HF Sinclair Corporation

Welcome to HF Sinclair Corporation and Holley Energy Partners fourth quarter 2022 conference call and webcast. Hosting the call today is Tim Goh, incoming Chief Executive Officer of HF Sinclair. He is joined by Atanasov, Chief Financial Officer, Steve Ledbetter, EVP of Commercial, Valerie Pompa, EVP of Operations, and Matt Joyce, SVP of Lubricants and Specialties, along with John Harrison, Chief Financial Officer of Hawley Energy Partners. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you'd like to ask a question at that time, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 1 again. If you should require operator assistance, please press star zero. We ask that you please 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 that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Beery, Vice President, Investor Relations. Craig, you may begin.

Thank you, Jack. Good morning, everyone, and welcome to HS Sinclair Corporation and Holley Energy Partners' first quarter 2023 earnings call. This morning, we issued press releases announcing results for the quarter ending March 31st, 2023. If you would like a copy of these press releases, you may find them on our website at hfsinclair.com and hollyenergy.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. 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. Good morning, everyone.

Today we reported first quarter 2023 net income attributable to HF Sinclair shareholders of $353 million, or $1.79 per diluted share. These results reflect special items that collectively decreased net income by $41 million. Excluding these items, adjusted net income for the first quarter was $394 million, or $2 per diluted share, compared to adjusted net income of $176 million, or 99 cents per diluted share, for the same period in 2022. Adjusted EBITDA for the first quarter was $705 million, an increase of approximately $328 million compared to the first quarter of 2022. In our refining segment, first quarter 2023 EBITDA was $544 million compared to $208 million in the same period last year. This increase was primarily driven by higher refining margins of both the West and Mid-Continent as well as a result of steady demand, tight supply, and favorable crude spreads. Crude oil charge averaged 499,000 barrels per day in the first quarter of 2023 compared to 525,000 barrels per day in the first quarter of 2022 due to heavy turnaround maintenance during the period. Of the three refinery turnarounds we conducted in the first quarter of 2023, I am pleased to report we successfully completed all three on time and on budget. While this is a significant accomplishment in itself, we also addressed many of our end-of-cycle reliability issues on the refinery equipment that was available during these downtimes. Our drive to improve our operating reliability is built around the maintenance strategies that we execute during these turnaround cycles. In our renewable segment, we reported adjusted EBITDA of $3 million and total sales volume of 46 million gallons for the first quarter of 2023. We continue to work to increase utilization at our renewables facilities and expect to achieve normalized run rates in the second half of 2023, which will allow us to optimize advantage feedstock from our pretreatment unit. Our marketing segment reported EBITDA of $6 million and total branded fuel sale volumes of 328 million gallons, representing a $0.04 per gallon margin in the first quarter of 2023. We continue to see strong value in the Dyno brand as the marketing business provides a consistent sales channel with margin uplift for our produced fuels, and we expect to grow our branded sites by 5% or more per year. Our lubricants and specialty product segment reported EBITDA of $99 million for the first quarter of 2023, compared to EBITDA of $145 million for the first quarter of 2022. This decrease was largely driven by the positive FIFO impact from consumption of lower priced feedstock inventory in the first quarter of 2022. We continue to be pleased with the strong performance of our lubricants and specialty product segment and continue to focus on sales mix optimization of our base oils and finished products. AGP reported EBITDA of $88 million in the first quarter of 2023, compared to $73 million in the same period of last year. This increase was mainly driven by contributions from the Sinclair Transportation Assets, which were acquired in March of 2022, as well as higher revenues from our Woods Cross Refinery Process Units, partially offset by higher interest expenses. Overall, we returned $334 million in cash to shareholders through share repurchases and dividends during the first quarter. As of March 31st, 2023, we have $420 million remaining on our share repurchase authorization. We remain fully committed to our long-term cash return strategy of returning 50% or more of our net income to our shareholders, while maintaining a strong balance sheet and investment-grade credit rating. This morning, HF Sinclair made a non-binding proposal to acquire all of the common units of Holley Energy Partners LP, not already owned by HF Sinclair, pursuant to a stock-for-unit merger transaction that would result in HEP becoming an indirect wholly owned subsidiary of HS Sinclair. We believe the proposed transaction simplifies our corporate structure, reduces costs, and further supports the integration and optimization of our portfolio. Please refer to the separate press release for specifics related to this proposal. Looking forward, as I make the transition to CEO of HS Sinclair, I'd like to take this time to share with you my near-term priorities for the company. First, we must continue advancing our operations excellence. This means improving the safety and reliability of our plants, which we believe will result in higher utilization rates and lower operating expenses. This is our top priority, and we have recruited many reliability subject matter experts over the last few years, and we are implementing our operations excellence management system to guide us through this journey. But as I mentioned earlier, it will take time working through our turnaround cycles to make the necessary improvements to our equipment. Second, we have completed a number of transformative acquisitions and we continue to focus on the integration of those assets into our portfolio with the goal of capturing more operating efficiencies and margin opportunities across our asset base. We already realized annual run rate synergies of roughly $100 million from the Sinclair acquisition, and we believe there is more to capture from this acquisition as well as in our lubricant and specialty product segment. Third, I am focused on free cash flow, and I'm committed to continuing our cash return strategy that I mentioned earlier. Returning excess cash to shareholders through dividends and share repurchases while maintaining an investment-grade balance sheet is fundamental to maximizing shareholder value over the long term and positioning the company for future success. With that, let me turn the call over to Atlas.

Thank you, Tim, and good morning, everyone. Let's begin by reviewing H.F. Sinclair's financial highlights. NIP cash flows provided by operations for the first quarter of 2023 total $178 million, which included $164 million of turnaround spent in the quarter. HF Sinclair's standalone capital expenditures totaled $92 million for the first quarter of 23. As of March 31st, 23, HF Sinclair's total liquidity stood at approximately $3 billion, comprised of a standalone cash balance of $1.36 billion, along with our undrawn $1.65 billion unsecured credit facility. As of March 31st, 23, we have $1.7 billion of standalone debt outstanding with a debt-to-cap ratio of 16% and net debt-to-cap ratio of 3%. HEP distributions received by HF Sinclair during the first quarter of 23 total 21 million. HF Sinclair owns 59.6 million 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 $950 million of last night's close. Let's go through some guidance items. With respect to capital spending for full year 2023, we still expect to spend between $250 to $280 million in refining, $25 to $35 million in renewables, $35 to $50 million in lubricants and specialty products, $20 to $30 million in marketing, $50 to $80 million in corporate, and 530 to 630 million for turnarounds and catalysts. At HEP, we expect to spend between 25 and 35 million in maintenance and 5 to 10 million in expansion and joint venture investments. For the second quarter of 2023, we expect to run between 550 to 580,000 barrels per day of crude oil in our refining segment And we have planned turnarounds scheduled at our Navajo and Parco refineries during the period. And lastly, as Tim mentioned, please refer to our separate press release we issued this morning for specifics related to our proposal to acquire the outstanding HEP public units. As negotiations are currently ongoing, we're unable to speak to specifics around the proposal during Q&A. And with that, let me turn the call over to John for an update on HEP.

Thanks, Agnes. HEP generated solid first quarter earnings supported by safe and reliable operations and strong volumes in both our crude and refined product transportation and storage systems. HEP's first quarter 2023 net income attributable to Holley Energy Partners was $58 million, compared to $50 million in the first quarter of 2022. The year-over-year increase was primarily attributable to earnings related to the Sinclair Transportation Assets, as well as higher revenues from our Woods Cross refinery processing units, partially offset by higher interest expense and operating costs. HEP's first quarter of 2023 adjusted EBITDA was $108 million, compared to $85 million in the same period last year. A reconciliation table reflecting these adjustments can be found in HEP's press release. HEP generated distributable cash flow of $84 million, and we announced a first quarter distribution of 35 cents per LP unit, which is payable on May 11th to unit holders of record as of May 1st. Capital expenditures during the quarter were approximately $8 million, including $4 million of expansion, $3 million in maintenance, and $1 million of reimbursable CapEx. We ended the quarter with approximately $556 million in liquidity, comprised of $7 million of cash and $548 million of availability under our $1.2 billion revolving credit facility. For 2023, we are focused on safe and reliable operations while we negotiate the proposal from HF Sinclair. We are now ready to turn the call over to the operator for any questions.

Certainly. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your touch-tone phone. We ask that you please limit to one question and one follow-up. If you have additional questions, we welcome you to rejoin the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing the star 1 key again. Thank you. Our first question comes from the line of Roger Reed with Wells Fargo Securities. Your line is open. Yeah, thank you. Good morning, everybody.

And Tim, welcome to the lead role here.

Thanks, Roger. Appreciate it.

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

Yeah, Roger, as Agnes mentioned earlier, We just put the proposal out last night. We're not able to talk about it just because it's a public negotiation. But what I can tell you is we believe this proposed transaction simplifies our corporate structure, it reduces our costs, and it further supports the integration and optimization of our portfolio. It also provides an opportunity to unlock cash. that is currently being held at the MLP level for LP distributions and debt reduction. And this cash would become available for Dyno's long-term capital allocation strategy.

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

Roger, thank you. This is Atlas. First of all, I think we're pleased with the performance of our renewables. segment in the first quarter on an adjusted EBITDA basis, we were positive, which we're pleased with. With respect to some of the challenges that we've talked about in the past couple, one of them has been reliability. The second one has been hydrogen availability. So, with respect to operational challenges, we've made very good progress in the first quarter. We've helped improve yields in some of our particular Cheyenne assets. and we continue to work on a longer-term solution for our hydrogen problem. So, working on the process optimization as well as the long-term solution on hydrogen are two important priorities for us. With respect to run rates, I think we have made steady progress, but we're really looking at that second half of the year where we're looking to achieve normalized run rates. With respect to the second quarter, I would also point to your attention to the fact that we have turnarounds in two of our facilities that are co-located with refineries, both Barco and Navajo, which would impact run rates in the second quarter. But that also gives us an opportunity to really continue to work on addressing operational issues and come out really in better shape after these turnarounds.

Yeah, and Roger, I'll just chime in as well, just for some color. You know, we're not happy with the results of the renewable diesel business yet, but we are happy with the progress. And so showing positive adjusted EBITDA this quarter is evidence that we're moving in the right direction. As Agnes mentioned, we had several turnarounds. This quarter, we have a few more here in the second quarter that will continue to improve the hydrogen infrastructure and the rest of the utility infrastructure that is around these renewable diesel plants, as well as what Agnes mentioned, just our better understanding of how to run these plants better is going to contribute and help us deliver in the second half the run rate that we're expecting.

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

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

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

Appreciate that. Thank you.

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

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

Yeah, Matt, this is Tim. I'd be happy to. I've mentioned before that You know, you've got resource and capability opportunities to improve. You've got systems and processes to improve. But the third leg in the triangle is we've got to improve the equipment itself, right? I like to say equipment doesn't know we're talking about it until we actually do something with it. And during the turnarounds, we have the ability to to take those maintenance strategies and actually affect the equipment that's usually not available except for turnarounds. So let me turn it over to our new EVP of operations, Valerie Pompa. She has over 30 years of operating experience, and we're really glad to have her on our team. Val, you want to talk a little bit more about turnarounds?

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

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

Sounds good. And then on the lubricant side, Was there a material FIFO impact in Q123? And could you talk about the factors that supported better lubricants, profitability, quarter-over-quarter, even though your index declined? Thanks.

Yeah, hi there. I'll take this one. This is Atlas. So with respect to our FIFO impact, there was a FIFO impact. It was about 14%. a million, but even with that in mind, we're still very pleased with our results. When you look at the profitability of the business, there's really a couple of notable drivers. One of them is the favorable product mix. The second one is really strong margins in our group three base oil that go into a lot of higher value end uses. And the third one is really continued strength in the finished products market. So when you take all of those three together, that really accounts for the successful quarter that we've had in that business. you know, product mix, products mix, and margins are really the two main drivers.

Yeah, and Matt, let me chime in too. The FIFO impact that Atlas mentioned was a $14 million headwind for this quarter. This is the first quarter of 23. Without that, our ex-FIFO number would have been higher than what we reported and was actually a quarterly record for us on an ex-FIFO basis. Last year, which is what you asked, We had a sizable FIFO tailwind. As you mentioned, it was something closer to $49 million, something in that range. And on an ex-FIFO basis, it would have been lower than that. But it gives me the opportunity to introduce another new member of our leadership team, Matt Joyce, who has nearly 30 years in the base oil and lubricants industry. We're really glad to have him. Matt, you want to provide any other color on the lubes business?

Yeah, sure. Thanks, Tim. And Matt, nice to meet you. Building on what Atnas mentioned, the team has really positioned us well, focused on key objectives. We're going after certain end-use markets that are higher-value markets, and we're well-situated in those today. We enjoy a presence in many of those markets, off-highway construction, mining, natural gas. We've introduced some new products into that space, and we're seeing some really good results. And further to that, we've seen some geographic expansion into targeted markets. that's been successful. And very finally, the product mix that Atnas mentioned and Tim has mentioned in prior earnings calls, that's by design. That is something that was intentional, that's not just stumbling into it. We have purpose to get in there and make our value and our value proposition to our end-user customers as robust as possible. As a result, get the returns that you're seeing and continue to trend at this higher than mid-cycle range, and we're really excited about that.

Great. Thanks for all the commentary.

You bet. Our next question comes from Paul Chang with Scotiabank. Your line is open.

Thank you. Good morning. Two questions, please. Tim, since you're saying you're going to take the opportunity during the turnaround to improve the assets, so should we assume over the next two or three years the turnaround expense is going to be higher than usual? And if that's the case, do you have a range that you can provide how that looks like over the next two or three years? And second question is, I think in the past that the company has said the lubricant in the long haul may be worth more money for other people and may not be together with the HSN care. So wondering if that is still the view, and if that's the view, what will be the precondition or criteria for you to make that decision? Thank you.

Okay, Paul, thanks for your questions. Let me ask Val to comment on the turnaround.

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

Paul, let me take the second questions on lubricants.

And before that, do you have a range of what the turnaround expense may look like over the next several years?

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

Okay. We do. Thank you.

Thank you, Tim. Yeah, Paul, just back to your questions on lubricants. And we continue to view this business as very valuable to our portfolio. Obviously, very pleased with the operations that we, over the last couple of years, especially the last 12-plus months, we're running the business as a fully integrated specialty lubricants business. And some of the preconditions that you asked about That could possibly lead to determining that someone is a better owner of this business. All boils down to valuation. Currently, we believe that this business is vastly undervalued within our portfolio. We're not given any credit for it. It throws a lot of free cash flow at the moment. And we still believe that there is more meat on the bone, so to speak. We have done a lot of good work over the last couple of years in integrating the assets in Europe, in Petrolia, Pennsylvania, as well as Mississauga. And we believe that there is still more synergies that could be gained over time. That, of course, will accrete further value into the overall valuation. When you look into the specialty lubricants business, there are some markers out there that are significantly higher in terms of multiples that are double digit in some cases. And so when this type of compelling valuation presents itself, we will not shrink from testing the market. But for the moment, in the near term, we're focusing on leveraging and extracting more of those synergies. And over the mid-term, perhaps test the market.

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

Thank you.

Neil Mehta with Goldman Sachs. Your line is open.

Yeah, good morning, Tim. Good morning, team. Good morning, Neil. Good morning, sir. My first question is,

related to return of capital and just provide your latest thoughts in terms of the share repurchase program in a lower margin environment than where we were and the latest thinking in your ability to repurchase those shares bilaterally from the Sinclair family as opposed to seeing these come through in the open market.

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

Yeah, you look at our first quarter, Neil, and we returned 14% cash return through our dividends and our share buybacks. Eighty-five percent of net income is what that translates to. So we're on a good pace. We feel like this year is going to be another strong year for us. um we've we've done direct buybacks with the family as you pointed out and we've done um we've done purchases in the open market we believe that you know over the long term we'll just continue to do similar things as opportunities arise but as admins mentioned we don't comment on on pace and in amounts that's fair and then we haven't spent a lot of time talking about the refining macro on this call so tim maybe you and your team can just share your perspective on

From the volatility that we've seen, what do you make of it, and how do you think about the progression of margins for the end of the year?

Yeah, obviously a lot of volatility. We were expecting more demand from China and more impact from the Russia embargoes. But I will tell you that we always thought that the first quarter we would see the most exports from China. And then as the country opens up over the course of the rest of this year, that the increased local demand in China will soak up those higher barrels and we'll see less of that coming into the United States. We still believe that's true. So in the first quarter, we definitely saw some additional imports. But again, we expected that to peak, and now we believe as China continues to open up, demand will, or supply will stay in the China area. We think we're excited about the summer demand that we normally see, especially in the Rockies and in the West. You didn't specifically ask about demand, but I know that question always comes up, so I'll just mention, you know, first quarter versus last year, our gasoline demand, we believe, is about 102% of what we saw last year. Diesel was about 101% of demand in our areas. And that has been higher diesel demand, but we still think it's strong and it was higher than last year. And really the surprise was jet. Jet demand was 8% higher in the first quarter of this year versus last year. And that's continuing to drive some of the distillate areas as well. We've always said that there's a macro basis out there, and we're seeing Asia and Europe starting to get closer to break even in terms of their macroeconomics. Some of the run cuts that we're starting to see are expected as you look at the cost curves and kind of where the marginal capacity is in the world. We still believe that the US has a six to $8 advantage over the European refining margins. And then we've talked about this before, but we think HS Sinclair's portfolio which is often overlooked, has an advantage over that. You know, when you look at, especially in our West region, the Rockies, the Southwest, where we believe we're seeing even higher advantages in product differentials than what you see, for example, in the Gulf Coast and certainly in the East Coast. And we saw that this year, or I'm sorry, this quarter with the demand in Phoenix. and the demand in Denver that continues to drive our profitability in our west region.

Great, Tyler. Thank you, Tim.

Our next question comes from the line of John Royal with J.P. Morgan. Your line is open.

Hi. Good morning. Thanks for taking my question. So, my first one is just a follow-up on the turnarounds in refining. I'm more interested in the quarterly cadence. You've mentioned that 1Q would be peak maintenance, and the guide for 2Q throughputs is certainly higher, but I think still kind of low to mid-80s utilizations with some additional turnaround activity. So can you guys give any thoughts on utilization run rates in the second half, and should we expect a minimal amount of maintenance following 2Q and running relatively full?

Yeah, John, thanks for the question. We've got two turnarounds in the second quarter, one at Navajo and one at Parco. I am pleased to report that the Navajo turnaround is complete and we have started up, so that's gone very well on time and on budget. The Parco turnaround we're in the middle of and everything's going very smoothly there. So after we start up part go, we anticipate to be able to run in the low 90s utilization. We think that'll carry through the rest of the year. We do have a couple more turnarounds in the fall, but we still think we're going to be able to maintain that kind of level of utilization for the rest of the year.

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

John, this is Atlas. Thank you for your question. What you noticed in our results, as you referred to as weakness, is really I'll point a couple of things. First of all, there's a seasonal component to this business, this being the first quarter. And number two, in markets such as Denver and Phoenix, where we've seen tightness of supply, that sometimes results in a dislocation between the unbranded and branded pricing, which could result in a temporary squeeze in margins. And that's why you're seeing that 4 cents dislocation. But over time and over the year, we feel very good about the view on this business. And I'll turn the call over to Steve Ledbetter, who's our new executive vice president of commercial. Steve, if you'd like to add some more color.

Yeah, absolutely. Thanks, Anas. John, thanks for the question. We're still very excited about the Sinclair brand, which, as you know, was one of the things we were excited about during the acquisition. And interestingly, something I was very excited about as I made the decision to join the H.S. Sinclair family. You know, we think the value proposition is strong and will compete well in our markets. And we look to take advantage of that full integrated value chain in those markets where we operate. We see a lot of interest in the West, in the Rockies, in the Southwest. and are looking forward to growing our wholesale branded business. And we're on pace to meet the targets that we suggested, between 5% and 10% growth of the wholesale marketing branded business year over year.

Thank you.

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

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

Yeah, Clay, this is Tim. We were pleased with our capture rate in the west. You know, obviously, we had some stronger crude diffs that helped us. The Denver shortages also helped us with capture as well. But quite honestly, with turnarounds going on also in the West, that hurt us on a capture rate standpoint. So we do think there's room to continue to improve, especially as the summer season comes through. We also think that during the first quarter, we built some intermediate inventories associated with the turnarounds. And we think we're going to be able to draw down those inventories in the second quarter. So we think there'll be improved capture there. But we don't guide on the actual capture rate itself. Those are just some factors that we think we're going into as you look to the second quarter.

I appreciate that. My second one is on HEP. And I know you guys can't talk about the negotiation, but this is a bit more mechanical in nature. Post-merger. You guys are requiring the ATP balance sheet, so I'm wondering what the consolidated leverage target is going forward.

Yeah, this is Atmos. Thanks for your question. First of all, I'll remind you that currently, you know, folks like the rating agencies and everyone look at ATP as consolidated within Sinclair because we consolidate it. And on a go-forward basis, as now, we're looking at around one turn of leverage.

Sorry, that includes ATP? Yeah. Awesome. I appreciate that. Thank you.

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

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

Yeah, Manav, it's a good question to reflect back on. We just really celebrated the one year anniversary of Sinclair a few weeks ago and then obviously Puget Sound had their one year anniversary last November and we celebrated that as well. So very, very pleased with how those have gone. I'll just say, you know, we of course talked about the $100 million of synergies that we captured, you know, really faster than we ever thought we would. And so I think that would be a surprise. I think things like the ability to have backup supply. We've got refineries now that are able to back each other up to help improve our customer reliability in terms of making sure we keep our stations wet. I think that's been a very pleasant surprise. Some examples of some of the synergies, you know, we were short octane at our Parco refinery. We were long octane at our Woods Cross refinery. So we were able to combine those two. poodles together and back out some higher-cost octane components in order to optimize our operations there. I think on a heavy crude standpoint, it was – we – Poly Frontier had extra heavy crude line space that Sinclair was short of, and so we were able to increase heavy crude into the Parkville Refinery by, call it, 10,000 barrels a day on day one. So that was another pleasant surprise that we had to deal with. Another one that we don't talk much about is asphalt. PARCO makes a lot of asphalt components. We have an asphalt business that's based in the Southwest, and we were able to integrate those two businesses, basically consuming all of the PARCO asphalt production into our asphalt business. And I think that's been very surprising and very profitable for us. So those are some things that we found right away. But I'll tell you, Manav, we think there's a lot more opportunity out there, and we're going after it. I wouldn't have a number for you today, but I will tell you that we believe there's plenty of opportunities. One of the remits that we have Steve here for as the EVP of commercial is to actually take that process that we just went through in terms of synergies with the Sinclair assets and expand that now to our overall portfolio, and to look at Puget Sound, look at the Southwest, look at the MidCon, and try to do kind of the same thing we just did with the Sinclair assets, with the whole portfolio, to look for margin opportunities and capture improvement projects.

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

Yeah, hi there. This is Atmos again. I have One thing to keep in mind is that we were focused almost 100% on the integration of Sinclair, which took a lot of time, resources, efforts, back office, front office, and obviously being able to achieve the 100 million of synergies has taken tremendous effort across the organization, but our focus was primarily on the So that was a matter of priorities. And as that integration is almost complete, we're pointing our attention to this more strategic with HEP.

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

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

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

Thanks. Maybe, sorry, one last follow-up on the HEP question before we leave it. For a number of years, I think the long-running position of the company was that you wouldn't take out the HEP shares until the accretion math worked in your favor. Is that still the case, or is there enough in terms of cost-saving strategic benefits, or are there enough to outweigh any potential dilution there?

Yeah, this is at this as Tim indicated and I indicated earlier, we're not going to comment on the specifics of the transaction as we've just made the offer and it's and it's under obviously on the negotiation, but we believe that overtime it will accrete value to our shareholders and also will point you that as Tim indicated in his remarks, you know cash flow is is a consideration for us as well.

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

Great. Thanks. And then maybe just one on a different side. As you look ahead to 2024, any comments on how the startup of the Trans Mountain Pipeline Could impact crude access or economics at your Puget Town refinery? Does that improve access to additional Canadian crudes or change the dynamics up there at all in the business?

Yeah, right. It does change the dynamics. We're looking right now at maybe a first quarter 24 startup. Obviously, as they do the line fill on the pipe before that, it'll change some of the some of the supply demand. We do think that WCS, WTF, WTI, sorry, spread will tighten as that line fill goes in. We think early on, the first couple years, that that WCS, WTI diff will stay tighter because of the extra takeaway capacity that the TMX line provides. But over the long term, and we think that's two to three years later, we do think production in Canada will increase and once again exceed the takeaway capacity and that we'll be back into kind of the same type of situation that we're in today. Having said that, keep in mind that our Puget Sound Refinery can also run 100% ANS crude from the water, that we are one of the few refineries in that area that can do that. So we have the ability to switch back between ANS and these Canadian crudes, which gives us extra flexibility to take advantage of this volatility that we'll no doubt see over the next couple of years. And so as today, it makes more sense to try to bring in as much of a Canadian crude as we can. But in the future, it may make sense to bring in more ANS, and we can do that and optimize our portfolio.

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

Yeah, there's no doubt that that will put pressure on the ANS market. You know, the barrels are going to go to Westridge. They're going to be put on ships, and they're going to likely head to California, maybe to some of the Far East. But, yes, that will play dynamics in the ANS market, which, again, gives us that advantage since we are able to run either crude and can ARB between the two.

Great. Thanks, Dan.

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

Hey, morning. Thanks for taking my questions. I wanted to go back to shareholder returns for a second. Two kind of related questions on that. First, I know the Sinclair family still owns a decent chunk that gives them two board seats. Any indication if they want to hold, continue to hold the two seats or one? and how you think about buybacks with those levels of ownership that they would need. And then somewhat related to that, you have previously got into a 50% payout ratio of cash starting in 2Q. Does that still hold in this environment, or are you thinking about that differently? Thanks.

Justin Fields- Thanks Jason, let me take your first question on the family, obviously we can't speak for the family. Justin Fields- We we don't know what their intent is and we we wouldn't be able to speak for it, but what I can tell you is this has been published in the in the documents that when or if their share count drops below 15%. their two seats on the board goes down to one seat on the board. So just so you know, that is built into the deal. And I'll turn it over to Agnes to talk about the capital return question.

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

Okay. And my follow-up, just on refining dynamics, you noted a couple of plants coming back online in the Rockies region. Have you seen that impact? uh product price premiums you're getting there and then separately um what's your outlook on brent ti we've we've seen that coming a bit here uh what's what's driven that and do you expect it to remain tighter going forward thanks yeah jason we we've seen um plans coming back online both from planned and unplanned um

events in the first quarter, we definitely see the impact in the markets. I mean, for example, in Denver, as everyone has been watching over the last, you know, several months, the cracks there went very high, and those cracks have come down from the very high levels. But I tell you, they're still attractive, and they're still certainly stronger than Gulf Coast cracks, you know, given that regional premium that I mentioned earlier. And I'll point out the same thing with Phoenix. Phoenix has seen very strong cracks and actually we're seeing very strong cracks still right now in Phoenix while there's a lot of still planned and unplanned downtime occurring in that area. So we're very pleased with that. We still think even with all the plants running this summer, Jason, that these rocky markets and the Southwest markets will continue to be very, very strong and very attractive for us. As you can see in the latest margin indicators that we published here at the beginning of the month, we still see the West gross margins as being very strong. On Brent TI, it has come in. Obviously, the OPEC cuts put some pressure on the Brent TI. I think you also saw that The TI is now being included in the basket that they use to talk about dated Brent. I think that has a little bit of an impact on narrowing that spread. But we still think the Brent TI spread is based on freight rates, on transportation. We still think that's going to be $3 to $4 a barrel long term. So no change there.

Great. Thanks.

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

Thank you. Tim, could you give us an update? Where are you guys in terms of the pathway for the LCFS? Have you already received it? And secondly, do you have a number you can share about the opportunity cost laws in the first quarter due to the downtime, both planned and untrained?

Paul, thanks for your follow-up question. I can tell you we have LCFS validation scheduled in the second quarter. Those will be at all three of our renewable diesel plants. And depending on the outcome of those validation visits, we could move from the provisional CIs to the actual CIs. So we're hopeful that that will occur. We'll start seeing the benefits from that in the third quarter. From an opportunity cost standpoint, Paul, we don't provide that level of guidance, but I can tell you that from a turnaround and from an unplanned basis, we see a lot of opportunities to improve. And that's why improving the safety and reliability of our assets is our number one priority. We believe it's the biggest impact we can have on this company's results. And the good news is we have control over it. And we've got the people, we've got the processes, and we've got the focus and determination. to work on those. Again, I point to the lubes business as an example of how we've done that. I'm pointing to the renewable diesel business as you can see that progress, that journey happening as well. And then I'll also say that same journey is happening on the refining side as well.

All right. Great. Thank you.

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

Thank you, Jack. I just want to wrap up with a couple points. First, I would like to recognize the impact that Mike Jennings has made on our company. Over the last three years, he has led us through a global pandemic, built a new renewable diesel business from scratch, bought the Puget Sound refinery, and acquired the Sinclair Oil Company to transform this company into HF Sinclair. His leadership, dedication, and his compassion for our employees has set the tone at the top, and he has been a great mentor to me personally. Mike will be missed, but his legacy will never be forgotten. Second, I want to thank the board for their confidence in me to lead this company going forward. I'm excited about the opportunity and challenge ahead. Some things won't change. like our long-term commitment to return cash to our shareholders, but some things will have to change, like the need to improve our operational performance of our refineries and our renewable diesel business. I'm pleased to welcome the new members of our leadership team, and together, we look forward to growing this business and creating additional value to our shareholders, our communities, and our employees. With that, thank you very much for your time today.

This concludes today's conference call. We thank you for your participation. You may now disconnect.