent TI, it has come in. Obviously, the OPEC cuts put some pressure on the Brent TI. Think you also saw that the TI is now being included in the basket that they use to talk about dated Brent. I think that has a little bit of an impact on Narrowing that spread.

Speaker 3

But we still think the Brent TI spread is based on freight rates. On transportation, we still think that's going to be $3 to $4 a barrel long term, so no change there.

Speaker 16

Great. Thanks.

Operator

And we have a follow-up question from Paul Cheng with Scotiabank. Your line is open.

Speaker 14

Thank you.

Speaker 2

Tim, could you give us an update where you guide in terms of the pathway For the LCFS, have you already received it? And secondly, And secondly, do you have a number you can share about the Opportunity cost loss in the Q1 due to the downtime, both planned and untrained.

Speaker 3

Paul, thanks for your follow-up question. I can tell you we have LCFS validation It is scheduled in the same quarter. Those will be at all 3 of our renewable diesel plants. And depending on the outcome of those validation visits, we could move from the provisional CIs To the actual CIs, so we're hopeful that that will occur

Speaker 14

and that

Speaker 3

we'll benefit from we'll start seeing the benefits from that in the Q3. From an opportunity cost standpoint, Paul, we don't provide that level of guidance. But I can tell you that From a turnaround and from an unplanned basis, we see a lot of opportunities to improve. And that's why improving the safety and reliability of our assets It's our number one priority. We believe it's the biggest impact we can have on this company's results.

Speaker 3

And the good news is we have control over it. And we've got the people, we've got the processes And we've got the focus and determination to work on those. Again, I point to the lubes business As an example of how we've done that, pointing to the renewable diesel business as you can see that Progress, that journey happening as well. And then, I'll also say that same journey is happening on the refining side as well.

Speaker 2

All right, great. Thank you.

Operator

There are no further questions at this time. I would now like to turn the call back over to Tim Goe for final comments.

Speaker 3

Thank you, Jack. I just want to wrap up with a couple of points. First, I would like to recognize the impact Mike Jennings has made on our company. Over the last 3 years, he has led us through a global pandemic, We built a new renewable diesel business from scratch, bought the Puget Sound Refinery and acquired the Sinclair Oil Company to transform this company into HF Sinclair. His leadership, dedication and his compassion for our employees Has set the tone at the top and he has been a great mentor to me personally.

Speaker 3

Mike will be missed, but his legacy will never be forgotten. 2nd, I want to thank the Board for their confidence in me to lead this company going forward. I'm excited about the opportunity and challenge ahead. Some things won't change, like our long term commitment to return cash to our shareholders, but some things will have to change, like the need to improve our operational performance of our refineries in our Renewable Diesel business. I'm pleased to welcome the new members of our leadership team and together we look forward to growing this business and creating additional value to our shareholders, our communities and our employees.

Speaker 3

With that, thank you very much for your time today.

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Earnings Conference Call
HF Sinclair Q1 2023
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