HF Sinclair Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 12 speakers on the call.

Operator

Welcome to the HF Sinclair Corporation's First Quarter 2024 Conference Call and Webcast. Hosting the call today is Tim Goa, Chief Executive Officer of HF Sinclair. He is joined by Atnus Atenasov, Chief Financial Officer Steve Letbetter, EVP of Commercial Valerie Pompa, EVP of Operations and Matt Joyce, SVP of Lubricants and Specialties. 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. Please note that this conference is being recorded.

Operator

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, Kathleen. Good morning, everyone, and welcome to HF Sinclair Corporation's 1st quarter 2024 earnings call. This morning, we issued a press release announcing results for the quarter ending March 31, 2024. If you would like a copy of the earnings press release, you may find 1 on our website athfsenclair.com. Before we proceed with remarks, please note the Safe Harbor disclosure statement in today's press release.

Speaker 1

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. The call also may include discussion of non GAAP measures. Please see the earnings press release for reconciliations to GAAP Financial Measures.

Speaker 1

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.

Speaker 2

Good morning, everyone. We are pleased to report our Q1 2024 results with you today. We continue to advance our corporate strategy focused on improving reliability, optimizing and integrating our portfolio and generating strong cash flows to support our cash return strategy. During the quarter, our business maintained safe and reliable operations, representing another quarter of successful turnaround and maintenance execution. We also returned $269,000,000 in cash to shareholders during the quarter and today announced a new $1,000,000,000 share repurchase authorization demonstrating our commitment to shareholder returns.

Speaker 2

Now let me cover our segment highlights before turning over to Atmos. In refining, for the Q1 of 2024, we generated solid financials despite experiencing seasonal demand weakness for transportation fuels. We continue to focus on the operations excellence of our assets, resulting in improved reliability during the winter months and successful execution of our planned maintenance. The scheduled turnaround at our Puget Sound refinery in the Q1 that continued into April was completed on time and on budget. On the commercial side, we optimized our crude slate in order to capture the favorable differentials for heavy Canadian and Syncrude crude oil.

Speaker 2

The year over year improvements in our throughput rates, increased heavy sour crude oil runs and lower OpEx per barrel illustrate the progress we've made towards our reliability and optimization priorities. In Renewables, for the Q1 of 2024, weakened RINs and LCFS credit prices resulted in a 16% decline in our renewable diesel indicator compared with the Q4 of 2023. Despite the economic headwinds in the quarter, we continue to focus on feedstock optimization by increasing low CI feedstocks and reducing our high cost feedstock inventory. In addition, we continue to improve our renewable diesel operations by improving reliability and decreasing operating costs. In the Marketing segment, in the Q1 of 2024, we saw strong value in our Sinclair branded sites as the marketing business continued to provide a consistent sales channel with margin uplift for our branded fuels.

Speaker 2

We continue to target 5% or more annual growth in the number of branded sites and are encouraged by what we are seeing in our store growth pipeline for 2024. In Movergates and Specialties, our focus on the sales mix optimization across our finished products portfolio resulted in another strong quarter despite weakened base oil prices in the period. Our integrated business model continues to deliver stable margins in a volatile market, resulting in a consistently strong EBITDA run rate over the past 3 years. In midstream, we are pleased with the progress of integrating the HEP assets into our consolidated portfolio and we'll continue to look for opportunities to optimize our logistics business. In the Q1, we returned $269,000,000 to shareholders through share repurchases and dividends.

Speaker 2

As of April 30, 2024, we have repurchased an additional $296,000,000 from REHCo in the Q2, reducing our share count by over 7,900,000 shares year to date. Since March 2022, we have repurchased over 53,000,000 shares or roughly 89% of the shares issued for our Sinclair transaction. This morning, we announced a new $1,000,000,000 share repurchase authorization, replacing our previous $1,000,000,000 authorization, of which approximately $214,000,000 remained, demonstrating our commitment to our long term cash return strategy and long term payout ratio, while maintaining a strong balance sheet and investment grade rating. Today, we also announced that our Board of Directors declared a regular quarterly dividend of $0.50 per share payable on June 5, 2024 to holders of record on May 22, 2024. Looking forward, as we head into the summer driving season, we expect a favorable market environment and combined with further progress against our corporate priorities, we believe we are well positioned to generate strong earnings and cash flow.

Speaker 2

With that, let me turn the call over to Agnes.

Speaker 3

Thank you, Tim, and good morning, everyone. Let's begin by reviewing HF Sinclair's financial highlights. Today, we reported Q1 net income attributable to HF Sinclair shareholders of $315,000,000 or $1.57 per diluted share. These results reflect special items that collectively increased net income by $172,000,000 Excluding these items, adjusted net income for the Q1 was $142,000,000 or $0.71 per diluted share compared to adjusted net income of $394,000,000 or $2 per diluted share for the same period in 2023. Adjusted EBITDA for the Q1 was 3 $99,000,000 compared to $705,000,000 in the Q1 of 2023.

Speaker 3

In our refining segment, Q1 adjusted EBITDA was $209,000,000 compared to $537,000,000 of refining segment EBITDA for the Q1 of 2023. This decrease was primarily driven by lower refinery gross margins in both the West and Mid Con regions as a result of seasonal demand weakness for transportation fuels, partially offset by higher refined product sales volumes. Crude oil charge averaged 605,000 barrels per day for the Q1 compared to 499,000 barrels per day for the Q1 of 2023. This increase was primarily a result of decreased turnaround activities and improved reliability at our refineries compared to the same period last year. In our Renewables segment, we reported adjusted EBITDA of negative $19,000,000 for the Q1 compared to $3,000,000 for the Q1 of 2023, principally due to weakened rents and LCFS credit prices in the Q1 of 2024.

Speaker 3

Total sales volumes were 61,000,000 gallons for the Q1 as compared to 46,000,000 gallons for the Q1 of 2023. Our marketing segment reported EBITDA of $16,000,000 for the Q1 compared to $6,000,000 for the Q1 of 2023, driven primarily by stronger branded wholesale margins. Total branded fuel sales volumes were at 321,000,000 gallons for the Q1 as compared to 328,000,000 gallons for the Q1 of 2023. Our Lubricants and Specialties segment reported EBITDA of $87,000,000 for the Q1 compared to EBITDA of $98,000,000 for the Q1 of 2023. This decrease was largely driven by lower base oil prices in the Q1 of 2024.

Speaker 3

Our midstream segment reported EBITDA of $111,000,000 in the Q1 compared to $93,000,000 in the same period last year, primarily due to higher revenues from tariff increases in the Q1 of 2024. Net cash provided by operations totaled $317,000,000 which included $70,000,000 of turnaround spend in the quarter. HF Sinclair's capital expenditures totaled $89,000,000 for the Q1. As of March 31, 2024, H. S.

Speaker 3

Sinclair's total liquidity stood at approximately $3,700,000,000 which includes cash balance of $1,200,000,000 our undrawn $1,650,000,000 unsecured credit facility and $806,000,000 availability on the HEP credit facility. During the quarter, we reduced our debt by approximately 62,000,000 dollars by paying down a portion of the debt outstanding under the HEP revolver. As of March 31, we had $2,700,000,000 of debt outstanding with a debt to cap ratio of 21% and net debt to cap ratio of 11%. Let's go through some guidance items. With respect to capital spending for full year 2024, we still expect to spend approximately $800,000,000 in sustaining capital, including turnaround on catalysts.

Speaker 3

In addition, we expect to spend $75,000,000 in growth capital investments across our business segments. For the Q2 of 2024, we expect to run between 6,200,000, 650,000 barrels per day of crude oil in our refining segment, which reflects planned turnarounds at our Puget Sound and Parco refineries during the period and improved reliability and operations across our fleet. We're now ready to take questions from the audience. Operator?

Operator

The floor is now open for questions. Your first question comes from the line of Neil Mehta of Goldman Sachs. Please go ahead.

Speaker 4

Yes. Good morning, team. I had a couple of non refining questions actually. The first one was on lubricants, really good quarter at the lubes business. I just love your perspective on whether you think this is represents a new normal?

Speaker 4

And then, Tim, I think you've talked about the potential monetization of this business, but maybe more as a 2025 event. Just any latest thinking around that as well?

Speaker 2

Yes. Good morning, Neil. Thanks for the question. So let me start and then I'll ask Matt to provide some more color on the lubes business because we are very pleased and happy with how it's performing. It's a good example, our lubes business, of our improved capability that we have to execute and deliver value to our shareholders.

Speaker 2

Our lubes team has done a great job integrating and optimizing our lubricants business over the past 3 years. And it's as you can see, it's delivering strong financial results regardless of the base oil cracks, which by the way are near bottom of cycle levels that we saw back in 2019. But as I've stated previously, optimizing this asset portfolio and continued simplification of our lubricants business is a strategic priority. We believe in the significant value of our lubricants business and we review and evaluate all of our assets on an ongoing basis with an eye for maximizing shareholder value. For Neil, at this time, we don't have any announcements or updates to provide.

Speaker 2

What I would like to do though is ask Matt to give a little bit more color on how our lubes business is able to perform despite the macro market environment.

Speaker 5

Thanks, Tim, and good morning, Neil. Thanks for the question. This is all about a continued focus on our execution of our strategy. First and foremost though, it also begins with safety and it was a perfect safety quarter for us, which is always a catalyst for great performance in the business. We've got some outstanding teammates who are working hard to stay safe, execute well and improve this business every day.

Speaker 5

But really we're building on our strengths of development, in house development, integration of our base oils and our finished lubricants business together and our ability to recognize and respond to market needs. We're utilizing these assets that we have more effectively to execute on the strategy and we're being operationally excellent in delivering that growth that we need to build the business for the future.

Speaker 3

Let me give you

Speaker 5

a couple of examples specifically of some synergies that we captured this quarter that really enable that efficiency and growth. One in particular is our Joshua, Texas facility, which had historically been a Red Giant Oil Lubricants plant. We're now moving that into supporting the whole of our finished lubes portfolio. And over the past quarter, we've invested in a low cost quick hit project that's enabled us to increase our capacity by nearly 50% over the course of the coming year. And this is significant given Joshua, Texas strategic location to the markets where we are winning and we're wanting to continue to grow and leverage our formulations and developments.

Speaker 5

On the process oil side of our business, I give the team a lot of credit. They found and discovered some market needs to better serve the tire industry. And we approved a capital light investment in the Q4 of last year and then we're instituting that, kicking it off in the Q1 this year at our Tulsa facility. And testing is underway with some large tire industry OEMs. And we've also found that we can use this technology to go into the construction material markets as well and we're doing that.

Speaker 5

So this investment will enable new technology introduction for first sales to come through in the Q4 of this year and then more in 2025. And then if I look at it base oil integration, we tend to have that as a common theme where we're leveraging that base oil integration. We've introduced and developed a new base oil cut in our Mississauga facility that's giving us a more advantaged total formulated cost to meet the needs of the PCMO markets in the U. S. And abroad.

Speaker 5

And that's satisfying General Motors specifications. This is a big deal both for our base oil business as well as for our own captive finished lubricants business. So you can tell there's a number of these pieces that add up together to drive operational excellence, core regional growth. And hopefully in the next coming quarters, we'll be able to share a little bit more about the transformational work that we have underway.

Speaker 2

So Neil, that was probably more detail and more examples than probably you were expecting. But we do want you and others to know that our lubes business is performing well and it's not by accident. This is not something that has just happened. We've demonstrated over the last 3 plus years that the earnings power of our lubricants business has been increased and it's running in the $300,000,000 to $350,000,000 range right now despite the base oil indicators being at near bottom of cycle conditions.

Speaker 4

Yes. No, that showed up this quarter. So thank you, Tim and team for that. On the other side of performance, probably renewable diesel, it's another tough quarter here. And just would love your thought on the path to profitability.

Speaker 4

And Tim, where are you? You've been very frank about not being happy with the performance from a profitability perspective at this point. So where do you think we are in terms of the transformation of that business?

Speaker 2

Yes. We are not happy with the results, Neil, as you point out. We are pleased with the progress that we're making though. And I'll let Steve talk about some of the initiatives that we've got going on.

Speaker 6

Hey, Neil. This is Steve. Leadbetter, as Tim mentioned, challenging Q1 financial performance. Some of the things we're focusing on in terms of improving our low feedstock low CI feedstock across the fleet we're more than masked by difficult macro margin pressures. The feedstock lag really is an issue and we saw that aggressively take place in Q1.

Speaker 6

We do have some operational improvements that we're seeing. We're very happy with. We had zero downtime related to hydrogen issues. February March were good performance months. Again, we're trying to run economic optimal economic utilization.

Speaker 6

But this is a story that really in terms of driving the profitability is all about accelerating our low CI feedstock runs where we think we have some real opportunities to do that. A couple of big milestones, we're moving one of the trains at Artesia to full 100% low CI feedstock. We think that's going to be an advantage. We're moving some small cap projects to allow some logistical synergies and truck unloading on some of the low CI feedstock. We're continuously driving our pathways and then placing our barrels into the most favorable markets.

Speaker 6

Happy to note that we injected our first delivery to the previously announced Rio Tinto mine of RD this month. And our feedstock inventories have gotten quite low on purpose given the accelerated backwardation in the market, which that allows us to buy prompt barrels and minimize this exposure on a very steep backward market. We'll continue to drive our catalyst optimization and OpEx efficiencies. And then again, we will look to run at the optimal economic rates to maximize our fleet profitability. And we think these are the best things to focus on and give us the highest chance of success to deliver the most profitable outcomes.

Speaker 2

Yes. Thanks, I will point out that in the Q1, we were not hydrogen limited in our renewable diesel operations. So I think that's a big accomplishment for the team in terms of optimizing our operations. And look, Neil, it's impossible to know what the mid cycle conditions are going to be for Renewal Diesel right now with the RIMs and with the LCFS numbers volatility there. But we are focused on the things that we can control.

Speaker 2

So utilization, advantage feedstocks, product netbacks, lower operating costs. And at the current RINs and LCFS levels, we believe our business can be breakeven to slightly positive and that's what the team is working towards. Thanks, Tim. Thanks, Steve.

Operator

Your next question comes from the line of Ryan Todd of Piper Sandler. Please go ahead.

Speaker 7

Great. Thanks. Maybe I will switch to the refining side and ask if you could maybe just provide updates on a couple of your markets, talk about what you're seeing in the Rockies market. It was I think it was fairly weak during a good chunk of the Q1, but it seems to be strengthening of late. And then maybe on the West Coast post Rodeo's closure, what you're seeing there in terms of general market dynamics in PADD V?

Speaker 6

Yes, Ryan. This is Steve. I'll take that one. Yes, as you mentioned, the Rockies market started off a bit weaker in terms of the crack environment. Demand also was impacted by some pretty significant weather events.

Speaker 6

As you saw towards the end of the quarter and positioning for driving season, we started to see some support in terms of the crack environment. Our ability to go move barrels into the group or to the front range allows us to be flexible and take advantage of that and then we continue to look to optimize across the value chain. On the West Coast, I think what you see in terms of total distillate supply picture with the RD volumes coming on, the distillate picture is challenged across the West Coast. Gasoline looked better and we look to take advantage of our capabilities in the market in the Pacific Northwest to place local market barrels for gasoline, but also look for distillate movements and export volume where we have capability to go do that. So nothing structurally and we see some seasonal demand things coming off.

Speaker 6

We're seeing margin structure come back both in the Rockies and the group and in the Pacific Northwest and we look to take advantage of that moving into Q2.

Speaker 2

Yes, Ryan, and this is Tim. I'll just chime in. I don't know if it's as much of our Rockies and Mid Con regions being weaker as opposed to just the Gulf Coast being so strong. There was a lot of maintenance both planned and unplanned in the Q1 in the Gulf Coast that created some strength in that region. As you know, we don't have any assets in the Gulf Coast.

Speaker 2

So of course, our regions look weak in comparison to that. When we look at the data and the historical trends, we see the same seasonal historical trends that we always see in our regions. We are not concerned and in fact, we are seeing demand pick up significantly right now. As planting season begins, diesel demand is picking up, gasoline demand has been picking up as a result of the RVP transition that just took place. And so we're pretty bullish.

Speaker 2

If you look at the April cracks that we just published, the last month's cracks were $5 above what we had realized in the Q1. And that bodes well in terms of what we typically see seasonally and what we're expecting here for the Q2.

Speaker 7

Perfect. Thank you. And then maybe a follow-up on shareholder returns. I mean really strong buyback in the Q1, new authorization out there to continue do that. Can you maybe frame up how you're thinking about whether there are any other things competing for that excess cash flow as you look out over the remainder of 2024?

Speaker 7

Should we expect to see you continue to lean pretty heavily into the buyback? And then maybe any comments on the market got a little spooked earlier this year when some of the Sinclair family shares made it to the open market. How are you approaching how is your approach to continue to repurchase shares there? And how much potential overhang is left there on the family side?

Speaker 2

Yes, Ryan. Thanks for your question. Let me ask Atmos to chime in.

Speaker 3

Ryan, good morning. With respect to your questions on capital returns, what we did in the Q1 clearly demonstrates our continued commitment to shareholder returns. As you have seen, we also repurchased an additional $296,000,000 worth of shares in early April, which puts us at $565,000,000 in total shareholder return through early April. To the extent that we are continuing to see an above mid cycle environment, which we are, we'll continue to lean very heavily into share repurchases and continue to exceed our payout ratio. With respect to the family, what you saw earlier in the year, obviously, we don't control how they sell shares in the market, but generally you've seen one open transaction per year.

Speaker 3

We'll continue to buy shares back from them. That's our preferred method of buybacks. And with respect to overhang, as you may have noticed, they are no longer our largest shareholder as of right now. And at 9% currently, I think that you will see probably this continue to go down. Now they also indicated their intent of keeping one board seat, which would 0.25% or better, but we just don't view their current ownership as an overhang as of right now.

Speaker 2

Yes. And Ryan, this is Tim. I'll chime in too. You mentioned the market got spooked a little bit and we absolutely saw that. But I will point out in addition to what Atmos just talked about, if you look at the open market purchases that we have made since the Sinclair transaction, we have actually bought more in the open market than REHCO has sold in the open market.

Speaker 2

And I think it's just important for people to put that into context as well as the point that Addis made that with this latest transaction that they dropped to 9% and are no longer our largest shareholder. Our commitment to capital returns is clear. In addition to the share buybacks that Atmos mentioned, remember, we raised the dividend in February by 11% and of course, our $1,000,000,000 reauthorization that we just announced this morning is just our commitment to continuing our shareholder return strategy.

Speaker 7

Great. Thank you.

Operator

Your next question comes from the line of Manav Gupta of UBS. Please go ahead. My

Speaker 8

question here is more

Speaker 9

on the midstream side. HEP is now integrated and I'm trying to understand is there what's the progress over there in terms of integration and also synergy upside? And then how do you look at this business? Is this business going to stay relatively flat or grow through organic projects or probably grow through some bolt on acquisitions? How should we look at your overall midstream portfolio going ahead now that it's fully part of HF Sinclair?

Speaker 6

Manav, hey, this is Steve. Thanks for the question. As of December, I'm now fortunate enough to be back in the midstream mix. As you know, that's my path. As far as the integration goes, we are pretty much complete with the integration.

Speaker 6

We have moved through the entire process of replacing and moving some of the refining processing units back to the refinery. We have some opportunities that we're beginning. We're just kind of on the infancy stage of looking where the synergies are. We're not looking to commit to a number at this point, but we do see some things where we can take the best practices of either side and make sure that we're doing things consistently across the entire operating environment, both refining and midstream. So we think there's some real value there and we'll continue to drive that.

Speaker 6

I think as we look at this business, we see it as a very important integral business to our value chain, which was the reason that we thought it made sense for us to go bring it back into the fold. And we're beginning to look at opportunities on how we unlock that. Where we have assets that are utilized, where we can do more with them or take advantage of helping get the molecule to the right markets at the right time, we see that as a real yet untapped opportunity and we'll look to continue to go drive that. But it's a critical piece of our business that we look to continue to grow.

Speaker 9

Perfect. My follow-up here is that, Tim, you have in the past said every company looks at it different ways and you said you would like to be one of the highest gross margin per barrel refiner out there in terms of giving them I mean that would make you like the higher putting you towards the top end of the capture. And I'm just trying to understand where is that process going? How far are you thinking the process? And what more needs to be done to put you on top of that table?

Speaker 2

Yes, Manav, we believe that our regional advantages of our portfolio give us significant competitive advantages and we're looking to continue to exploit that. We've been working as we talked about reliability, number 1, optimization integration, number 2. And Steve, you want to talk about some of the things we're doing on the optimization and integration side?

Speaker 6

Yes, absolutely. So I'm looking to go take advantage of, as we mentioned before, the integrated value chain. And that is getting the right cost of acquisition of feedstock, processing it the most efficient way and having the right mix and then getting into the right markets that make the most sense, leveraging our assets. So the things that we'll continue to take advantage of are some of our pipeline placements and the light to heavy differential that we see and enjoy and our value chain on the heavy oil value chain with our asphalt business and upgrading that. But we see the value chain being more than just one element.

Speaker 6

So as an example, we're going to prioritize and capture increased demand on things like jet over diesel on balance, increasing our premium sales. We believe that we have an opportunity to really drive that and that allows us to integrate right through the wholesale marketing value chain. And then again, our kits are very well placed to and connected to many different crude hubs. And so we think optimizing our crude slate gives us flexibility there. And all of these things and components really allow us to go truly optimize the right decision to put the best molecule in the best market.

Speaker 6

And that's what we're going to continue to focus on.

Speaker 2

And Manav, what I would just add on to what Steve just said is, we've talked about our $75,000,000 of growth CapEx that we had put in the plans for this year. And I can tell you we continue to execute on those projects. These are small quick hit projects. A lot of them of what Steve was just covering are covered in this $75,000,000 of growth CapEx. They improve yields, they lower op costs.

Speaker 2

We target typically around a 25% or higher IRR for these projects, And we expect those to continue to help us improve our gross margin per barrel. Thank you.

Operator

Your next question comes from the line of Paul Cheng of Scotiabank. Please go ahead.

Speaker 10

Thank you. Hey guys, good morning. Tim, with TMX is going to ramp up very soon or maybe start up or should be starting up. How that would change your pictures on cruise slate or product yield ending? I mean, right now, I think pictures on is running mostly ANS.

Speaker 10

So do you think that it will have any impact on your physical barrels you're going to run and how your product yield is going to look like? Or that is really is going to be benefiting from a defensive standpoint?

Speaker 2

Yes, Paul, this is Tim. TMX started up May 1, and we think it will have an impact both at Puget Sound and in our Mid Con. I'll ask Steve to comment on that.

Speaker 6

Yes. So, Paul, Steve, thanks for the question. So as far as running NS, we have the capability to run a variety of crudes with some heavy and some sour and we typically get advantaged crudes out of Canada and we blend them up to an ANS like crude slate,

Speaker 2

crude spec.

Speaker 6

The ability for Puget to go take advantage of what's happening is really in the fact that we're connected via pipe and we were successful placing and nominating pipe barrels on this first go around and our ability to go take waterborne barrels in our dock capacity. We also believe that longer term, as things continue to fill up on TMX and get out over the water, that's going to our proximity to the dock is an advantage because there will be more barrels looking for a home and the location that we have and our ability on pipe as well as the dock gives us the ability to go compete very well for those barrels. So for Puget, we don't see a major impact and we also believe that we're going to have the ability to compete and then the market will clear the additional costs associated with that project. Thinking about it from the larger footprint, when we think about our Parco and our other Mid Con assets, we'll probably see a temporarily tighter differential and we've already seen that coming out of the end of the quarter. But as we mentioned before, we don't think that's long term.

Speaker 6

We think as production eclipses egress in 1 to 2 years that we think that those differentials will widen back out. And in the interim, as I mentioned earlier, we're connected to multiple trading hubs and we will take advantage of the flexibility of the crude slate. So we've shown our ability to navigate these situations carefully and we'll continue to do that with this one, but we don't see it as a major problem.

Speaker 2

Yes. And Paul, this is Tim. As you know and as others have commented this quarter, the WCS, WTI spread has narrowed, but some of that is associated with just normal spring maintenance that we see seasonally at this time. And of course, some of that's directly related to the line fill that took place ahead of the May 1 start up. If you look further out, we believe, as Steve mentioned, that the WCS WTI spread will widened and we even see that in the strip now.

Speaker 2

I think others have a similar view and kind of stabilize and really arrange that if you look at the last 5 years of averages, we'll be right in the middle of the 5 year WCS WTI spread.

Speaker 10

Thank you, Tim. But Steve, can I just go back into my question? Just curious that if that means that you will be able to run more WCS and then mix it with other grade to make it more ANS type or that does not really going to be the case? And if you do want more WCS with that impact on your product slate in Puget Sound, I think that really is what I'm trying to figure out.

Speaker 2

Yes. Paul, let me try to take a shot at that. This is Tim. Having more crude around our refinery in Washington is always a good thing. And so having the TMX start up and having more barrels available to us both via the pipeline as well as via the water, is going to be an advantage for Puget Sound.

Speaker 2

So Puget Sound was designed to run 100 percent ANS. And so what we do, as you may know, is we blend up the Canadian barrels, both the heavy and the CIN and the MSW to basically fit the ANS profile and we can run 100% of that from the Canadian side. So the real advantage we have is because we have a unique configuration with both cat unit and a coker in that refinery, we're able to basically pick and choose whatever the right crudes are of the month in order to optimize our crude slate at Puget Sound. So we view this as a positive in terms of giving us flexibility and lowering our crude cost at Puget Sound.

Speaker 10

Okay. Thank you. And my second question is that, Tim, it's probably not a fair question because it's not under your watch when it was sanctioned. The Audi project has been challenging, whether it is during the development, it was cost overrun and also that being delayed in terms of the start up. And after the start up that also the economic has been challenging and operation has been challenging.

Speaker 10

So as I look back, what lesson that the organization have learned in terms of the future project FID or the evaluation? I mean, what have we learned? And how that is changing your evaluation process going forward?

Speaker 2

Yes, Paul. We have been working on our renewable diesel business here for a couple of years, as you pointed out. And I think there's lots of lessons learned and we talk about that amongst our management team, we talk about that amongst our Board all the time. But the biggest change that has occurred has been the market dynamics around LCFS and the RINs. And we knew that was going to be out of our control and we knew that was going to be something that was going to be subject to external interference, I guess, I would say, and it may not be the right word.

Speaker 2

But we still thought it was the right thing to do. We still think it's the right thing to do going forward. We have not given up on our renewable diesel business. I just want to make sure our investors know that. But we still believe that with the operational improvements that we've made, and as I mentioned, were not limited by hydrogen in the Q1.

Speaker 2

In fact, from an operation standpoint, we ran pretty smoothly. We were limited by the economics around RINs and LCFS. When you look at the backwardation in the feedstock market, That was also one of the reasons that our results were lower in the Q1 than we were in the Q4. So we know those will turn around. It will be cyclical.

Speaker 2

And so our plan is to continue to get ourselves in a position so that, A, if the conditions don't change, we'll be breakeven to slightly positive and B, when the market does change and we do think the LCFS and the RINs markets will improve. It may take a year or so to make that happen. But keep in mind, California Board has signaled that they are going to be tightening the LCFS credits. You saw New Mexico has announced their own LCFS program that will significantly benefit our renewable diesel plant that's located in New Mexico. And you look at the just the way the market is shaping up right now, we believe the biodiesel plants that are currently out in the market are competitively disadvantaged versus the renewable diesel plants that are out there.

Speaker 2

And so we think there'll be some additional attrition. You saw some of that announced already here in the Q1 in the biodiesel world. And we think the renewable diesel market will recover and come back off its cyclical lows here. So lots of learnings, Paul, and we can talk about that sometime over a beer. But we do believe that we're going to be set up here for success as the market continues to improve.

Speaker 10

All right. Thank you.

Operator

Your next question comes from the line of Matthew Blair of DPH. Please go ahead.

Speaker 1

Thank you and good morning. I know it's a small segment, but your wholesale marketing business posted positive EBITDA in a pretty tough environment is actually up quarter over quarter. Could you talk about the things that are going right here?

Speaker 6

Yes, Matt, this is Steve. Thanks for the question. We are very excited about our marketing business and very excited about the performance in the quarter. Some of the improvement is associated with integration and bringing the full slate on quarter 1, 2024 versus quarter 1, 23. But we have taken some opportunities to go improve the overall performance from a margin perspective.

Speaker 6

I think we're looking very strategically at how we're pricing in the market and making sure that we're capturing the value from the brand. We really believe that this is a tremendous value that is yet untapped as a strategic growth lever. And we're putting some things in place to make sure that we can go fully explore that and get that value and drop it to the bottom line. We're creating very much a clear picture on our retail network plan and we're expanding our branding partnerships to go really grow this, and we're allocating resources both to people and capital to make that happen. And from a revenue replacement perspective, as we go put new sites on, we're seeing between 60% 150% more volume than the fleet average.

Speaker 6

So as we go continue to grow, of which we look to do more and more, we're seeing that the overall margin structure and volume picture continues to improve. This is something we look to take advantage of as we continue to move forward.

Speaker 2

And Matt, I'll just chime in. Again, thanks for noticing the marketing segment. I think it's something that often gets overlooked, but it's absolutely part of our core strategy. So remember, refining, midstream, marketing, those three segments together combine to be really our core value chain that we offer here at HF Sinclair. And you'll see, it was brought up earlier in the call, our midstream performance is strong.

Speaker 2

You just mentioned our marketing performance is strong. And when you combine that with our refining business, you get a better picture of what the earnings potential is of our core business. Some other of our peers kind of include marketing in their refining or they include midstream in their refining. We break ours out, but you've got to be able to look at the 3 together to understand really we're trying to offer to the market in terms of our portfolio.

Speaker 1

Sounds good. And then I want to ask about the outlet markets for diesel for your Puget Sound refinery. I think there was a comment earlier that the West Coast has been impacted by increasing RD penetration. Does this refinery typically send barrels diesel barrels down to California? And if so, is that still occurring?

Speaker 1

Or do you have to look for new markets, sending those barrels to Canada or to Mexico or possibly Asia instead?

Speaker 6

Yes, Matt. This is Steve. I think I made the comment, so I'll follow-up on it. As we look at the diesel supply demand balance on the West Coast with the RD penetration and growth, we look to make sure that we have placement where we have local logistics and we're going to do that, but there are also some opportunities to go move that into Latin America. As you know, moving barrels over the water with the Jones Act impact makes that more difficult into United States and into California.

Speaker 6

But we see an opportunity and we think we compete well at Latin America barrels that's where some of those things are or some of our cargoes are going.

Speaker 2

Yes. And Matt, I would just point out that when we brought the Puget Sound Refinery into our portfolio, we acknowledged at the time that diesel was probably going to get a little long given the fact that the renewable diesel push and the LCFS credits, but the Puget Sound refinery was more of a gasoline producing refinery than it was a diesel producing refinery with the cat unit that we had there. And it's playing out like we expected and I think the Puget Sound refinery is competitively advantaged. It's able to make carb gasoline. And so while we're not moving diesel to California, we are moving gasoline to California.

Speaker 2

And we think that's going to continue to take advantage of the arbs that are opening up there. We also think with the recent conversions in California and the shortages of gasoline that that's also a tailwind for our PADD IV markets, Phoenix and Las Vegas in particular, which we have access to through our Rockies refineries and our New Mexico refineries that are also benefiting as we move gasoline barrels west to take advantage of that shortage.

Speaker 1

Great. Thank you very much.

Operator

Your next question comes from the line of Theresa Chen of Barclays. Please go ahead.

Speaker 8

Good morning. Thank you for taking my questions. First on the capture front, I wanted to follow-up on the comment earlier about leaning more into your premium sales. Just given the octane spread that we're observing,

Operator

can you give us a sense

Speaker 8

of how much octane enhancement or production capability you have in your system? And that your was it the backdrop of the overall gasoline margin outlook for the summer?

Speaker 6

Patrice, this is Steve. Good to speak with you again. Yes, so on our premium, we believe that we are underrepresented in terms of the overall premium make in our markets. And so we also believe that our locations and our logistic advantages allow us to go compete better and all of that improvement in terms of more premium percentage over and above subgrade is improvement to capture and it's something that we're going to focus on. That's really from a competitive perspective.

Speaker 6

And we see our ability to go compete against some of the other through our branded wholesale channel is really the place where the integrated value chain comes on. And it's something that quite honestly we need to focus more on and we will continue to do that here into the next few quarters.

Speaker 2

Yes. And Theresa, this is Tim. It is good to hear your voice and glad you're back One of the side benefits, I would say, unintended consequences of our focus on hydrogen and making it available for our renewable diesel plants, both in Artesia and in Parco is that we've been running our reformers better. And our reformers that are making hydrogen are also making octane. And that's what's giving us a little bit more octane than what we've had in the past.

Speaker 2

And so that's been benefiting our fuel side as we continue to improve those operations as well.

Speaker 8

Thank you for that detailed answer and great to speak with all of you again as well. Second question related to the movement of product from PADD IV to PADD V specifically. Following up on your comments related to the tightness in gasoline in California over time. Your unit pipeline system, are you seeing higher utilization in that? And if this is really going to be a structural move, is there a capability to expand that?

Speaker 6

Yes. So I think as far as movements go, things are still balancing out in terms of where products are going to come from in terms of the new demand patterns. We see our footprint from a midstream perspective, very well positioned products coming from the West Coast and that's one advantage we see and we will look to take advantage of continuing to do that through the integrated value chain, both on our production runs as well as well as on our midstream assets. And then the other thing is, Tim made a point earlier on being able to produce some carb gasoline and we will continue to look to do that. That actually looks to be like something that is getting shorter as some of these refineries convert on the West Coast.

Speaker 6

So we will try to fill some of those gaps from our Puget Refinery and then we will also try to take advantage of the market plays out of the Salt Lake Valley and the Rockies into those markets like Cedar City and Las Vegas.

Speaker 8

Thank you.

Operator

Your next question comes from the line of Jason Gabelman of TD Cowen. Please go ahead.

Speaker 11

Hey, morning. Thanks for taking my questions. I wanted to ask about the updated mid cycle refining EBITDA that you provided shortly after last earnings call. It included a higher OpEx per barrel, and this is a decent amount of time after the acquisition. So wondering if that was just a delayed update or something else going on there.

Speaker 11

And then you had in the past broken out the mid cycle margin between the Gulf Coast crack, the TI Brent spread and then the product transportation to HF Sinclair markets and that mid cycle margin moved higher on this update. So just wondering what drove that? Thanks.

Speaker 2

Yes. Jason, thanks for the question. At the last earnings call, we told you that we have now had a couple of years under our belt of running these new assets in our portfolio, Puget Sound and the Sinclair assets in particular. And we told you we were going to take a look at what we've seen and what we've learned from doing that. And that's what we did when we updated our mid cycle guidance.

Speaker 2

We did increase our operating costs because we do see, at least in the near term, some higher than the $6 to $6.50 a barrel target that we still have long term, but we just don't think that's near term. And so we raised those op costs to reflect more of what we're seeing on the West portfolio. But at the same time, we're actually seeing higher earnings potential out of these assets as well. And so that's why we raised the gross margin per barrel in the mid cycle estimates as well. We believe and what we're seeing is that the gross margin that these assets are bringing in is higher than what we saw.

Speaker 2

So net net, the actual impact on our mid cycle estimate for refining was actually up $250,000,000 to reflect both increased synergies as well as the increased earnings power that we see from the Puget Sound and from the Sinclair assets that more than offset the higher OpEx.

Speaker 11

Okay. Got it. To be clear, the increase in the gross margin estimate was not a function of higher Gulf Coast index assumptions. Is that fair?

Speaker 2

I think there's always a mix of all of that, Jason, but I think you can think about it as synergies. You can think about it as competitive advantage that we think these assets have in those markets that are out there.

Speaker 11

Okay, great. Thanks. And then my follow-up question is just a couple of clarifications was hoping you could provide with the 1Q results. I'll just fire off a few of them. The was there any FIFO impact in the lubricants business?

Speaker 11

Was there any working capital impact on cash flow? And then can you remind us how much sink crude you run through your system and if that's in the West region or the Mid Con region? Thanks.

Speaker 3

Good morning. This is Adam. So I'll take the first two. With respect to the FIFO impact on lubricants, it was minimal. It was just a little over $1,000,000 So practically none for this quarter.

Speaker 3

And with respect to overall working capital impact on cash flow, we saw a tailwind of approximately $70,000,000 with respect to working capital this quarter, which makes sense because prices rose in Q1 and generally that's conducive to working capital.

Speaker 6

Yes. I'll answer on this end. So not giving a specific number, but it was significantly discounted early in the quarter. And as we mentioned, we look to optimize our crude slate flexibility and we ran a significant amount both at Puget, El Dorado and Parkland. And it was a record for our runs for the quarter.

Speaker 11

Okay. Thanks.

Operator

There are no further questions at this time. I will now turn the call back over to Tim for any closing remarks.

Speaker 2

Thank you, Kathleen. Before we close, I wanted to welcome our new Board member, Gene Johns, who was appointed in February. Gene is an accomplished business leader and brings strong executive and industry experience and expertise to us, and we are proud to have her on our Board. Know we covered a lot of ground this morning, including our bullish outlook for Q2. But going forward, I want to remind you that our priorities remain the same.

Speaker 2

We are focused on executing our plan by 1, improving our reliability 2, integrating and optimizing our new portfolio of assets and 3, returning excess cash to our shareholders. Thank you for joining our call and have a great day.

Operator

This concludes today's conference. Please disconnect your line at this time and have a wonderful day.

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Earnings Conference Call
HF Sinclair Q1 2024
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