HF Sinclair Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 15 speakers on the call.

Operator

Welcome to HF Sinclair Corporation Second Quarter 20 24 Conference Call and webcast. Hosting the call today is Tim Goh, Chief Executive Officer, HF Sinclair. He is joined by Etan Sattanasov, Chief Financial Officer Steve Ledbetter, EVP of Commercial Father Repompa, EVP of Operations and Matt Choi as VP of Rubicants and Specialties. At this time, all participants have been placed in a listen only mode and the floor will be open for your question 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, Mark. Good morning, everyone, and welcome to HF Sinclair Corporation's 2nd quarter earnings call. This morning, we issued a press release announcing results for the quarter ending June 30, 2024. If you would like a copy of the earnings press release, you may find them on our website at hfsenclair.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 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. Our Q2 2024 performance reflects continued progress on our commitment to deliver safe and reliable operations, resulting in higher utilization and lower operating cost per barrel in our refining business. In fact, we are seeing the benefits of our strategic initiatives across all of our businesses, including strong contributions from our lubricants and midstream business segments again this quarter. During the Q2, we also returned $467,000,000 in cash to shareholders and today announced a $0.50 quarterly dividend demonstrating our continued commitment to shareholder returns. Now let me cover our segment highlights before turning over to Atmos.

Speaker 2

In refining, for the Q2 of 2024, improved reliability efforts resulted in increased utilization rates and sales volumes versus the Q1. The scheduled turnaround at our Parkhill refinery was completed on time and on budget, marking another successful example of improved execution. Our operating expenses were $7.29 per throughput barrel for the 2nd quarter, which represents significant progress towards our near term target of $7.25 We continue to focus on improving safe and reliable operations and lowering operating expenses across the refinery fleet. In Renewables, for the Q2 of 2024, I am pleased to report we achieved positive EBITDA through our team's optimization efforts despite continued weakness in RINs LCFS credit prices and the planned maintenance at our Parco Renewable Diesel Facility. We are continuing to 1, reduce the level of high cost inventories 2, increase our low CI feedstock mix and pretreatment unit utilization rates and 3, lower our operating expenses through improved reliability.

Speaker 2

In marketing, in the Q2 of 2024, we continue to benefit from the margin uplift for our branded fuels and we grew our branded site count by 17 locations. Looking forward, we have signed new contracts to convert 150 stores to our branded wholesale sites, which translates into expected growth of approximately 10% over the next 6 to 12 months. In Lubricants and Specialties, our strong Q2 was largely driven by continued optimization in our sales mix, operational efficiency initiatives and furthering our base oil and integration efforts. We continue to see opportunities to organically grow the business by high grading our finished products portfolio, accelerating growth with strategic channel partnerships and introducing new offerings that provide solutions to meet current and emerging market needs. In our midstream business, for the Q2 of 2024, we are realizing the value of our fully integrated assets post acquisition.

Speaker 2

We achieved record volumes for the period and we believe we will continue to grow this business as we continue to optimize it with our refining and marketing segments. In the Q2, we returned over $467,000,000 to shareholders through share repurchases and dividends. Since March 2022, we have repurchased approximately 55,000,000 shares, which represents 2 thirds of the shares we issued for the Sinclair and HEP transactions. As of June 30, 2024, we have approximately $925,000,000 outstanding on our share repurchase authorization, and we remain committed 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 September 5, 2024 to holders of record on August 21, 4.

Speaker 2

Looking forward, we remain focused on executing our corporate strategy as we strive to continue to 1, improve reliability 2, optimize and integrate our expanded portfolio and 3, generate strong cash flows to support our cash return strategy. With that, let me turn the call over to Anas.

Speaker 3

Thank you, Tim, and good morning, everyone. Let's begin by reviewing HF Sinclair's financial highlights. Today, we reported 2nd quarter net income attributable to HF Sinclair shareholders of $152,000,000 or $0.79 per diluted share. These results reflect special items that collectively increased net income by $2,500,000 Excluding these items, adjusted net income for the 2nd quarter was $149,000,000 or $0.78 per diluted share compared to adjusted net income of $504,000,000 or $2.60 per diluted share for the same period in 2023. Adjusted EBITDA for the Q2 was $406,000,000 compared to $868,000,000 in the Q2 of 2023.

Speaker 3

In our refining segment, 2nd quarter EBITDA was $187,000,000 compared to $732,000,000 of refining segment adjusted EBITDA for the Q2 of 2023. This decrease was primarily driven by lower adjusted refinery gross margins in both the West and Mid Con regions as a result of higher product supply in our regions from higher refining utilization rates across the industry, which was partially offset by higher refined product sales volumes. Crude oil charge averaged 635,000 barrels per day for the Q2 compared to 554,000 barrels per day for the Q2 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 $2,000,000 for the Q2 compared to negative $11,000,000 for the Q2 of 2023, principally due to increased sales volumes and feedstock optimization despite lower indicator margins in the Q2 of 2024.

Speaker 3

Total sales volumes were 64,000,000 gallons for the Q2 as compared to 50,000,000 gallons for the Q2 of 2023. Our Marketing segment reported $15,000,000 of EBITDA for the Q2 compared to $25,000,000 for the Q2 of 2023, driven primarily by lower margins. Our Lubricants and Specialties segment reported EBITDA of $97,000,000 for the 2nd quarter compared to EBITDA of $71,000,000 for the Q2 of 2023. This decrease was largely driven by increased sales volumes, sales mix optimization, operational efficiencies and furthering our base oil integration efforts despite the $14,400,000 FIFO charge from consumption of higher priced feedstock inventory in the Q2 of 2024 compared to $500,000 FIFO benefit in the Q2 of 2023. Our Midstream segment reported adjusted EBITDA of $110,000,000 in the 2nd quarter compared to $88,000,000 in the same period of last year, primarily due to higher revenues from increased sales volumes as a result of improved refining reliability and increased tariffs that went into effect in the second half of 2023.

Speaker 3

Net cash provided by operations totaled $226,000,000 which included $99,000,000 of turnaround spend in the quarter. HF Sinclair's capital expenditures totaled $84,000,000 for the Q2. As of June 30, 2024, HF Sinclair's total liquidity stood at approximately $3,400,000,000 which included cash balance of 866,000,000 dollars our undrawn $1,650,000,000 unsecured credit facility and $850,000,000 availability in the HEP credit facility. As of June 30, we had $2,700,000,000 of debt outstanding with a debt to cap ratio of 21% and net debt to cap ratio of 14%. Let's go through some guidance items.

Speaker 3

With respect to capital spending for full year 2024, we still expect to spend approximately $800,000,000 of sustaining capital, including turnaround on catalysts. In addition, we expect to spend $75,000,000 in growth capital investments across our business segments. For the Q3 of 2024, we expect to run between 570,600,000 barrels per day of crude oil in our refining segment, which reflects the planned turnaround at our Parkland refinery as well as the turnaround at our El Dorado refinery that was scheduled for 4Q, but will now begin in September. We're now ready to take some questions from the audience and I'll turn it over to Mark.

Operator

The floor is now open for Our first question is coming from Manav Gupta with UBS Financial. Manav, your line is now open.

Speaker 4

First, congrats on the very strong buyback guys. My first question relates to the lubes business. It exceeded our expectations. Clearly, a lot of integration work that you have been doing is helping you out. So help us understand the outlook for this business and should we expect the strong performance to continue?

Speaker 2

Yes, Manav, thanks. This is Tim. Our news business is performing very well and is a good example of our improved capability to execute and deliver value to shareholders. We believe our current run rate right now is $350,000,000 of EBITDA per year and has been for the last three and a half years. So we are transforming this segment from what I call a cyclical base oil business that was back in 2019 to a specialty growth business that's capturing 12% to 13% EBITDA margins today.

Speaker 2

And so let me ask Matt to maybe give some color on what

Speaker 5

we're doing to continue to improve this business.

Speaker 6

Yes. Thanks, Tim, and thanks for the question, Manav. The team continues to focus on executing on our strategic priorities. And really, that boils down to being more operationally excellent, to figuring out ways that we continue to embed our base oils and use those as a meaningful way of delivering core growth and getting the right people into the right places to help us continue on that growth trajectory. When we look forward and look out at what's to come, we're really optimistic.

Speaker 6

But it's really the operational excellence that we've been focused on in integrating our base oils and getting those into finished and specialties applications. Just an example, we continue to build on our supply chain strength this past quarter. We successfully and seamlessly transitioned to our new Edmonton facility, which is a state of the art terminal operation with bulk storage and rail siding. And that allows us to be more logistically savvy. It allows us to be more efficient with our costs and it also enables our customers to be better served and to step up into that business and continue to grow in those very strategic parts of the country.

Speaker 6

Additionally, we announced a this past quarter, we announced a strategic distributor partnership to service our specialties business for our Saba born branded business in Europe, Middle East and Africa. And we've chosen to work with an industry leader in the specialty chemicals and ingredients distribution that allows us to further streamline our business as well as accelerate growth in high value end uses and get reach into broader geographic coverage where we simply did not have that before. So we're excited about these types of pieces of business that are enabling us to grow and grow profitably.

Speaker 4

Perfect. Another area I noticed which you were aiming for was to get green in the renewable diesel side. Looks like we have been there. So have you gotten to an operating rate where you seem confident that barring certain market exceptions, going ahead, the Renewable business has finally turned the corner and you should be at least able to make breakeven EBITDA, if not higher, going ahead?

Speaker 2

Yes. Manav, on Renewables, we're very pleased with the results that we delivered this quarter. I think I said on the last call that our goal was to be breakeven to slightly positive at these bottom of cycle conditions. And that's exactly what you saw us deliver here in the Q2. We're focused on the things we can control, utilization, advantaged feedstocks, product netbacks, slower op costs.

Speaker 2

And our 2nd quarter performance demonstrates that the strategy is working and that we can be and we are now profitable at these bottom of cycle conditions. So let me ask Steve if he wants provide any color on what we're doing with renewables.

Speaker 7

Thanks, Tim. I think Tim covered it well. I mean, we're pretty pleased with our Q2 performance. When you look at all the indicators, they continue to decline across the quarter. And we said in a low margin environment, as mentioned, if we can get breakeven deposit, we consider that successful as we improve our competitiveness around key elements.

Speaker 7

So the feedstock approach, product optimization and operational reliability are what we said were the factors to do that. And I think Q2 is a proof point. Those will continue to be the cornerstones of what we focus on as we move forward in a market position and market set of conditions that have volatility that we're looking at. But we'll control the things we can control and we think that's the best thing that we can go do to make this business profitable and accretive to HS and Clari.

Speaker 4

Thank you so much for your detailed responses.

Operator

Our next question is coming from Ryan Todd with Piper Sandler. Ryan, your line is now open.

Speaker 8

Great. Thanks. Maybe first off, I mean, can you talk about what impact you've seen across your system to date from the start up of a few months in from the TMX pipeline, maybe both in terms of Canadian availability and pricing, any impact on crude availability of Puget Sound? And WCS just started to widen out, back out a bit here. What's maybe any thoughts in your outlook for Canadian differentials going forward?

Speaker 7

Ryan, it's Steve. I'll take that one as well. We anticipated as TMX came on that that would compress the differentials. And of course, we saw that considerably quarter over quarter, which impacts all of our differential or heavy run throughout our kit, specifically on the West Coast that impacts Puget. We have the capability.

Speaker 7

We're connected to pipe and we have ample dock capacity to take crude. And we think longer term as the market settles out that, that will be an advantage for us as there will be more barrels looking for a home and our proximity will be advantaged there. Again, we're already seeing a lot of production come on and so some of the new increased capacity is beginning to be filled. And so we think the run of about 1 to 2 years will widen those differentials back out. As you mentioned, we begin to see some differentials widening coming on the back part of this quarter and into Q4.

Speaker 7

Some of that is associated with, again, there was quite a bit of supply and some runs in the Q2 and we've seen some announced unplanned and planned maintenance elements in the Q3 that will impact and take some of that product or that feedstock off the market. So that's a bit supportive in terms of the differentials. And we'll continue to focus on the things that matter most. We're connected to multiple trading hubs. We sit on many important crude production sites that feed our facilities, and we think we'll be able to compete and navigate our way through this

Speaker 2

effectively. Yes. And Ryan, I'll just throw in a couple more comments. We've always said that Canadian production is going to continue to increase. We see that a big 200,000, 250,000 barrel a day increase coming online this year, which is going to continue to fill up that line.

Speaker 2

We think some barrels will move from what's going down at the Gulf Coast right now and being exported onto the TMX line going west. And so we don't think it's going to be long before the TMX line gets filled up. And we still think that's the next year or 2 that is still going to happen. In the meantime, Enbridge is still apportioned at least as we've seen it so far. And we still think there's plenty of opportunities for people to get the heavy barrels that they want.

Speaker 2

And so we continue to think that the WCS diff will be maybe more favorable than what some of the forecasts have been put out there for

Speaker 8

your operating expense, cost control, your operating expense cost control, I think it came in a little bit lower than we were expecting. I think continuing the trend of improved cost performance, you're pretty close to your target there. Can you talk maybe about what is working across the system, the progress you've made and maybe the outlook, what is yet to do still in terms of continuing to drive costs down?

Speaker 2

Yes, Ryan. Our teams are working very hard on operating costs and reliability in general. So Valerie, let me ask her to come and provide some color.

Speaker 9

Sure. I'll just kind of go back to what we said before. So our priorities around OpEx are reliability first, that starts to bring down, gain control, bring down our costs. 2nd is workflow efficiency and then turnaround excellence. So we've demonstrated our turnaround scoping and predictability.

Speaker 9

We're starting to see that in renewables. We see the impacts of our turnarounds in all of our reliability metrics. And then second, the second part of that priority is workflow efficiency and really engaging our folks. So we one example is supplier strategies. So we have worked with our procurement organizations to adjust supplier strategies in such a way that we operate in a regional model.

Speaker 9

And that's producing significant benefits across the fleet. And those are sustainable gains. And then simplify and integrating those processes across different work streams to eliminate waste and maximizing value, That gets us better base case optimization without spending really without spending capital. Other examples, specifically removing rentals have generated lower costs to operate. So the things that we're doing are all bolstered with technology to enhance and speed up and make that those changes sustainable.

Speaker 5

Okay. Thank you.

Operator

Our next question comes from the line of Theresa Chen. Theresa, your line is now open.

Speaker 10

Good morning. I wanted to go back to the LSP discussion. To your comments about high grading finished products in your portfolio, can you just help us understand what inning are you in completing that and how much more of an uplift can that sort of going forward?

Speaker 6

Yes. Thanks for the question. This is Matt Joyce. We believe we're still in the early innings on this particular business. We're encouraged by the results, and we've now demonstrated those results for multiple years that are continuing to build on the momentum and confidence that we have.

Speaker 6

But if we're talking baseball analogies, I'd say we're in the 3rd inning and we have plenty of room to roam here. And the opportunities, what we continue to find is we look for new ways to grow and innovate. And when we bend over to look for nickels and dimes, we actually find 1,000,000 of dollars of opportunity, and we're executing very well to drop that to the bottom line.

Speaker 10

Thank you. And on the, path 4, refining economic side, now with multiple large midstream operators having announced sizable pipe expansions, one coming online this quarter to pipe Gulf Coast product to PADD 4 and another just announced a couple of weeks ago coming online at mid-twenty 26, bring incremental product to the market. Can you just give us your latest thoughts on PADD IV supply and demand for products going forward?

Speaker 7

Yes. Theresa, this is Steve. We watch those things very closely and there will be continued announcements and how they come to fruition. When they come to fruition, we'll monitor that. Our belief is that we have strategic advantages of where the product the feedstock is secured, where the product is made and where it is placed.

Speaker 7

And we have a sizable footprint in terms of midstream as well as our refining kit that can access the Rockies and access the Salt Lake Valley and then all the way connect down to Vegas. And we're very focused on making sure that we have the best offering to our customers and people who are really looking to get supplied with ratable basis. We see this as something that we welcome competition, we think that we have some strategic advantages there. We won't shy away from that. We're looking to optimize across the value chain every day.

Speaker 2

And Theresa, I'll just chime in and say, we've said all along that we believe our refineries are in competitively advantaged regions where the demographics provide us structural support above our peers. We buy crude at export parity. We place our products at import parity. And I think these pipelines that are coming into the PADD IV area that you're referencing, that just continues to support the fact that we'll place our products at import parity. And we think as the market continues to weaken or go back to mid cycle conditions, those competitive advantages that we have geographically just continue to support the earnings power of our business.

Speaker 2

And we talked about this, but we raised our refining mid cycle EBITDA up $250,000,000 at the start of the year and that was to reflect what we believe are the increased synergies and the higher earnings power of these competitively advantaged assets. So I think you see that play out. We think that's going to continue to play out despite the weakening margins and despite these additional pipelines that are coming

Speaker 10

in. Thank you.

Operator

Next question is coming from Adam Wijaya with BNP and SaaS. Adam, your line is now open.

Speaker 11

Good morning, team and thank you for taking my questions. I Wanted to start on getting your latest thoughts on the refining macro given more recent crack weakness maybe specifically on the distillate side. So maybe talk about what you guys are seeing in terms of demand within your own system? And then maybe highlight some pockets of strength or weakness?

Speaker 7

Hey, Adam, it's Steve. I'll take that one. So as we look at it, I think people were really concerned in the Q2 about a demand issue. I'll talk specifically distillate because I think that was your first question. I think there was a bit softness in terms of demand on diesel and was relatively flat on gas and increasing in jet.

Speaker 7

I think part of that was contributed to with some of the weather impacts that we had in the Mid Con specifically and maybe missed a bit of the planting season. We are starting to see demand really come back strong in PADD IV right now on the back part of this. And then I think as far as the cracks go overall from a macro perspective, you saw more distillate coming online with some of the larger refineries in the Middle East pushing barrels up into Europe and suppressing some of the margin environment for Europe and into the U. S. But structurally, we see that as settling out.

Speaker 7

And right now, diesel is operating slightly below mid cycle, but we see that that's coming back into balance. We're seeing some strength come into play. We're seeing the actual inventory levels draw and on both distillate and gas. Now as far as pockets of opportunity, we are really looking at our areas being balanced, but also some incremental demand associated with jet that continues to grow. And we're going to look to take advantage of optimizing that and extending our jet value chain to take advantage of the strategic logistical advantages that we have.

Speaker 7

We're connected to many of the major hubs and we look to focus on that as we move forward.

Speaker 2

Yes. And what I would just say this is Tim. What I would just say is you saw EIA come back just yesterday and report that May was, I think, their strongest gasoline demand month since August of 2019. Steve will often say this in our internal meetings, but we're not having a demand issue. The demand is there and it continues to support the fundamentals.

Speaker 2

Really, the biggest phenomenon in the 2nd quarter was a supply issue. Utilization was very high as you guys saw in the reported numbers. And if you compare that to the average utilization that we typically see in industry, something closer to the 88%, 89%, we're running way hotter than what the average utilization has been and that additional supply that was in the market in second quarter is what really what was squeezing the margins. We don't think that's sustainable. We've said that all along over the last several years and you're even starting to see that just over the last couple of weeks.

Speaker 2

Just the industry is not able to sustain that level of high utilization. And as a result, you're starting to see cracks starting to improve. And we think that's going to continue here into the 3rd quarter.

Speaker 11

Got it. That's super helpful. And then maybe just switching gears on lubricants. You've demonstrated a couple of years of really strong profitability here. So I wanted to get your updated thoughts on maybe timing of a potential strategic decision on how to further unlock value from this business.

Speaker 11

Anything you could share would be super helpful. Thank you.

Speaker 2

Yes. As we've stated before, optimizing our asset portfolio and continued simplification of the loops business is our strategic priority. We believe in the significant value of this lubes business and we review and evaluate all of our announcements or updates to make at this time on the lubes

Operator

question is coming from Doug Leggate with Wolfe Research. Doug, your line is now open.

Speaker 12

Hey guys, this is actually Carlos filling in for Doug. Thank you for taking our question. I guess we want to build on a question that was asked previously on utilization. How do you guys see utilization shifting across your markets, especially when you see Cenovus and the return of Whiting having a direct impact to your mid continent markets? What's your perceived utilization trend in that specific market?

Speaker 12

Thank you.

Speaker 2

Yes. Thanks for the question. We have seen increased utilization numbers being reported in say PADD II, right? That's one of the phenomenons we saw in the Q2, as I mentioned earlier. And today, you're seeing that utilization come down as again, we don't think that level of high utilization could be sustained.

Speaker 2

However, our overall strategy and we've talked about this a little bit in the past. Our overall strategy is we have the capability to move barrels west. And so we have, as you know, positioned ourselves where we can move some of our PADD II barrels from the Mid Con into the Rockies, which we think will continue to upgrade those barrels as utilization stays high or gets higher in the Mid Con. And then we have capability to move from the Rockies over into the West Coast even through our UNEV pipeline into Vegas. And our strategy is as the California refineries and the West Coast refineries continue to reduce the amount of production that they have, that there'll be a general need for the barrels to move west.

Speaker 2

And we think our facilities, midstream in particular, give us the ability to do so and capture that.

Speaker 12

Thank you. That's very helpful. And then as a quick follow-up on one of the previous questions as well. On lubricants, obviously, you've had an improving quarter and results are showing up. But given what it looks like an apparent diesel recession, how sustainable the U.

Speaker 12

S. Says the segment in and of itself will be going forward?

Speaker 6

Yes, it's a great question. It's Matt Joyce here. I think we've mentioned it in the past and we'll say again, I think the entire strategy here is to continue to drive our business to be a more resilient business that can sustain through cycles. And I think this is a great another great quarter that exemplifies just that. We've seen cracks the crack spread was certainly compressed and margins compressed, but we were able to maintain our optimized portfolio.

Speaker 6

We were able to play to our strengths of both the finished and the specialties businesses. And we saw those deliver very nice results. So looking forward, this is a sustainable business. This is our new norm, and we're tracking well, and we look to continue to improve it.

Speaker 2

Yes. And I'll just make another comment on top of that. We are disconnecting this business from the base oil cracks and the margins that are associated with base oils. And that's through all the optimization efforts that Matt talked about. It's also through organically growing our finished lubes businesses.

Speaker 2

And remember, our finished lubes business is really more industrial and focused on growing with than it is associated with passenger cars. And so we really believe the outlook continues to be strong for our loops business. And if you talk about the weakness in the base oil cracks earlier, they're not going to get much weaker than what we saw in the early parts of the Q2. And yet the results, as I mentioned, are disconnected from that now.

Speaker 12

Thank you all. Appreciate the time. Our

Operator

next question is coming from Matthew Blair with DPH. Matthew, your line is now open.

Speaker 5

Thank you and good morning. In refining, we noticed that your asphalt yield kept up a little bit in the Q2. Could you talk about asphalt dynamics in Q2 and what you're seeing so far in the Q3?

Speaker 7

Sure, Matt. I think our asphalt business is something that is a nice little extension of the value chain. So the extent that we can run heavier crudes, we have the facilities to go upgrade the product and get it into the retail paving grade markets. And the locations of those assets are really beneficial for us. We like to say, we can take the components and we can pave all year in the Southwest.

Speaker 7

We have a few elements where we've optimized rail. So our cost structure has come down a bit. We also have had some price improvement. And so we continue to look at this business as a true extension of our heavy value heavy oil value chain and it's something that we're going to continue to go grow. I think the market gave us a little bit of help this quarter, But overall, we think we're operating right kind of in the mid of where the market will perform long term.

Speaker 7

Our approach is to continue to focus on optimization, logistics, costs and growing our relationships with a lot of our end customers there.

Speaker 2

Yes, thanks for that question. We don't get a lot of asphalt questions. But as you know, asphalt was one of the big areas where we had synergy opportunities that we've been capturing associated with the Sinclair combination. So we have a finished asphalt business that's legacy HollyFrontier. And with Sinclair's wholesale asphalt that they've been producing, we've really been able to combine those 2 businesses.

Speaker 2

Most of our feedstock is now internally produced as opposed to 3rd party purchases. And that's really been allowing us to take full advantage of our asphalt business.

Speaker 5

Great. And then on the El Dorado turnaround, I believe you said it was moved up from the 4th quarter. Was that just due to market conditions? Or was there some maintenance that you need to accelerate at the plant?

Speaker 9

We just picked the opportunity to pull it in a couple of weeks really for optimization around workforce and scheduling. The market was favorable and it just made a lot of sense from an efficiency perspective.

Speaker 5

Sounds good. Thank you.

Operator

Our next question is coming from Jason Gabelman with D. B. Cowen. Jason, your line is now open.

Speaker 13

Morning. Thanks for taking my questions. I wanted to ask on the maintenance budget moving forward. It seems like there's been some benefit from the higher maintenance spend and kind of mid cycle guidance for this year. Given that, do you expect that that number will track lower in the future as your operations improve?

Speaker 13

Or do you need to spend at a higher level over the next couple of years to continue to get your operations in line with targets?

Speaker 9

Yes. So great question. As reliability improves, our costs will come down, our maintenance. I think short term what we're seeing is we're seeing some improvements, but I would say we're going to be flat in the near term as we continue to invest in our programs. So that money is coming out of the reactive side of the business and going into proactive programs.

Speaker 9

And so as we shift those dollars to build out reliability, that's really going to keep us relatively flat on our maintenance spend.

Speaker 2

Jason, we updated our mid cycle assumptions to show $7.25 as our near term target for OpEx per barrel. We've talked about long term, we still believe we can get to $650,000,000 and that's going to be through the additional work process flow improvements that Valerie mentioned earlier. But near term, $725,000,000 we still think is the right number to be thinking about.

Speaker 13

Got it. And then in terms of cash returns to investors, it seems like Sinclair is quickly approaching their target shareholding level. Once they get there, are you going to provide a more fulsome update on your distribution framework? Or should we just kind of assume when that ends, you're going to the 50% payout ratio that you've previously provided?

Speaker 3

Yes. Thank you for your question. This is Atmos. Our commitment to shareholder returns remains unchanged, and we continue to be on pace to exceed our 50% payout ratio to the extent that we continue to generate strong cash flows as we're seeing this some of these favorable margins returning, we will be returning all of that cash back to our shareholders. So our commitment remains unchanged to meet and exceed our 50%.

Speaker 3

This year, just for reference, we're

Speaker 8

on

Speaker 5

a year

Speaker 3

to date basis, we're 250% payout ratio. Last year, we did 74 percent. So, I think our history demonstrates that commitment.

Speaker 13

Thanks.

Operator

Our next question is coming from Joe Lache with Morgan Stanley. Joe, your line is now open.

Speaker 14

Hey, good morning and thanks for taking my questions. So I wanted to start on the marketing side. I think the 10% store growth you spoke about in the prepared comments is above the 5% or greater growth target rate that you all have talked about in the Would you mind just talking to your outlook for that segment, please?

Speaker 7

Yes, sure, Joe. Thanks for the question about marketing. We like to get those questions. This is something that we are pretty excited about. The 150 sites coming online in the next 6 to 12 months is 10% growth year over year, which is above what we had previously guided against.

Speaker 7

But that I think reflects what we see is still yet an untapped opportunity for us. There's a lot of demand for dino and a lot of hunting ground still in front of us. We think that putting branded locations and the branded put in and around the regions where we have logistic advantages is a key focus area for us. And some of the growth that you will see is fulfilling that premise. And we think this is just the beginning.

Speaker 7

We think that there is value in accretive to HS and Clear by continuing to focus on this and grow this. And we're looking to do that in multiple ways. We're allocating the resources to go make this a reality over the next several years.

Speaker 14

Thanks. That's helpful. And then now that the AGP transaction has been for a few months now, could you just talk to any opportunities you're seeing in terms of operational synergies on the commercial side?

Speaker 7

Yes. So I have midstream as well. Thank you for asking about that. It's another segment we're pretty strong and happy about. We're pleased with the performance there.

Speaker 7

We've already seen some synergies that are obvious with cost simplification around public company costs and retaining all the value for the segment as a result of the buy in. And it's still early days yet, but we are seeing some opportunities across the value chain that previously have been more difficult to either identify and or execute effectively. And I'll just give one example. We have a very strong concentration in our Southwest, what we call the Southwest area in the Permian. And we're already finding ways where we can go fully leverage that and put more of the crude feedstock that we want on our logistics assets and move more of those molecules to the markets that we choose.

Speaker 7

So we see that as just one of the examples, but there are other areas that we'll begin to peel back as we look to come up with common solutions to common problems against all of our operating platforms.

Speaker 2

Joe, I'll just chime in too and say, we had record volumes in the Q2 in our midstream business. And that is all playing out as we continue to optimize really our marketing, which you asked about earlier, our midstream business along with our refining business. So we really consider those three businesses our core business that really have to work well together and integrate together. And then when we say we are focused on integration and optimization, that's really what we're trying to do is continue to grow the marketing and midstream businesses along with our refining business. So again, thanks for the question.

Speaker 2

It plays right into our strategy around our core businesses.

Speaker 14

Great. Thank you.

Operator

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

Speaker 2

Thank you, Mark. So before we close, I wanted to welcome our new General Counsel, Eric Mitscher to our leadership team. Eric brings us more than 35 years of legal experience in the oil and gas industry, including the last 7 years serving as General Counsel for BP. I'm confident that Eric will be a strong contributor to our business going forward. We are focused on executing our strategic initiatives and the improvements are evident in our 2nd quarter results.

Speaker 2

Higher utilization and throughputs, lower op cost per barrel, positive EBITDA in renewable diesel, strong earnings in lubricants and midstream. All of these are indicative of the hard work and commitment of our employees executing our plan. Looking ahead, our priorities remain the same: 1, improve our reliability 2, integrate and optimize our new portfolio of assets and 3, return excess cash to our shareholders. Thank you for joining our call, and have a great day.

Operator

This does conclude today's teleconference.

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Earnings Conference Call
HF Sinclair Q2 2024
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