HF Sinclair - Q3 2024

Transcript

Operator (participant)

Welcome to HF Sinclair Corporation's third quarter 2024 conference call and webcast. Hosting the call today is Tim Go, Chief Executive Officer of HF Sinclair. He is joined by Atanas Atanasov, Chief Financial Officer, Steve Ledbetter, EVP of Commercial, Valerie Pompa, EVP of Operations, and Matt Joyce, SVP of Lubricants and Specialties. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star zero. We ask that you please limit yourself to one question and one follow-up.

Additionally, we ask that you pick up your handset to allow optimal sound quality. Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Vice President, Investor Relations. Craig, you may begin.

Craig Biery (VP of Investor Relations)

Thank you, Novi. Good morning, everyone, and welcome to HF Sinclair Corporation's third quarter 2024 earnings call. This morning, we issued a press release announcing results for the quarter ending September 30th, 2024. If you would like a copy of the earnings press release, you may find it on our website at hfsinclair.com. Before we proceed with remarks, please note the safe harbor disclosure statement in today's press release. In summary, it says statements made regarding management expectations, judgments, or predictions are forward-looking statements. These statements are intended to be covered under the safe harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. The call also may include discussion of non-GAAP measures. Please see the earnings press release for reconciliations to GAAP financial measures.

Also, please note any time-sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript, and with that, I'll turn the call over to Tim.

Tim Go (CEO)

Good morning, everyone, and happy Halloween. We are pleased with our third quarter financial and operational performance in all of our businesses, and especially by the strong and consistent earnings in our Marketing, Midstream, and Lubricants and Specialty segments. These contributions from our differentiated business segments highlight the value of our diversified portfolio, especially as global refining margins weaken. We continue to execute our strategy to integrate and optimize our portfolio in order to strengthen the earnings power and competitive advantage of our businesses while focusing on improving safe and reliable operations. During the third quarter, we returned $222 million in cash to shareholders and today announced a $0.50 quarterly dividend, demonstrating our continued commitment to shareholder returns. Now, let me cover our segment highlights before turning over to Atanas.

In refining for the third quarter of 2024, we continued our streak of improved reliability by completing the turnaround at our Parco refinery on time and on budget. Year to date, we've made progress on lowering our operating expenses and will continue to focus on cost management and improving utilization as we drive towards achieving our near-term target of $7.25 per throughput barrel. Our optimization efforts resulted in a quarterly record for jet production across our fleet, and our Woods Cross Refinery set a quarterly record for premium production. In renewables for the third quarter of 2024, we set a record for the highest quarterly sales volumes of renewable diesel and achieved our lowest operating expenses per gallon. Our team's optimization and reliability efforts resulted in another quarter of positive adjusted EBITDA despite continued headwinds from weak RINs and LCFS credit prices.

Our strategy for the Renewable Diesel business remains centered on the things we can control: to one, reduce the level of high-cost inventories, two, increase our low CI feedstock mix, and three, lower our operating expenses. In Marketing in the third quarter of 2024, we continued to grow our store count with the addition of 22 net new branded sites, and on a year-to-date basis, we have added a net of 46 fully branded sites to our portfolio. Our strong third-quarter results reflect the growth strategies we are executing since the Sinclair acquisition. Looking forward, we continue to expand our growth pipeline and now have new signed contracts to convert 168 stores to branded wholesale over the next 6 to 12 months, and we continue to target 10% annual growth for branded sites.

In Lubricants and Specialties, we reported another strong quarter of results despite the fierce headwinds from falling oil prices. Our strategic initiatives of, one, optimizing our sales mix, two, operational efficiency, and three, furthering our base oil integration efforts continue to strengthen our Lubricants business. In addition to our efforts to organically grow the business by high-grading our finished products portfolio, we have also introduced digital tools providing better visibility to our supply chain and manufacturing cost structures and have developed new product offerings to serve growing end-use markets. In our Midstream business for the third quarter of 2024, we delivered another strong quarter of performance as we continue our integration work to drive our growth in this segment. Year to date, we have set record affiliate and third-party transportation volumes supported by strength in our crude pipeline systems in the Rockies and Southwest.

In the third quarter, we returned $222 million to shareholders through share repurchases and dividends. Since the Sinclair acquisition in March 2022, we have returned over $3.9 billion in cash to shareholders and have reduced our share count by over 57 million shares, which represents 71% of the shares we issued for both the Sinclair and HEP transactions. As of September 30th, 2024, we have approximately $800 million outstanding on our share repurchase authorization, and we remain committed to our long-term cash return strategy and long-term payout ratio while maintaining a strong balance sheet and investment-grade credit rating. As I mentioned earlier, we also announced that our board of directors declared a regular quarterly dividend of $0.50 per share payable on December 4th, 2024, to holders of record on November 21st, 2024.

Looking forward, we remain committed to improving our safe and reliable operations, and we believe our diversified business portfolio positions us to generate attractive through cycle cash flows and continued strong returns to our shareholders. With that, let me turn the call over to Atanas.

Atanas Atanasov (CFO)

Thank you, Tim, and good morning, everyone. Let's begin by reviewing HF Sinclair's financial highlights. Today, we reported third-quarter net loss attributable to HF Sinclair shareholders of $76 million or -$0.40 per diluted share. These results reflect special items that collectively decreased net income by $172 million. Excluding these items, adjusted net income for the third quarter was $97 million or $0.51 per diluted share compared to adjusted net income of $760 million or $4.06 per diluted share for the same period in 2023. Adjusted EBITDA for the third quarter was $316 million compared to $1.2 billion in the third quarter of 2023. In our refining segment, third-quarter adjusted EBITDA was $110 million compared to $1 billion in the third quarter of 2023.

This decrease was primarily driven by lower adjusted refinery gross margins in both the West and Mid-Continent regions as a result of high global supply across the industry, which were partially offset by high refined product sales volumes. Crude oil charge averaged 607,000 barrels per day for the third quarter compared to 602,000 barrels per day for the third quarter of 2023. This increase was primarily a result of improved reliability and decreased turnaround activities at our refineries compared to the third quarter of 2023. In our Renewables Segment, we reported Adjusted EBITDA of $2 million for the third quarter compared to $5 million in the third quarter of 2023. This decrease was primarily due to lower indicator margins despite increased sales volumes and feedstock optimization in the third quarter of 2024.

Total sales volumes were 69 million gallons for the third quarter as compared to 55 million gallons for the third quarter of 2023. Our Marketing segment reported EBITDA of 22 million for the third quarter compared to 21 million for the third quarter of 2023. This increase was primarily driven by high margins in the third quarter of 2024. Our Lubricants and Specialties segment reported EBITDA of 76 million for the third quarter compared to EBITDA of 118 million for the third quarter of 2023. This decrease was primarily driven by 27 million FIFO charge from consumption of high-priced feedstock inventory in the third quarter of 2024 compared to 30 million FIFO benefit in the third quarter of 2023, partially offset by improvements in the underlying business, including increased sales volumes, sales mix optimization, and base oil integration in the third quarter of 2024.

Our Midstream segment reported Adjusted EBITDA of $112 million in the third quarter compared to $101 million in the same period of last year. This increase was primarily driven by high revenues from increased volumes and higher tariffs in the third quarter of 2024. Net cash provided by operations totaled $708 million, which includes $90 million of turnaround spend in the quarter. HF Sinclair capital expenditures totaled $124 million for the third quarter. As of September 30th, 2024, HF Sinclair's total liquidity stood at approximately $3.7 billion, which includes a cash balance of $1.23 billion, our undrawn $1.65 billion unsecured credit facility, and $850 million availability on the HEP credit facility. As of September 30th, we had $2.7 billion of debt outstanding with a debt-to-cap ratio of 22% and net debt-to-cap ratio of 12%. Let's go through some guidance items.

With respect to capital spending for full year 2024, we still expect to spend approximately $800 million in sustaining capital, including turnarounds and catalysts. In addition, we expect to spend $75 million in growth capital investments across our business segments. For the fourth quarter of 2024, we expect to run between 565,000 and 600,000 barrels per day of crude oil in our refining segment, which reflects the planned turnaround at our El Dorado refinery. We're now ready to take some questions from the audience.

Operator (participant)

The floor is now open for 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 the pound key. Thank you. Our first question is coming from Ryan Todd with Piper Sandler. Please go ahead.

Ryan Todd (Managing Director and Senior Research Analyst)

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

Tim Go (CEO)

Yeah. Good morning, Ryan. This is Tim. Let me ask Atanas to jump right in.

Atanas Atanasov (CFO)

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

Tim Go (CEO)

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

Ryan Todd (Managing Director and Senior Research Analyst)

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

Tim Go (CEO)

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

Valerie Pompa (EVP of Operations)

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

Tim Go (CEO)

Ryan, I would just say, not only is that showing up in turnaround performance, it's showing up in throughput, but it's also showing up in OpEx per barrel. And even though our OpEx was a little bit higher this quarter, it was mostly due to the maintenance items that we had. Year-to-date, we're $0.66 per barrel lower than we were last year, and that's a tribute to the improved reliability that Val and her team are delivering to the bottom line.

Ryan Todd (Managing Director and Senior Research Analyst)

Great. Thanks, Tim.

Operator (participant)

All right. Your next question comes from Manav Gupta with UBS.

Manav Gupta (Executive Director)

Good morning.

Operator (participant)

Please go ahead.

Manav Gupta (Executive Director)

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

Tim Go (CEO)

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

Steve Ledbetter (EVP of Commercial)

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

That, coupled with what we're doing in terms of getting more value out of the brand, we believe should be an increased value to the overall enterprise.

Atanas Atanasov (CFO)

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

Manav Gupta (Executive Director)

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

Tim Go (CEO)

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

Matt Joyce (SVP of Lubricants and Specialties)

Yeah. For sure. Manav, Matt here. What we saw is, of course, we had a lot of FIFO headwinds, which, of course, means that we're going to use those feedstock inventories and consume older, more expensive feed versus our replacement costs. But in any case, these tend to balance out throughout the year, and the underlying business remains very healthy. Actually, absent of that FIFO in this quarter, it was one of our strongest quarters since we've held the businesses over the past many years, and it's really driven through a focus on operational efficiencies that we've talked about. The team has done a tremendous job of getting after some digital tools that are allowing us to get a better visibility of transportation, of planning, and of pricing management, and that's a big part of the secret sauce that we're using.

I referred to it in past quarters as our housekeeping, but we've done a really nice job of that. And on top of it, we've gone out with some regional core growth opportunities and developed new offerings that place our base oils in the highest value applications that we can. And one that we're really proud of is in our specialties portfolio, we introduced a new ingredient, rubber processing technology for the tire and construction industry this past quarter called Circosol 5100. That will provide a much-needed source of TDAE, Treated Distillate Aromatic Extracts in the North American market, and provide significant improvement in the tire industry. And that's under test right now. We're going to see some modest sales start in early 2025.

And then the other one that we've just introduced is really exciting called Innovate, which is a new dielectric immersion cooling fluid technology intended for use in the data centers and digital mining space. So again, looking for new different areas to grow and see where our molecules and our technologies can be used to better improve our business and those businesses and markets we serve.

Tim Go (CEO)

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

Manav Gupta (Executive Director)

Thank you so much for taking my questions.

Operator (participant)

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

Paul Cheng (Managing Director and Senior Equity Research Analyst)

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

That's the first question.

Tim Go (CEO)

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

We continue to grow it. That's what our main focus is going to be, and as the stock and as the shareholders appreciate the value of that business, then yeah, we can continue to grow it and keep it for a while.

Paul Cheng (Managing Director and Senior Equity Research Analyst)

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

Tim Go (CEO)

Yeah, Paul, good question. Obviously, as we go into a downturn, everyone's going to be worried about costs. I've already mentioned that our OpEx per barrel in refining is down $6 versus a year ago, but Valerie's not finished yet and is continuing to work down those costs. I'll let her talk a little bit more about what she's doing there.

Valerie Pompa (EVP of Operations)

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

Tim Go (CEO)

Yep. And that's refining, Paul. I'll just point out a couple other things. I mean, we're working hard to reduce costs. That's part of our integration and optimization priority. But I can just point out a couple of things like in the lubes business that Matt just talked about. If you look at their OpEx, I think they're underrunning $15 million this year versus last year. I think that's not by accident. It's by the efforts that have been going on and hitting the bottom line. I think if you look at our G&A, we're running about $20 million this year below what we ran last year. And again, that's not by accident. That's all associated with the integration and optimization efforts that we've got going on. Midstream's got the same thing with the integration efforts that we have going on.

And then, of course, renewables has the lowest OpEx per barrel this quarter that we've been able to demonstrate. So we're not going out there with a flashy program, but instead, we're trying to show in the bottom line numbers what we're doing to reduce costs.

Paul Cheng (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Our next question comes from Doug Leggate with Wolfe Research. Please go ahead.

Doug Leggate (Managing Director and Senior Research Analyst)

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

Tim Go (CEO)

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

Steve Ledbetter (EVP of Commercial)

Sure. Doug, to Steve, thanks for the question. You mentioned two things specifically. One, I think, relates to supply, and so I'll talk about that a little bit. First of all, Q4, we're heading into the obvious winter demand slump and seasonal driving coming off and refiners finishing maintenance, but when we look in 2025, we believe it will be closer to mid-cycle for a couple of reasons, and on a larger basis, we think there's a lot of puts and takes in terms of shutdown and then demand or capacity coming on to the tune of around 300,000 barrels net new capacity, but we think demand should outpace that. Obviously, timing matters, but we feel like we'll be in a normal balanced margin environment for 2025, which is around mid-cycle. You also mentioned TMX, and we've seen some impacts clearly there with regards to the crude values.

Just as an example, the diffs have narrowed. And when you look out through next year, we think that that light to heavy diff kind of stands at around a $12.50-$15 range, obviously depending on several things. By example, Q1 of 2025 on the strip looks like it's roughly $6 less than it was in terms of Q1 2024. But we also see that our position in the Pacific Northwest, our ability to be close to the dock, have plenty of dock capacity, the ability to take multiple crudes as more barrels get out over the water, we will be in a good position to go compete for those barrels.

Then through the balance of next year, while the diffs are slightly compressed until the production outruns pipeline capacity there at TMX, we will have some compression in those diffs, and it will impact our Midcon and Parco refineries. Again, we're well connected to many hubs, and we're working hard to optimize the crude slate and flexibility there. All in all on balance, we believe that our 2025 is a bit more supportive towards mid-cycle. That's how we're calling it right now.

Doug Leggate (Managing Director and Senior Research Analyst)

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

Matt Joyce (SVP of Lubricants and Specialties)

Yeah. So I'll take that one as well. We're watching the BTC very closely as it goes away and the PTC comes on and is CI-based. As you mentioned, we've continued to push very hard to get more CI or low CI feedstock in our kit through better sourcing our capability on the PTU and actually a few small tweaks in the plants. And so we think we could compete with our current setup. We also have the ability to go take barrels to different markets that are not as dependent on low CI for that value. And we've been able to move barrels into Canada and some local markets as well where there has been some uplift. So there's some uncertainty heading into the first part of the year. And we think that it's going to end up having to settle out with some more support from RINS.

And so that's a bit of a how does that happen and when does that happen? And then on the positive side associated with this, there'll be fewer imported finished barrels. So we think the supply structure and demand structure tighten up a bit that shows some supportive margin for 2025. But there's still a bit of uncertainty in the first part of the year, but we're watching it very closely and we'll manage that risk carefully.

And Doug, that's, of course, commentary around the BTC and the PTC. But if you look at the overall renewable diesel factors and market, of course, we believe the LCFS credit prices are headed higher in 2025. I think that'll be a tailwind for our business. You know the New Mexico LCFS program is being finalized here over the next few months. And we think when that comes online here at the end of 2025, maybe the early of 2026, that that will be a tailwind for us given we'll be the only renewable diesel producer in New Mexico. And we think overall RINs prices are going to be going up as well. So we've shown that even in these current bottom low cycle conditions, we can produce positive EBITDA, and we're positioned well for those tailwinds to show themselves next year and maybe the year after too.

Doug Leggate (Managing Director and Senior Research Analyst)

Got it. Thank you, guys. Appreciate the answers.

Operator (participant)

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

Neil Mehta (Managing Director and Senior Equity Research Analyst)

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

Atanas Atanasov (CFO)

Neil, good morning. This is Atanas. Thank you for your question. I think this is a reasonable assumption over the next couple of years and that zip code of 800-875, including some growth CapEx in it. So I think you're right.

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

Neil Mehta (Managing Director and Senior Equity Research Analyst)

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

Steve Ledbetter (EVP of Commercial)

Yeah, Neil, this is Steve. Thanks. I look after our Midstream business as well. As part of the proposition of buying it in, we feel like there was an untapped opportunity there, and I think we're starting to see that. We really believe that there is utilization to go get, and we think there are some pieces of the kit that we can optimize or go add to to really allow us to unlock the integrated value chain and operate our kits as such. So we're focused on how do we go make sure that we're touching the molecules early and often and getting them on our system. Perfect example is things that we can unlock now because we are under one umbrella.

Our Permian Southwest gathering asset, we're working and investing to go move more barrels from third-party or alternative modes of transport onto our system and helping that all the way through to our plants and in between the plants. And that's just one example that we see as an opportunity. So we think it is a growth engine, and we think that this is something we'll continue to focus on as well as improving our overall cost profile. And we believe that there are some things that we can do between the operating platforms and refining as well as Midstream where we can share the best practices and learn and do things, common solutions for common problems. But we're pretty excited about the opportunities ahead of us and what we can go do with the Midstream sector.

Tim Go (CEO)

Yeah. And Neil, I would just chime in too. We talked about buying in the HEP business a year ago, and one of the reasons was for the free cash flow accretion associated with that. That's going to pay us dividends now. The other one was for the growth, and that's what you're pointing out. This quarter, I think we had record pipeline volumes. Last quarter, I think we had record total volumes going through. If you look at our run rate, our run rate is $50 million EBITDA higher than it was a year ago. And that's associated with not just higher tariffs, which we knew were coming, but also these higher volumes, lower op costs as we've talked about, and higher third-party volumes that go with that as well. So we do think Midstream can be a growth engine.

We've talked a lot about LUBs and how LUBs has been a real bright spot for us over the last several years. I really believe that you're going to see the same thing in Midstream, and you're going to see the same thing in Marketing as we continue to grow those what we call higher multiple businesses in our portfolio.

Neil Mehta (Managing Director and Senior Equity Research Analyst)

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

Tim Go (CEO)

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

Neil Mehta (Managing Director and Senior Equity Research Analyst)

Okay. Very clear. Thanks, team.

Operator (participant)

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

Theresa Chen (Managing Director and Senior Equity Research Analyst)

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

Steve Ledbetter (EVP of Commercial)

Yeah. Thanks, Theresa. Demand, again, everyone has been concerned about a structural issue with demand. What we've seen is there is not a structural issue with demand. It has been relatively flat and even up in some of the markets. The issue in terms of cracks has been associated with the additional supply on the market, which has come from the various things that we've already talked about. We think in our markets that there are areas that have regional advantages where there's growth that's still happening and people are moving there. And we see that that is an advantage that we can exploit. And we'll go continue to grow that through optimizing our Midstream footprint and our branded put through our retail stations. And so we're pretty excited about the overall regions that we operate in.

One of our largest growth areas that we've seen so far to date, as you mentioned, is in the Pacific Northwest. That's fertile hunting ground where we can look to optimize between the plants and that locale, and then also in the Southwest, we've seen good demand and good growth there, and we'll continue to fill out the other regions where we already have a high concentration of our branded put.

Theresa Chen (Managing Director and Senior Equity Research Analyst)

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

Steve Ledbetter (EVP of Commercial)

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

Theresa Chen (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

The next question comes from Jason Gabelman with TD Cowen. Please go ahead.

Jason Gabelman (Managing Director and Senior Equity Research Analyst)

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

Atanas Atanasov (CFO)

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

Jason Gabelman (Managing Director and Senior Equity Research Analyst)

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

Tim Go (CEO)

Yeah, Jason, this is Tim. I'll jump in. I do think that the recent announcement in California is consistent with our long-term outlook for those supply-demand balances in California, and that is supporting our overall long-term strategy to be able to move barrels west. We've talked about this before, but of course, the Puget Sound Refinery has the ability to make CARB gasoline and will benefit as the gasoline becomes short in California. We've already been able to take some part in that market, and we'll hopefully be able to take more of it as the balances continue to go short on gasoline. But as you point out, our Woods Cross Refinery supplies Las Vegas, which gets half of its supply from California, and our New Mexico refinery supplies Phoenix, which gets about half of its supply from California.

So as the California gasoline production continues to reduce, we do stand to benefit by being able to place our barrels and take more of that market share in those regions. Even though they're not specifically in California, they are tied to the California market, and we believe that we're going to be beneficiaries of that event.

Jason Gabelman (Managing Director and Senior Equity Research Analyst)

Yep. Got it. That's great color. Thanks.

Operator (participant)

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

Matthew Blair (Managing Director and Senior Equity Research Analyst)

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

Steve Ledbetter (EVP of Commercial)

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

Matthew Blair (Managing Director and Senior Equity Research Analyst)

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

Steve Ledbetter (EVP of Commercial)

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

Calling it right now, I don't think we're ready to call it, but those are the things that we can take advantage of and continue to drive.

Matthew Blair (Managing Director and Senior Equity Research Analyst)

Sounds good. Thank you.

Operator (participant)

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

Joe Laetsch (Executive Director and Senior Equity Research Analyst)

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

Matt Joyce (SVP of Lubricants and Specialties)

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

Tim Go (CEO)

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

Ryan Todd (Managing Director and Senior Research Analyst)

Thanks for the time. I appreciate it.

Matt Joyce (SVP of Lubricants and Specialties)

You bet.

Operator (participant)

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

Tim Go (CEO)

Thank you, Novi. In summary, our third-quarter results demonstrate the earnings power of our diversified portfolio. We are focused on executing our strategic priorities, and these business improvements are growing the bottom line of our Midstream, Marketing and Lubricants and Specialties businesses. In our refining and renewable segments, we're focused on what we can control during these challenging market conditions. Both segments are delivering better turnarounds, reliability, and lower operating costs to drive solid performance in below-mid-cycle conditions. All of these are indicative of the hard work and commitment of our employees executing our plan. In short, our focus over the past few years is working, and our business and our balance sheet are much stronger than before. Looking ahead, our priorities remain the same: to, one, improve our reliability. Two, to integrate and optimize our new portfolio of assets. And three, return excess cash to our shareholders.

Thank you for joining our call, and have a great day.

Operator (participant)

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