Delek US Holdings, Inc.

Good morning, and welcome to the DELIC fourth quarter and full year 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Blake Fernandez. Please go ahead.

Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delic US Holdings' fourth quarter 2020 financial results. Joining me on today's call is Uzi Amin, our Chairman, President, and CEO, Reuven Spiegel, EVP and CFO, and Luis Lobela, EVP and President of Refining, as well as other members of our management team. Presentation materials used during today's call can be found on the investor relations section of the DELIC US website. As a reminder, this conference call may contain forward-looking statements as that term is defined under the federal securities laws. Please see slide two for the safe harbor statement. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release, which is posted on the investor relations section of our website. Our prepared remarks are being made assuming that the earnings press release has been reviewed and we are covering less segment and market information than is incorporated into the 4Q press release. On today's call, Reuven will review financial performance, I will cover capitalization and guidance, Louis will cover operations and CapEx, and then Uzi will offer a few closing comments. With that, I will turn the call over to Reuven.

Thank you, Blake. On an adjusted basis for the fourth quarter of 2020, DELIC US reported a net loss of $204 million, or a negative $2.77 per share, compared to net income of $9 million, or $0.11 per diluted share in the prior year period. Our adjusted EBITDA was negative $138 million in the fourth quarter of 2020, compared to $65 million in the prior year period. The second paragraph of the press release highlights $38 million of after-tax headwinds, or 52 cents per share, of items included in adjusted results. I would like to highlight the tables on page 10 of the release providing inventory hedging impacts and page 14 providing other inventory impacts in the quarter. On slide 4, we provide a cash flow waterfall. In the fourth quarter of 2020, we had a positive cash flow of approximately $117 million from continuing operations. which includes a working capital benefit of $243 million. Cash capital expenditure in the quarter were approximately $32 million. With that, I will turn it over to Blake.

Thanks, Reuven. Slide five highlights our capitalization. We ended the fourth quarter with $788 million of cash on a consolidated basis and $1.56 billion of net long-term debt, excluding net debt at Delos Logistics of $988 million We had net long-term debt of approximately $573 million at December 31, 2020. I would remind you that we expect a federal tax refund of approximately $156 million, of which $136 million is expected to be collected in the first half of 2021. Moving to slide six, we provide our first quarter guidance for modeling. Our controllable cost reduction initiatives remain on track on an underlying basis. That said, inclement weather in our regional footprint in February is putting upward pressure on energy-related expenses on a short-term basis. We would expect weather-related expenses to normalize in due course. Lastly, the Wink to Webster JV announced in January that the Midland to Webster segment of the pipeline is now operating. With that, I will turn the call over to Lewis to discuss operations in CapEx.

Thanks, Blake. During the fourth quarter, our total refining system crude oil throughput was approximately 229,000 barrels per day. In the first quarter of 2021, we expect crude oil throughputs to average between 165,000 to 175,000 barrels per day, or approximately 56% utilization at the midpoint. This reflects an accelerated timing of the Eldorado turnaround originally planned for 2Q, weather-related downtimes at Big Springs and Tyler, and in February, and then Cross Springs continue to run at its current operating mode. Big Springs and Tyler are expected to be back to normal operations in March and we have no further turnaround work planned for the rest of the year. On slide seven, capital expenditures during the fourth quarter were $32 million bringing full year 2020 spending to $240 million. This was $10 million below our revised capital budget and $85 million below our original 2020 budget. As a reminder, our 2021 capital program is expected to be $150 to $160 million, including turnarounds, representing a reduction of approximately $85 million from the 2020 levels. Next, I turn the call to Uzi.

Thank you, Luis. Good morning, everybody. DELEC remains on track and well positioned entering 2021, supported by cost and capital reduction initiatives. Recent industry downtime resulting from cold weather along the Gulf Coast should create improving product inventories and margins for the Gulf Coast region. Our 80% ownership in DKL continues to perform well, with the company outlining another 5% distribution increase in 2021. In renewable diesel, We have retained a low-cost option of $13 million to acquire a one-third economic interest in GCE Holdings Acquisitions, which indirectly owns and operates the Bakersfield, California, refinery. In our view, this approach to renewable diesel helps mitigate execution risk and is far less capital intensive. The retail business has served as a layer of stability and diversification throughout the year. We see strong growth opportunities in this segment with returns well above other areas within energy. With that, I'll turn the call over to Blake.

Thanks. Before we conclude, we would like to address CVR's Energy's nomination of three director candidates for election to the board at our 2021 annual meeting. DELIC is committed to maintaining a strong, independent, and diverse board that serves the best interests of its shareholders, employees, customers, and partners, and regularly reviews opportunities to create and deliver value. Our nomination and corporate governance committee will evaluate CVR's nominees and make a recommendation in due course. We will not be making further comments on the nominations of our shareholder conversations at this time. The purpose of today's call is to discuss fourth quarter and four-year 2020 earnings results, and we ask that you keep your questions focused on these topics. With that, operator, can we please open the call for questions?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Our first question comes from Roger Reed with Wells Fargo. Please go ahead.

Yeah, thank you. Good morning. How are you all? Hey, Roger. Good morning. I guess if we could, really, the renewable diesel, we've all been kind of waiting to hear what the investment side for you would be. Any more you can offer us in terms of timing of the facility coming online? Any thoughts on, given that it's going to use a different kind of feedstock than a lot of the other facilities, how that's going out in Bakersfield, and maybe thoughts on margin potential?

So, Roger, there's not a lot of updates besides what's in the slides. It's supposed to come online January 22. We have a 90-day option once it's up and running, so there's really no benefit to us to execute that prior to the facility being up and running and basically mitigating the execution risk. You rightly point out they are potentially growing some camelina seed, and that could mitigate some of the feedstock risk. As we understand it, that could have a very low CI score and that could be very interesting. But we're going to really defer to GCE and their disclosure. So at this point, we're basically just awaiting the execution and let them build the facility and 90-day free look. And as you see there, $13 million to participate. So not a lot of additional information aside from what's in the slide.

Okay, thanks. As a follow-up, I don't want to get into the issue with the activist side of things, but some of what they've talked about is some of what those of us on the sell side and I think the buy side have thought before, which is what is the value of some of the units? Crop Springs, at the time you acquired Elan, Uzi, we were all wondering if the unit would stay up and running. Right now, it's obviously idle. Putting all the other stuff aside, what kind of environment do you think we would need to see for Kratz Springs to come back into operation? Or should we consider it as one of these candidates more for a terminal or a future expansion of renewable fuels?

Roger, that's a great one. Let me take it in pieces. First of all, Kratz wasn't idle. We took the time and did a straight-time turnaround. It is finishing as we speak. In today's environment, including RINs, cross-prings is actually in the positive territory. It's not making, on paper, it's not making a lot of money, but in today's margin, it's $3, $4, $5 million a month margin. So let's just call it $3 or $4 million. That's including the RINs. We did take the time and enhance another project that we will be able to disclose over the next month or two that will add profitability to CrowdSpring. So we're in a waiting mode, but if margins continue to be where they are, $15,000, $16,000, which means $1, then we may restart the refinery over the next two to three weeks.

All right, thank you.

The next question is from Manav Gupta with Credit Suisse. Please go ahead.

Hey, Uzi, this is a little bit of follow-up on Roger, and I think I won't ask about a specific asset, but those who know you know you well enough that you operate assets for free cash. You don't operate assets for nameplate capacity or any other reason. So I'm just trying to understand, let's say three to six months down the line, and let's not get into specific refinery, but let's say there is a refinery where you think it will struggle to make free cash, would there be any hesitation on your part to close the asset and move ahead with it?

Well, we are to the, Manav, we are to the leisure of the shareholders. Shareholders want us to make money, not to be big. And we are, our commitment, and we are committed to a free cash flow, and we are committed to operating Profitable Assets. You make decisions on assets not in one month or two months or three months. You take long-term vision. But absolutely, to answer your question, it's clear that if we can't make money in an asset that is for a period of time, then we shouldn't operate it. We look all the time on optionalities and changing different things. By the end of the day, our commitment is to make money, not to have more assets.

That's perfect. And Uzi, just on big springs very quickly, it's a very good refinery. It's done very well for you in the past. In the quarter, it looked a little lighter side. I'm just trying to understand whether any one times because it's a very good asset. So for that asset to generate that kind of gross margin, something must have gone wrong. So if you could elaborate a little.

Yeah, absolutely. Two or three reasons, if you will. First of all, asphalt. You know, in the rising market, asphalt is lagging, and that's one thing. The second thing, we had a couple of hiccups in Big Spring. We still consider Big Spring one of the best refineries in the country. So it's like this square, it is, but I wouldn't read much into it. Actually... When we hear about different people, we get phone calls about that asset all the time if we have any intent to do something with it. Certainly not, especially in light of Permian coming back. So one or two quarters don't mean much. We had to freeze this quarter as well, but we will be back, what, March 1st, I think, Louis, with full flight. Big Spring is one of our best assets.

Thank you so much, Uzi, for taking my questions.

The next question is from Prashant Rao with Citigroup. Please go ahead. Hi, Uzi and team.

Thanks for taking my question. I just said, one, I wanted to sort of ask about the balance sheet. You know, the debt level is high. It is for a lot of refiners right now, given where we are on the cycle. But just wanted to get your thoughts on how you see deleveraging occurring and if there's a target for year-end, and do you think that it can be achieved through free cash flow and some of these revenue initiatives, or are other methods or strategies needed?

Thanks. Good morning. Thanks for taking the time, Parshad. So let's go one by one. As you know, we have $156 billion, as we said, coming our way, hopefully over the next month, if not over the next three months. We're hoping to get this first quarter. If not, it will be in the second quarter. We didn't commit to first quarter. So $156 million coming our way. That's on that side. Second, free cash flow. We said that all we need is another year of $270, $280 million to be free cash flow. That's the second thing. You know, we have DKL doing very well. And I don't know what, we just announced that we have another 5% increase in dividend with DKL. So that's an asset that is doing very, very well. We're not in the business of holding 80% in DKL. So that's another avenue of getting cash. So I wouldn't rule out one of these options. We feel very comfortable with our cash position. You saw in the quarter we didn't burn any cash. We actually built cash. We feel that the first quarter and the second quarter will be similar to that. So just something, the balance sheet is not something that we're concerned much about.

Okay. Thanks, Suzan. Just a quick follow-up for us so that we know what you're, we're on the same page as you. When you're thinking about, you know, the debt level on the balance sheet, are you targeting sort of internally, is your target more debt to total cap metric, or are you looking at it more on a net debt to EBITDA metric? What do you guys think is the right and many others. Thank you very much. Thank you very much.

We are at $650 million right of net debt. If we can get less than two times at the decay level, outside decay, that's an area that we're comfortable with. That's super helpful.

Thanks, Uzi. Appreciate the time. The next question is from Ryan Todd with Simmons Energy. Please go ahead.

Great. Thanks. Maybe a quick follow-up on the refining side. Can you talk a little bit about any comments on RIN costs? What was the RIN expense in the fourth quarter? How are you thinking about RIN expense in the first quarter? And maybe refresh our view around the likelihood of potential reintroduction of small refinery exemptions under the new administration.

Well, I'll take the second one. Blake, I'm sure, won't to take the first one that will allow me to drink my tea here. So the second one, we are not counting on the Biden administration to handsomely give SREs. However, there is that Supreme Court ruling that is coming in, I think, a couple of months, and that may change things. I'm going to remind everybody that even under the Obama administration, Cross Springs, and El Dorado refineries got their exemptions. So we'll see what the court ruling is. And then if it's positive to refiners, I don't see any reason why these two refineries won't be eligible to that. However, if the court, and our assumption is that The court won't rule for that. Now, we don't really know, but we can't build our cash flow based on something that is not tangible.

And Ryan, on the first question, so we have historically not disclosed what our rent exposure or expense is. I will tell you, obviously, CROTS with the FCC unit not running, that's a good chunk of our exposure right there. So that mitigates some of it. But historically, we have not disclosed it. I mean, at the end of the day, we do have some blending capability. But I want to be clear, we prefer not to have elevated rent expenses. So, you know, we just kind of leave it there.

Maybe on a separate note, I mean, I guess I appreciate that you can't say much about the Bakersfield plan. But outside of the Bakersfield investment, have you... explored the potential to participate further in the RD business. Are there any of your facilities that you view as potentially conducive to conversion, like Crot Springs, or at this point as kind of the near-term focus, just the capital light plan there?

You know, Ryan, you're asking a great question. We want to do it step at a time. Are we looking at it? Absolutely. We are concerned about the feedstock cost. and we want to do it, you know, we play through GCE in one-third of that. We feel comfortable with that position. We do look at other opportunities, maybe to convert the entire refinery, maybe to convert some of the refineries. Just remember that we have four small refineries are relatively small, so they are all attractive to some degree with that area. But we are not in the business of investing right now $400 million, $500 million in something that may not happen profitability-wise.

Okay. Thanks, guys.

The next question is from Phil Gresh with J.P. Morgan. Please go ahead.

Yes, hi, good morning. Thanks for taking the questions. First one, just on the working capital trends, which looked positive in the fourth quarter, how much of that was just rising crude price effects and benefits that come from that versus maybe, I don't know, any inventory effects for Kratz Springs from running at a lower level? And just how would you expect working capital to progress from a cash perspective in 2021? Phil,

First, shutting down a refinery hurts your working capital. It doesn't help. So shutting down cross didn't help us. It actually hurt. Because if you remember, you pay for crude, and I'm sure you do, 20 days after the end of the month, and you collect the receivables five days. So shutting down a refinery and not running full slate hurts your working capital and doesn't help. Rising crude prices certainly help. $60 now will help tremendously in the first quarter as well. I don't have the breakdown between inventory and rising prices on the receivable side or the payable side. I want to make sure that you understand, though, we manage our cash on a daily basis. and pay attention to our cash. So by the end of the day, that's the most important thing, and we run our business like that.

Okay, great. Thank you for the clarification. One other thing, Uzi, you talked about in the last call, you had thrown buybacks out there as a discussion point if cracks got to a certain level, though it does sound like obviously the balance sheet is a key priority as well. So just your latest thoughts on buybacks versus balance sheets

It's a combination, obviously. We feel comfortable with the balance sheet. As I said, $156 million are coming our way pretty soon. That puts us in a great position with the balance sheet, again, especially in light of DKL performing so well. We'll see what we do with that thing. The balance sheet feels good. We don't want... to do buyback out of leveraging. So we would like to see, like I said, two, three, four months of free cash flow now. In the past, we said that $9, $10 cracks are good, with REINS prices being $1. At that time, REINS were $0.20. Today, REINS are $1. Obviously, that number is much higher. So I don't want to commit today to a number of cracks because I really don't know what the other things will do, midland differential or raise. Once we see free cash flow, there's no reason to believe that we won't go and find a combination between buyback and deleveraging.

Okay. Last question just on retail. You talked in your release about...

So, Phil, you know, retail, we see very strong organic growth opportunity within the energy complex. That's probably one of the strongest rate of return opportunities that we see. And so, basically, that's what we wanted to highlight. Obviously, it's served as an avenue of stability this past year. and once we do get back to a growth mode, we do see the opportunity to redeploy capital into that business and we're basically above 20% rate of return on some of the investments that we're seeing. So retail is attractive and whether that sits with us or someone else, that remains to be seen.

Okay, thanks.

The next question is from Matthew Blair with Tudor Pickering Holt. Please go ahead.

Hey, good morning, everyone. I'd like to start on the refining side. It looks like Tyler's gross margins improved fairly substantially quarter-by-quarter, which is in contrast to most mid-con segments that saw falling margins. Is there anything you'd like to call out here?

Well, we did very well in Tyler vis-a-vis moving crude and capitalizing on on opportunities in that market. The DELEC Trading and Supply performed very well in Tyler. So you probably saw the $7 and it jumped. I would say that this is maybe one or two times event. I wouldn't go and just say this is going forward because at the same time, as you know, we didn't perform as well at El Dorado, and these two offset each other from time to time. So Tyler did great, but let's take some time before we celebrate victory here. Makes sense.

And then on the renewable diesel side, It doesn't look like there's any existing LCFS fuel pathways for Camelina. So I guess one is getting that pathway, is there any risk to getting that pathway or do you view that as pretty standard? And then two, Blake, I think you mentioned you're expecting a pretty low CI. Are we talking something in kind of like the 20 to 30 range or could it possibly be even lower than that?

Matthew, we really want to defer to our friends over at GCE, since we're not even technically in the partnership at this point. I have read, and I'm sure you've seen industry commentary out there talking about 25, 30 CI scores, but again, we're not even in that, so I don't want to comment for our friends. At this point, we just view it as a very attractive option. And again, to the extent that they can grow their own feedstock, I think that mitigates a lot of the risk in the industry, which we are very concerned about in terms of feedstock risk. So at this point, we really kind of just need to leave it there. Yeah, that's a good point.

Thanks for the responses. The next question is from Neil Mehta with Goldman Sachs. Please go ahead.

Good morning, guys. First question is on Delic Logistics. As you said, Izzy, the stock's done really well here, and we've seen some multiple expansions. So how do you think about the potential for monetization there, given your large ownership, which accretes to your sum of the parts? And then in general, as you think about potentially right-sizing the size of your refining business, if you elect to do that, How do you think about the fact that DKL is very much tied in to the refining system, recognizing there's a lot of third party in there too?

First, these are, Neil, as usual, very good questions. I think there are three or four of them. I'll try to address each one of them here. First of all, DKL performed very well, and rightfully so. We improved the Leverage ratio, we improved the coverage ratio. The big spring gathering system, the trucking is performing very well for DKL. And we do have other organic grow projects at DKL. And today we announced another 5% increase for next year. So we feel good about DKL. Still, the yield is hovering between 8% and 9%. And we were very consistent with that thing. We are not in the business of owning 80%. We said it all along. It depends how we go about it, if we want to buy it in or start monetizing some of it. That's something that we are looking at it very carefully. We couldn't do much during the blackout period, so that's something that we should continue to look at. We'll obviously look at the difference between DK and DKL and say to ourselves, okay, does it make sense to look at DKL and then buy DK in lieu of DK shares, I mean buyback. More and more, DKL is a third-party provider and not just tied to refineries. I think Odeli and team are doing a great job in going away from being dependent on the refineries and it shows itself in the multiple. that more and more it's becoming a real MLP. So do I think that DKL is something that we look at, that we need to look at? Absolutely. One last thing around DKL and the refining assets. We just need to remember that as we get more and more third party, the percentage of refining assets in DKL goes down and its dependency on refining goes down. I hope I answered all your questions, Neil.

Yeah, that's really good, Uzi. And the follow-up is just on, you know, you have a large gathering system in the Permian. Are you seeing, as Brent has now moved through 65 here, the return of production, particularly from privates, and just what is your view on activity levels as you talk to customers for Permian Production. And then how do you think about that flowing into Midland Differentials, which are trading at a premium to TI? And part of that, I think, is the production level, but part of that is also the quality of that neat barrel, which is a better quality than even a front barrel.

All these are great questions, Neil. I think that it will take time. for production to catch up with the overbuild of the capacity. I think as crazy as it sounds, the Biden administration may help the differentials because they won't allow building infrastructure while the Trump administration allowed wide open building assets. Do I think that the differentials will go back to minus $5,000 over the next year or two? We don't think so. and we don't build our budget based on that. The level of activity is increasing. By the day, you see it. And more and more people will get comfortable. Remember, I don't think that the permanent producers have seen $60 for a long, long, long, long time because when it was $60 WTI last time, the differentials were like $5 or $7 or $8. So I think a lot of people are rushing to do it. I think the demand If a vaccine will materialize, as we see in Israel, for example, where there's a 95% reduction in the severe cases, then demand will come back second part of 21 and 22. And if this is the case, then the outlook will be nicer. I saw that Goldman put a note together thinking that a branch would go even higher from here, I think 75. and if this is the case then production or level of activity will go up. I don't count, we do not count on the $5 discount at this point. Thanks Susie, appreciate it.

The next question is from Doug Legate with Bank of America. Please go ahead.

Hey guys, good morning. This is Kaleon for Doug. Just a couple questions for me. I know you guys have pulled forward the Eldorado turnaround. I want to know what the scope of that turnaround is, whether the scope of that work is final, or whether it could be augmented by perhaps the recommendation of the board.

So, hey, this is Lewis. Yeah, the scope of the turnaround for Eldorado is maintenance, general maintenance, open, clean, and inspect. The scope is pretty much fixed. Due to the weather we had, the team was ready to execute and we pulled it forward so we can try to get it in, get ready for the rise in demand.

And Kalei, I think that just so you know, the timing of that is expected to be back online basically beginning of April. So we should have a full 2Q effect.

My second question is also on renewable diesel. With the execution of the renewable diesel option, obligate you to the liabilities of the operator, such as any debt that they're incurring?

Kalei, that's something we probably ought to take offline. So maybe we can huddle up on that offline, if that's all right. Sure.

Thanks, guys. The next question is from Jason Gabelman with Cowan. Please go ahead.

Yeah, hey, thanks for taking my questions. Maybe I'll try a couple on this Global Clean Energy project, understanding that you can only talk so much about it. I was wondering if Global Clean Energy has actually broken ground yet on the project, and if the facility is going to include a pretreatment unit. And then my follow-up, is on refining. I was just wondering, El Dorado looks like it ran at least in 4Q at a decently high rate and the whole system is running at a decently high rate, but margins remain pretty weak. So it just, I don't know, it looks like maybe the optimal operating paradigm is to run at lower rates. Can you just discuss The decision, particularly at Eldorado, to run at relatively high levels despite negative margins. Thanks.

Jason, on the renewable piece, we're really going to have to defer to our folks over there at GCE. At this point, it's not 100% clear what the pretreatment situation is. Thank you very much.

Tyler and El Dorado. We do believe that in today's market, today's environment, El Dorado is certainly in the green in all areas. When I say green, I mean green EBITDA and green net income. So we'll see once we come up how it plays. But I wouldn't read much into one quarter. If you look at Tyler, Tyler is $7.00. and Eldorado is minus four. So they offset each other.

Got it.

Thanks. This concludes our question and answer session. I would like to turn the conference back over to Uzi Yemin for any closing remarks.

Well, I'd like to thank everybody for their interest in our company. 2020 was a tough, tough, tough, tough year. And 21, at least the second part of 21 looks a little bare or bare. I'd like to thank my colleagues around the table here. I'd like to thank investors for their confidence in us. We don't take it lightly. I'd like to thank the board of directors for their vote of confidence, but mainly I'd like to thank our employees for making this company what it is. Have a great day. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.