HollyFrontier Corporation

Good morning and welcome to Holly Frontier's and Holly Energy Partners investor conference call. At this time, all participants have been placed in listen only mode. The call will open for your questions following the presentation. As a reminder, this conference call is being recorded and the press release and slide presentation regarding today's announcements are available on the investor relations section of the Holly Frontier and Holly Energy Partners website. The archived replay can also be accessed on both websites following the call. I will now turn the call over to your host, Craig Beery, Vice President of Investor Relations. Mr. Beery, you may now begin.

Thank you, Lauren. Good morning, everyone, and thank you for joining us. On the call with me today are Mike Jennings, Chief Executive Officer and President of Holley Frontier and Chief Executive Officer of Holley Energy Partners. and Rich Boliva, Executive Vice President and Chief Financial Officer of Holley Frontier and President of Holley Energy Partners. We are also joined by Tim Goh, Executive Vice President and Chief Operating Officer of Holley Frontier, and Tom Curry, President of Holley Frontier Renewables. Before we proceed with remarks, please note the Safe Harbor Disclosure Statements in today's press release. In summary, if such statements are made regarding management expectations, judgments, or predictions or 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 filing. 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 Mike Jennings.

Hey, thanks, Craig, and good morning, everyone. We are thrilled to share the news this morning that Holley Frontier Corporation and Holley Energy Partners have entered into definitive agreements with the Sinclair companies. In light of that, we'll be doing things a little differently on the call today. Rich and I will first walk through the transactions and the expected benefits they will create for Holley Frontier, Holley Energy Partners, and our shareholders. After that, Rich will briefly review HFC and AGP's results for the quarter before we turn it over for questions. Starting on slide three, to put it simply, the acquisition of Sinclair's assets will be transformative for both Holley Frontier and Holley Energy Partners. It diversifies and scales Holley Frontier's portfolio with the addition of Sinclair's iconic brand and integrated distribution network, its renewable diesel business, which was a first mover in the space, and its two complementary refineries in the Rocky Mountain region. And we expect it will strengthen our financial position, increasing our earnings, cash flow, and free cash flow within the first year, positioning us to increase returns to shareholders while we deepen our commitment to ESG and sustainability. For HEP2, this transformative transaction provides strategic and financial benefits. With the addition of Sinclair's integrated network of pipelines and storage facilities, HEP will have the scale and incremental earnings power to capture new growth opportunities and focus on increasing returns to unit holders. Turning to slide four, this transaction follows a decade of growth since the merger of Holley and Frontier. We've spent the greater part of that period expanding our refining business, building our renewables business, establishing and growing our lubricant business, and benefiting from our interest in Holley Energy Partners. Since 2011, we've returned more than $3.6 billion in cash through special and regular dividends, and an additional $2.3 billion through share repurchases. Similar to our 2011 merger, we believe these transactions with Sinclair represent an inflection point for our company. We know the Holding family well and have deep respect for the brand and the business they and generations of Sinclair employees have built over the last century plus. We're pleased that the family will retain a significant stake in our combined companies, and we're incredibly excited about beginning this next chapter as HF Sinclair. I'll turn now to a brief overview of the details of the transactions on slide five. First, the Holly Frontier transaction. Holly Frontier is acquiring Sinclair's branded marketing business and all commercial activities related thereto. which build upon an iconic brand with exceptional customer loyalty. Also, Sinclair's renewable diesel business and Sinclair's two Rocky Mountain-based refineries. Sinclair's hospitality ranching and upstream oil and gas businesses are not part of this transaction. Holly Frontier will create a new publicly traded holding company named HF Sinclair Corporation. Sinclair shareholders will receive approximately 60.2 million shares in the newly formed HF Sinclair, equal to 26.75% of the company. Holly Frontier's existing shareholders will own 73.25% of the equity, or approximately 164.9 million shares of the common stock of HF Sinclair. As a result, each outstanding share of Holley Frontier common stock will convert into one share of HF Sinclair common stock at the closing. The all-stock transaction has a value of $1.8 billion based on Holley Frontier's closing stock price on July 30, 2021, and Sinclair comes with no debt. Upon closing, Holley Frontier's existing senior management team will operate the combined company and Sinclair has been granted the right to nominate two directors to the HF Sinclair Board of Directors at the closing. The transaction is expected to close in mid-2022. And now I'll turn the call to Rich. Thank you, Mike. Good morning, everybody.

Turning to slide six, HEP will acquire Sinclair's integrated crude and refined product pipeline and terminal assets, comprised of 1,200 miles of pipeline, eight product terminals, and two crude terminals, with four and a half million barrels of operated storage. It will also acquire Sinclair's interest in three midstream joint ventures for crude gathering and product offtake, including Powder Flats Pipeline, Pioneer Pipeline, and the remaining interest in the Unos Pipeline, of which we already own a significant stake. Critically, this transaction provides additional scale and unease power to AGP, is expected to add $70 to $80 million of annual EBITDA. Over 75% of the revenue on these assets will be supported by long-term minimum volume commitments with HF Sinclair. Under the terms of the HEP transaction, Sinclair shareholders will receive 21 million HEP common units and $325 million of cash for a total consideration of $758 million based on HEP's closing price on July 30th of 2021. Upon closing of the acquisition, HEP's existing senior management team will continue to operate the company and Sinclair has been granted the right to nominate one director to the HEP board at closing. The HEP transaction is also expected to close in mid 2022.

Thanks, Rich. So turning to slide seven. HF Sinclair will be well-positioned for the next decade and beyond. We expect to generate shareholder value through strong free cash flow, increased earnings per share, as well as realizing synergies, all of which underpin a commitment to deliver enhanced cash returns to shareholders and will fuel our continued growth. Moving to slide eight, Alex Frontier and Sinclair share a common philosophy on commitments to environmental stewardship sustainability, and strong corporate governance that will endure and be strengthened with NHF Sinclair. The transaction will increase the scale of our renewable diesel business. This is a critical step forward as we diversify our business for a low-carbon future. Our cultures also share a deep commitment to safety, which is important to us as we strive every day to put our people first, do right by our communities, and manage risk. We also take very seriously the responsibility for supplying the exceptional products that provide our customers with mobility and quality of life. And at the governance level, our board is equipped with the right mix of skills and experience to oversee the company and ensure we are delivering for our shareholders and our other stakeholders. Turning to slide nine, you can clearly see how we are creating scale in our geographies. diversifying our business, and building an integrated business with a strong marketing presence. With that in mind, I want to take some time walking through why these individual businesses are a complementary fit within our existing business and discuss some of the compelling strategic benefits of this acquisition. On slide 10. I'll begin with the marketing brand. By adding a brand to the wholesale business, the combined company will have a significant base business and the opportunity to grow this iconic brand across a range of HF Sinclair products and geographies through a consistent sales channel. The Sinclair dinosaur, known as Dino, is one of the industry's most recognized symbols and will represent the brand for HF Sinclair. We're thrilled to bring on board Sinclair's marketing team who will help us to manage and grow a footprint of over 300 distributors and 1,500 branded locations across 30 states with over 2 billion gallons of annual branded fuel sales. The marketing business provides significant renewable identification or REN generation through Sinclair's integrated product distribution network. The addition of the branded marketing business also provides a consistent sales channel for produced fuels with stable margins, as well as additional earnings from brand licensing and credit card programs. Turning now to renewables on slide 11. Sinclair was a first mover in this space. Its renewable diesel unit co-located at its Sinclair, Wyoming refinery, has been operational since 2018 and was recently expanded to produce 10,000 barrels per day. Sinclair is also currently in the process of constructing a pretreatment unit, allowing for further feedstock advantage and flexibility. Feedstock flexibility generates higher low-carbon fuel standard value through lower carbon intensity while also mitigating single feedstock risk. The pretreatment unit is expected to be completed in mid-2022. The combined renewable diesel business will have the scale and size to support logistical, procurement, feedstock, and operational synergies, and will enhance our ESG profile as we help to facilitate a clean energy transition. Together, we will be a leading producer of renewable diesel in the U.S. with three renewable diesel production facilities with an anticipated production of approximately 380 million gallons annually. Beyond the facilities, the Sinclair team brings significant renewables expertise that we intend to leverage to capture further synergy opportunities. In short, this is a key part of the transaction. With Sinclair, we are standing in a fast-growing segment, and we will have additional size and scale to support logistical, procurement, feedstock, and operational synergies. Turning to the refining business on slide 12, we're adding two refineries that are complementary to Holly Frontier's existing refinery network, expanding the company's combined footprint in the Rocky Mountain region. Together, the Sinclair and Casper refineries add almost 125,000 barrels per day of operating capacity and approximately 5.2 million barrels of storage. The Sinclair refinery distributes products by pipelines to Denver and Salt Lake City, and the Casper refinery delivers products across the Eastern Rocky Mountain region and South Dakota. Like Holly Frontier's existing refineries, the Sinclair refineries are feedstock-advantaged, given their northern-tier access to Canadian and Rocky Mountain crudes. Each refinery has the complexity to convert discounted crude oils into a high percentage of gasoline, diesel, and other high-value refined products. Looking at our combined refining network, we will feature seven complex refineries in the Mid-Continent, Southwest, Rocky Mountains, and Pacific Northwest regions with a combined crude oil processing capacity of 678,000 barrels per day. With these additions, the combined company has an opportunity to create significant value through increased reliability and an improved cost structure. Rich?

Okay, turning to slide 13. Holley Energy Partners' acquisition of Sinclair's expansive network of crude and product assets provides an integrated system with connectivity to key crude hubs in the Rockies, including Casper and Guernsey. Together, the combined company will operate 4,600 miles of pipeline and 19 terminals with over 20 million barrels of storage capacity. HEP will also acquire stakes in three joint ventures, serving crude production in the Powder River Basin and product distribution for Wyoming through Utah and Nevada. Consistent with HEP's existing business, these assets will be supported by long-term minimum volume commitments, representing 75% of the revenue generated. We expect this will translate to $70 to $80 million annually from this acquisition of EBITDA, and grow HEP to $450 million in annual EBITDA. So let's turn to the financial aspects of these acquisitions. We expect to generate $100 million of run rate synergies within the first two years post-closing through a combination of commercial improvements, operating expense reductions, and SG&A savings. On the commercial side, we expect to increase gross margin by $40 million through multiple opportunities, such as the sale of legacy Holley Frontier refined product through the branded wholesale business, improvements in renewable diesel sales values, and feedstock costs. From an operating expense perspective, we anticipate another $40 million in cost savings, primarily through the optimization of the combined company's renewable diesel logistics, and improvements from our procurement activities. And finally, we also expect $20 million in traditional SG&A reductions associated with corporate savings. In addition to these run rate synergies, we expect to generate another $100 to $200 million in one-time savings during the first two years from working capital benefits. Turning to slide 15. The transaction is expected to be accretive to the company's earnings, cash flow, and free cash flow within the first year. In a mid-cycle environment, total EBITDA for HF Sinclair is expected to be over $2.5 billion per year, and we anticipate after-tax free cash flow of approximately $1.5 billion per year. College Frontier's credit profile will be enhanced as part of the combined company through reduced leverage, increased scale and diversification of our businesses. Consistent with our history, we expect to maintain a strong balance sheet and investment grade credit rating. Fueled by significant free cash flow generation, the combined company will be able to support a balanced approach to capital investment and cash return to shareholders. To that end, Slide 16 lays out Holly Frontier's renewed commitment to returning capital to our shareholders. In the near term, as previously announced, we intend to reinstate the regular quarterly dividend of $0.35 per share no later than the second quarter of 2022. In the medium term, we intend to return $1 billion of cash to our shareholders through regular dividends and share repurchases by the first quarter of 2023. Over the next 18 months, this represents a cash return from 15%. Returns increase from there. For 2023 and beyond, we intend to implement a target payout ratio comprised both of dividends and share repurchase of 50% of adjusted net income. Bottom line, we are committing to substantial capital returns as we realize the benefits of our growth initiatives and renewables and the acquisitions of the Puget Sound Refinery and Sinclair Oil. Turning to slide 17 and HEPs, the sustainable free cash flow we expect to generate by this transaction will support our deleveraging strategy while allowing for increasing unit holder returns. In the near term, we intend to reduce leverage and maintain our quarterly distribution of $0.35 per unit. Inclusive of the Sinclair acquisition in 2023, we expect to reach a leverage ratio of 3.5 times and increase distributions with a target coverage ratio of 1.5 times and maintain the option to repurchase units. Longer term, in 2024 and beyond, Our goal is to maintain leverage below three times and increase the distribution with a target coverage ratio of 1.3 times, again, with the option to repurchase units. We expect that these increases to the quarterly distribution and optional unit repurchases would be funded through excess free cash flow.

Mike? Yeah, thanks. Looking ahead on slide 18, we presented a roadmap to completion. The transaction has been approved unanimously by the boards of directors of both companies and is subject to certain closing conditions, including receipt of regulatory clearance. We expect to close in mid-2022. And so I will now ask Rich to walk through the second quarter financial results for both Holley Frontier and Holley Energy Partners.

Okay. Thank you, Mike. Details of our earnings are available in this morning's press releases. Holly Frontier reported net income attributable to stockholders of $1.03 per diluted share and adjusted net income of $143 million or $0.87 per diluted share for the second quarter. Reported consolidated EBITDA was $444 million and adjusted EBITDA was $335 million. Our strong second quarter results were driven by sequential improvements in refining margins in both the West and Mid-Continent regions. as well as strengthening base oil margins, which are visible in the results from the RACVAC portion of Holly Frontier Lubes and Specialties, as well as in the Tulsa Refinery. For the second quarter of 2021, net cash provided by operations totaled $428 million, and at June 30th, our cash balance stood at approximately $1.4 billion, representing a build of approximately $205 million in the quarter. For the third quarter of 2021, in our refining business, we anticipate running between 380 and 400,000 barrels per day of crude oil. At HEP, we reported second quarter net income attributable to unit holders of $56 million, or 53 cents per unit, and reported EBITDA of $88 million, all supported by continued improvement in crude and refined product demand within the markets we serve. Distributable cash flow was $67 million for the quarter, representing a 2% increase versus the same period last year. HEP announced a quarterly distribution of $0.35 per unit to be paid on August 13th to unit holders of record on August 2nd. With that, I'll hand it back to Mike for some closing thoughts.

Okay, thanks for those details, Rich. The second quarter was financially and operationally very solid. Ending on slide 19, as we communicated today, we believe this transaction will drive value for all of our stakeholders. With more diversified and integrated revenues and with increased scale, this transaction is a win. Shareholders will benefit from the free cash flow synergies and accretion, which will enable a balanced approach to investment and cash return to shareholders. For customers and partners, we will extend the reach of our products and network of pipelines and storage facilities. And for employees, this transaction adds a strong and talented workforce across all of our business segments. I'm confident that together we will capitalize on the many opportunities this combination with Sinclair will provide. And with that, Lauren, we're going to open the line for questions. Thank you.

The floor is now open to questions. At this time, if you have questions or comments, please press star one on your touch tone phone. We ask that you please limit to one question and one follow up. If you have additional questions, we welcome you to rejoin the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Thank you. Our first question comes from Ryan Todd from Piper Sandler. Ryan, your line is now open.

Great. Thanks. Good morning and congratulations, guys. Maybe could you just talk from, I guess, a couple of high-level strategic things on the deal? I mean, after the timing of the Anacortes deal earlier this year, can you maybe talk about the timing of what's now multiple kind of transformative transactions in a single year, how you view that the environment has kind of driven the whether it's more willing sellers or more of an opportunistic outlook from you all? And how does this, particularly the Sinclair deal, position you differently for an uncertain refining environment going forward versus how you viewed yourselves previously?

Absolutely, Ryan. Thanks for being on the call. Listen, our company has taken on a major strategic shift in the past 18 months as we've worked to add renewable fuels to our mix and protect our feedstock economics through pretreatment, redouble our efforts to improve reliability and asset utilization at the refineries, increase our asset quality and add a high-value products market through investment in Puget Sound, and now combining with Sinclair to add a really exceptional downstream branded marketing channel, increase production of renewables both on a relative and absolute basis, and increase our presence in the Rocky Mountain states, all very intentional while also adding a logistics network that knits this together. This is exceptionally transformative for us, and I think it differentiates us from many other downstream businesses in the business that we have built here in response to the environment that we're now in. So we think that HF Sinclair is going to be a great place to work and will support the forward-leaning capital return strategy that we've laid out alongside this deal. As it pertains to your comment on the market and on asset availability, What I'd say is this isn't really responsive to willing sellers, but rather our desire to build the business in a manner that we think is going to be durable for the future.

Thanks, Mike. Maybe a follow-up on cash returns. I mean, you laid out kind of a near-term, mid-term, and long-term strategy for for capital allocation. Can you maybe talk a little bit about what metrics drive the reinstatement of the dividend and the buyback? You mentioned the reinstatement of the dividend later than second quarter of 2022. What would allow you, is there an environment that would allow you to reinstate that earlier? Depending on the environment, is there a risk that it could slip further? And maybe the same kind of questions on On the billion dollars of cash return and the outlook for the buyback, is there kind of an underlying cash flow in 2022 that supports that expected buyback, and how could that swing either way?

Hey, Ryan. Morning. It's Rich. So with respect to the dividend, again, it will be reinstated no later than the second quarter of 2022, and we're optimistic, depending on the markets, to your point, that we can come back earlier than that. With respect to the buyback, absolutely. Look, we, as you can tell, expect to add a lot of cash flow in the next six to 12 months between renewables, Puget Sound, and then Sinclair. And at the same time, obviously, our capital expenditures will be falling dramatically in 2022 versus 2021. So free cash flow generation here is going to go up dramatically, and we intend to return that to the shareholder.

Great. Thanks, Rick.

Our next question comes from Theresa Chen from Barclays. Theresa, your line is now open.

Good morning. Thank you for taking my questions. Maybe if I can just follow up on the last question that Ryan asked about, you know, the macro environment underlies your assumptions to get to not just the target, you know, EBITDA and free cash flow, but also the capital allocation targets. You know, what has to happen in terms of broad-based benchmark cracks, differentials, you know, capture? What are your assumptions that underlie your expectation that you'll be able to achieve these targets?

Teresa, and it's Rich. They're not, I would not call them terribly aspirational. Our internal estimates are not very dissimilar from consensus. They're probably a touch lower. So really, we just need the macro environment not to get worse. And again, we expect to generate a large amount of free cash under that scenario. If we get better than that, it'll be even better. But really, we're not assuming some sort of dramatic recovery or anything exotic in order to get to these numbers.

Teresa, I think if you take the second quarter as an example, our business is in a very healthy state right now. Really, all aspects of it are working well. We're looking forward to renewable diesel, as you know, but the base business is solid, despite what has been a punch in the gut from COVID. We've recovered pretty well, and it doesn't take a big step forward in order to be able to meet these returns targets that we're laying out.

Got it. And just in terms of the two refineries to be acquired, in terms of the breakdown between WCS, Rocky Suite, and other crudes, can you provide a percentage range of each?

Yes. The Casper Refinery runs principally on Rocky Suite. and that's 30,000, 30,000 barrels a day. Sinclair, otherwise Rollins Refinery, is more in the neighborhood of 30,000 to 40,000 barrels a day of sweet and heavy, with the remainder being sweet treats.

Thank you very much.

Our next question comes from Paul Cheng from Scotia Bank. Paul, your line is now open.

Thank you. Hey, guys. Good morning. Just wondering, Rich, can you provide, you give a mid-cycle EBITDA expectation for refining, marketing and renewable. Can you tell us, maybe give some hints that how those mid-cycle numbers compare to the actual result in the first half of this year or 2019? Is there any comparison that we can use?

So, Paul, I think we've laid this out in some of our historic IR materials, similar assumptions. But really, we're looking at Gulf Coast cracks on a 3-2-1 basis of roughly $10 a barrel. You know, historic premiums to our product markets.

Well, the Gulf Coast doesn't work in here, right? Pardon, Paul? No, I say the Gulf Coast doesn't really matter in here. It really is more on the Rocky Mountains.

Right, so you're going to trade at premiums to the Gulf Coast, but we do believe that the Gulf Coast sets the market at the end of the day, the marginal barrel. Obviously, we have crude advantages across our fleet that we assume historic mid-cycle numbers on, and those product differentials that I mentioned, Paul, we assume those to be similar to history.

Does that help? How about on the marketing and the renewable?

So with respect to the marketing, Paul, this business looks very similar to what you see in publicly traded companies that are out there now that do wholesale. You typically see a few pennies a gallon of wholesale margin. There's some money to be made in credit cards and licensed branding as well. It's very stable over time. With respect to renewables, I think this gets to the broader question. Obviously, things are moving around dramatically, and Mike made the point about pre-treatment. What we see today really is that the economics are in your ability to process discounted feeds, not so much in your ability to take high-grade soybean oil and turn it into renewable diesel. We expect that that will move around over time. That's why we were consistent on having that kind of feedstock flexibility at the end of the day. Okay.

And a second question that can you share with us that how much is the RIN, the marketing business, generally?

So basically, Paul, Sinclair is long RINs. They're more or less balanced on the D6 basis and long D4 RINs via the renewable fuels business that they've got. So pro forma transaction.

Can you tell us how much is actually that they generate?

Well, I think probably a better answer here, Paul, is pro forma the transaction, highly frontier, or HF Sinclair, I should say, excuse me, will basically be balanced.

And that's including your own two renewables. your two renewable diesel plants, right, when you say you're balanced? Yes. And when you say balanced, is it you are balanced on the total rim or you are balanced individually on D6 and individually in D4 and D5?

We'll be balanced on our total rims, Paul.

And how about D6 specifically?

So directionally, we'll be short D6 and long D4 and in balance.

Paul Sankey We now have a question from Paul Sankey from Sankey Research. Paul, your line is now open.

Paul Sankey Morning all. Just if I could continue on the EBITDA question. So given that you're saying that a mid-cycle would be about a billion of refining EBITDA to HFC, Based on the report you just made and what you said about the $10 crack on the Gulf Coast, it feels like we're only about 20% below where we would be on your mid-cycle assumption. Can you just sort of run through some of the elements of that EBITDA and how much distance there is to travel, if you want, before we get to this $2.6 billion that you've talked about for the combined company? Thanks.

So, Paul, I think we flagged a billion dollars of refining EBITDA for legacy Holly Frontier, right? And this quarter we printed about $210 million. So to your point, we're just a little off that. I think directionally, if we just get a little more improvement in the jet fuel market, that probably bridges us home.

Yep. I was already thinking more about the St. Clair breakdown.

Well, it's going to be similar, Paul. I think at the end of the day, right, you add these together. These are all apples to apples assumptions across Puget Sound, Legacy, Holly Frontier, and Sinclair. Yeah, okay.

Beyond that, Paul, I think what you're seeing is... I was going to say, what you're seeing in the last couple of years in the Rockies is really ahead of mid-cycle.

um earnings and margins and so you know to the extent that continues that that puts wind in the sails great okay and then you know a tough one for you guys is that you've had some operational criticisms uh over the years um and you've had some issues with your renewable diesel project within as far as you've it's bit behind and behind time and over over budget What conviction can you give us that it's the right thing for you to be taking on a much bigger footprint in the way that you are and that you're going to be able to do the number one most important thing, which is run the assets well and efficiently? I know that's a tough question to answer, but I have to ask it.

Thanks. Paul, it's a tough question. This is Tim. Let me try to start with this and see if I was going to chime in, but we've been focused on the last year and a half really Europe and to really trying to build our operating capability grow it we've been implementing operating discipline programs. We have an operations excellence management system that we've implemented. We've got a molecule management process that we've laid out. We've been bringing in some additional resources to help shore up our existing capability, both on the turnaround side, on the process safety side, mechanical integrity, overall operations leadership. We spent the last few years trying to strengthen our internal capability to improve not just the refining operations, which I think you're starting to see some of the fruits of that labor here, even just in this last quarterly earnings update, but it's going to serve as the foundation for us to be able to build on with T to Sound and with the Sinclair assets. One thing I will tell you is we've got familiarity with operating in the Rockies. We understand the crude markets. We understand the product markets. We understand the operating environment for that. We have plenty of time, we believe, to plan and execute this integration. Keep in mind the Puget Sound transaction is scheduled and anticipated to close here in the fourth quarter, which will give us plenty of time to continue to plan and integrate the acquisition of Sinclair which we're anticipating to close in mid-2022. So we think we have time and we think we have the resources to be able to build and integrate this transaction.

Paul, this is Tom Curry. Sorry, go ahead. I was just going to say, this is Tom Curry in terms of renewables. Just a quick update of where we are since we last talked at the last earnings call. Nothing has really changed. We're still on track in terms of both cost and schedule. All the long lead items have been ordered, as have been the critical path items. Their schedule still looks good at this point in time. We're heavily into the construction phase at all three locations, that being the two RDU plants as well as the PTU in Artesia. Things are going well. No manpower shortages or anything else. And like I say, we are on track as last reported.

Paul, I would add that execution, as you highlight, is absolutely critical, and we've got it. With respect to renewable diesel, we took on a big project, particularly during a time when it's sometimes hard to get a pizza delivered. But we're nearing the end of it, and we're really excited about these projects, and we think we can bring them on from here according to the schedule and budget that Tom's laid out. So we feel like we're in a good spot there.

Yeah, and it feels like this morning's result and say, you know, things are operating well at the Holy Frontier level. Is that a statement you'd make? Is everything running the way you would want it right now? Absolutely. Okay, great. Thanks, Tim.

We now have a question from Phil Gresh from JP Morgan. Phil, your line is now open.

Yes, good morning. You were talking on the Sinclair side that the refining EBITDA you think is operating, I think you said, ahead of mid-cycle. I was wondering how you would characterize the performance in the renewable diesel business right now, given that it does not have a pretreatment unit currently, and then if you could kind of walk through some of your assumptions to get to the $150 million of EBITDA there that we could think about as we try to model this.

Hey, Phil. It's Rich. Good morning. So given they just completed an expansion of their plant, given that they do not have a pretreatment unit at the moment, it's been a little tough for the last six to 12 months. But again, they're doing the right thing here in investing in a pretreatment unit that we expect to be up and running before close. So I think that's essential to the assumptions that we've made here. Going forward, we're expecting D4 wins north of a dollar is what we've assumed. Blender's tax credit we now expect will probably be extended somewhat longer than 2022, but we do expect that to get phased out over time. And I continue to expect LCFS credits to be higher in the long run.

And do you have a rough feedstock mix for post-PTU?

There will be probably roughly 50-50, maybe a little higher on low-CI feed versus high-grade bean oil.

Okay. And so the $400 million of renewables EBITDA, are you saying that does or does not include some amount of funders' tax credits?

It does include some amount of lender's tax chart, yes.

Okay, okay. And then, Rich, just on, I'm just kind of running free cash flow per share numbers of standalone Holly versus the pro forma. It looks to be a little bit dilutive on free cash flow per share. So I guess I'm just curious how you think about You know, the valuation, obviously St. Clair is a different mix than Stenal and Holly, but just in general, how do you think about, you know, the valuation paid and, you know, if you'd agree with my comment.

So now, Phil, actually, look, we expect, frankly, across all metrics, earnings per share, cash flow per share, and free cash flow per share. That will be accretive in the first year, call it to the tune of mid-single digits, and that will increase dramatically over time as those synergies come in. So now we're expecting some substantial accretion across all the kind of conventional metrics you would look at.

Okay. All right. Thank you. Yeah.

Our next question comes from Manav Gupta from Credit Suisse. Manav, your line is now open.

Hey, Rich and Mike. So if we just look at the 2Q earnings, right, you are – out-earning your bigger competitors and more diversified competitors. And so, if you think about it only on PE basis, there's a massive dislocation in your stock price, right? I mean, your stock is 30, your bigger peers are 60 and 70. And so, things are actually working out very nicely for you. And from that perspective, perspective, you're about to take all this transformation, you know, Puget Sound, renewable diesel, and Sinclair. Again, if everything works out, your EBITDA could be $1.8 billion next year. But there is an execution risk here. There's a lot of things which you'll have to make sure go right. And I'm just trying to understand why push for so much change when you are actually doing so well on a standalone basis.

Yeah, it's a good conservative point, Manav. What I would say is that the good quarter doesn't comprise a good strategy. And looking at the business environment that we see and foresee, we believe that the downstream integration into branded wholesale, controlling more of the value chain and serving those customers on a branded basis really is going to help us out both with RFS compliance and with gross margin generation. We think that it's a smart move. We also see the renewable diesel business as an important addition as we try to expand in that and have the opportunity to optimize and gain synergies across the two sets of plants. Finally, adding Rocky Mountain's exposure to us, given our experience in that geography, is a smart and high-earning thing to do. I guess we could leave well enough alone, but we're trying to build this for the five and 10 years forward, not for the next two quarters.

My second question is, you did see some capex escalation in renewable diesel last quarter. And again, it's still the same, but I'm trying to understand, was there a design change made somewhere during the process that would allow you to use a lot more uh lower quality soybean oil versus the rdb and did that make that was that one of the reasons your capex actually went up because if that is one of the cases that should be pretty positive because the lower quality soybean oil is trading like 20 cents discounts to rdb so was that also a reason your capex actually went up on the renewable diesel side last quarter

And if you bring up an excellent point, it's Tom Curry. Yes, we did make some scope changes as we went along to accommodate in the low CI feedstocks, predominantly Kylo at the Cheyenne refinery, repurposed refinery, that is going to do a lot for us in terms of feedstock flexibility. And it also works well with our PTU at Artesia as well. So it reduces our dependence upon RBD or, you know, refined soybean oil. And we think it's going to play out well and give us a great amount of flexibility as we move forward that we'll be able to run a variety of feedstocks to get the maximum value out.

Congrats on the great quarter and look forward to the deal. Thank you. Thanks, Manav.

We now have the question from Spiro Dunes from Credit Suisse. Spiro, your line is now open.

Thank you. Morning, guys. First question just on the strategy for HEP. Can you talk a little bit more about some of the integration and synergy opportunities for these assets at the HEP level? I'm curious if that $70 million to $80 million even contemplates any synergies. And if you could, Rich, just maybe expand on why these assets provide more opportunities for growth versus some of your legacy assets there. Thanks.

Sure, Spiro. Good morning. Look, it's a very complementary set of assets, both in the sense of culture and the way we operate, being based around steady refinery customers, as well as in the sense of a cultural fit. So we're really excited to welcome some new colleagues here. I think to your point about growth, look, I think we're going to have a, achieve some real scale at a corporate level and in certain markets where we'll be able to, I think we'll find organic opportunities that we've not had historically, particularly on the crude gathering side. So we're really looking forward to be able to grow going forward here. To your question, it does assume a little bit of synergy. You know, a few million dollars a year, it's not going to be a huge number on the HEP side.

Got it. That's a couple of rich. Thanks. Uh, second question just around the capital allocation outlook, uh, once again, for ATP, uh, the reduction in that coverage ratio seems to imply pretty healthy kind of double digit distribution growth. I just want to make sure I didn't miss anything. I'm sort of reading that, right. And if you could just maybe talk about the mechanics of reaching that goal. And then, uh, I guess how much is any Puget sound asset drop downs are contemplated in that outlook guy, if at all.

Yup. So you are correct in where your math is getting you on a growth rate basis. I think we will probably phase into that. I don't think it will be step change. There is not any Puget Sound embedded in that. It's probably worth highlighting here on the Sinclair Transportation side, maintenance capital here is very low. It's consistent with what you see at HEP today in the $5 million-ish range. So that EBITDA is going to flow right through. the cash flow per share and distributable cash flow.

Perfect. That's all I had. Thanks, guys. Congrats.

Thanks, Darrell.

We now have a question from Doug Legates from Bank of America. Doug, your line is now open.

Good morning, guys. This is Kaleon for Doug. Hey, good morning, guys. Just a couple questions for me. So, firstly, I don't think anyone would argue that strategic logic of building scale in the Rockies but wondering if you guys see any FTC issues on the concentration of assets.

You know, we expect to have this transaction reviewed thoroughly by the FTC. We believe that it's a good transaction for our customers, marketers, employees, and the communities we serve, and we don't see it as reducing competition. So, you know, that's kind of where we are at this point.

Got it. Second question, just can you remind us on the breakdown of the synergies? And I'm wondering how conservative you're being given the concentration of the purchasing power and the operation overlap. It's very robust.

Sure. I'm going to give you a little more detail there, Kalei. So again, you said about $40 million on the gross margin side. By way of example, we see plenty of opportunity on the renewable side, sourcing lower cost feeds, using our scale in that space, as well as our ability to consolidate transportation, really, which is obviously a big deal in the renewable space. The operating expense side, again, we see some opportunities in renewables. There's also a tremendous opportunity here in procurement. Our procurement organization has delivered a lot of value to us in the last five years, and we'll be able to realize some real opportunities with Sinclair from that group. And, again, as mentioned, G&A, we're comfortable that we can obtain $20 million there. So these feel like very comfortable run rate synergies for us.

Got it. And last one, if I can just sneak it in. Are there any tax considerations from Sinclair? net operating losses for Outdoors and Eclair?

No.

Okay. Thank you.

Our next question comes from Michael Bloom from Wells Fargo. Michael, your line is now open.

Thank you. Thanks for taking my questions. Just two follow-ups on HEP. One, is there any growth or maintenance capex associated with the acquired assets from Sinclair? That was the first question.

So, Michael, I think there's going to be roughly $5 million a year of maintenance capital in these assets. There is the opportunity for growth capital, particularly with the Powder Flats joint venture, but that's going to be driven by rig count and well growth in that area.

Okay, great. And then just to clarify on the sequence of distribution growth and leverage, is the plan going to be to first get to three times leverage and then start pushing towards from 1.5 to 1.3 on the coverage? Or do you anticipate that those things will sort of happen simultaneously?

So I think these things will happen simultaneously, Michael. We want to work our way into this. Again, I don't expect a stair-step change here.

Great. Thank you very much.

Thank you.

We now have a question from Jeremy Tonnet from J.P. Morgan. Jeremy, please go ahead.

Hi. Good morning. Morning, Jeremy. Just wanted to follow up. Just wanted to follow up from the HEP perspective here with regards to accretion because the transaction terms on EB to EBITDA level looks fairly similar maybe to where HEP trades at. And so just wondering if you could dive in a little bit more on what goes into the accretion at the HEP level in this transaction and maybe timing of achieving that accretion.

Yeah, Jeremy, so directionally I think you're correct. So we'll be using marginally more leverage at the HEP side, which helps. And then consistent with what I mentioned earlier, we're talking about very low maintenance capital in these assets. So this will really flow through on a cash flow per share basis.

got it so it's really just leverage here is how we should think about it that and then again we're not going to need to add any gna so we'll get some operating leverage there got it i'll leave it there thank you our next question comes from jason gambleman from cowan jason please go ahead

Yeah, thanks for taking my questions. I first wanted to ask on HFC, just understanding the debt and buyback outlook for the next couple of years. Can you just provide what the debt to EBITDA target is once the acquisition closes, where you want to get that number to? And is the intention on the buyback to offset the shares issued over some period of time, maybe the next couple years or further out, just any color on that. And then just going back to the strategic rationale on the deal, you know, you mentioned you wanted to create a more durable business. Do you see the need to do anything else to get the business in a place that you wanted or following the Sinclair acquisition, do you now think HFC post-Sinclair is in a position to be durable over the next five to 10 years?

Jason, I'll answer the third question first, and then Rich will hit the financial metrics and the leverage, okay? Do we need to do anything else to get there? The short answer is no. We've obviously got a lot on our plate. We've emphasized execution as being critical, and we're really excited about what we have. This business model, as it comes together, is going to, to our mind, be a launchpad. But we're very satisfied, too. integrate it and run it and basically optimize it for the next period of time and then focus on cash returns.

Jason, on your financial questions, with respect to leveraged targets, I wouldn't say we have a target per se. We do expect the closing to be right around one and a half times consolidated net debt to EBITDA. And we do expect and then foresee this whittling that down going forward. clearly well within the range of an investment-grade balance sheet. With respect to your question of repurchases, yes, absolutely. We would expect to be in the market. We do expect that the Sinclair Oil shareholders will be sellers over time, and we look forward to being able to participate in the market when they're selling.

our next question comes from roger reed from wales fargo roger please go ahead yeah good morning i just uh wanted to catch up on a on a couple of items um one getting back to the question on the kind of mid cycle what your expectations are for the various crude diffs and predominantly i guess brent ti or lsdi and then wcs and then my other question is on the capex side you give i believe 590 million consolidated capex and is that just a maintenance level or what all is included in there any kind of a breakdown by segments of the companies we look at refining renewable and believes business

Hey, Roger. So on the crude diff assumptions that are embedded in there is consistent with what we've shown previously, a Brent TI diff of $3, $4 a barrel. Really, we expect no middling differential for the foreseeable future and a WCS differential with these kind of crude prices and the low to mid teens. With respect to CapEx, That is a maintenance capital number that you see, and again, it's a mid-cycle number, freely admitting that there is no actual mid-cycle year in capital spending. As you can imagine, the lion's share of that is in the refineries and is in turnarounds, so there will be volatility around that.

Okay, thanks for that, Rich. And then one other kind of modeling-type question is we look at the – renewable diesel, and your assumption is kind of a mid-cycle. You mentioned, well, I'm sorry, you mentioned, but it was mentioned on the call, possible extension of the BTC for a period of time. What sort of the, you know, you run the math. Are you assuming a 50 cents? Are you assuming it stays a dollar, 25 cents a gallon? Just curious what you're using for your

Tom Cray, what we used in our analysis is that we expected the BTC to continue on unchanged through 2022 and then ratchet down over the next five years at 75, 50, 25, and then zero. That's the way that we modeled it. in absence of any firm information given at this point in time. So that's what we used.

No, that's fine with me. I'm just curious what you were using. Thank you. Yeah.

We now have a follow-up question from Paul Cheng from Scotia Bank. Paul, your line is now open.

Thank you. Hey, guys, maybe I missed it. Did you say how long is the lockup?

So, Paul, the lockup is going to be worked through in phases over a 15-month period. Basically, the first quarter of the stock will be unlocked at closing, and then there'll be a quarter unlocked the six-month mark, the 12-month mark, and the 15-month mark.

Okay, so you have 25% every three months unlocked.

Every six months or so.

Okay. Every six months? So 25% are not every six months?

So at close, at six months, at 12 months, and then the last one's a little shorter, 15 months.

I see. Okay. Sorry. So six months, 12 months, and then 15 months. All right. On the... On page 15 on the capex, for the skincare asset of $175, I think, Rich, you mentioned that logistics is $5 million. Renewable can't be that high. Probably it's only maybe $20, $25 million. And marketing, since it's brand marketing, It's a wholesale, so it's probably not more than 5, 10 minutes. So it seems to suggest that the refining may be about 130 to 145 minutes, that kind of range. That seems really high. Is my math have done something wrong?

No, I think, Paul, the margin, the capital numbers in

in marketing are probably going to be a little higher than you're saying and renewables are probably a little higher than you're saying um but yes i think to be honest i think we've been pretty conservative with the capital on the refining side yeah because i mean that is a hundred and twenty thousand there today and twenty five thousand there today in total capacity so one would have thought the cap x there uh for maintenance should not be more than say 90 million or so so i'm a bit surprised that so you you think that that number could potentially be conservative yes yeah paul as you heard from tim we are laser focused on execution and asset reliability

And we want to ensure that we have sufficient capital in our modeling and in our planning to be able to deliver those results. So, yes, it's conservative, but for now it's intentional until we really get in and understand more about what we're going to want to do to help to achieve higher reliability across the system.

Yeah, that's totally fine. I just want to make sure that it's not something related to the configurations of those two facilities, and that's such that their maintenance capacity will be much higher on a daily bill of capacity compared to other assets in the U.S.

So that's a fair question, Paul. That's a fair question, and the answer is no. It's our own conservatism to ensure that we can deliver on our promises.

Yeah, and in fact, Paul, I would just – this is Tim. I would just chime in that Sinclair has just completed investing a billion dollars in capital in their two refineries over the last several years as a way to modernize and improve their infrastructure. So these are not –

that these are not undercapitalized facilities that we're taking on here and is there any um outstanding or pending uh environmental emission regulation kind of spending that they need to spend in those two facilities over the next five years or anything it's a normal thing

environmental regulations and our desire to exceed those continues to grow. And so I would say it's normal spending as we try to improve our environmental footprint and reduce emissions.

Okay. Very good. Thank you.

Thank you, Paul.

Our next question comes from Neil Mehta from Goldman Sachs. Neil, your line is now open.

Hi, good morning. This is Carly on for Neil. Thanks for taking the questions. Just a quick one kind of on the quarter. Base oil margins continue to be robust here and HFLSP results were strong relative to history in the quarter. So can you just talk about your views on the base oil margins in the back half and just what you're seeing around base oil supply demand in real time?

Sure. This is Bruce speaking. So we see the environment continuing the way it is through the balance of the year. Our forward forecast indicates that. And base oil supply in general on a global as well as domestic basis remains pretty tight, particularly in Group 3 and Group 1. 2 is a little more balanced but still favorable. So we would look for the same continuation of metrics that we've been seeing.

Great. That's helpful. Thank you. And then just to follow up around the capital returns point. So, you know, Holly's been known over the years for special dividends and a strong return of capital. So you mentioned the regular dividend reinstatement and the buybacks, but just curious if there would be any other means of capital returns that you would consider over time in addition.

No, Carly, those would really be the two we'll focus on. We look at the dividend as the stable source of capital return and treat the buyback as the variable. Obviously, we'll have a more stable business going forward, but we'll still have volatility in our cash flows.

Great. Thank you.

There are no further questions, so I'll now hand you back over to Craig for any closing remarks.

Thanks so much, Lauren, and thank you all for joining us. Obviously, we're really excited about this transaction. We think it's incredibly strategic and transformative for our company as we step into an integrated downstream business centered around the Dyno brand, which has been built through time to one of the most recognizable petroleum brands in the country. And important enough that we're willing to take its name. So this is big for us. The renewable diesel business that Sinclair has and has built is also going to add incredibly to what we have going on in that space. And finally, the... The earnings engine of petroleum refining and what those people do every day to supply their customers is going to fit well within our system. It's in crude and product markets that we understand. And we're really looking forward to it. And all of this really comes together to drive two things. One is an opportunity for our employees to have long and stable and productive careers. And the second is for our investors to enjoy high cash returns from a company that's intent on doing the right thing. So thank you so much for your support and your participation today, and we'll look forward to talking to you next quarter.

Thank you. This concludes today's conference call. Please disconnect your lines and have a wonderful