HF Sinclair Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 14 speakers on the call.

Operator

Welcome to HF Sinclair Corporation and Holly Energy Partners Second Quarter 2023 Conference Call and Webcast. Hosting the call today is Tim Goh, Chief Executive Officer of HF Sinclair. He is joined by Atanas Antifab, Chief Financial Officer Steve Ledbetter, EVP of Commercial Valerie Pompa, EVP of Operations and Matt Joyce, SVP of Lubricants and Specialists along with John Harrison, Chief Financial Officer of Holly Energy Partners. Questions following the presentation. Goh.

Operator

We ask that you limit yourself to one question and one follow-up. Additionally, we ask that you pick up your handset to allow optimal sound quality. Please note this conference is being recorded. It is now my pleasure to turn the floor over to Craig Berry, Vice President, Investor Relations. Craig, you may begin.

Speaker 1

Thank you, Audra. Good morning, everyone, and welcome to H. S. Sinclair Corporation and Holly Energy Partners' 2nd quarter 2023 earnings call. This morning, we issued a press release announcing results for the quarter ending June 30, 2023.

Speaker 1

If you would like a copy of the press releases, you may Find them on our websites athfsenclair.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 or predictions are forward looking statements. 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.

Speaker 1

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 provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript. And with that, I'll turn the call over to Tim Goh.

Speaker 2

Good morning. Today, we reported Q2 2023 net income attributable to HF Sinclair's shareholders of $508,000,000 or $2.62 per diluted share. These results reflect special items that collectively increased net income by $4,000,000 Excluding these items, adjusted net income for the 2nd quarter was $504,000,000 or $2.60 per diluted share compared to adjusted net income of $1,300,000,000 or $5.59 per diluted share for the same period in 2022. Adjusted EBITDA for the 2nd quarter was 868,000,000 dollars a 53% decrease compared to the Q2 of 2022. In our Refining segment, 2nd quarter 2023 EBITDA was strong at $703,000,000 compared to $1,700,000,000 in the same period last year.

Speaker 2

This decrease is primarily driven by lower refining margins in both the West and Mid Continent regions and lower refined product sales volumes due to higher maintenance activity. Operating expenses of 4 $27,000,000 in the Q2 of 2023 improved versus the $469,000,000 ordered in the same period last year as we benefited from lower natural gas costs. We continue to focus on controllable operating expenses as well as streamlining and optimizing our operations. Crude oil charge averaged 554,000 barrels per day in the Q2 of 2023 compared to 627,000 barrels per day in the Q2 of 2022 due to higher maintenance activity during the period. I'm pleased to report that the 2 turnarounds at our Navajo and Parker Refineries in the period We're completed on time and on budget, and we continue to make progress on our long term reliability improvement initiatives.

Speaker 2

In our Renewables segment. We reported EBITDA of $23,000,000 for the Q2 of 2023 compared to negative $63,000,000 for the Q2 of 2022. Excluding the lower cost of market inventory valuation adjustment, This segment reported adjusted EBITDA of negative $11,000,000 for the Q2 of 2023 compared to negative $28,000,000

Speaker 3

for the Q2 of 2022.

Speaker 2

Total sales volumes were 50,000,000 gallons for the Q2 of 2023 as compared to 26,000,000 gallons for the Q2 of 2022. Utilization rates were impacted this quarter by 2 hydrogen plant turnarounds at Navajo and Parkco, which are co located with 2 of our renewable diesel plants. We continue to improve the performance of this business with a target of achieving normalized run rates by the end of 2023, which will allow us to optimize advantaged feedstock from our pretreatment unit and improve the profitability of this business. Our Marketing segment reported EBITDA of $25,000,000 for the Q2 of 2023 compared to $24,000,000 in the Q2 of 2022. Total branded fuel sales volumes or a quarterly record of 364,000,000 gallons compared to 335,000,000 gallons in the same period last year.

Speaker 2

Gross margin per gallon was also a quarterly record at $0.09 in the second quarter as we saw strong demand for branded fuels across our regions. We added 9 new branded sites in the Q2, and we continue to expect to grow our branded sites by 5% or more per year. Our Lubricants and Specialty Products segment reported EBITDA of $72,000,000 for the Q2 of 2023 compared to EBITDA of $156,000,000 for the Q2 of 2022. This decrease was largely driven by a lower FIFO benefit from consumption of lower priced feedstock inventory for the Q2 of 2023 of $500,000 as compared to the $71,000,000 benefit in the Q2 of 2022. We continue to look for ways to optimize the lubricants business, and we remain focused on sales mix optimization of our base oils and finished products.

Speaker 2

HEP reported EBITDA of $82,000,000 in the Q2 of 2023 compared to $80,000,000 in the same period of last year. This increase was mainly driven by strong transportation and storage volumes in the Rockies region. At this time, We do not have an update regarding the proposed buy in of HEP as we are still in discussions. We do not intend to disclose developments with respect to the proposed transaction unless and until HF Sinclair and HEP have entered into a definitive agreement to effect the proposed transaction. For this reason, we will not be able to discuss any specifics during Q and A.

Speaker 2

During the Q2, we announced and paid a regular quarterly dividend of $0.45 per share to stockholders totaling $87,300,000 Subsequent to quarter end, we announced earlier this week that we repurchased 8,200,000 shares for an aggregate price of $411,000,000 from REH Company. This puts our year to date total cash return, including dividends and share repurchases, at over $834,000,000 On a trailing 12 month basis, we've returned over $2,000,000,000 in cash to shareholders as of August 2, 2023. Overall, we are very pleased with our strong second quarter results. With the majority of the planned turnaround behind us, we believe our diversified portfolio is well positioned to capture margins available to us the remainder of the year. Our long term commitment to returning excess cash to shareholders Has not changed, and we continue to target a payout ratio of 50% of net income to shareholders, while maintaining an investment grade rating.

Speaker 2

We remain focused on the reliability and integration of our asset base to further strengthen the earnings portfolio and free cash flow generation of HF Sinclair. With that, let me turn the call over to Adam.

Speaker 4

Thank you, Tim, and good morning, everyone. Let's begin by reviewing HF Sinclair's financial highlights. Net cash flows provided by operations for the second Quarter of 2023 totaled $490,000,000 which included $183,000,000 of turnaround spend in the quarter. HF Sinclair's standalone capital expenditures totaled $72,000,000 for the Q2 of 2023. As of June 30, 23, HSN Clear standalone liquidity stood at approximately $3,300,000,000 comprised of a cash balance of $1,600,000,000 along with our undrawn $1,650,000,000 unsecured credit facility.

Speaker 4

As of June 30, 23, we have $1,700,000,000 of standalone debt outstanding with a debt to cap ratio of 15% and net debt to cap ratio of 1%. HEP distributions received by H. F. Sinclair during the Q2 of 2023 totaled 21,000,000 H. S.

Speaker 4

Sinclair owns 59,600,000 HEP Limited Partner Units, which following the acquisition of Sinclair Transportation represents 47% of HEP's outstanding LP units at a market value of approximately $1,200,000,000 as of last night's close. Let's go through some guidance items. With respect to capital spending for full year 2023, we have lowered our total capital guidance range from $940,000,000 to $1,150,000,000 to a new range of $900,000,000 to $1,060,000,000 We now expect to spend between $250,000,000 to $270,000,000 in Refining $25,000,000 to $30,000,000 in Renewables $35,000,000 to $45,000,000 in Lubricants and Specialty Products $20,000,000 to $30,000,000 in Marketing dollars 40,000,000 to $60,000,000 in corporate $500,000,000 to $585,000,000 for turnaround on Catalysts. At HEP, we expect to spend between $25,000,000 to $30,000,000 in maintenance and $5,000,000 to $10,000,000 in expansion and joint venture investments. For the Q3 of 2023, we expect to run between 585,000 to 615,000 barrels per day of crude oil in our refining segment, and we have planned turnaround scheduled at our Casper and Tulsa refineries during the period.

Speaker 4

Let me turn the call over to John Harrison for an update on HEP. John?

Speaker 5

Thanks, Adnanis. HEP posted another solid quarter of earnings, driven primarily by strong crude and product volumes in the Rockies region. HEP's Q2 2023 net income attributable to Holly Energy Partners was $50,000,000 compared to 57,000,000 Q2 of 2022. The year over year decrease was primarily attributable to higher net interest expense. HEP's Q2 2023 adjusted EBITDA was $103,000,000 compared to $104,000,000 in the same period last year.

Speaker 5

A reconciliation table reflecting these adjustments can be found in HEP's press release. HEP generated distributable cash flow of 73,000,000 and we announced a 2nd quarter distribution of $0.35 per LP unit, which is payable on August 11 unitholders of record as of July 31, 2023. Capital expenditures during the Q2 were approximately $9,000,000 including $6,000,000 in maintenance, dollars 2,000,000 of reimbursable and $1,000,000 of expansion CapEx. We ended the 2nd quarter with approximately $600,000,000 in total liquidity comprised of cash plus availability under our $1,200,000,000 revolving credit facility. We are now ready to turn the call over to Audra for any questions.

Operator

Thank you. The floor is now open for questions. Goh. If you have additional questions, we welcome you to rejoin the queue. We'll take our first question from Manav Gupta at UBS.

Speaker 6

Good morning, guys. We are consistently seeing an improvement in your capture rates, both regions, which is very impressive despite the turnaround. Help us understand some of the things you have been doing to attain this improvement in capture, which we are seeing over the last 6 to 9 months.

Speaker 2

Thanks Manav for your question. This is Tim. Let me ask Steve to comment on capture rates here.

Speaker 7

Hey, Manav. Thanks for the question. I think it's a combination of everything. It's really around optimization, making sure that we're taking the right decisions to put the right molecule in the right market. From a margin perspective, we've had a bit of support.

Speaker 7

We look to optimize our late in crude structure and take advantage of some of the differentials that We've seen and then from an operations perspective, it's about running full, getting the molecules produced and getting him out into the right markets to get to capture where we want it to be. So it's kind of a combination of everything.

Speaker 6

Perfect. I have a quick follow-up. You have a West Coast asset. It can run heavy crude. I want to understand A little bit, would TMX be a tailwind for your overall crude slate as it relates to the Puget Sound refinery?

Speaker 7

Yes. Again, this is Steve. As far as the TMX is concerned, we think when it comes on, it will tighten the differential in the short term, But a few uncertainties include the ability of the dock to handle the capacity to get it off over the water and then timing of Production in terms of outrunning the capacity. So we think somewhere in the next 3 to 5 years could be when a constraint occurs again and differentials will widen.

Speaker 6

But as it relates to Puget Sound, that would be a benefit, right, if that crude lands up on the West Coast?

Speaker 7

Yes. We believe that's the case.

Speaker 2

Yes. We think that will be helpful, Manav, this is Tim, because it will also put some pressure on ANS crude as well As they compete for other refinery runs on the West Coast, because our Puget Sound refinery Can run both crudes and can go 100 percent ANS and go 100 percent Canadian. We believe it gives us an advantage to be able to arm those crudes post TMX startup.

Speaker 6

Thank you for the detailed response and congrats on a very strong quarter.

Speaker 2

Thanks, Matt.

Operator

We'll take our next question from Neil Mehta at Goldman Sachs.

Speaker 8

Hey, good morning, team, and congrats On a good quarter here. I want to kick off on return of capital, a lot of moving pieces around share repurchases and the agreement with REH. So maybe you could spend some time walking the investment community with what's been announced here over the last couple of weeks as it relates to REH And then talk about your capacity to continue to return capital to shareholders.

Speaker 2

Great. I'll ask Agnes, Neil, To start off and then I can come in at the end and share some more.

Speaker 4

Neil, thanks for the question and good morning. Well, first of all, Goh. Our business continues to operate at and above the expectation in generating Robust cash flows. With that, our commitment to returning capital to our shareholders remains a priority and and as you can see here to date we've repurchased with this latest announcement 13,100,000 shares. With respect to capital return to shareholders, we've said that our target is 50% payout ratio.

Speaker 4

We have consistently Exceeded that and our target remains to be at or above that. With respect to the family, We can't speak for the family, but we have a constructive relationship. You can see there, you've all noticed there are 13 The disclosures where they've indicated their intent to continue to transact directly with us And we're very much opened and keen on continuing to repurchase shares. With the HEP transaction being under discussion, we have been in At times locked out of the market, but we continue to look for those windows and this most recent transaction is Indicative of our desire and commitment to continue with our shareholder return strategy, and we expect to be on that trend trajectory through the end of the year.

Speaker 2

Yes. And Neil, I'll just throw in a few more comments, Neil, that we've said on the past Few conference calls that we can't speak for the family. So the family decided to speak for themselves, and that's why they put the 13D out there. They wanted people to understand that they intend to transact directly with the company Goh going forward. And then they also intend to maintain at least one Board seat for the foreseeable Goh.

Speaker 2

So I

Speaker 7

think that provides some clarity

Speaker 2

in terms of what their intentions are and they wanted to make sure that was clear to the rest of the public. We said all along that in the middle of these HEP discussions, Our window to buy back shares was going to be very restricted during the HFP during these discussions. But as Agnes mentioned, we want to reiterate our commitment to shareholder returns. We found an opportunity between the two parties and we took advantage of it and executed. And so we'll continue to look for more opportunities as

Speaker 7

the year progresses.

Speaker 8

Thanks, Tim and Annette. The follow-up is, it was a very heavy first half of the year from a turnaround Perspective and a lot has been made at that. As you kind of look through the back half, maybe you can remind us again of the maintenance schedule and How we should think about the volume trajectory to the balance of the year?

Speaker 9

Yes. Singh, this is Valerie. We have 2 turnarounds in the back half of the year, Our Casper facility and in Tulsa towards the back half of September and into the 4th quarter. So those are Impacts are listed and accounted for in our crude guidance. The rest of the year is a clean year.

Speaker 9

We don't expect any Yes.

Speaker 2

Neil, I'll just chime in. Val and her team have done a fantastic job of executing the heavy turnaround period that we had in the first half of the year. We knew all along that it was going to be a heavy load. We're Happy to report, as we mentioned earlier, that overall, the turnarounds are completed on schedule and on budget. And in fact, that's the reason Atna has mentioned The lowering of capital guidance for the rest of the year is because of the way those turnarounds have been executed this year.

Speaker 10

Thanks, Tim. Thanks, Tom.

Operator

We'll go next to Paul Cheng at Scotiabank.

Speaker 10

On the Refining reliability improvement long term, I think you have said in the past, you say, 5, maybe 5 to 6 year process and you are about 2 to 3 year into that. And we're very happy turnaround that we are Qing, are we still having another 2 or 3 years? Or do you think within the next maybe 12 to 18 months, you will be largely complete? And when you complete on this process or the initial process, what is the more sustainable We buy it. But in a more sustainable reliability, what is the target throughput per year that We could be looking for and also then what kind of cost structure under that circumstances will be.

Speaker 2

Paul, this is Tim. You're right. We are very pleased with how the turnarounds went. We're pleased with how our capture is performing as was talked about earlier on this call. But this is a long process, And we've told all as we've said all along, it's really measured by turnaround cycles, not by years.

Speaker 2

And so we've been Working over the last 2 or 3 years to improve our turnaround execution and to improve our turnaround performance. This year, it just continues that effort. But we are we talk in terms of turnaround cycles. And so with a little bit more color, let me ask Mala to maybe chime in.

Speaker 9

Yes. So our focus and our turnarounds have Then strongly aimed at reducing operating risk and improving our utility reliability, so that we have a more robust and Resilient Systems. So if you look at any refining complex, the more resilient we can get our utilities and Goe. Remove aging equipment, the better off your reliability starts to look. So we've taken a big step with Those activities this year will continue to develop our turnaround strategies in the coming years to support a sustained reliability improvement year over year.

Speaker 2

And Paul, one last thing. You asked for what our target throughput is. Goh. We in our mid cycle roll up that we put out there, we put 640,000 barrels as our basis. Of course, we think as we continue to implement these strategies that Valerie just talked about That we hopefully will get to an above mid cycle kind of condition.

Speaker 2

But I'd say at this point, I would use 640,000 barrels a day as our First, are you?

Speaker 10

Hey, Tim, is that a crew or a total throughput that you are mentioning?

Speaker 2

It's crude.

Speaker 10

That's true. And then under that, what kind of unit cost we will be talking?

Speaker 2

What kind of unit cost are we talking about? So we'll I'll let Val say Something

Speaker 6

in the Philippines.

Speaker 10

Let's assume on the natural gas price, it's somewhere in the 3 to 3.50. So if you can give us some idea that on the two regions, what is the say what is your target unit cost Once that you complete this reliability improvement.

Speaker 9

Yes. As we improve reliability, our Costs will continue to come down. A large component of any operating organization as large as ours It's tied to how well you execute and how reliable your facilities are. So as we directionally improve there, our costs will continue to decrease. Our estimation is directionally it will be down, and we're thinking somewhere between $6,000,000 $6.50 overtime.

Speaker 10

Thank you.

Speaker 2

Yes, Paul, you're starting to see some of the benefits of some of the integration work And some of the reliability work already that we're doing to get operating costs this quarter are down, which is an encouragement, Obviously, we have more work to do.

Speaker 10

All right. We do. Thank you.

Operator

Our next

Speaker 11

Great. I was wondering If you could provide a little more color in terms of where you are in normalizing RD operations. I mean, it's sequentially improved, but Can you walk us through kind of the pathway where you think you are in terms of throughput utilization and kind of normalizing that up to a full run rate.

Speaker 4

Yes, good morning. This is Atnus. With respect to utilization and where we are, Our goal has not changed. What we have indicated is that we're looking to achieve what we'd call normalized run rates, which is 75% 80% by the end of this year. As you can recall, we had the turnarounds at 2 of our co located facilities, which impacted utilization rates.

Speaker 4

But on the flip side, it also gave us an opportunity to look under the hood, so to speak, and make improvements to our Equipment. One of the some of the positive things that you're already seeing is the decreasing OpEx Per gallon, which declined 29% quarter over quarter. Another thing is the Improvements that we've made to Catalyst. So our focus has been process optimization as well as Goh. And Cheyenne has been a great example of that.

Speaker 4

So

Speaker 11

at the end of

Speaker 4

the day, Again, our goal has not changed, and we remain committed. Steve?

Speaker 7

Yes, maybe I'll just I think we are excited about what we're seeing in the underlying capability of this business. As Adonis mentioned, we did show both yield improvement and reduced costs. We also ran well at Cheyenne with 99% yield and 89% utilization, which we believe is a good sign in our ability to run productive levels and choose to run the economic barrels that we see fit. So yes, excited about where we are and look for normalized towards the end of the year.

Speaker 11

Great, perfect. And then maybe any update just in terms of what you're seeing in the lubes business and the backdrop there both from a as we head in or as we're partway through the Q3 here in terms of what you're seeing on kind of the Rack Back Rack Forward Dynamics there. As well as maybe your continued thought process on in terms of the kind of the long term suitability of that business within the portfolio.

Speaker 4

Sure. This is Adam. Just at the high level with respect to the performance of the business, what we're seeing is continuously strong performance. We have volumes have softened up a little bit primarily on recessionary fears around our Specialties market, but on the flip side, one of the positives is our ability to hold up margins and continue to improve Product mix, hence the strong performance of the business. And on an ex FIFO basis, Where we are here to date compared to last year, we're actually $12,000,000 better on an apples to apples And so our goal is to continue to shift more of those base volumes base oils volumes into finished and specialty.

Speaker 4

And I want to remind you again that at the end of the day, we don't look at our businesses rack back and rack forward. We look at it on a holistic basis. And I'll turn it over to Matt Joyce to provide some more color. Yes.

Speaker 3

Thanks for the question. It's Matt Joyce here. More specifically, over Past quarter in particular, team has done a tremendous job continuing to focus on streamlining our supply chain and manufacturing Of certain products and end uses. We've also been working to get better visibility to our costs through implementation of new digital tools that we're bringing on board that will help with inventory management and planning. So that's in process, and that will actually be seen in the second half of the year.

Speaker 3

So when you're looking into that quarter 3, quarter 4 benefits, those are some of the pieces that we're putting together. And we've been looking at the right mix of products. We're really fortunate to have a good balance of products that are in what I'd call sustainable markets where we can really be distinctive in our value proposition and our solutions to the marketplace. And We're very satisfied and excited about the opportunities that some of the regional focus the team has taken, in In these markets, those have proven to be very good. So despite these headwinds Some of the softer volumes that the markets have experienced in general.

Speaker 3

We're doing really well to manage our margins, Goh. We have to make sure that our own housekeeping are in order and look for the right targets and the right customers and partners to grow with in the future.

Speaker 8

Audra, are you still there?

Operator

Yes, I'm still here. Can you hear me?

Speaker 2

We can now. Yes. Let's move on to the next question, Hunter.

Operator

Okay. We're going to go to Jason Gabelman at TD Cowen.

Speaker 12

Hey, good morning. Thanks for taking my questions. The first one I wanted to ask was kind of on the niche markets that you serve. I think both the Rockies and Southwest Saw some margin strength in 2Q, and I was hoping you could talk about what drove that and if you're seeing that continue Into 3Q, particularly given some regional outages seem to be reaching their conclusion? And I have a follow-up.

Speaker 12

Thanks.

Speaker 7

Yes, Jason. Hey, this is Steve. I'll take that one. Those markets that we serve, as you know, There's not a ton of liquidity in some of those markets and so supply and demand balances can move pretty quickly. I think what we saw is the strength of the crack in those markets associated with low inventories In the peak of the driving season really allowed us to take advantage of that.

Speaker 7

When you think further out, we see some of the back half of the year, some of Goh. The cracks coming off and diesel normalizing to a more fundamental position. But again, in our markets, we think we have a competitive advantage to take those cracks and drive them to the bottom line and we want to do that through the rest of the year.

Speaker 2

Yes. And Jason, this is Tim. I'd just chime in to say, we've always said, especially since the Sinclair combination That the strength of our portfolio in refining is

Speaker 10

the

Speaker 2

markets that we serve, which provides both growing demographics that are supporting demand, advantage crude and then of course product Premiums over the Gulf Coast. And what you're seeing play out this year, I think, is very indicative of why we think we have a real competitive advantage in our portfolio.

Speaker 12

Got it. And my follow-up is on M and A and Refining. It seems like there's a number of assets coming to the market that are available for purchase. And Dyno has obviously demonstrated a desire to consolidate the refining space over the past couple of years. So I was wondering if we could just get your updated thoughts And how are you viewing refining M and A?

Speaker 12

Are there any specific regions that you'd be more interested in, in other any types of assets? Or do you feel like the size of your refining portfolio is in a good place right now? Thanks.

Speaker 2

Yes, Jason, thanks for the question. Goh. We believe in liquid transportation fuels. We would not have done the transaction with Puget Sound Refinery Goh. With Sinclair, we did not believe that there were years, if not decades left for the right refining assets, That's which we believe we've acquired.

Speaker 2

Having said that, we've just gone through a very successful growth spurt. 2020, we added our renewable diesel business. 2021, we acquired Puget Sound. Goh. We acquired the Sinclair assets.

Speaker 2

And of course, in 2023, we're working on potential discussions with HEP. So there's Goh. We've had a run of very successful growth and hopefully, we'll continue as we continue discussions with HEP. But right now, as I mentioned On the last call, our focus is on the same priorities that we've talked about when I first got into the job. We need to focus on EHS and reliability.

Speaker 2

We know there's a lot of opportunity there. In fact, I'd like to say to our folks, we think there's a hidden refinery there in the sense of improving our operations and capturing more throughput and more opportunity in the assets that we have as opposed to going into Anything inorganic. And then the second thing is we're focused on integrating and optimizing the assets that we have. And that's what Steve was talking about earlier in terms of What you're seeing in capture and what Val was talking about in terms of what you're seeing in lower OpEx. We believe that our focus right now is to focus inwardly Goh.

Speaker 2

And to try to improve those the assets that we currently have. So we're not really in the market looking at anything right now, Jason. It's probably not the right time in the market time anyway with us with the market being above mid cycle and that suits us just fine because we have plenty of work to do

Speaker 12

Great. Thanks for the answers.

Operator

Our next question comes from Roger Read at Wells Fargo.

Speaker 13

Hey, thanks. Good morning.

Speaker 2

Good morning, Roger.

Speaker 13

Sorry, I've missed part of this. We've got kind of a crazy morning going on here with the earnings front. But I just wanted to come back if we could to the lubes side of the business in terms of operations. Just Goh. How is that shaking out?

Speaker 13

Seasonally, Q3 is usually pretty good in this, but we've seen so many moves here in base oil prices and supply chain issues that have hit. So I was just curious, are we finally entering a normal period with this or are we still in kind of jumbled period.

Speaker 3

Yes. Hey, Roger, it's Matt Joyce here. Thanks for the question. What we're looking forward to is Seeing a bit more of a normalized supply chain. I think we've as an industry, the lubricants and specialties business over the past couple of years, as you probably know, have faced a lot of upheaval with additives and Broken supply chains around the globe that have really impacted the business.

Speaker 3

And it's also been the start and stop coming out of the COVID hangover. And I think right now there's some tepid anticipation that we're going to see some Greenshoots here with regards to demand. We're also hearing of and again, just Very briefly that there are some other supply issues and reliability issues in the market when it comes to base oils. We're not Certain that how big an impact that's going to have on the whole of the business, but certainly, we're in a really good position to fill that void as needed. When we look at it, there's it's very evident that cracks have shrunk and we've seen crudes roll up some increases over the past weeks months.

Speaker 3

And we're looking at and again, we're going to be considering and anticipating moves in both base oils and perhaps even finished in order to manage those the recovery of increased costs that the business has experienced. In general, though, we're probably looking at above mid cycle, but we're still watching that demand picture very carefully as it's been soft and we've been able to manage through that with the housekeeping we've been focused on over the past quarter or 2.

Speaker 2

Yes. And Roger, I'll just chime in to reinforce what Matt was saying. We've now demonstrated Above mid cycle performance for the last two and a half years. And that's a tribute to the team. That's a tribute to all the Integration and synergy work that they've been doing.

Speaker 2

All this time, you've seen the cracks starting to compress. I mean, this has been happening now for Probably 3 or 4 quarters and yet our business continues to perform and I think that's a sign of the structural improvements that Matt and his team have been working on.

Speaker 13

It's definitely good to hear. And again, I apologize if this Question has been asked. But on the renewable diesel operations, we've seen with some competitor startups going on A real tightening on the feedstock side. So I'm just curious, I mean, definitely better results for you on a sequential basis. But as you're looking at Feedstock options here into the second half of the year.

Speaker 13

Can you kind of walk us through how the PTU is running? And Goh. Your choices for feedstock as you're kind of navigating the different costs of those.

Speaker 7

Yes. This is Steve. I'll take that. I think you hit it head on. We see some tightening in terms of the overall margin structure in the back half of the year, partially due to feedstock, but also the RVO standard and what that's done and then the LCFS supply That's kind of on the market.

Speaker 7

So we are looking to optimize our feedstock. We run a good portion of soy, but we have the ability Go take advantage of some low CI feedstocks and we've got plans in place to go do that in the back half of the year. As far as the PTU, it's running Very well. And we see that as a competitive advantage to our business and laying that in into some of the other Assets where we could take advantage of that integration.

Speaker 13

And one follow-up on that. Your hydrogen production, is that Doing what you had anticipated across the RD facilities?

Speaker 7

Yes. I mean, so as far as the hydrogen consumption and production, with the co located plants, we had both of them down this quarter due to turnaround, which did impact the hydrogen availability to go run. And unfortunately, that was in 2 of the early months where margins were more supportive. But that's really just a planned circumstance of the maintenance activities that were Goe. Needed to be handled.

Speaker 7

But overall, we feel comfortable with our hydrant availability to go run these plants and generate the products That we choose to put in the markets that we choose.

Speaker 4

And this is Adnan. I'll only add that, again, as we mentioned earlier, one of the benefits of the co located turnarounds is, Particularly as it relates to our reformer unit is that turnaround ends up improving the reformer reliability and therefore the availability and supply of hydrogen and we have a number of other ongoing improvement efforts in the hydrogen plants both of Navino and Parco as well as Shaoyan.

Speaker 13

Great. Thank you.

Operator

We'll take a follow-up from Paul Cheng at Scotiabank.

Speaker 10

Thank you. Two questions, please. I want to go back into Audi. Anna, that you're talking about the hydrogen I mean in order for you to run closer to say the main take capacity, I think hydrogen was a bottleneck. And I believe Tim had mentioned that you guys are working to substantially improve that availability and that may take Until 2024.

Speaker 10

So can you give us an update, where are we on that to have sufficient hydrogen on-site so that you will be able to run the Audi at a much higher rate than say the 75%, 80% instead of say you have to Make the decision between running the diesel for the refinery or that running the Goh. And also that I think you guys have changed the catalyst. Can you give us an idea that The benefit on that in terms of the year and also that, what's the duration that it would take now for you to Make a to change the catheters. I think previously you've been doing about 6 months. Are we going to say any of that much longer duration?

Speaker 2

Yes, Paul, this is Tim. Let me take a shot at some of the short term questions, and then I'll ask Val to comment on some of the longer term efforts we're Goh. So we believe that with these turnarounds that we just completed in the second quarter And with some of the short term hydrogen optimization steps that Val and her team have been able to implement that we will be able to hit Normalized run rates here in the second half of the year. And when we say normalized run rates, we're talking 75% to 80% utilization, Brian, you kind of mentioned that number before. We do think we can get to that level with the current facilities we have.

Speaker 2

Now on a long term basis, we are continuing to look at ways to debottleneck and expand our hydrogen production. I can let Val talk a little bit about that in a few minutes. But I just wanted to make it clear that we do think we have

Speaker 3

a

Speaker 2

path forward here in the second half of the year to hit

Speaker 9

Yes, this is Valerie. So on the hydrogen, as you mentioned, let's first take the co located sites. We have reformers that we just went through turnarounds on. We've made significant improvements in those assets and Reliability is expected and what we're seeing today is improving. Additionally, our hydrogen generation complex, We have some several low capital operational program improvements that will start to take place in the back half of the year.

Speaker 9

And we anticipate that that will continue those small improvements will directionally add up to give us more hydrogen capacity as we go through the year. And then we're looking at what's next as we look forward. Let me comment a bit on Catalyst. So we our Catalyst is performing well. We are seeing, as They mentioned before 99% yield, in our Cheyenne facility.

Speaker 9

Our interval and duration as we've learned how to operate these Goe. Unit is improving with each learning and each time we have an opportunity to employ some new operational improvements. So we're anticipating that those will continue to lengthen.

Speaker 10

So Valerie, what is the current expectation for Okay. Between you have to change the catheters?

Speaker 9

Generally, We're not going to disclose kind of the exact numbers, but I can say directionally we're seeing improvement.

Speaker 10

Okay. So it sounds like that unless that you have fund Or that makes some pretty significant investment. We shouldn't assume the Audi operation where from a hydrogen availability standpoint next Year could be doing much better than 75%, 80%.

Speaker 2

I think that's what we're that's our target, Paul to get to by the end of this year. I think next year, of course, we're going to be have implemented some additional Improvement steps and it's too early to give you any type of guidance or targets for next year. But I think what we're saying is by the end of this year, we should be at that level.

Speaker 10

Okay. Tim, one of your competitor that have attribute their improved Capture rate and profitability due to substantial revamp of their commercial operation. Wondering that when you're looking at the Dyno, do you think that you have the right commercial Culture and Organization and Personnel.

Speaker 2

Yes. Well, it's a good question. We know there's a lot of, in fact, several competitors out there who are talking about their commercial Capabilities. I think we've got a similar focus here at Dyno to try to look at that. I think some of our competitors are talking about Trading as well as part of that commercial capability.

Speaker 2

We are not looking at trading as part of our commercial capability, at least not at this point. I don't We have the right resources to probably get into that. But I will ask Steve to comment because one of the things, as you know, Steve has been brought in to do is basically help us

Speaker 3

look at our commercial capability and improve it. Yes. Thanks, Tim.

Speaker 2

Paul, I think from

Speaker 7

Yes. Thanks, Tim. Paul, I think from and so this is early days still, but after being here for 3 months, the thing that I'll reflect on when you ask about commercial culture and capability, I think we have a high degree of talent and capable commercial people who really have a lot of expertise in this arena, both optimization, planning, refining across the assets and into the markets that we want to go Play. And even to the extent that we understand where we have advantaged easy non speculative trades, we take advantage of that, take advantage of differentials. I think our opportunity here is really around enabling and unlocking more value in an integrated fashion through tools such as enhanced digital real time information.

Speaker 7

And I think that's really kind of the next frontier that we go take on. And we see a lot of value there. I think we're just At the beginning of unlocking the true integrated value of this company that has been put together with these assets over the past few years. Yes.

Speaker 2

Paul, when I say our first priority is to improve base EHS and reliability, think operations. And then when I say, our second priority is to integrate and optimize our new portfolio of assets, think commercial. That's how we're approaching those two priorities.

Speaker 10

All right. Thank you.

Operator

And that does conclude the question and answer Session. I will turn the floor back over to Tim Goh for any closing remarks.

Speaker 2

Thank you, Audra. Our strong second quarter results are a testament to the strength of our business and the hard work of our employees to execute our strategies and deliver these results. We believe our refining, Marketing and Lubricants businesses are all performing above our mid cycle estimates. And with the majority of our planned turnaround work behind us, We believe we are well positioned to capture the margins available to us for the remainder of the year. Our priorities remain the same to improve our base EHS and reliability to integrate and optimize our new portfolio of assets and 3, to return excess cash to our shareholders.

Speaker 2

Thank you for joining our call. Have a great day.

Operator

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful

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Earnings Conference Call
HF Sinclair Q2 2023
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