PBF Energy Inc.

Q2 2021 Earnings Conference Call

7/29/2021

spk14: Good day everyone and welcome to the PBF Energy Second Quarter 2021 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the management's prepared remarks. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.
spk10: Thank you, Laura. Good morning and welcome to today's call. With me today are Tom Nimley, our CEO, Matt Lucey, our President, Eric Young, our CFO, and several other members of our management team. A copy of today's earnings release, including supplemental information, is available on our website. Before getting started, I'd like to direct your attention to the safe harbor statement contained in today's press release. In summary, it outlines that statements contained in the press release and on this call which express the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we describe in our filings with the SEC. Consistent with our prior periods, we will discuss our results today, excluding special items. In today's press release, we described the non-cash special items included in our second quarter 2021 results. The cumulative impact of the special items increased net income by an after-tax benefit of approximately $200 million, or $1.65 per share. As noted in our press release, we'll use certain non-GAAP measures while describing PVF's operating performance and financial results. For reconciliations of non-GAAP measures to the appropriate GAAP figure, please refer to the supplemental tables provided in today's press release. I'll now turn the call over to Tom Nimley.
spk12: Tom Nimley Thanks, Colin. Good morning, everyone, and thank you for joining our call today. As we expected coming into this year, general market conditions are continuing to improve. Before providing comments on the market, I would like to address last week's decision by the Board of the Bay Area Air Quality Management District to implement stricter particulate emission standards related to fluid catalytic cracking units, or SCCs. The Board has set a numerical standard, and we have five years to meet it. Importantly, how we meet that standard is entirely up to us. They have not required us to install any specific technology, including a wet gas scrubber. As such, we will not have to incur the estimated $800 million that this project would conservatively have cost. What we are doing is progressing a project included in our capital plan for this year that will get us below a 0.02 emissions level, which is a long way towards the 0.01 level established by the recent rulemaking. After that project is complete, we will have time to test our emissions and identify possible changes that could potentially reduce emissions further. Last week's rulemaking was another step in an ongoing process. We anticipated the outcome. We expect that the rule or parts of the rule will likely face legal challenges in which the California Environmental Quality Act requires a mandatory mediation between all parties. We appreciate the support received from the building and trade unions, Western States Petroleum Association, and other business partners in our efforts to present alternatives that achieve the mutually desired goal of improving air quality while continuing to supply our products to one of the largest markets in our country. I want to reinforce the fact that we have many potential options and time to address the newly implemented standard. Five years, which as one analyst noted last week, is a lifetime in refining. Moving to the present, the refining market has improved somewhat as we expected over the course of 2021. The recovery continues. Inventories have fallen back within historical bands. Demand is improving. With gasoline and distillate at or above pre-pandemic levels, Jet demand has increased to 80 to 85 percent of pre-pandemic levels, up from 65 percent earlier in the year. Benchmark cracks have improved during the quarter, driven in part by rising gasoline demand, but the realized crack continues to be hindered by the high costs associated with RINs. We saw a softening of the gasoline market late in the quarter, which in part was driven by an increase in imports. More recently, we've seen an improvement in gasoline margins as European demand has improved and refinery issues in other regions have reduced transatlantic shipments. On the crude side, ongoing discussions and production limits by OPEC Plus have kept global crude prices elevated and the light heavy spreads narrow. There appear now to be an agreement in principle that will allow the expected OPEC Plus output increase to proceed through the rest of the year. and we believe this could help maintain overall prices and provide incentives for more production to come to market. With the incremental crude being predominantly heavier, higher sulfur crude, we expect to see some additional widening of the light heavy and sweet-sour spreads. Demand remains the key driver. Domestically, demand continues to gradually improve, and we see the next inflection point coming towards the end of the third quarter as the nation's students return to school, which will allow more parents to return to normal work routines. We expect, as this occurs going forward, we will also see increasing business travel, which should incrementally improve jet demand and margins. Internationally, the recovery has been less consistent, but we expect those regions to recover, which should set the stage for gradual but sustained growth in product demand globally. With that, I will now turn the call over to Matt.
spk09: Thanks, Tom. As Tom mentioned, market conditions are trending in the right direction. Our aggressive efforts to improve PBF's competitive position should help accelerate the company's recovery. In regards to the rulemaking in California, and as Tom mentioned, and I will say again, the big takeaway from the rulemaking is that we will not be required to install a wet gas scrubber that was infeasible from a land, cost, and water use perspective. As part of the Martinez acquisition, Shell agreed to pay for new reactors for the refinery's cat feed hydrotreater. These reactors are on schedule to be delivered towards the end of the third quarter, and we intend to install them during scheduled work in the fourth quarter. The new reactors will reduce the sulfur and other particulate matter in the feed to the FCC. We believe the improved feed will directionally improve product quality and lead to a reduction in particulate emissions from our FCC to below 0.02. The installation of the reactors, which will amount to less than $20 million, was included in our initial capital planning for 21. and represents zero incremental spend. The reduction in emissions will begin to be realized in the first quarter of 22. Once we've had the time to evaluate the results of this project on our FCC emissions, we've identified additional potential changes that could further reduce emissions. Importantly, we will have over four and a half years to continue to work with the refinery, and the AQMD to reach the new standard. In the second quarter, our refineries ran well at approximately 875,000 barrels a day of throughput. We expect to run similar volumes in the third quarter. We are now completing turnaround work at torrents. The bulk of the work occurred in July and should be complete over the next 10 days or so. This turnaround is included in our throughput and capital guidance. Earlier this year, PBF announced a potential renewable diesel project at our Chalmette refinery. Our project is intended to maximize the benefits of Chalmette's strategic location on the Gulf Coast, with its excellent access to water, rail, and truck logistics, as well as our synergistic California logistics footprint. We are progressing discussions with partners to develop the 20,000-barrel-a-day renewable diesel production facility, which would include a pretreatment unit. We've continued our detailed review of the project and expect that once we reach final investment decision, our project will be capable of coming on stream within 12 months at a significantly lower expected cost than similar announced projects. An important step in the process and in determining the economics of the project were the ongoing negotiations in Louisiana to secure state tax incentives to help bring this renewable fuels and economic development project to the region. We are pleased to announce that earlier this week we received approval for these incentives. We work closely with the state and our neighbors in the St. Bernard's Parish and wish to thank all those involved in advancing the project. With this necessary step accomplished, we look to finalize partner discussions and move to a final investment decision in the coming months. In regard to RINs, I've said many times over the last 10 years, the program is broken. You can say, what does that mean? The program is not administered fairly and there are winners and losers on a massive scale. Furthermore, as currently administered, high RIN prices do not increase ethanol consumption. Simply put, the facts show that high RIN prices do not get the ethanol industry past the blend wall. Therefore, the program operates with an insurmountable annual shortfall. Now we've come to the point where if the program does not get fixed, it actually breaks. We are now more than halfway through the year and still do not have an RVO. If the RVO percentages are held constant in 21, as they were in 20, the RIN bank, which has been depleting, will actually run dry sometime, potentially as soon as the end of this year. RINs are effectively permits to sell gasoline. If not enough RINs are available to meet the mandate, refiners will be forced to sell domestic gasoline proportional to the RIN supply. If at that point the program still goes unaddressed, RIN prices will skyrocket beyond the ludicrous levels they are today. Consumers will be forced to ration gasoline consumption and pay even more exorbitant prices for the fuel that is available. Refiners will be forced to export gasoline because if there are insufficient RINs, the gasoline cannot be sold domestically. And obviously, imports will be limited because there will not be enough RINs available. The EIA noted there was 800 million deficit in RIN generation in 2020 compared to what was needed to meet the RVO mandate. This means there was an equivalent drawdown in the RIN bank which, according to EPA data, likely puts the bank at around 2.6 billion RINs as of the beginning of this year. If we look at current projections for demand and assume an RVO flat to 2020, 2021's RIN requirement is over 2 billion RINs more than what we're on track to generate this year, according to EPA data. The current pace of RIN generation compared to the RVO will result in a $2.3 billion drawdown in the RIN bank in 2021, leaving only 300 million RINs remaining at the end of the year. At that rate, if both fuel demand and the RVO remain flat for next year, the market could quickly run out of RINs sometime in the first quarter of 2022 or perhaps sooner. The scenario above yet again highlights the fact that the RFS is dysfunctional. While I am hopeful, I am hopeful that we will have action by the current administration that will enable us to have a workable program in the very near future, I am virtually certain the issues will need to be addressed before 2023, which is the outside compliance date for 2021 RINs if you choose to exercise a deferral for the 21 program year. The EPA, Congress, and the administration have created uncertainty in the market with continued delays in setting the 2021 RVO and risk economic calamity and consumer outrage if they let the above scenario unfold. At this point, Given recent news, we know the administration is aware of the situation and believe they will take action to avoid the crisis.
spk11: Now I'll turn it over to Eric. Thanks, Matt. Today, PBF reported an adjusted loss of $1.26 per share in the second quarter and adjusted EBITDA of $2.1 million. Important to note, included in the adjusted EBITDA figure is approximately $60 million of net non-cash mark-to-market expense related to environmental credits. Our results include approximately $298 million of rent expense during the second quarter. Consistent with our prior disclosure, this represents a full accrual of our expected RVO for the period plus the mark-to-market adjustment for our carrying value of credits. Consolidated capex for the quarter was approximately $79 million, which includes $77 million for refining and corporate capex and $2 million for PBF logistics. For the first half of 2021, capital expenditures totaled approximately $140 million. Consistent with prior guidance, we expect second half 2021 capital expenditures to be approximately $250 to $300 million. Our financial results continue to improve as the pandemic recovery progresses. We believe the second quarter was an inflection point as we generated positive adjusted operating margin and we continue to believe the combination of an improving market backdrop and a more streamlined cost structure at PBF should continue to generate incremental positive cash flow. Our liquidity position remains consistent with more than $2.6 billion of total liquidity, including approximately $1.4 billion of cash at the end of the second quarter. We continue to prudently manage our balance sheet and financial resources to provide flexibility for the near term. Our full financial statements were released this morning, and I would like to take a moment to help navigate one item in particular. In looking at our balance sheet, included in our accrued expense footnote, PBF reported accrued renewable energy credit and emissions obligations of approximately $1.1 billion. This figure includes roughly $400 million related to our current and future California environmental credit obligations, and roughly $700 million related to RENs. Related to our California environmental credit obligations, we expect approximately 250 million of working capital outflows during the fourth quarter should satisfy more than 290 million of the $400 million accrual. Important to note, this payment represents the final obligation in a three-year compliance scheme. The 700 million RIN-related accrual consolidates our 2020 and 2021 compliance years. As we have previously mentioned, we currently expect to satisfy in full our 2020 obligation by the compliance deadline in January of 2022. In order to achieve this target, we expect to use approximately $200 million in net cash through the remainder of the year. In addition, our RIN accrual includes an incremental $100 million in fixed price commitments that we expect to cash settle throughout the remainder of the year. Having said that, the RIN market is dynamic, and depending on how the market moves, there may be opportunities to take advantage of market dislocations to improve our position. Important to note, the 2021 proposed RVO has yet to be published, and this is a key factor in determining our overall strategy. As currently available under the program, We can defer some or all of our 2021 obligation to March of 2023. Operator, we've completed our opening remarks and we'd be pleased to take any questions.
spk14: In a moment, we will open the call for questions. The company requests that all callers limit each turn to one question and one follow-up. You may rejoin the queue with additional questions. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation film will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Roger Reed with Wells Fargo. You may proceed with your question.
spk12: Yeah, thank you. Good morning. Good morning, Roger.
spk05: Just to come back, I think first off on the macro, Eric, you made the comment about, you know, it seems like you hit an inflection point in Q2. And then you talked, Tom, earlier about crude diffs probably opening up with OPEC plus putting more oil on the market. Third quarter started a little weak, but has really improved in the last couple weeks. Do you see something that is fundamentally better As we're progressing, or would you attribute this to the typical volatility we see in margins? And I recognize there's a whole bunch of things that affect what's going on on a daily basis, but I was just curious if things look a little bit better as you're paying attention to inventories, as you're paying attention to imports, and then the guidance you put out in terms of volumes for Q3.
spk12: Yeah, Roger, there's a lot there, but you're spot on. We do think it's gradual. You know, I wish it was a little bit faster, but there's clearly improvements in the market from a variety of reasons. We're basically below historical averages on all major clean products, a little bit higher on jet, but not much within the five-year band. Certainly, they're on gasoline and distillate. The distillate is below the five-year average. When we look at the cracks, they have been improving. We believe that's associated clearly with demand recovering. And as I said, distillate has been holding up all year. And in fact, even last year, it held up stronger than anything else, as you're well aware. And in fact, is above pre-pandemic levels for this time in 2019. Gasoline is just about at that level. And demand continues to improve. And that's the key. To be honest, that is absolutely a key in that if jet does not improve, that will keep the ability for the refiners to run more limited because of the jet limitations. That being said, the industry is running at 91% utilization. So we have this demand getting back to levels of 2019, and we have over a million barrels a day less capacity than we had in that period of time. And that's why utilization is at 91%. So demand looks like it's recovering. Certainly the inventories are in control. If you look at the light heavy spreads, sweet-sour spreads, compare them to the beginning of the year, most of the heavier, higher sulfur crudes, Maia, Arab Medium, Kirkuk, all of the crudes that have higher sulfur have moved out about $2, a little more than $2 from the beginning of 2021 to now. And as I said, When you start bringing on 400,000 barrels a day more crude each month, it's all going to be incrementally, basically, medium, heavy, higher sulfur crude, which should work to the advantage of high-complexity refiners like PBF.
spk05: Okay, thanks for that. I know this is not something that gets answered in any one question, but as you think about the RFS and the RENS program, there's what you want and there's what might be achievable from a political standpoint. And thinking about what has happened previously with the Obama administration, they did at times tweak the RVO, the Trump administration more of the SREs, which seems a little tougher now. solution here politically, given some recent legal issues and pushback from the RFA and all. But I was just curious, what do you... I kind of get it. If you get rid of the program, you're happy, but that's not happening. So what is it you think would be reasonable within the political framework maybe to see the EPA do between now and year end? Is it as simple as simply resetting an RVO for 21 or is the deficit that you highlighted for the RINS bank potentially so large that it has to be a step out kind of decision, not a tweak but a rework?
spk09: Roger, I would say a couple of things. One, in regards to a solution, there are many solutions and there are many easy solutions. But the first thing they need to do is make sure that the scarcity of RINs doesn't exist. So the simplest solution, and one that has been talked a lot about, is simply setting the RVO at a level where RINs do not become so scarce. And that's something that they could do with the snap of a finger. There's other opportunities they can do to rework the program. Indeed, we're sort of engaged in all fronts with our partners with the Represented workforce. I think you alluded to it. There's no question about the Trump administration completely failed this program they They took away SREs, but we're reallocating the volume. So it was sort of a double damning event They they granted e15 Year-round waiver, which was just overturned by the courts. And so I think the ethanol industry is is scratching their heads saying hey How do we come to a workable solution now that the Trump administration is gone? So I think there are other aspects of the program they can change, but the most simple one is setting an RVO that works for all the stakeholders. And I think they understand that. And we just need to get through the political process on that.
spk05: Thank you.
spk14: Our next question comes from the line of Phil Gresh with JPMorgan Chase. You may proceed with your question.
spk08: Hey, good morning. Eric, thank you for all the color around the accrued expenses piece. Just a quick follow-up or two on that. One is it looks like it's $550 million you're talking about in the second half of the year, and that number sounds consistent with the last quarter call, I believe. So I guess... Should I just infer that in the second quarter, I think there was an initial plan to maybe pay some of that in the second quarter. Was it just pushed to the second half? And then related to that, I guess what you're implying is that about $500 million of the RINs is for 2021. I just wanted to confirm that number.
spk11: So two quick responses on that. I think folks should assume – If we think about we had an overall RIN expense of almost $300 million during the quarter, we did ultimately spend a little north of $150 million on RINs throughout the course of the second quarter. At the same time, I think we've been fairly vocal. We've been active in the RIN market. And so ultimately, there are incremental purchases that are made to cover certain forms of compliance. And on a go-forward basis, I think the key message is We today, included in the 700 million, there's about 400 that ultimately is floating slash non-fixed price commitments, right? So that's a mark-to-market adjustment. It's gonna fluctuate. If rents get cut in half, that 400 goes down by 50%. The $300 million is what's remaining on the books, fixed price commitments, 200 of which we've allocated to our 2020 compliance. That is our first priority at this point, is to ultimately show up at the end of January 2022 with our full RVO turned into the EPA. The remaining capital that we know we have earmarked through the remainder of the year involves the $250 million of AB 32 related compliance credits that we have a repurchase obligation that will ultimately hit in the fourth quarter.
spk08: Okay, got it. And I guess, could you give us an update, Eric, on how you think about operating cash levels? I think in the past you've given a $500 million number. I just wanted to see if that's something that would still hold in this current oil price environment.
spk11: I think anywhere, you know, again, price of crude oil will be a key determinant in what we feel comfortable carrying from a cash perspective. I think today, absent anything that we're dealing with in terms of coming out of the recovery following the pandemic, yes, I think 500 million is a more than reasonable number. And quite frankly, in a similar historical period, we've probably operated with between 250 and 500 of operating cash. So I think that's a reasonable number, though, given given the current market environment that we have for crude price in and around kind of a $70, $75 barrel number.
spk08: Okay, got it. That's very helpful. One last one. This will be for Matt. I think last quarter you were hoping perhaps to have a bit more color on renewable diesel on the progress of the project, I think, by this point. I guess you got the approval this week for the incentives, so how much of that do you think was I guess a factor in the next steps of this process and the willingness to have partners step in versus, say, other things like feedstock or other issues you're still trying to figure out?
spk09: It's a big project that has a lot of work streams that are simultaneous. Obviously, working with the state of Louisiana and bringing economic development potentially to that region, we are working that. working all aspects of it, not only the engineering coming to final cost, working with a potential partner and doing the diligence around the potential partner as well as them doing the diligence around us, in addition to all the engineering work that you have to do on the front end to make sure that your project is as viable as you think. We continue working on all fronts. Quite honestly, I would characterize it as sort of being right on schedule where we expect it to be. There's no big delays or anything. We're going to have to assess the market and decide to go forward, and that should be done in the very near future.
spk08: Okay. Thank you.
spk14: Our next question comes from the line of Teresa Chen with Barclays. You may proceed with your question.
spk00: Morning. Tom, I'm curious to hear your view on what's happening in the East Coast currently. At this point, summer driving season is in full force and facilities in that area have rationalized capacity, including capacity at one of your own plants. Though the quarter was noisy due to Colonial being shut down for six days and imports and such, Looking past all of that, can you talk about what is happening on a capture front or your expectations going forward on a normalized basis since there has been capacity rationalized and demand has rebounded and yet we are in the midst of working through the volatility of imports from Europe and elsewhere. And that seems to have subsided at this point with the maintenance issues going on there. But just looking forward, what are your expectations for the East Coast?
spk12: I think you're spot on in that there's been a lot of choppiness, particularly on the East Coast. And that was once you get past the fact that certainly a lot more mobility in the East Coast as there is in the country. We're seeing that a lot more cars on the road. People are returning to work and And we do expect, as we said, that even after we get past Labor Day and the traditional slowdown in the driving season might be countered by the fact that there will likely be more school buses on the road and more people coming back to work because their children have returned, hopefully, to a more normal life. The big thing on the East Coast, and Pad 1 has clearly been of the fact that there's been such a huge between Northwest Europe and the Med and North America, and particularly the East Coast. Let's see, two weeks ago we had imports of 1.4 million barrels a day, significantly higher than we had in 2019. So I think one of the things that we're really looking for and hopeful on is in fact that Europe gets control of the pandemic or makes strides in, they seem to be doing in that area, and their business environment improves, and that is clearly happening. Cracks have moved up in the meds in Northwest Europe by several dollars a barrel. They're not where they need to be, but certainly the imports, it will go down. And last week, yesterday's numbers were still elevated, but on a go-forward basis, it appears as though they will be dropping off. That in combination with what we said about continuing increasing in demand, we expect the cracks to continue to improve. I will say that we are pleased with how the East Coast reconfiguration is done specifically in our environment. It does appear to be working as we intended. We effectively took the strengths of two refineries and kept them and eliminated some of the weaknesses and particularly in Paulsboro on the fuel side of the business. So we hopefully will see continued improvement in Pad 1 and on the East Coast.
spk00: Thank you. That's a great color. And then maybe turning to the West Coast, in light of the commentary that you gave on the Bay Area Air Quality Management District's new standard, and the projects and developments under contemplation to potentially meet that. And it seems like that in itself is a moving target given the arbitration process oncoming. So just curious, you know, in addition to the reactors that should decrease the particulate emissions below the 0.02 level, what other projects, you know, are you looking at that can further reduce that?
spk12: Now, let me just back up for a great question, talk about the project itself that we are implementing. As Matt said, that was a project that was basically contemplated and negotiated as part of the acquisition itself. And what we're doing is Shell has purchased these reactors, and these reactors are going to operate at a higher operational severity than the current reactor, so they'll be able to run at a higher pressure, higher temperature. And the reason we wanted to do this project initially and importantly is that by increasing the pressure in the reactors and the temperatures in the reactors, it increases the amount of sulfur, nitrogen, aromatics, and metals that you take out of the feed to the cat cracker, which results in a higher yield pattern and a higher volume expansion across the FCC. It improves the quality of the cat feed. As a result, it also is the sulfur, nitrogen, metals contribute to particulate matter. So, by taking it out in a cat feed hydrotreater, you reduce the particulate matter that is being emitted from the cat cracker, and that's how we can get down below 0.02. There are myriad ways of trying to make additional changes, including feedstock changes, using additives to try to see if you can inject additives to reduce the particulate matter further. operational changes, many things that we have already been contemplating, but we want to see what we can get and prove that we can get at least below .02, but we think we're going to be able to do better than that with this project, and then that will allow us to take the time, work with the agency. This is going to be mediated, and I remain confident that we're going to get an acceptable outcome on this. Thank you.
spk14: Our next question comes from the line of Doug Legate with Bank of America. You may proceed with your question.
spk03: Hey, guys. Tom, you gave a fairly thorough view as to how you're going to respond to this issue on the West Coast, but I just wonder if you could kind of spell it out for us. You've got a reasonable amount of near-term flexibility to get below 0.02. What happens... If the action as stated is fully enforced, what does that mean for you guys then in terms of potential additional spend?
spk12: Well, as I said, we actually think there's not going to be a huge amount or a significant material amount of additional spend. This project will get us, we say it's going to be below 0.02. We think it's going to be better than that. The agency itself has modeled this reactor improvement And it kind of agrees with that. But we have to demonstrate that. So we've got to get the project online and see what our new baseline is. If it is where we think, we think that we're going to get very either there, maybe not there, but very close to there with the operational changes and maybe use of additives, as I said. We're not going to be putting in a very large project. That's clear. But we have to first see what we get from this project. and in the negotiation process or the mediation process, which is almost inevitable because some people are going to, maybe even us, would litigate this. We have to first see what we can get from the project. And I don't think we're going to wind up being in a bad position on this.
spk11: Doug, it's important to note, we're replacing 50-year-old equipment with these new reactors. And to Tom's point, there's a lot of computer modeling that's going on today. But until the full installation and implementation is concluded, we've got a lot of different knobs that we can turn. Folks need to understand these are very complex machines that we're operating out on the West Coast. And again, we feel confident that we're going to be making some progress, but let's get through the first part of 2022 when, again, we have a real live baseline and then can start changing different things and testing and going through the process that really needs to be concluded.
spk03: Well, fellas, my follow-up is also related to this because obviously one of your large competitors out there is talking about they don't maybe have as good a solution as you guys might have, and they're talking about an awful billion dollars of potential. capital i'm just wondering if you could offer any thoughts as to how you see you know not so much how chevron situation plays out but how you see the risk or upside to balances product balances um in that market if they don't get their situation resolved i'll leave it there yeah uh we don't know what chevron is going to do uh right now the uh
spk12: The supply-demand situation, the balances, as you refer to them, in California looks, for the immediate next several years, reasonably good. And that's principally because we have Martinez, the former Avon refinery, that's already been idled. We have Rodeo at Santa Maria for P-66 that's in transition. And, frankly, he's already shut down one of the hydrocrackers in Rodeo. and turned it into a renewable project. So there's been a fair amount of capacity that's been taken offline. We see the California market being constructive once, and demand has come back. It really has come back. The last week, yesterday's numbers were strong. So we see the market being constructive. Now, if obviously there was some additional steps taken, either because somebody decided to take equipment offline, or one of the ways you can effectively reduce particulate emissions is to reduce rates. So if that became the case, you would obviously have some more capacity or throughput be reduced, and that would be further constructive to the marketplace.
spk03: Appreciate you offering those perspectives, Tom. Thanks, Charles.
spk14: Our next question comes from the line of Paul Chang with Scotiabank. You may proceed with your question.
spk04: Hey, guys. Good morning. Good morning, Paul. Tom and Matt, not that it will happen, hopefully not, but if area at top is similar standard as Bay Area here, if torrents have a similar elegant solution as what you see in Matinsa, or that wet gas scrub pipe is the only real solution for torrents?
spk12: That's not even been put on the table. Obviously, we just, Exxon, replace the electrostatic precipitators after the explosion. And we're in compliance. There are no issues. This has not been contemplated in the South Coast. The Bay Area has been working on it. We've been working for how long with this in the Bay Area?
spk03: Since we took over.
spk12: Since we took over. So that's been a work in progress. The same situation doesn't exist down there with the new precipitator. We're in full compliance and there's no discussions in this regard at this time.
spk04: Okay. And just curious that, I mean, this year your capex is about $400 to $450. How long then you can spend just at this level, let's say over the next several years, if the market condition did not move in the right direction as we hope? Or can you go even lower than for a couple of years, or that this is really the bad minimum?
spk12: We're going to respond to the market conditions in our spend. There's no doubt about that. But there will come time that some of the units talk to you. And at some point, you can defer turnarounds, but you might have to either take a squat. And these are things we're looking at. What do I mean by a squat? Instead of doing a 45-day turnaround, you might have a piece of equipment that is saying they need some help. You shut that piece of equipment, fix that down, restart the unit, and then run it a little bit longer. But to your question, we've had a low spend. We're continuing to have a low spend. We're continuing to do everything we can to reduce capex with some of the best practices we put in place. But this equipment ultimately is going to be needed to capex. First and foremost, we have to run a safe, reliable, environmentally responsible operation, so we will have to spend to maintain the units in a correct operable condition. So we would expect to see some increase in capex go forward.
spk04: Yeah, and Tom, I think before the pandemic, at one point, what considered as sustaining or maintenance capex for you guys is about 600, I think, to 650. Is that still a reasonable number in a normal market condition?
spk12: Actually, Harmon, what would you say that sustaining capex is?
spk05: just plain sustaining, probably close to $500 million.
spk12: So you heard that falls up. Sustaining is about $500 million. And then, of course, you've got some, you know, we might be spending some money on return projects and things of that nature. But that's going to be a function of what the market is.
spk04: And talking about that, I know you're still, you haven't mentioned the project, but renewable diesel plan that you talked about, Any preliminary CAPEX that you can share?
spk12: I'm sorry, Paul.
spk09: CAPEX in regards to the project, we have not published or spoken about it just because it's being actively worked. What we can say and what we have said is the project from a capital perspective and quite honestly from an OPEX perspective appears to be a top quartile project. So when you compare it to the other projects that have been announced, the project looks very, very good. We benefit because we had an idle hydrocracker, quite frankly, that was preserved in a professional manner. And so that gives us a tremendous leg up. And then on the operating costs side with the project, we directly benefit or we would directly benefit from the fact that you have synergies with the refinery. So all the ancillary sort of services you would need to do if you are a standalone business, you get the benefit of reduced OPEX being connected to the Shell Mine Refinery.
spk04: Two final questions for me, for Eric. Eric, I don't know if you can give us some idea, sense, that how's the current debt market? What's the opportunity if you need to raise additional debt in the near term? Is it doable? And secondly, I think in the first quarter, you were hoping by now that you will be maybe turning the page and will become positive free cash flow. So just curious that, I mean, how that look and whether you guys, from a cash flow standpoint in July, whether you break even in the cash flow. Thank you.
spk11: So in reverse order, I think we're a bit disappointed with the second quarter because we didn't get to the level in the June timeframe that we were really shooting for. Unfortunately, the market didn't deliver the economics that we wanted, and the continued pressure from RINs did not allow us to generate enough free cash flow from operations to cover essentially our capex and interest. However, it is important to note You know, we have seen a relatively steady recovery overall since the first quarter. So if we go back over the course of the past 12 months, you know, the refining industry, obviously, everybody's lost a lot of money. And so the first step for us was getting the positive operating contribution or operating margin. We feel very confident we've gotten there. And now the next step will be, what is the incremental? operating margin that we ultimately need to generate and if we think about overall costs right we've got roughly 20 25 million dollars a month in terms of interest if we think about a circa 300 million dollar a year interest burden and for our guidance that we've provided for the second half of the year you know we're going to have 45 to 50 million dollars a month in overall capex The actual cash itself is relatively lumpy simply because we do have fixed income payments that come not every month. And the CapEx is also not rateable. But if we think about that over kind of the next six months, you know, I think, again, what Tom pointed out on the front end from a macro standpoint is what we're seeing today. One of the things that needs to be settled near term is what is the near term 2021 RVO so we can put this RIN issue behind the entire industry and move forward that's going to be a critical point in understanding exactly where this market's going to go the macro is the macro for us and so i think we continue to operate in the bounds where we feel comfortable our capex numbers are increased for the second half of this year that is in anticipation of continued economic recovery coming out of the pandemic i think on your debt question uh to be completely honest with you we have zero plans to go into any type of debt market and have not spent a lot of time talking to investment bankers or investors around if we had to raise debt, what would the price be? I think we pay attention, as we've said before, to where our fixed income securities trade. Today, we have more than ample liquidity. It's going to fluctuate as commodity prices fluctuate. But overall, our key focus internally is maintaining safe, reliable operations. to be able to get to the point where we're covering all of our fixed costs across the board. Clearly the cash expectations that we laid out, we have exceeded those through the end of June. A lot of that, however, is driven by working capital. I think we've tried to be very transparent in terms of how that working capital is ultimately going to flow through the second half of this year so that we remain in compliance with our AB 32 and RIN programs for calendar years 2020. Thank you.
spk14: Our next question comes from the line of Neil Mehta with Goldman Sachs. You may proceed with your question.
spk02: Yeah, thanks so much, Eric. I just want to build on that. Obviously, the credit markets are what the credit markets are, but the unsecured has been under a lot of pressure. And as if to say that there are liquidity issues at the business, but one of the things that was, I think, incremental in today's release is that you're up to $2.6 billion in liquidity. So can you just put a bow on a lot of the comments that you made over the last 50 minutes of why you feel comfortable about the liquidity position that the company is in? and summarize that for us as you look out over the next year.
spk11: I think the key piece being we know what our dedicated uses of cash are from a working capital standpoint through the remainder of the year. We've provided some CapEx guidance for everyone. We know what our interest burden is and ultimately we believe that this industry is going to continue to recover and margins will be there for us to be profitable. If they're not, then ultimately there are other steps that the industry overall is going to have to take. And so, again, just taking a very, very high-level view, it is hard to imagine that the refining industry over the course of multiple years will consistently lose money. That has never been the case historically, and every time there has been a recession, there has been a recovery coming out of it. The pandemic was a recession on steroids. And so ultimately, a lot of things will need to be addressed over the next 12 months. But directionally, what we are seeing in terms of macro recovery, everything is trending in the right direction.
spk02: Thanks, Eric. And the follow-up here, this one might be for Tom, but it just strikes us that the industry in the second quarter was running at an elevated utilization. Demand has come back very nicely ex-jet. But margins until recently have not followed. Do you think that industry discipline in the refining space is still intact? And ultimately, will the industry let demand run a little ahead of utilization as we go into the shoulder to enable the margins to perform a little better?
spk12: Yeah, I think certainly that's the key, right? The industry did a spectacular job during the pandemic in actually rationalizing capacity and not letting the inventory situation degrade even further because of the destruction in demand. I think there was a feeling that when we got down to very low case rates and hospitalization rates and mortality rates that Perhaps this is indeed, and we were opening up the country, okay, this is it. We're getting on the freeway, and let's see what happens. But I think two things. One is, in fact, variants. You've got to watch the variants. Obviously, we're going through spiking cases now. Hopefully, the fact that a high percentage of the population has been vaccinated won't result in a huge amount of step change in hospitalizations, et cetera. But We have to watch it very closely. And I think the industry will watch it very closely. And in fact, until we get jet demand completely or get close to full recovery, there's a governor on this. As I said, you cannot run higher than we're running. I think the 91% is about it from a jet limitation. And we'll just watch the inventories. And if the inventories start building, I've said a thousand times over the last many, many, many years, Running to put product in the tank and hold it is a fool's errand. So we would have to cut back and reduce our production to make sure that we don't let the inventories get away from us, because that would result in, obviously, a decrease in the cracks. Thanks, Tom.
spk14: Our next question comes from the line of Paul Sankey with Sankey Research. You may proceed with your question.
spk07: Good morning, everyone. A very specific question, Tom, while I've got you. There's been some reports that there's shortages of jet fuel around the country. I didn't really understand it, given where jet fuel inventory is. I wondered if you had a perspective on that. A follow-up would be on the way crude inventory is acting. It's just interesting that Cushing is coming down the way it is. And I was wondering, as regards to the very, very low Saudi imports, whether that was purely a function of price differentials or whether there's actually a limitation on availability of Saudi crude and any other comments on heavy is always interesting from heavy light differentials is always interesting from you guys. Thanks.
spk12: Okay. I'm going to take the first part and maybe a little bit of the second part. And I think we have Tom O'Connor, our head of commercials on the phone. I'll ask him to weigh in and give some thoughts on the crude situation. It's interesting that what's going on recently in jet, as everybody is aware, a lot of things have happened that have caught industries by surprise in the supply chain. So even the airline industry, it appears as though the number of people that are wanting to fly is being restrained by the fact that the airlines don't have enough people to put them in the air. So they've got to get more pilots back. They've kind of held up on that. Similarly, reports on the jet shortages, regional jet shortages, are in some ways supposedly due to a lack of drivers that are getting jet fuel from wherever they're lifting it on the rack and getting it to the airport. So there's a supply constraint. And the government came out this morning and said they were going to intercede and try to see what they can be done to help that. And that's being done at the same time recently We've had these fires on the West Coast and parts of the country, and there's been a rather significant increase in cargo planes that have been flying around trying to deal with that issue. So you've had an increase in the demand associated with that event. At the same time, it appears as though there's a supply chain restriction that is impacting the ability to get the jet fuel from, say, a refinery to a terminal, but ultimately to an airport. So I think that's what's going on. On the desk and the crew situation, I've made my comments. Tom, are you on the line?
spk01: Yes, I am. Paul, in regards to that, throughout the second quarter, as we looked at four balances, basically, in the Cushing market, ultimately we had to get to a price where it was basically incentivizing crude to stay domestically. And we've continued to see that in terms of, you know, you've got the narrow differentials taking place in terms of where the Houston market is because effectively the market got so strong domestically that it basically shut the ARBs to move to different areas. And effectively now we're starting to see that softening. while term structure is still quite strong, it is starting to weaken and is balancing in terms of the ARBs are starting to soften a touch. In fact, the market's gotten potentially close to where we were talking about or the industry would be talking about tank bottoms. And it appears that that initial concerns may be alleviated as we basically have approached peak runs and then we'll be heading into the seasonal decline in terms of also increased turnaround activity in the fourth quarter. So, In terms of overall crude avails, I mean, we're starting to certainly see more barrels available sort of across the fleet between different areas, particularly in the fuel oil market, which has moved from very stubborn single-digit differentials in the first half of the year to starting to expand a little bit.
spk07: And based on everything you've just said, I assume that Saudi Middle Eastern oil is basically priced out of the market.
spk01: That continues to be the themes. I mean, I think what we'll start to see, I mean, also dating back on that, right, is that, you know, we've had obviously a lot of issues to sort out through the month of July, in particular as, you know, the UAE issues regarding around their baselines have been sorted. So I think we'll get better clarity of that as we start to move forward and start to see where the OSPs and volumetrics start to proceed.
spk07: Brilliant. Thanks. And if I could, sorry, but ask a follow-up maybe for Mr. Lucy. Is there some, can you highlight any catalyst moments going forward or timeframe going forward for when we sort out this stupid RIN thing? Is there something that you're looking for, some next series of data points perhaps, or are we just going to continue drifting, you know, in a vague leave it to Washington kind of mode? Thanks.
spk09: I actually think we're in a window, Paul. There was some paralysis because of the Supreme Court. That's now passed us by, and obviously Holly prevailed on that. But as I said before, that sort of becomes a moot point unto itself because it still leaves SREs at the discretion of the administration. But you have a window now where, first of all, they're required to put out an RBO, and And Secretary Regan has been around the country talking about they feel the need to be transparent. And unlike the previous administration put out an RVO on a timely basis, they haven't lived up to that promise yet. But statutorily, they're required to do that. And I expect, you know, we always dance around with paralysis with the politicians. But I will tell you, we've had excellent partnership with the representative workforce that, you know, we work with every day. And they are speaking as loudly as they can to the administration because they understand the threat to their livelihoods and what it means to them. And so, you know, next year you get into election year and you can create a whole new list of reasons why things get frozen. But I actually think we have a window And as I said in my comments, I'm hopeful that, you know, in the near future, we're going to have more clarity. And in the worst-case scenario, you know, if it all plays out, as I described, I was sitting with the governor of a reasonably sized state in the not-too-distant past, and I sort of laid this out to him. He said, well, they're not going to let that happen, are they? And I said, I presume you're right. And so the EPA and the administration can move as quickly or as fast as anyone in the world, but I expect that we're going to have a window here in the not too distant future where there'll be more clarity.
spk07: Okay. Thanks a lot.
spk14: And your final question comes from the line of Matt Blair with Tudor Pickering Holt. You may proceed with your question.
spk13: Hey, good morning, everyone. You mentioned your advanced discussions with partners on the RD project. Would any of these partners provide you with access to Advantage Deeds, or should we think about this as more like a financial partner?
spk09: Entering this process, I probably have said this in the past, we've been focused on partners where we think that they're going to be additive to the project, and that can come in multiple ways. Obviously, money is a commodity that's fungible, but we've been much, much more focused on partnering with someone that can improve the dynamic of the project and make it even more compelling than it already is. So that's where our focus is. I'm not going to get in on specifically what types of partners, but we've been pleased with our discussions in that regard, and we continue to progress it every day.
spk13: And then this might be a tough question to answer now, but any early thoughts on the end geographical markets for the summit RD project. You know, do you expect to place volumes in the California or do you kind of see it as more like a New York, Canada, Europe and market for you.
spk09: We are merchant refiners, and as such, and one of the things you learn in refining, you want as many options as you possibly can, because the reality is we don't know where the bell is going to ring and when it's going to ring. And so you want to have complete optionality that goes for feeds, but also access to product markets. It's one of the reasons that we think Shellmet is uniquely positioned from a location standpoint, not only for sourcing feeds, but optionality to go to California, to go to Western Canada, or go to Europe, or quite frankly, anywhere else where it becomes the most attractive product market for that renewable diesel product. So we think Chalmette, having access to water, rail, and truck, gives us the greatest amount of flexibility, and we'll be able to deliver very competitively into whatever market presents the highest net back. Great, thank you.
spk14: We have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Tom Nibley for closing remarks.
spk12: Well, thank you very much for attending the call today. We look forward to meeting with you at the end of the third quarter and hopefully demonstrate that we have, in fact, seen the inflection point and turned a corner and have gotten to positive cash flow. Have a great day.
spk14: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.
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