HF Sinclair Corporation

Welcome to HF Sinclair Corporation's third quarter 2024 conference call and webcast. Hosting the call today is Tim Goh, Chief Executive Officer of HF Sinclair. He is joined by Atanas Atanasoff, Chief Financial Officer, Steve Ledbetter, EVP of Commercial, Valerie Pampa, 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. If you 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 Beary, Vice President Investor Relations. Craig, you may begin.

Thank you, Novi. Good morning, everyone, and welcome to HF Sinclair Corporation's third quarter 2024 earnings call. This morning, we issued a press release announcing results for the quarter ending September 30th, 2014. If you would like a copy of the earnings press release, you may find them on our website at hsinclair.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, and happy Halloween. We are pleased with our third quarter financial and operational performance in all of our businesses, and especially by the strong and consistent earnings in our marketing, midstream, and lubricants and specialty segments. These contributions from our differentiated business segments highlight the value of our diversified portfolio, especially as global refining margins weaken. We continue to execute our strategy to integrate and optimize our portfolio in order to strengthen the earnings power and competitive advantage of our businesses while focusing on improving safe and reliable operations. During the third quarter, we returned $222 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 third quarter of 2024, we continued our streak of improved reliability by completing the turnaround at our park over refinery on time and on budget. Year to date, we've made progress on lowering our operating expenses, and we'll continue to focus on cost management and improving utilization as we drive towards achieving our near-term target of $7.25 per throughput barrel. Our optimization efforts resulted in a quarterly record for jet production across our fleet, and our Woods Cross refinery set a quarterly record for premium production. In renewables, for the third quarter of 2024, we set a record for the highest quarterly sales volume of renewable diesel and achieved our lowest operating expenses per gallon. Our team's optimization and reliability efforts resulted in another quarter of positive adjusted EBITDA despite continued headwinds from weak RINs and LCFS credit prices. Our strategy for the renewable diesel business remains centered on the things we can control. To one, reduce the level of high-cost inventories, two, increase our low CI feedstock mix, and three, lower our operating expenses. In marketing, in the third quarter of 2024, we continue to grow our store count with the addition of 22 net new branded sites, and on a -to-date basis, we have added a net of 46 fully branded sites to our portfolio. Our strong third quarter results reflects the growth strategies we are executing since the Sinclair acquisition. Looking forward, we continue to expand our growth pipeline and now have new signed contracts to convert 168 stores to branded wholesale over the next six to 12 months, and we continue to target 10% annual growth for branded sites. In lubricants and specialties, we reported another strong quarter of results despite the fight for headwinds from falling oil prices. Our strategic initiatives of one, optimizing our sales mix, two, operational efficiency, and three, furthering our base oil integration efforts, continue to strengthen our lubricants business. In addition to our efforts to organically grow the business by high-grading our finished products portfolio, we have also introduced digital tools, providing better visibility to our supply chain and manufacturing cost structures, and have developed new product offerings to serve growing and use markets. In our midstream business, for the third quarter of 2024, we delivered another strong quarter of performance as we continue our integration work to drive our growth in this segment. Year to date, we have set record affiliate and third-party transportation volumes, supported by strength in our crude pipeline systems in the Rockies and Southwest. In the third quarter, we returned $222 million to shareholders through share repurchases and dividends. Since the Sinclair acquisition in March 2022, we have returned over $3.9 billion in cash to shareholders, and have reduced our share count by over 57 million shares, which represents 71% of the shares we issued for both the Sinclair and HEP transactions. As of September 30th, 2024, we have approximately $800 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 credit rating. As I mentioned earlier, we also announced that our board of directors declared a regular quarterly dividend of 50 cents per share, payable on December 4th, 2024, to holders of record on November 21st, 2024. Looking forward, we remain committed to improving our safe and reliable operations, and we believe our diversified business portfolio positions us to generate attractive through cyclical cash flows and continue strong returns to our shareholders. With that, let me turn the call over to Adness.

Thank you, Tim, and good morning, everyone. Let's begin by reviewing HF Sinclair's financial highlights. Today, we reported third quarter net loss attributable to HF Sinclair shareholders of 76 million, or negative 40 cents per diluted share. These results reflect special items that collectively decreased net income by 172 million. Excluding these items, adjusted net income for the third quarter was 97 million, or 51 cents per diluted share, compared to adjusted net income of 760 million, or $4.06 per diluted share for the same period in 2023. Adjusted EBITDA for the third quarter was 316 million, compared to 1.2 billion in the third quarter of 2023. In our refining segment, third quarter adjusted EBITDA was 110 million, compared to 1 billion in the third quarter of 2023. This decrease was primarily driven by lower adjusted refinery growth margins in both the West and Mitcon regions as a result of high global supply across the industry, which were partially offset by higher refined product sales volumes. Crude oil charge averaged 607,000 barrels per day for the third quarter, compared to 602,000 barrels per day for the third quarter of 2023. This increase was primarily a result of improved reliability and decreased turnaround activities at our refineries compared to the third quarter of 2023. In our renewable segment, we reported adjusted EBITDA of 2 million for the third quarter, compared to 5 million in the third quarter of 2023. This decrease was primarily due to lower indicator margins despite increased sales volumes and feedstock optimization in the third quarter of 2024. Total sales volumes were 69 million gallons for the third quarter, compared to 55 million gallons for the third quarter of 2023. Our marketing segment reported EBITDA of 22 million for the third quarter, compared to 21 million for the third quarter of 2023. This increase was primarily driven by higher margins in the third quarter of 2024. Lubricants and specialty segments reported EBITDA of 76 million for the third quarter, compared to EBITDA of 118 million for the third quarter of 2023. This decrease was primarily driven by 27 million FIFO charge from consumption of high-priced feedstock inventory in the third quarter of 2024, compared to 30 million FIFO benefit in the third quarter of 2023, partially offset by improvements in the underlying business including increased sales volumes, sales mix optimization, and BASO integration in the third quarter of 2024. A midstream segment reported adjusted EBITDA of 112 million in the third quarter, compared to 101 million in the same period of last year. This increase was primarily driven by high revenues from increased volumes and higher tariffs in the third quarter of 2024. Netcast provided by operations totaled 708 million, which includes 90 million of turnaround spend in the quarter. HF Sinclair capital expenditures totaled 124 million for the third quarter. As of September 30th, 2024, HF Sinclair's total liquidity stood at approximately 3.7 billion, which includes a cash balance of 1.23 billion, our undrawn 1.65 billion unsecured credit facility, and 850 million availability on the HEP credit facility. As of September 30th, we have 2.7 billion of debt outstanding with a debt to cap ratio of 22% and net debt to cap ratio of 12%. Let's go through some guidance items. With respect to capital spending for full year 2024, we still expect to spend approximately 800 million in sustaining capital, including turnarounds and catalysts. In addition, we expect to spend 75 million in growth capital investments across our business segments. For the fourth quarter of 2024, we expect to run between 565 and 600,000 barrels per day of crude oil in our refining segment, which reflects the planned turnaround at our El Dorado refinery. We're now ready to take some questions from the audience.

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 pound key. Thank you. Our first question is coming from Ryan Todd with Piper Sandler. Please go ahead.

Thanks. Congrats on the quarter. Maybe a question, first of all, in terms of cash allocation. You got a great balance sheet. You've maintained an attractive level of shareholder returns in the quarter. As we think about going forward, if margins stay weak, how should we expect you to manage the balance sheets and the trade-offs between how you approach shareholder returns versus the possibility of increasing that debt or managing that debt?

Yeah, good morning, Ryan. This is Tim. Let me ask Atness to jump right in.

Ryan, thank you for your question. I would point to history and what we're doing this year. In a weakened crack environment, we're able to maintain a very strong balance sheet with net debt of, net leverage of under one times. And if you look at our -to-date O&Cash return, we're at 11% on a 12-month trailing basis. We're at 14%. In a continued weakness, we believe we're still able to maintain a competitive O&Cash return to our shareholders. We're certainly committed to our dividend, 100%, as well as our buybacks and total return to our shareholders. That coupled with our investment grade rating, which is a key differentiator for us, two priorities. We believe we can maintain a prudently conservative balance sheet and continue to return cash to our shareholders.

Yeah, and Ryan, this is Tim. I'll just jump in and say, remember, one of the reasons we bought in our HEP business last year was for the free cash flow and was for times like this, where we knew that having that cash flow within our portfolio was gonna be better. And so we're very happy we did that and we're positioned better for it.

Great, thanks. And then maybe just a question on refining operations. I mean, throughput was very strong in the quarter, continued trend of a strong reliability in your end. I mean, can you talk about what's working well in terms of the efforts you've made to improve operational reliability, what you're still focused on, what are areas that are still maybe further improvements that we should expect as we look forward?

Yeah, Ryan, thanks for the question. As you know, focusing on improving our reliability has been our core priority here for the last several years. And it is good to see the fruits of that labor starting to show. So let me ask Valerie to comment.

Good morning. Yeah, so remember we've talked about our strategy before. We're focused on heavy, we've had heavy turnaround last few years and each of those turnarounds making improvements. And so what's working is our turnaround performance. Every turnaround we're addressing reliability opportunities, we're putting in the right capital, the right scope, and we're getting very predictable on those as demonstrated this year with PARCO and the turnarounds we've completed. What's also working is our strive, our technology-driven efficiency improvements. We're doing a lot of technology improvements to drive efficiency in our operations and maintenance. Work at the ground floor, and that's starting to produce dividends in terms of lowering our operating costs by equipment count. So all of the strategies we've been talking about and continue to talk about are just now starting to produce dividends.

And Ryan, I would just say, not only is that showing up in turnaround performance, it's showing up in throughput, but it's also showing up in optics per barrel. And even though our optics was a little bit higher this quarter, it was mostly due to the maintenance items that we had. Year to date, we're 66 cents a barrel lower than we were last year, and that's a tribute to the improved reliability that Val and her team are delivering to the bottom line.

Yeah, thanks,

Dan.

Right, your next question comes from Manav Gupta with UBS.

Please go ahead. Good morning, team. Looks like you guys are very focused on growing your marketing business. Help us understand why there is a strategic focus here. Does it give you ability to place a product? Some pipelines are being built into your regions that allow you to offset those pipelines, those product pipelines. Help us understand the real reason you are so focused on growing your marketing business.

Yeah, thanks for the question, Manav. As you know, when we merged with Sinclair and brought them into the family, growing the marketing business was our core priority. And again, we're really starting to see that, find its legs. And Steve, why don't you talk a little bit more about the value and the benefit of doing that?

Yeah, sure, thanks, Manav. This is Steve. Following on with Tim's comments, we really believe that there's a significant opportunity here to increase our branded put. We think there are logistical advantages to producing in markets that we serve and being connected through our midstream assets. And we're looking to exploit that. And the final piece is we think that the brand is undervalued in terms of how we get value out of it. So that brand to put gives us some resiliency through the cycle. And to be honest, there's quite a bit of interest and demand for Dyno. And so what we've seen so far in our growth, as Tim mentioned earlier, we have an additional signed size of 168 that will be on the ground between six and 12 months. And that coupled with what we're doing in terms of getting more value out of the brand, we believe should be an increased value to the overall enterprise.

So Manav, as you noticed, we're on a run rate of call it 75 to $80 million of EBITDA in our marketing business, which is much higher than the 50 million of mid-cycle that we started with at the acquisition. But what you're seeing in that marketing segment is really only the tip of the iceberg. Because what's happening is for every branded barrel we're able to place, it really comes out of the marginal bulk barrel that we have to sell. And that at a much lower price. And those bulk barrels and the uplift associated with that is actually in the refining business. And so what you see reported in the marketing segment is really just a piece of the value of these branded butt barrels, because it's also uplifting the refining net back on the wholesale barrels too.

My second question here is on the use, when we adjust for the fee for impact, it's again a pretty strong quarter. And you have improved, continue to improve this business. And it's starting to get to a round rate of about 350 million of EBITDA. So despite what the underlying volatile commodity is doing, so help us understand some of the projects you have undertaken or measures you have undertaken which is allowing you to get to that round rate of about 350 million of EBITDA in this business.

Yeah, thanks Manav. The Lube's business just continues to perform quarter over quarter. It's really our poster child of what we can do when we focus on integration and optimization. And I think Matt and his team have really done a great job. Matt, you wanna talk about what's going on?

Sure, Manav, Matt here. What we saw is of course we had a lot of FIFO headwinds which of course means that we're gonna use those feedstock inventories and consume older, more expensive feed versus our replacement costs. But in any case, these tend to balance out throughout the year. And the underlying business remains very healthy. Actually absent of that FIFO in this quarter, it was one of our strongest quarters since we've held the businesses over the past many years. And it's really driven through a focus on operational efficiencies that we've talked about. The team has done a tremendous job of getting after some digital tools that are allowing us to get a better visibility of transportation, of planning, and of pricing management. And that's a big part of the secret sauce that we're using. I referred to it in past quarters as our housekeeping, but we've done a really nice job of that. And on top of it, we've gone out with some regional core growth opportunities and developed new offerings that place our base oils in the highest value applications that we can. And one that we're really proud of is in our specialties portfolio, we introduced a new ingredient, rubber processing technology for the tire and construction industry this past quarter called Circosol 5100. That will provide a much needed source of TDAE, treated distillate aromatic extracts in North American market and provide significant improvement in the tire industry. And that's under test right now. We're gonna see some modest sales start in early 2025. And then the other one that we've just introduced is really exciting called Innovate, which is a new dielectric immersion cooling fluid technology intended for use in the data centers and digital mining space. So again, looking for new different areas to grow and see where our molecules and our technologies can be used to better improve our business and those businesses and markets we serve.

So Manav, as you can hear, we've talked a lot about integration of our base oil business in with our finished lube business. And that's driving a lot of our resiliency in terms of through the base oil crack cycle. But what Matt's talking about is growth. And you're really seeing a lot of really good growth in the finished lube business, in particular in North America, double digits in North America for the last several years. And that's really what's driving the good numbers you're seeing.

Thank you so much for digging my questions.

Our next question comes from Paul Cheng with Scotiabank. Please go ahead.

Good morning, Paul. Can I have two questions? The first one, I want to go back into lubricant. Tim, in the past, I think you guys have mentioned that in the long haul, this may not be a core business or that may not be part of your core portfolio. But I'm just curious that with your improvement in the business and you gain the expertise in there, is there any reason why it cannot be part of your core portfolio in the long run? Is there any particular reason what you don't like about this business? And as such that you think in the long haul, it may be better off that to be in someone else's portfolio. Other than, yeah, the evaluation could be maybe a little bit higher multiple, but I mean, after you pay tax and everything, is it really that much value added? So that's the first question.

No, it's a good question, Paul. And let me just say, no, we've never been unhappy with our lubes business. And the only real complaint that we made was that we weren't getting credit for the value of our lubes business. And so when we had conversations in the past about, to maximize shareholder value, is the lubes business better in someone else's portfolio? That was under the premise that the lubes business wasn't getting the proper valuation in our portfolio. I think you can see over the last several quarters that the appreciation and the valuation of the lubes business has been getting more attention in our portfolio lately. And especially now with refining margins weakening, I think you're seeing a lot more appreciation for that business in our portfolio. So the answer to your question is, yes, we can see it as a core business long-term. We continue to grow it. That's what our main focus is gonna be. And as the stock and as the shareholders appreciate the value of that business, then yeah, we can continue to grow it and keep it for a while. Thank

you. The second question is that a number of your peers that have specifically announced some kind of cost reduction programs, one of your peers that this morning just announced like a $200 million of cost saving efforts. I know that you guys obviously that continue to work on in that space. Is there any number you can share over the next several years that your initiative, that is there any area, major area that you're focusing that is going to drive down course? And then if there is, could you quantify for us? Thank

you. Yeah, Paul, good question. Obviously as we go into a downturn, everyone's gonna be worried about costs. I've already mentioned that our OPEX per barrel and refining is down six versus a year ago, but Valerie's not finished yet and is continuing to work down those costs. I'll let her talk a little bit more about what she's doing there.

Yeah, again, we're continuing to push our OPEX through and focused on maintenance. A good portion of our operating expenses go towards maintenance and the activities that support our maintenance staff and those activities. And as we get more reliable, we expect to continue to see those costs come off our books. We're starting to see where we have more matured those programs faster. Those sites in the West are producing very good OPEX and we see that that is gonna go across the rest of the fleet. So in terms of an exact dollar amount, we will not, we're not gonna provide that. We have internal goals, but our goal first is 725 on a consistent basis.

Yeah, and that's refining, Paul. I'll just point out a couple other things. I mean, we're working hard to reduce costs. That's part of our integration and optimization priority. But I can just point out a couple things, like in the LOOS business that Matt just talked about. If you look at their OPEX, I think they're underrunning $15 million this year versus last year. I think that's not by accident. It's by the efforts that have been going on and hitting the bottom line. I think if you look at our GNA, we're running about 20 million this year below what we ran last year. And again, that's not by accident. That's all associated with the integration and optimization efforts that we've got going on. Midstream's got the same thing with the integration efforts that we have going on. And then of course, renewables has the lowest OPEX per barrel this quarter that we've been able to demonstrate. So we're not going out there with a flashy program, but instead we're trying to show in the bottom line numbers what we're doing to reduce costs.

Thank you. Our next question comes from Doug Luggett with Wolf Research. Please go ahead.

Good morning. Thank you for taking my questions. Tim or I'm not sure who wants to take this one, but obviously your refining market is probably seeing some of the biggest changes it's seen in quite some time with Sonora is bringing back capacity with slightly out of your realize, but wiping running at full tilt. And obviously there's a lot of changes going on with TMX in terms of crude availability. So I guess I'm looking at the reset you gave us in your mid cycle margin assumption some quarters ago on slide eight of your latest deck. I just wonder how you should think about risking that in light of these changes. Are you still confident that this is a reasonable baseline or how would you think about the risk to that $15 gross margin assumption?

Yeah, Doug, good to hear from you. Yeah, we're confident in our mid cycle numbers. Remember that's a cycle. And we know that there's gonna be ups and downs in the cycle. And right now we're below mid cycle as you're pointing out, but that doesn't change our view of the strengthening of the business that we've done in our refining business in particular. There is a lot going on. I'll let Steve talk a little bit about that. But the bottom line is we're still confident in our mid cycle numbers. Steve, you wanna cover?

Sure, Doug to Steve, thanks for the question. You mentioned two things specifically. One, I think relates to supply. And so I'll talk about that a little bit. First of all, Q4, we're heading into the obvious winter demand slump and seasonal driving coming off and refiners finishing maintenance. But when we look in 2025, we believe it will be closer to mid cycle for a couple of reasons. And on a larger basis, we think there's a lot of puts and takes in terms of shutdown and then demand coming, or capacity coming on to the tune of around 300,000 barrels net new capacity. But we think demand should outpace that. Obviously timing matters. But we feel like we'll be in a normal balanced margin environment for 25, which is around mid cycle. You also mentioned TMX and we've seen some impacts clearly there with regards to crude values. Just as an example, the diffs have narrowed. And when you look out through next year, we think that light to heavy diff kind of stands at around a 1250 to $15 range, obviously depending on several things. By example, Q1 of 25 on the strip looks like it's roughly $6 less than it was in terms of Q1 24. But we also see that our position in the Pacific Northwest, our ability to have, be close to the dock, have plenty of dock capacity, the ability to take multiple crews as more barrels get out over the water, we will be in a good position to go compete for those barrels. And then through the balance of next year, while the diffs are slightly compressed until the production outruns pipeline capacity there at TMX, we will have some compression in those diffs. And it will impact our mid-con and parko refineries. But again, we're well connected to mini hubs and we're working hard to optimize the crude slate and flexibility there. But as a lot on balance, we believe that our 2025 is a bit more supportive towards mid cycle. And that's how we're calling it right now.

I guess we're gonna watch the dynamics, but I appreciate the confidence and I hope you're right for sure. But my follow up is on renewable diesel. And I guess it's just really specific to your portfolio mix. As the BTC goes away at the end of this year, and we have more of a CI based credit system, how do you see your system set up in terms of whether to take advantage of that or not as a case for now?

Yeah, so I'll take that one as well. You know, we're watching the BTC very closely as it goes away and the PTC comes on and the CI based as you mentioned, we've continued to push very hard to get more CI, low CI feedstock in our kit through better sourcing our capability on the PTU and actually a few small tweaks in the plants. And so we think we could compete with our current setup. We also have the ability to go take barrels to different markets that are not as dependent on low CI for that value. And we've been able to move barrels into Canada and some local markets as well where there has been some uplift. So, you know, there's some uncertainty heading into the first part of the year. And, you know, we think that it's going to end up having to settle out with some more support from RINs. And so that's a bit of a how does that happen? And when does that happen? And then, you know, on the positive side associated with this, there'll be fewer imported finished barrels. So we think the supply structure and demand structure tighten up a bit that shows some supportive margin for 2025. But there's still a bit of uncertainty in the first part of the year, but we're watching it very closely and we'll manage that risk carefully. And Doug, that's of course

commentary around the BTC and the PTC. But if you look at the overall renewable diesel factors and market, of course, we believe the LCFS credit prices are headed higher in 2025. I think that'll be a tailwind for our business. You know, the New Mexico LCFS program is being finalized here over the next few months. And we think when that comes online here at the end of 25, maybe the early 26, that that will be a tailwind for us, given we'll be the only renewable diesel producer in New Mexico. And we think overall RINs prices are going to be going up as well. So, you know, we've shown that even in these current bottom low cycle conditions, we can produce a positive EBITDA and we're positioned well for those tailwinds to show themselves next year and maybe the year after too. Got it. Thank you guys, appreciate the answers.

Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Yeah, good morning, Tim and team. The first question is just around capital as we think about next year. This year, I think you got to 875, of which 75 is growth, 800 sustaining. How do you think about some of those moving pieces as we go into 2025? And is this a reasonable run rate as we think about next year?

Good morning, this is Athens. Thank you for your question. I think this is a reasonable assumption over the next couple of years, you know, and that zip code of 800 to 875, including some growth capex in it. So I think you're

right. We're in the process of putting our budget together, Neil, as you know, so no official guidance at this time. We'll put that out in December like we normally do, but we're not seeing any major peak coming here next year. I just think that's what Athens is trying to signal that we'll give you a better number here at the end of the year.

Perfect, yeah, that helps us frame it out. And then as we think about the midstream side of your business, can you talk about priorities from here? And how do you see that as part of the business going forward? Is this a free cash flow engine or can it be a vehicle for growth? So big priorities around the midstream side of your business over the next year or so.

Yeah, Neil, this is Steve. Thanks, I look after our midstream business as well. As part of the proposition of buying it in, we feel like there was an untapped opportunity there and I think we're starting to see that. We really believe that there is utilization to go get and we think there are some pieces of the kit that we can optimize or go add to to really allow us to unlock the integrated value chain and operate our kits as such. So we're focused on how do we go make sure that we're touching the molecules early and often and getting them on our system. Perfect example is things that we can unlock now because we are under one umbrella. Our Permian Southwest Gathering asset, we're working and investing to go move more barrels from third party or alternative modes of transport onto our system and helping that all the way through to our plants and in between the plants. And that's just one example that we see as an opportunity. So we think it is a growth engine and we think that this is something we'll continue to focus on as well as improving our overall cost profile. And we believe that there are some things that we can do between the operating platforms and refining as well as a midstream where we can share the best practices and learn and do things, common solutions for common problems. But we're pretty excited about the opportunities ahead of us and what we can go do with the midstream sector.

Yeah, and Neil, I would just chime in to, we talked about buying in the HEP business a year ago. And one of the reasons was for the free cash flow accretion associated with that, that's gonna pay us dividends now. The other one was for the growth and that's what you're pointing out. This quarter, I think we had record pipeline volumes. Last quarter, I think we had record total volumes going through. If you look at our run rate, our run rate is $50 million EBITDA higher than it was a year ago. And that's associated with not just higher tariffs, which we knew were coming, but also these higher volumes, lower op costs as we've talked about, and higher third-party volumes that go with that as well. So we do think midstream can be a growth engine. You know, we've talked a lot about lubes and how lubes has been a real bright spot for us over the last several years. I really believe that you're gonna see the same thing in midstream and you're gonna see the same thing in marketing as we continue to grow those, what we call higher multiple businesses in our portfolio.

Tim, the one quick follow-up on that is that when you talk about as a growth engine, do you mean primarily organically or do you see the potential for bolt-on as well in midstream?

Well, our focus right now is organic. I mean, we've talked about that this past year as one of our priorities is internally focused reliability, internally focused integration and optimization. But I think over time, as we develop that foundation and really solidify it, I think there's gonna be opportunities for modest inorganic opportunities for growth as well. So I would just say it's not our highest priority right now. Our highest priority is internal organic growth, but that is on the table for sure.

Okay, very clear. Thanks, Tim.

The next question comes from Theresa Chen with Barclays. Please go ahead.

Morning. Steven, let's just get some additional details on your comments about demand across your footprint by product and related to what you said earlier on expectations for demand outpacing supply over time. How does that translate to your specific markets, inland more niche areas plus the Pacific Northwest?

Yeah, thanks Theresa. You know, demand again, everyone has been concerned about a structural issue with demand. What we've seen is there is not a structural issue with demand. It has been relatively flat and even up in some of the markets. The issue in terms of cracks have been associated with the additional supply on the market, which has come from the various things that we've already talked about. We think in our markets that there are areas that they have advantages, regional advantages, where there's growth that's still happening and people are moving there and we see that that is an advantage that we can exploit. And we'll go continue to grow that through optimizing our midstream footprint and our branded put through our retail stations. And so, you know, we're pretty excited about the overall regions that we operate in. One of our largest growth areas that we've seen so far today, as you mentioned, is in the Pacific Northwest. That's fertile hunting ground where we can look to optimize between the plants and that locale. And then also in the Southwest, we've seen good demand and good growth there and we'll continue to fill out the other regions where we already have a high concentration of our branded put.

Got it, and on that branded put, based on your execution and rollout thus far, how much of an incremental margin benefit does that bring and is that sustainable over the medium term? How should we think about that incremental financial uplifting?

Yeah, so, you know, on a revenue replacement basis, when we go put a new site up versus a site that doesn't really fit in our portfolio, we see between 60 and 120% increase in overall volume over time and they're in better locations. And so, the margin structure continues to improve with better sites. We're not giving explicit guidance, but we're starting to see it in the run rate. Tim mentioned earlier the EBITDA run rate of between 75 and 80 million, we believe is realistic based on what we've seen in 2024 and we think there's further opportunities. So, higher margin, resilient and better volume locations, high grading from a bulk to an unbranded to a branded outlet is really the strategy and the key to continue to unlock value.

Thank

you. The next question comes from Jason Gabelman with GD Cowan. Please go ahead. Morning.

Morning, thanks for taking my questions. One quick accounting one, it looks like cash flow was very strong, well above what's implied by your EBITDA numbers. So, just wondering if there was a working capital benefit or something else going on with cash from ops.

Yeah, Jason, this is Atmos. That's an accurate observation. We did have a working capital tailwind in the winter over the summer months as we were working down inventory. So, that helped us.

Okay. And then the other one, just thinking about the position and this has been touched on quite a bit on the call, but it sounds like part of the growth in retail is to secure demand outlets for that supply, but as we think about what's going on in California and refinery shutting down, I was hoping you could one, talk about your ability to supply that state from both the New Mexico plan and the Washington plant, and then if there's an interest in kind of pushing the logistics further west to move product from your Rockies footprint. Thanks.

Yeah, Jason, this is Tim. I'll jump in. I do think that the recent announcement in California and it's consistent with our long-term outlook for those supply-demand balances in California, and that is supporting our overall long-term strategy to be able to move far west. We've talked about this before, but of course, the Puget Sound refinery has the ability to make carb gasoline and will benefit as the gasoline becomes short in California. We've already been able to take some part in that market and we'll hopefully be able to take more of it as the balances continue to go short on gasoline, but as you point out, our Woods Cross refinery supplies Las Vegas, which gets half of its supply from California, and our New Mexico refinery supplies Phoenix, which gets about half of its supply from California. So as the California gasoline production continues to reduce, we do stand to benefit by being able to replace our barrels and take more of that market share in those regions, even though they're not specifically in California, they are tied to the California market and we believe that we're gonna be beneficiaries of that. Okay.

Yep, got it, that's great, Caller, thanks.

Our next question comes from Matthew Blair with TPH. Please go ahead.

Thank you and good morning. Looks like in the third quarter, the marketing volumes were down about 8% year over year, even though your site count was up 3%. Could you talk about some of the dynamics that caused that?

Yeah, Matt, this is Steve. You know, this is really a timing issue where we're relieving our lower volume and our lower margin sites and our high grading with higher volume and higher margin sites. They take a bit of time to ramp up and we see that will come on. So this is really a timing issue in the volume. Like I said earlier, we're seeing growth in EBITDA on the margin and that's a direct result of us high grading the portfolio already.

Sounds good, right, the margins did improve. Okay, and then could you talk about any expectations for refining capture rates into the fourth quarter here? I think you posted 48% capture in Q3. It seems like higher RINs could be a small headwind to your indicator, but then there might be tailwinds from areas like butane blending, crude diffs and market structure. So how do you see refining capture shaking out in the fourth quarter?

Yeah, we're not guiding necessarily on capture, but there are a few trends that we're watching. One is that, as I mentioned earlier, the light to heavy index is more narrow than we've traditionally seen. And one thing that we are watching, we do have our Eldorado plant in turnaround and as you know, that's a big heavy crude producer. Now butane blending, there may be some offsets there and we think that as we continue to go push our jet production, that is an area that has been favorable to us and maximizing that, extending the jet value chain, and then continuing down the path of producing as much premium as we can and extending it through our retail value chain and also our heavy oil value chain and upgrading our bottoms from wholesale to retail. Those are things we'll continue to focus on. Calling it, right now I don't think we're ready to call it, but those are the things that we can take advantage of and continue to drive.

Sounds good, thank you.

Our next question comes from Joe Latch with Morgan Stanley. Please go ahead.

Hey, good morning, thanks for the time. Just one question from me this morning. So on the lubricant side, I know you talked about organic growth, but on the inorganic side, I think lubricant is a pretty fragmented market. Are there opportunities to grow inorganically here or is it really just more of a focus on the organic side? Thank you.

Thanks, Joe, it's Matt here. I appreciate the question. And yeah, you know, one of the things, if you look back across the past couple of years, we've really focused internally to ensure that we're in the best place to organically build a fort foundation, a solid foundation, and you're seeing that track record of success. But as we've established looking forward, I think that this is an excellent opportunity to look out at our portfolio, see where we have segment strengths, where we have some gaps, where there may be some really nice bolt on acquisitions. And we'll look at those and consider them for growth in the future. So I think that it's absolutely plausible to see something like that, and we'll keep you informed as when we make progress or choose to go down that path in the future.

Yeah, as you know, Joe, as you pointed out, the industry's fairly fragmented. We have been an industry consolidator in the past, right? When we put PCLI and Sonoborne and Red Giant together, we've needed the last few years to build our foundation and to integrate and optimize that portfolio. But as Matt mentions, if we find, and we are looking for some opportunities to continue to enhance that portfolio, we would certainly consider.

Thanks for the time, I appreciate it.

I am now turning the floor back over to Tim for any closing remarks.

Thank you, Novi. In summary, our third quarter results demonstrate the earnings power of our diversified portfolio. We are focused on executing our strategic priorities, and these business improvements are growing the bottom lines of our midstream marketing and lubricants and specialties businesses. In our refining and renewable segments, we're focused on what we can control during these challenging market conditions. Both segments are delivering better turnarounds, reliability, and lower operating costs to drive solid performance in below mid-cycle conditions. All of these are indicative of the hard work and commitment of our employees executing our plan. In short, our focus over the past few years is working, and our business and our balance sheet are much stronger than before. Looking ahead, our priorities remain the same. To one, improve our reliability, two, to 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.

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