HF Sinclair Corporation

Welcome to HF Sinclair Corporation's second quarter 2024 conference call and webcast. Hosting the call today is Tim Goh, Chief Executive Officer, HF Sinclair. He is joined by Atanas Atanasoff, Chief Financial Officer, Steve Ledbetter, EVP of Commercial, Father Repompa, EVP of Operations, and Matt Joyce, SVP of Lubricants and Specialties. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. Would like to ask a question at that time, please press star one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. 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 Berry, Vice President Investor Relations. Craig, you may begin.

Thank you, Mark. Good morning, everyone, and welcome to HF Sinclair Corporation's second quarter earnings call. This morning, we issued a press release announcing results for the quarter ending June 30th, 2024. If you would like a copy of the earnings press release, you may find them on our website at hfsinclair.com. Before we proceed with remarks, please note the safe harbor disclosure statement in today's press release. 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. 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.

Good morning, everyone. Our second quarter 2024 performance reflects continued progress on our commitment to deliver safe and reliable operations, resulting in higher utilization and lower operating costs 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 second quarter, we also returned $467 million in cash to shareholders, and today announced a 50 cent quarterly dividend, demonstrating our continued commitment to shareholder returns. Now, let me cover our segment highlights before turning over to Agnes. In refining for the second quarter of 2024, improved reliability efforts resulted in increased utilization rates and sales volumes versus the first quarter. The scheduled turnaround at our PARCO 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 second 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 second quarter of 2024, I am pleased to report we achieved positive EBITDA through our team's optimization efforts. Despite continued weakness in RINs and LCFS credit prices, and the planned maintenance at our Parco Renewable Diesel facility. We are continuing to, one, reduce the level of high-cost inventories, two, increase our low-CI feedstock mix and pretreatment unit utilization rates, and three, lower our operating expenses through improved reliability. In marketing, in the second quarter 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 six to 12 months. In lubricants and specialties, our strong second quarter was largely driven by continued optimization in our sales mix, operational efficiency initiatives, and furthering our base oil 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 second quarter of 2024, we are realizing the value of our fully integrated assets post acquisition. 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 second quarter, we returned over $467 million to shareholders through share repurchases and dividends. Since March 2022, we have repurchased approximately 55 million shares, which represents two-thirds of the shares we issued for the Sinclair and HEP transactions. As of June 30, 2024, we have approximately $925 million 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 regularly a regular quarterly dividend of 50 cents per share, payable on September 5th, 2024, to holders of record on August 21st, 2024. Looking forward, we remain focused on executing our corporate strategy as we strive to continue to, one, improve reliability, two, optimize and integrate our expanded portfolio, and three, generate strong cash flows to support our cash return strategy. With that, let me turn the call over to Ennis.

Thank you, Tim, and good morning, everyone. Let's begin by reviewing H.S. Sinclair's financial highlights. Today we reported second quarter net income attributable to H.S. Sinclair's shareholders of $152 million, or 79 cents per diluted share. These results reflect special items that collectively increase net income by 2.5 million. Excluding these items, adjusted net income for the second quarter was 149 million, or 78 cents per diluted share, compared to adjusted net income of 504 million, or $2.60 per diluted share, for the same period in 2023. Adjusted EBITDA for the second quarter was 406 million, compared to 868 million in the second quarter of 2023. In our refining segment, second quarter EBITDA was $187 million compared to $732 million of refining segment adjusted EBITDA for the second quarter of 2023. This decrease was primarily driven by lower adjusted refinery growth margins in both the West and MidConn 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 second quarter compared to 554,000 barrels per day for the second quarter of 2023. This increase was primarily a result of decreased turnaround activities and improved reliability of our refineries compared to the same period last year. In our renewable segment, we reported adjusted EBITDA of 2 million for the second quarter compared to negative 11 million for the second quarter of 2023, principally due to increased sales volumes and feedstock optimization despite lower indicator margins in the second quarter of 24. Total sales volumes were 64 million gallons for the second quarter as compared to 50 million gallons for the second quarter of 2023. Our marketing segment reported 15 million EBITDA for the second quarter compared to $25 million for the second quarter of 2023, driven primarily by lower margins. Our lubricants and specialty segment reported EBITDA of $97 million for the second quarter compared to EBITDA of $71 million for the second quarter of 2023. This increase was largely driven by increased sales volumes, sales mix optimization, Operational efficiencies and furthering our base oil integration efforts despite the 14.4 million FIFO charge from consumption of higher price feedstock inventory in the second quarter of 2024 compared to 0.5 million FIFO benefit in the second quarter of 2023. Our midstream segments reported adjusted EBITDA of 110 million in the second quarter compared to 88 million in the same period of last year. primarily due to higher revenues from increased sales volumes as a result of included refining reliability and increased tariffs that went into effect in the second half of 2023. Net cash provided by operations totaled $226 million, which included $99 million of turnaround spend in the quarter. HF Sinclair's capital expenditures totaled $84 million for the second quarter. As of June 30th, 2024, HF Sinclair's total liquidity stood at approximately $3.4 billion, which included a cash balance of $866 million, our undrawn $1.65 billion unsecured credit facility, and $850 million availability on the HEP credit facility. As of June 30th, we have $2.7 billion 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. With respect to capital spending for full year 2024, we still expect to spend approximately $800 million of sustaining capital, including turnaround on catalysts. In addition, we expect to spend $75 million in growth capital investments across our business segments. For the third quarter of 2024, we expect to run between 570 and 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 Eldorado 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.

The floor is now open for questions. At this time, if you have questions or comments, please press R1 on your touchstone phone. We ask that you please limit your question in 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 pound key. Thank you. Our first question is coming from Manav Gupta with UBS Financial. Manav, your line is now open.

First, congrats on the very strong buyback, guys. My first question relates to the loops 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?

Yeah, Manav, thanks. This is Tim. You know, 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 million 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. And so let me ask Matt to maybe give some color on what we're doing to continue to improve this business.

Yeah, thanks. Thanks, Tim. And thanks for the question, Madoff. Yeah, 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 rules and use those as a meaningful way of delivering core growth and 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, but it's really the operational excellence that we've been focused on in integrating our base oils and getting those into finishing 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 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 that business and continue to grow it in those very strategic parts of the of the country additionally we announced a This past quarter we announced a strategic distributor partnership to service our specialties business for our Sonoborn 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 and 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.

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, you know, barring certain market exceptions, going ahead, the renewable business has finally turned a corner and you should be at least able to make break-even if not higher going ahead?

Yeah, 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 break-even to slightly positive at these bottom-of-cycle conditions, and that's exactly what you saw us deliver here in the second quarter. We're focused on the things we can control, utilization, advantage feedstocks, product netbacks, lower out costs, and our second 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 you want to provide any color on what we're doing with renewables.

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

Thank you so much for your detailed responses.

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

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

Brian and Steve, I'll take that one as well. You know, 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, you know, that impacts Puget. You know, we have the capability, 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, you know, 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 one to two 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. Some of that is associated with Again, there was quite a bit of supply and some runs in the second quarter, and we've seen some announced unplanned and planned maintenance elements in the third quarter that will impact and take some of that product or that seed stock 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 crew production sites that feed our facilities, and we think we'll be able to compete and navigate our way through this effectively.

Yeah, and Ryan, I'll just throw in a couple more comments. You know, 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. We think some barrels will move from what's going down 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 the next year or two, 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 TAB, Mark McIntyre, For people to get the heavy barrels that they want, and so we continue to think that the. TAB, Mark McIntyre, WCS diff will be maybe more favorable than what some of the forecasts have been put out there for.

TAB, Mark McIntyre, Thanks for all that color and then maybe shifting gears you're operating expense. you know, cost control, 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 cost down?

Yeah, 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 call.

Sure. I'll just kind of go back to what we've said before. So our priorities around OPEX are reliability first. That starts to bring down, gain control, bring down our costs. Second is workflow efficiency, and then turnaround excellence. So we've demonstrated our turnaround scoping and predictability. We're starting to see that in renewables. We see the impacts of our turnarounds in all of our reliability metrics. And then the second part of that priority is workflow efficiency and really engaging our folks. So 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. 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 maximize some 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 those changes sustainable.

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

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

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

Thank you. And on the Cat 4 refining economic side, Now with multiple large midstream operators having announced sizable pipe expansions, one coming online this quarter to pipe Gold Coast product to Pad 4 and another just announced a couple weeks ago coming online at mid-2026, bring incremental product to the market. Can you just give us your latest thoughts on Pad 4 supply and demand for products going forward?

Yeah, Teresa, this is Steve. You know, we watch those things very closely, and there will be continued, you know, 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. 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 rateable basis. We see this as something that, you know, we welcome competition, but 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.

And Teresa, I'll just chime in and say, you know, 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 PATH 4 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. And, you know, we talked about this, but we raised our refining mid-cycle EBITDA up $250 million 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 in. Thank you.

Next question is coming from . Adam, your line is now open.

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.

Hey, Adam. Steve, I'll take that one. You know, as we look at it, I think people were really concerned in the second quarter about a demand issue. I'll talk specifically distillate, because I think that was your first question. You know, I think there was a bit of softness in terms of demand on diesel and was relatively flat on gas and increasing in jet. 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 Pad 4 right now in 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 you know, is settling out. And right now, diesel is operating slightly below mid-cycle, but we see that that's coming back into balance. We're seeing some strengths come into play. We're seeing the actual inventory levels draw on both distillate and gas. Now, as far as pockets of opportunity, we're 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 debt value chain to take advantage of the strategic logistical advantages that we have. We're connected to many of the major hubs, and we look to focus on that as we move forward.

Yeah, and what I would just say, this is Tim, what I would just say is, you know, 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. Really, the biggest phenomenon in the second 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 the second quarter is 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. 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 in the third quarter.

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

Yeah, 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 loops business, and we review and evaluate all of our assets on an ongoing basis. with an eye for maximizing shareholder value. However, we don't have any announcements or updates to make at this time on the LUPS business.

Got it.

Thank you. Our next question is coming from Doug Liggett with Wolf Research. Doug, your line is now open.

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 market, especially when you see Synovus and the return of Widing having a direct impact to your mid-continent markets? What's your perceived utilization trend in that specific market? Thank you.

Yeah, thanks for the question. We have seen increased utilization numbers being reported in, say, PAT-2, right? That's one of the phenomenas we saw in the second quarter, as I mentioned earlier. And today you're seeing that utilization come down as, again, we don't think that that level of high utilization can be sustained. 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 Pad 2 barrels from the MidCon into the Rockies, which we think will continue to upgrade those barrels as utilization stays high or gets higher in the MidCon. And then we have capability to move from the Rockies over into the West Coast, even through our UNF pipeline into Vegas, And our strategy is, you know, 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. And we think our facilities, midstream in particular, give us the ability to do so and capture that.

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 do you assess the segment in and of itself will be point forward?

Yeah, it's a great question. It's Matt Joyce here. I think we've mentioned it in the past and we'll say it again. 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. We were able to play to our strengths of both the finished and the specialties businesses and and we saw those deliver very nice results. So looking forward, you know, this is a sustainable business. This is our new norm, and we're tracking well, and we look to continue to improve it.

Yeah, and I'll just make another comment on top of that. You know, we are disconnecting this business from the base oil cracks and the margins that are associated with the base oils, and that's through all the optimization efforts that Matt talked about. It's also through, you know, organically growing our finished lubes businesses. And remember, our finished lubes business is really more industrial and focused on, you know, growing with GDP than it is associated with passenger cars. And so we really believe the outlook continues to be strong for our lubes business. And, you know, if you talk about, you know, you talked about the weakness in the basalt cracks earlier. They're not going to get much weaker than what we saw in the early parts of the second quarter, and yet the results, as I mentioned, are disconnected from that now.

Thank you all. Appreciate the time.

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

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

Sure, Matt. You know, I think our asphalt business is something that is a nice little extension of the value chain. So to 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, you know, we can take the components and we can pave all year in the Southwest. 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. Our approach is to continue to focus on optimization, logistics, costs, and growing our relationships with a lot of our end customers there.

Yeah, 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 Holly Frontier, and with Sinclair's wholesale asphalt that they've been producing, we've really been able to combine those two businesses. Most of our feedstock is now internally produced as opposed to third-party purchases. And that's really been allowing us to take full advantage of our asphalt business.

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

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

Sounds good. Thank you. Our next question is coming from Jason Goveman with D.V. Cohen. Jason, your line is now open.

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, 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?

Yeah, so great question. You know, as reliability improves, you know, 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 you know, invest in our programs so that money is coming out of the reactive side of the business and going into proactive programs. And so as we shift those dollars to build out reliability, that's really going to keep us relatively flat on our maintenance spend.

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

Got it. And then in terms of cash returns to investors, you know, 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?

Yeah. Thank you for your question. This is Atmus. 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, you know, 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%. This year, just, you know, just for reference, we're, you know, On a year-to-date basis, we're 250% payout ratio. Last year, we did 74%, so I think our history demonstrates that commitment. Thanks.

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

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 past. Would you mind just talking to your outlook for that segment, please?

Yeah, 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 six to 12 months is 10% growth year over year, which is above what we previously guided against. But that, I think, reflects what we see as still yet an untapped opportunity for us. There's a lot of demand for dino and a lot of hunting grounds 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. You know, we think that there is value in creative to HSNCLAIR by continuing to focus on this and grow this, and we're looking to do that in multiple ways. We're allocating resources to go make this a reality over the next several years.

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

Yeah, 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. 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. You know, 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. 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.

Joe, I'll just chime in too and say, you know, we had record volumes in the second quarter 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 defining 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. It plays right into our strategy around our core businesses. Great. Thank you.

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

Thank you, Mark. So before we close, I wanted to welcome our new general counsel, Eric Mitcher, to our leadership team. Eric brings us more than 35 years of legal experience in the oil and gas industry, including the last seven 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 second quarter results. higher utilization and throughputs, lower op costs per barrel, positive EBITDA on 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. One, improve our reliability. Two, integrate and optimize our new portfolio of assets. And three, return excess cash to our shareholders. Thank you for joining our call and have a great day.

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