HF Sinclair Corporation

Welcome to HF Sinclair Corporation and Holley Energy Partners' second quarter 2023 conference call and webcast. Hosting the call today is Tim Goh, Chief Executive Officer of HF Sinclair. He is joined by Atanas Antetov, Chief Financial Officer, Steve Ledbetter, EVP of Commercial, Valerie Pompa, EVP of Operations, and Matt Joyce, SVP of Lubricants and Specialists. along with John Harrison, Chief Financial Officer of Holley 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 would like to ask a question at that time, please press star 1 on your touchtone telephone. 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 0. We ask that you limit yourself to one question and one follow-up. Additionally, we ask that you pick up your handset to allow optimal sound quality. Please note this conference is being recorded. It is now my pleasure to turn the floor over to Craig Berry, Vice President, Investor Relations. Craig, you may begin.

Thank you, Audra. Good morning, everyone, and welcome to HF Sinclair Corporation and Holley Energy Partners' second quarter 2023 earnings call. This morning, we issued a press release announcing results for the quarter ending June 30th, 2023. If you would like a copy of the press releases, you may find them on our websites 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. Today we reported second quarter 2023 net income attributable to H.F. Sinclair shareholders of $508 million, or $2.62 per diluted share. These results reflect special items that collectively increase net income by $4 million. Excluding these items, adjusted net income for the second quarter was $504 million, or $2.60 per diluted share, compared to adjusted net income of $1.3 billion, or $5.59 per diluted share for the same period in 2022. Adjusted EBITDA for the second quarter was $868 million, a 53% decrease compared to the second quarter of 2022. In our refining segment, second quarter 2023 EBITDA was strong at $703 million compared to $1.7 billion in the same period last year. This decrease was primarily driven by lower refining margins in both the West and mid-continent regions and lower refined product sales volumes due to higher maintenance activity. Operating expenses of $427 million in the second quarter of 2023 improved versus the $469 million recorded in the same period last year, as we benefited from lower natural gas costs. We continue to focus on controllable operating expenses as well as streamlining and optimizing our operations. Crude oil charge averaged 554,000 barrels per day in the second quarter of 2023, compared to 627,000 barrels per day in the second quarter of 2022, due to higher maintenance activity during the period. I'm pleased to report that the two turnarounds at our Navajo and Parker refineries in the period were completed on time and on budget, and we continue to make progress on our long-term reliability improvement initiatives. In our renewable segment, we reported EBITDA of $23 million for the second quarter of 2023 compared to negative $63 million for the second quarter of 2022. Excluding the lower of cost or market inventory valuation adjustment, the segment reported adjusted EBITDA of negative $11 million for the second quarter of 2023 compared to negative $28 million for the second quarter of 2022. Total sales volumes were 50 million gallons for the second quarter of 2023, as compared to 26 million gallons for the second quarter of 2022. Utilization rates were impacted this quarter by two hydrogen plant turnarounds at Navajo and Parco, which are co-located with two of our renewable diesel plants. We continue to improve the performance of this business, with the target of achieving normalized run rates by the end of 2023 which will allow us to optimize advantage feedstock from our pretreatment unit and improve the profitability of this business. Our marketing segment reported EBITDA of $25 million for the second quarter of 2023, compared to $24 million in the second quarter of 2022. Total branded fuel sales volumes were a quarterly record of 364 million gallons compared to 335 million gallons in the same period last year. Gross margin per gallon was also a quarterly record at nine cents in the second quarter, as we saw strong demand for branded fuels across our regions. We added nine new branded sites in the second quarter, and we continue to expect to grow our branded sites by 5% or more per year. Our lubricants and specialty product segment reported EBITDA of $72 million for the second quarter of 2023, compared to EBITDA of $156 million for the second quarter of 2022. This decrease was largely driven by a lower FIFO benefit from consumption of lower-priced feedstock inventory for the second quarter of 2023 of $0.5 million as compared to the $71 million benefit in the second quarter of 2022. We continue to look for ways to optimize the lubricants business, and we remain focused on sales mix optimization of our base oils and finished products. HEP reported EBITDA of $82 million in the second quarter of 2023, compared to $80 million in the same period of last year. This increase was mainly driven by strong transportation and storage volumes in the Rockies region. At this time, we do not have an update regarding the proposed buy-in of HEP as we are still in discussions. We do not intend to disclose developments with respect to the proposed transaction unless and until H.F. Sinclair and HEP have entered into a definitive agreement to affect the proposed transaction. For this reason, we will not be able to discuss any specifics during Q&A. During the second quarter, we announced and paid a regular quarterly dividend of 45 cents per share to stockholders totaling $87.3 million. Subsequent to quarter end, we announced earlier this week that we repurchased 8.2 million shares for an aggregate price of $411 million from REH Company. This puts our year-to-date total cash return, including dividends and share repurchases, at over $834 million. On a trailing 12-month basis, we've returned over $2 billion in cash. to shareholders as of August 2, 2023. Overall, we are very pleased with our strong second quarter results. With the majority of the planned turnaround behind us, we believe our diversified portfolio is well positioned to capture margins available to us the remainder of the year. Our long-term commitment to returning excess cash to shareholders has not changed, and we continue to target a payout ratio of 50% of net income to shareholders. while maintaining an investment grade rating. We remain focused on the reliability and integration of our asset base to further strengthen the earnings portfolio and free cash flow generation of HF Sinclair. With that, let me turn the call over to Adam.

Thank you, Tim, and good morning, everyone. Let's begin by reviewing HF Sinclair's financial highlights. NEDCAS flows provided by operations for the second quarter of 2023 total $490 million. which included $183 million of turnaround spend in the quarter. HF Sinclair's standalone capital expenditures totaled $72 million for the second quarter of 2023. As of June 30, 2023, HF Sinclair's standalone liquidity stood at approximately $3.3 billion, comprised of a cash balance of $1.6 billion, along with our undrawn $1.65 billion unsecured credit facility. As of June 30th, 23, we have $1.7 billion of standalone debt outstanding with a debt-to-cap ratio of 15% and net debt-to-cap ratio of 1%. HEP distributions received by HF Sinclair during the second quarter of 2023 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 $1.2 billion as of last night's close. Let's go through some guidance items. With respect to capital spending for full year 2023, we have lowered our total capital guidance range from 940 million to 1.15 billion, to a new range of 900 million to 1.06 billion dollars. We now expect to spend between 250 to 270 million in refining, 25 to 30 million in renewables, 35 to 45 million in lubricants and specialty products, 20 to 30 million in marketing, 40 to 60 million in corporate and $500 to $585 million for turnaround and catalysts. At HEP, we expect to spend between $25 to $30 million in maintenance and $5 to $10 million in expansion and joint venture investments. For the third quarter of 2023, we expect to run between 585,000 to 615,000 barrels per day of crude oil in our refining segment, and we have planned turnarounds scheduled at our Casper and Tulsa refineries during the period. Let me turn the call over to John Harrison for an update on HEP. John?

JOHN HARRISON Thanks, Agnes. HEP posted another solid quarter of earnings driven primarily by strong crude and product volumes in the Rockies region. HEP's second quarter 2023 net income attributable to Holley Energy Partners was $50 million compared to $57 million in the second quarter of 2022. The year-over-year decrease was primarily attributable to higher net interest expense. HEP's second quarter 2023 adjusted EBITDA was $103 million compared to $104 million in the same period last year. The reconciliation table reflecting these adjustments can be found in HEP's press release. HEP generated distributable cash flow of $73 million, and we announced a second quarter distribution of $0.35 per LP unit. which is payable on August 11th to unit holders of record as of July 31st, 2023. Capital expenditures during the second quarter were approximately $9 million, including $6 million in maintenance, $2 million of reimbursable, and $1 million of expansion capex. We ended the second quarter with approximately $600 million in total liquidity comprised of cash plus availability under our $1.2 billion revolving credit facility. We are now ready to turn the call over to Audra for any questions.

Thank you. The floor is now open for questions. At this time, if you have questions or comments, please press star 1 on your touchtone 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. We'll take our first question from Manav Gupta at UBS.

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

Thanks, Manal, for your question. This is Tim.

Let me ask Steve to comment on capture rates here. Thanks for the question. I think it's a combination of everything. It's really around optimization, making sure that we're taking the right decisions to put the right molecule in the right market. From a margin perspective, we've had a bit of support. We look to optimize our late and crude structure and take advantage of some of the different differentials that we've seen. And then from an operations perspective, it's about running full, getting the molecules produced. and getting them out and into the right markets to get the capture where we want it to be. So it's kind of a combination of everything.

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

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

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

Yes, we believe that's the case. Yeah, we think that'll be helpful, Manav. This is Tim, because it will also put some pressure on A&S crude as well as... as they compete for other refinery runs on the West Coast. Because our Puget Sound Refinery can run both crudes and can go 100% ANS, can go 100% Canadian, we believe it gives us an advantage to be able to arb those crudes post-TMX startup.

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

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

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

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

Neil, thanks for the question, and good morning. Well, first of all, our business continues to operate at and above expectation in generating robust cash flows. With that, our commitment to returning capital to our shareholders remains a priority and a focus. And as you can see here, the date we've repurchased with this latest announcement, 13.1 million shares. With respect to capital return to shareholders, we've said that our target is 50% payout ratio. We have consistently exceeded that, and our target remains to be at or above that. With respect to the family, we can't speak for the family, but we have a constructive relationship. You can see there, you've all noticed there are 13 D disclosures where they've indicated their intent to continue to transact directly with us, and we're very much open and keen on continuing to repurchase shares. With the HEP transaction, being under discussion. We have been at times locked out of the market, but we continue to look for those windows, and this most recent transaction is indicative of our desire and commitment to continue with our shareholder return strategy, and we expect to be on that trajectory through the end of the year.

Yeah, and Neil, I'll just throw in a few more comments, Neil, that we've said in the past a few conference calls that we can't speak for the family. So the family decided to speak for themselves, and that's why they put the 13-D out there. They wanted people to understand that they intend to transact directly with the company going forward. And then they also intend to maintain at least one board seat, you know, for the foreseeable future. So I think that provides some clarity in terms of what their intentions are, and they wanted to make sure that was clear to the rest of the public. You know, we said all along that in the middle of these HEP discussions, Our window to buyback shares was going to be very restricted during these discussions, but as Atnas mentioned, we want to reiterate our commitment to shareholder returns. We found an opportunity between the two parties, and we took advantage of it and executed, and so we'll continue to look for more opportunities as the year progresses.

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

Yeah, I think this is Valerie. We have two turnarounds in the back half of the year. Casper, our Casper facility, and then Tulsa. towards the back half of September and into the fourth quarter. So those impacts are listed and accounted for in our crew guidance. The rest of the year is a clean year. We don't expect any additional outages.

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

Thanks, Tim. Thanks, Tom.

We'll go next to Paul Chang at Scotiabank.

On the refining reliability improvement long-term, I think you have said in the past it's a five, maybe five to six-year process, and you are about two to three years into that. And we've a very heavy turnaround that we are seeing. Are we still having another two or three years or do you think within the next maybe 12 to 18 months you will be largely complete? And when you complete on this process or the initial process, what is the more sustainable reliability? What is the target output per year that we could be looking for? And also, what kind of cost structure under that circumstances will be?

Hey, Paul. This is Tim. You're right. We are very pleased with how the turnarounds went. We're pleased with how Our capture is performing as was talked about earlier on this call. But this is a long process, right? And we've told all, we've said all along, it's really measured by turnaround cycles, not by years. And so we've been working over the last two or three years to improve our turnaround execution and to improve our turnaround performance. This year, it just continues that effort, but we are, we talk in terms of turnaround cycles. And so, with a little bit more color, let me ask Valida to maybe chime in.

Yeah, so our focus and our turnarounds have been strongly aimed at reducing operating risk and improving our utility reliability so that we have a more robust and resilient system. So if you look at any refining complex, the more resilient we can get our utilities and infrastructure, remove aging equipment, the better off your reliability starts to look. So we've taken a big step with those activities this year. We'll continue to develop our turnaround strategies in the coming years to support a sustained reliability improvement year-over-year.

And, Paul, one last thing. You know, you asked for what our target throughput is. You know, in our mid-cycle roll-up that we put out there, we put 640,000 barrels a day as our basis. Of course, we think as we continue to implement these strategies that Valerie just talked about, that we hopefully will get to an above mid-cycle kind of condition. But I'd say at this point, I would use 640,000 barrels a day as our first target.

Hey, Tim, is that a crew or a total throughput that you are mentioning? That's crewed. That's crewed. And then under that, what kind of unit calls will we be talking?

What kind of unit cost are we talking about? So I'll say something in a few minutes.

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

Yeah, as we improve reliability, our costs will continue to come down. A large component of any operating organization as large as ours is tied to how well you execute and how reliable your facilities are. So as we directionally improve there, our costs will continue to decrease. Our estimation is directionally it will be down, and we're thinking somewhere between 6 and 650 over time.

Paul, you're starting to see some of the benefits of some of the integration work and some of the reliability work already that we're doing. Operating costs this quarter are down, which is an encouragement, but obviously we have more work to do. All right. Thank you.

Our next question comes from Ryan Todd at Piper Sandler.

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

Yeah, good morning. This is Atlas. With respect to utilization and where we are, Our goal has not changed. What we have indicated is that we're looking to achieve what we'd call normalized run rates, which is between 75% and 80% by the end of this year. As you can recall, we had the turnarounds of two of our co-located facilities, which impacted utilization rates. But on the flip side, it also gave us an opportunity to look under the hood, so to speak, and make improvements to our equipment. One of the – some of the positive things that you're already seeing is the decreasing OPEX per gallon, which declined 29 percent quarter over quarter. Another thing is the improvements that we've made to catalyst, so our focus has been process optimization as well as yield improvement, and Cheyenne has been a great example of that. So, at the end of the day, again, our goal has not changed, and we remain committed. Steve?

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

Great. Perfect. And then maybe any update just in terms of what you're seeing in the lubes business and the backdrop there, both as we're partway through the third quarter here in terms of what you're seeing on kind of the rack-back and rack-forward dynamics there, as well as maybe your continued thought process in terms of the long-term suitability of that business within the portfolio?

Sure. This is Adam. Just at the high level, with respect to the performance of the business, what we're seeing is continuously strong performance. We have volumes that have softened up a little bit, primarily on recessionary fears around our specialties market, but on the flip side, one of the positives is our ability to hold up margins and continue to improve product mix. Hence, the the strong performance of the business. And on an ex-FIFO basis, where we are year-to-date compared to last year, we're actually $12 million better on an apples-to-apples basis. And so our goal is to continue to shift more of those base volumes, base oils volumes into finished and specialty. And I want to remind you again that at the end of the day, we don't look at our businesses racked back and racked forward. We look at it on a holistic basis. And I'll turn it over to Matt Joyce to provide some more color.

Yeah, thanks for the question. It's Matt Joyce here. More specifically, over the past quarter in particular, the team's done a tremendous job continuing to focus on streamlining our supply chain and manufacturing of certain products and end uses. We've also been working to get better visibility to our costs through implementation and new digital tools that we're bringing on board that will help with inventory management and planning. So that's in process, and that will actually be seen in the second half of the year. So when you're looking into that quarter three, quarter four benefits, those are some of the pieces that we're putting together. And we've been looking at the right mix of products. We're really fortunate to have a good balance of products that are in what I would call sustainable markets, where we can really be distinctive in our value proposition and our solutions to the marketplace. We're very satisfied and excited about the opportunities that some of the regional focus that the team has taken, in particular in the U.S. in these markets, those have proven to be very good. So despite these headwinds on some of the softer volumes that the markets have experienced in general, we're doing really well to manage our margins. clean up and make sure that our own housekeeping are in order, and look for the right targets and the right customers and partners to grow with in the future.

Audrey, are you still there?

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

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

Okay. We're going to go to Jason Gagelman at TD Callen.

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

Yeah, Jason. Hey, this is Steve. I'll take that one. Those markets that we serve, as you know, there's not a ton of liquidity in some of those markets, and so supply and demand balances can move pretty quickly. I think what we saw is the strength of the crack in those markets associated with low inventories in the peak of the driving season really allowed us to take advantage of that. When you think further out, we see some of the back half of the year, some of the cracks coming off and diesel normalizing to a more fundamental position But again, in our markets, we think we have a competitive advantage to take those cracks and drive them to the bottom line, and we'd like to do that through the rest of the year.

Yeah, and Jason, this is Tim. I'd just chime in to say we've always said, especially since the Sinclair combination, that the strength of our portfolio in refining is the markets that we serve. which provide both growing demographics that are supporting demand, advantage crude, and then, of course, product premiums over the Gulf Coast. What you're seeing play out this year, I think, is very indicative of why we think we have a real competitive advantage in our portfolio.

Got it. My follow-up is on M&A and refining. It seems like there's a number of assets coming to the market that are available for purchase. And Dino's obviously demonstrated a desire to consolidate the refining space over the past couple of years. So I was wondering if we could just get your updated thoughts on how are you viewing refining M&A? Are there any specific regions that you'd be more interested in, any types of assets? Or do you feel like the size of your refining portfolio is in a good place right now? Thanks.

Yeah, Jason, thanks for the question. You know, we believe in liquid transportation fuels. We would not have done the transaction with the Puget Sound refinery or with Sinclair if we did not believe that there were years, if not decades, left for the right refining assets, which we believe we've acquired. Having said that, we've just gone through a very successful growth spurt. 2020, we added our renewable diesel business. 2021, we acquired Puget Sound. 2022, we acquired the Sinclair assets. And of course, in 2023, we're working on potential discussions with HEP. So there's, you know, we've had a run of very successful growth, and hopefully we'll continue as we continue discussions with HEP. But right now, as I mentioned, on the last call. Our focus is on the same priorities that we've talked about when I first got into the job. We need to focus on EHS and reliability. We know there's a lot of opportunity there. In fact, I like to say to our folks, we think there's a hidden refinery there in the sense of improving our operations and capturing more throughput and more opportunity in the assets that we have as opposed to going into anything inorganic. And then the second thing is we're focused on integrating and optimizing the assets that we have. And that's what Steve was talking about earlier in terms of what you're seeing in capture and what Val was talking about in terms of what you're seeing in lower OPEX. We believe that our focus right now is to focus inwardly and to try to improve the assets that we currently have. So we're not really in the market looking at anything right now, Jason. It's probably not the right time in the market time anyway with the market being above mid-cycle, and that suits us just fine because we have plenty of work to do organically.

Great. Thanks for the answers.

Our next question comes from Roger Reed at Wells Fargo.

Hey, thanks. Good morning. Good morning, Roger. Sorry I've missed part of this. We've got kind of a crazy morning going on here with the earnings front. But I just wanted to come back, if we could, to the lube side of the business in terms of operations. Just, you know, how is that shaking out seasonally? Third quarter is usually pretty good in this, but, you know, we've seen so many moves here in base oil prices and, you know, supply chain issues that have hit. So I'm just curious, are we finally entering a normal period with this, or are we still in kind of a jumbled period?

Yeah. Hey, Roger. It's Matt Joyce here. Thanks for the question. What we're looking forward to is seeing a bit more of a normalized supply chain. I think we've, as an industry, the lubricants and specialities business over the past couple of years, as you probably know, have faced a lot of upheaval with additives and broken supply chains around the globe that have really impacted the business. And it's also been the start and stop coming out of the COVID hangover. And I think right now there's some tepid Anticipation that we're gonna see some green shoots here with regards to demand. We're also hearing of, and again, just very briefly, that there are some other supply issues and reliability issues in the market when it comes to base oils. We're not certain how big an impact that's going to have on the whole of the business, but certainly we're in a really good position to fill that void as needed. When we look at it, it's very evident that cracks have shrunk, and we've seen crews roll up some increases over the past weeks and months. And we're looking at, and again, we're going to be considering and anticipating moves in both base oils and perhaps even finished products northbound in order to manage the recovery of increased costs that the business has experienced. In general, though, we're probably looking at above mid-cycle, but we're still watching that demand picture very carefully as it's been soft and we've been able to manage through that with the housekeeping we've been focused on over the past quarter or two.

Yeah. And, Roger, I'll just chime in to reinforce what Matt was saying. You know, we've now demonstrated above mid-cycle performance for the last two and a half years, and that's a tribute to the team. That's a tribute to all the integration and synergy work that they've been doing. All this time, you've seen the cracks starting to compress. I mean, this has been happening now for probably three or four quarters, and yet our business continues to perform, and I think that's a sign of the structural improvements that Matt and his team have been working on.

That's definitely good to hear. And again, I'll apologize if this question has been asked, but on the renewable diesel operations, you know, we've seen with some competitor startups going on a real tightening on the feedstock side. So I'm just curious, I mean, definitely better results for you on a sequential basis. But as you're looking at feedstock options here into the second half of the year. Can you kind of walk us through how the PTU is running and then your choices for feedstock as you're kind of navigating the different costs of those?

Yeah, this is Steve. I think you hit it head on. We see some tightening in terms of the overall margin structure in the back half of the year. Partially due to feedstock, but also the RVO standard and what that's done, and then the LCEFS supply that's kind of on the market. So we are looking to optimize our feedstock. We run a good portion of soy, but we have the ability to go take advantage of some low CI feedstocks, and we've got plans in place to go do that in the back half of the year. As far as the PTU, it's running very well, and we see that as a competitive advantage to our business, and laying that in into some of the other assets where we could take advantage of that integration.

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

Yeah, I mean, so as far as the hydrogen consumption and production, you know, with the co-located plants, we had both of them down this quarter due to turnaround, which did impact the hydrogen availability to go run, and unfortunately that was in two of the early months where margins were more supportive. But that's really just a planned circumstance of the maintenance activities that were needed to be handled. But overall, we feel comfortable with our hydrogen availability to go run these plants and generate the products that we choose to put in the markets that we choose.

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

Great. Thank you.

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

Thank you. Two questions, please. I want to go back into Aldi. Anna, you're talking about the hydrogen availability. I mean, in order for you to run closer to, say, the link to catastrophe, I think hydrogen was a bottleneck. And I believe Tim had mentioned that you guys are working to substantially improve that availability, and that may take until 2024 so can you give us an update where are we on that to have sufficient hydrogen on site so that you will be able to run the rd at a much higher rate than say the 75 80 percent instead of say you have to make the the decision between running the the diesel for for the refinery or that running the rd So, and also that I think you guys have changed the catalyst. Can you give us an idea that the benefit on then in terms of the yield and also that what's the duration that it will take now for you to make a, to change the catalyst? I think previously you've been doing about six months. Are we going to say end it at a much longer duration?

Yeah, Paul, this is Tim. Let me take a shot at some of the short-term questions, and then I'll ask Val to comment on some of the longer-term efforts we're talking about. So we believe that with these turnarounds that we just completed in the second quarter, and with some of the short-term hydrogen optimization steps that Val and her team have been able to implement, that we will be able to hit normalized run rates here in the second half of the year. And when we say normalized run rates, we're talking 75 to 80% utilization, right? And you kind of mentioned that number before. We do think we can get to that level with the current facilities we have. Now, on a long-term basis, we are continuing to look at ways to de-bottleneck and expand our hydrogen production. I can let Val talk a little bit about that in a few minutes, but I just wanted to make it clear that we do think we have a path forward here in the second half of the year to hit this normalized run rate.

Yeah, this is Valerie. So on the hydrogen, as you mentioned, let's first take the co-located sites. We have reformers that we just went through turnarounds on. We've made significant improvements in those assets and reliability is expected and what we're seeing today is improving. Additionally, our hydrogen generation complex, we have several low-capital operational program improvements that will start to take place in the back half of the year, and we anticipate that that will continue. Those small improvements will directionally add up to give us more hydrogen capacity as we go through the year. And then we're looking at what's next as we look forward. Let me comment a bit on catalysts. So our catalyst is performing well. We are seeing, as they mentioned before, 99% yield. In our Cheyenne facility, our interval and duration as we've learned how to operate these units is improving with each learning and each time we have an opportunity to employ some new operational improvements. So we're anticipating that those will continue to lengthen.

So, Valerie, what is the current expectation for the period between you have to change the catalysts?

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

Okay. So it sounds like that unless that you have fund or then make some pretty significant investment, we shouldn't assume the LD operation from a hydrogen availability standpoint, next year could be doing much better than 75%, 80%?

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

OK. Tim, one of your competitors that have attribute their improved capture rate and profitability due to substantial revamp of their commercial operation. Wondering that when you're looking at the dyno, do you think that you have the right commercial culture and organization and personnel?

Paul, it's a good question. We know there's a lot of, in fact, several competitors out there who are talking about their commercial capabilities. I think we've got a similar focus here at Dyno to try to look at that. I think some of our competitors are talking about trading. as well as part of that commercial capability, we are not looking at trading as part of our commercial capability, at least not at this point. I don't think we have the right resources to probably get into that. But I will ask Steve to comment because one of the things, as you know, Steve has been brought in to do is basically help us look at our commercial capability and improve it.

Yeah, thanks, Tim. Paul, I think from, and so this is early days still, but after being here for three months, the things I'll reflect on when you ask about commercial culture and capability, I think we have a high degree of talent and capable commercial people who really have a lot of expertise. In this arena, both optimization, planning, refining across the assets and into the markets that we want to go play. And even to the extent that we understand where we have advantaged easy, non-speculative trades, we take advantage of that, take advantage of differentials. I think our opportunity here is really around enabling and unlocking more value in an integrated fashion through tools such as enhanced digital real-time information. And I think that's really kind of the next frontier that we go take on. And we see a lot of value there. I think we're just kind of at the beginning of unlocking the true integrated value of this company that has been put together with these assets over the past few years.

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

All right. Thank you.

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

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

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