HF Sinclair - Earnings Call - Q4 2017
February 21, 2018
Transcript
Speaker 0
Good morning and welcome to HollyFrontier's Fourth Quarter twenty seventeen Conference Call and Webcast. Hosting the call today from HollyFrontier is George Demiris, President and Chief Executive Officer. He is joined by Rich Bolivar, Executive Vice President and Chief Financial Officer Jim Stump, Senior Vice President of Refinery Operations and Tom Creery, President, Refining and Marketing. At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions following the presentation. Additionally, we ask that you pick up your handset to allow optimal sound quality.
Please note that this call is being recorded. It is now my pleasure to turn the floor over to Craig Beery, Director, Investor Relations. Craig, you may begin.
Speaker 1
Thank you, Lisa. Good morning, everyone, and welcome to HollyFrontier Corporation's fourth quarter twenty seventeen earnings call. I'm Craig Beery, Director of Investor Relations for HollyFrontier. This morning, we issued a press release announcing results for the quarter ending December 3137. If you would like a copy of the press release, you may find one on our website at hollyfrontier.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 securities laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. Today's statements are not guarantees of future outcomes.
The call also may include discussion of non GAAP measures, and please see the press release for reconciliations to GAAP financial measures. Also, please note that information presented on today's call speaks only as of today, February 2138. Any time sensitive information provided 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 George Demeris.
Speaker 2
Thanks, Craig. Good morning, everyone. Today, we reported fourth quarter net income attributable to HFC shareholders of $521,000,000 or $2.92 per diluted share. Certain items detailed in our earnings release that Rich will discuss in his prepared remarks increased net income by $397,000,000 on an after tax basis. Excluding these items, net income for the current quarter was $125,000,000 or $0.70 per diluted share versus a net loss of $10,000,000 or $06 per diluted share for the same period in 2016.
Adjusted EBITDA for the period was $334,000,000 an increase of $233,000,000 compared to the fourth quarter of last year. This increase was principally driven by improvements in our Refining and Marketing segment, where higher sales volumes, refining margins and crude differentials combined to increase adjusted EBITDA to two sixty one million dollars versus $24,000,000 in the fourth quarter of last year. Our Lubricants and Specialty Products business had a good fourth quarter with $40,000,000 of adjusted EBITDA. The Rack Forward portion of this business posted adjusted EBITDA of $48,000,000 representing a 14% EBITDA margin and had operating costs of $38,000,000 For the eleven months that we owned PCLI in 2017, adjusted EBITDA for Rack Forward was $179,000,000 representing an EBITDA margin of 13%. Rack Back margins were lower in the fourth quarter compared to the third quarter due to operational and feedstock supply issues from a major supplier to our Mississauga plant.
We expect these issues are one off events. For full year 2017, base oils represented 31% of our sales, while 45% was finished products and 24% was light products and intermediates. Going forward, we see a significant opportunity to high grade a portion of our existing base oil sales into higher finished product sales. On average, finished products realize a margin uplift of approximately $50 per barrel over base oils. Our growth strategy is centered on organic initiatives to achieve this downward integration and provides a positive outlook for the earnings power of our lubricants and specialty products business.
For 2018, we anticipate Rack Forward EBITDA of $175,000,000 to $200,000,000 with an EBITDA margin of 10% to 15% of sales, in line with the guidance we provided at our Analyst Day in December. In late twenty seventeen, we were pleased to see the passage of the Tax Cuts and Jobs Act. The reforms to The U. S. Tax Code encourage capital investments and lower the corporate rate to better enable manufacturers to compete in the global market.
We applaud the administration and Congress for enacting comprehensive legislation, which recognizes the value of our industry's global supply chains and the importance of master limited partnerships in improving our nation's energy infrastructure. We expect to meaningfully benefit from a reduction in our effective tax rate going forward. We are excited about 2018 based on our improving refinery reliability, our outlook for both crude spreads and product cracks as well as the growth and improvement potential of our lubricants and specialty products business. Our capital allocation strategy will continue to focus on disciplined growth, while maintaining our current assets and balance sheet strength. First and foremost, we will continue to make the investments necessary to operate our existing assets safely and reliably.
Second, we'll maintain a healthy level of liquidity to preserve our investment grade rating. Third, we intend to maintain a competitive regular dividend yield. Fourth, we will look for opportunities to grow, both organically and through M and A. We have stated our aspirations to grow each of our three businesses and remain confident that we are well positioned to do so. When we have transparency to cash in excess of these four uses, we will return cash to shareholders in the form of stock repurchases.
I'll now turn the call over to Jim for an update on our operations. Thank you, George.
Speaker 3
For the fourth quarter,
Speaker 1
our crude throughput was 461,000 barrels per day, that's slightly above our guidance of four and fifty thousand barrels per day and is also our second best quarter ever. On a consolidated basis, we set a monthly crude charge record of 484,000 barrels per day for November and for the full year 2017, we achieved our highest annual crude charge averaging 439,000 barrels per day. The Rockies region continues to improve operationally running an average combined crude rate of 80,000 barrels per day in the fourth quarter. We set a monthly crude charge record running an average of 40,000 barrels per day at our Woods Cross refinery in November. Our Navajo plant ran well during the quarter averaging approximately 111,000 barrels per day.
Navajo's operating expense per throughput barrel was $4.76 in the fourth quarter and was a 15% improvement versus the same period from 2016. Our consolidated operating cost of $5.79 per throughput barrel was slightly elevated versus the $5.59 in the same period last year. This increase is primarily due to approximately $18,000,000 of environmental and insurance accruals we incurred during the quarter. For the first quarter of twenty eighteen, we expect to run between 830,000 barrels per day of crude oil, mostly impacted by our planned turnaround at our Tulsa West plant. I will now turn the call over to Tom for an update on our commercial operations.
Thanks, Jim, and good morning, everyone. As Jim previously mentioned, we ran a total of 461,000 barrels a day of crude oil in the fourth quarter. This slate was composed of approximately 26% sour and 19% WCS and black wax crude oil. Our average relating crude cost in the Mid Con was flat against WTI and under WTI by 3.6 in The Rockies and $0.26 in the Southwest. In the fourth quarter of twenty seventeen, we witnessed global and U.
S. Product inventories becoming rebalanced as they receded from five year average highs to current lows, signaling an increased global demand. Gasoline inventories in the Magellan system while increasing by 1,000,000 barrels during the fourth quarter of 7,000,000 barrels were still lower than last year levels at this time. Diesel inventories were down by 1,800,000 barrels versus last year to close the Magellan system at 4,670,000 barrels. In terms of days of supply in the group, fourth quarter gasoline was at nineteen days and diesel at twenty three days.
Each of these ratios is at or near six year lows. Lower inventories and higher demand helped cracks in all regions during the fourth quarter. When compared to the third quarter of this year, cracks in the Mid Con were lower in the fourth by $1.25 and approximately $4.5 in both the Southwestern Rockies. However, when compared to fourth quarter cracks of 2016, cracks in our markets were some 5 to $8 higher. Crude differentials widened across heavy slates during the fourth quarter.
On the Canadian side, a pipeline leak on the Keystone system precipitated widening differentials for Canadian heavies. The majority of the price impact will not be seen until the first quarter of twenty eighteen due to the timing of the trade window and the entrant the time for the physical delivery of this oil. To put this in a better perspective, the average December trade differential was $13.93 per barrel compared to current differentials for April delivery of upwards of 30 per barrel. HSE due to its firm space commitments on various pipelines is well positioned to purchase and deliver volumes of price advantaged heavy crude oil from Canada. Fourth quarter consolidated gross margin was $12.54 per barrel sold, an 85% increase over the $6.77 recorded in the same quarter of 2016.
We continue to see improvements in our Rocky Mountain region with a realized gross margin of $12.19 per produced barrels, which represents a 96% increase from the fourth quarter of twenty sixteen. With the tailwind from WCS differentials and improving Black Wax production levels, we anticipate higher realized margins in 2018 in the Rockies. Our RIN expense in the quarter was $78,000,000 including a $27,000,000 benefit we received for the Woods Cross 2016 small refinery exemption. For the full year, our RIN expense was $288,000,000 including the Woods Cross and Cheyenne small refinery exemptions for 2016. And with that, let me turn the call over to Rich.
Speaker 2
Thank you, Tom. As George mentioned, the
Speaker 3
fourth quarter included a few unusual items. Earnings were positively impacted by a $3.00 $7,000,000 reduction in deferred income taxes due to the Tax Cuts and Jobs Act, a $93,000,000 pre tax lower cost to market benefit, a $27,000,000 pre tax reduction in RINs costs as a result of our Woods Cross refineries small refinery exemption and a $21,000,000 pre tax gain for the re measurement of HEP's pre existing interest in the SLC and Frontier Pipeline. These positives were partially offset by $4,000,000 of PCLI integration related charges. Table detailing these items can be found in our press release. In the fourth quarter of twenty seventeen, cash flow provided by operations was $166,000,000 including turnaround spending of $24,000,000 and HollyFrontier's standalone capital expenditures totaling $65,000,000 As of December 31, our total cash and marketable securities balance stood at $631,000,000 essentially flat versus our balance on September 30.
Cash flow from operations and consequently our cash balance was impacted by the timing of tax and interest payments and an increase in inventory in preparation for the first quarter turnaround of our Tulsa refinery. During the fourth quarter, we announced and paid a $0.33 regular dividend, putting our yield at 2.9% at last night's close. As of January 31, we have $1,000,000,000 of standalone debt outstanding and no drawings on our $1,350,000,000 credit facility. Puts our liquidity at a healthy $2,000,000,000 and debt to cap at a modest 17%. Total HEP distributions received by HollyFrontier during 2017 were $131,000,000 a 25% increase over 2016.
On October 31, HollyFrontier and HEP closed their previously announced IDR simplification transaction. HFC now owns 59,600,000.0 HEP limited partner units, representing 57% of HEP's units with a market value of over $1,800,000,000 as of last night's close. We believe this transaction provides fair value for the IDRs to HFC
Speaker 1
and
Speaker 3
strengthens HEP's capital structure for long term sustainable growth. Beginning with the fourth quarter of twenty seventeen, our segment reporting was reorganized to reflect our three business segments: HollyFrontier Refining and Marketing, HollyFrontier Lubricants and Specialty Products or HFLSP and Holly Energy Partners. HFLSP includes the Rack Forward operations of both PCLI and Tulsa and the Rack Back operations of PCLI. SG and A is allocated to the three segments with stewardship and certain integration costs reflected in the Corporate segment. SG and A in the quarter was elevated due to seasonal fourth quarter compensation payments, onetime expenses related to our IDR restructuring and PCI integration costs.
For the full year 2018, we anticipate G and A expenses of $105,000,000 to $115,000,000 for Refining and Marketing, dollars 125,000,000 to $135,000,000 for HFLSP, dollars 12,000,000 to $15,000,000 for HEP and 10,000,000 to $15,000,000 in corporate. With respect to tax rate, due to the impact of the Tax Cuts and Jobs Act, we estimate our consolidated effective tax rate will be 23% to 25% for 2018 versus the 36% to 38% in prior years. In 2018, we expect to spend $375,000,000 to $425,000,000 for both standalone capital and turnarounds at HollyFrontier Refining and Marketing, dollars 70,000,000 to $80,000,000 at HF Lubes and Specialties, including the scheduled turnaround of our Mississauga base oil plant and $40,000,000 to $50,000,000 of capital at HEP. As George mentioned earlier, we're committed to returning excess cash to shareholders. We are targeting a minimum cash balance of approximately $500,000,000 Based on our positive outlook for 2018 and the impact of recent tax reform, we expect to resume share repurchases.
We currently have approximately $179,000,000 remaining on our existing $1,000,000,000 share repurchase authorization. And with that, Lisa, we're ready to take questions.
Speaker 0
The floor is now open for questions. Our first question comes from the line of Paul Cheng from Barclays.
Speaker 2
Good morning, Paul.
Speaker 4
I think that this may be for Jim. For Quality Frontier, you run about 80,000 to 100,000 barrels per day of Canadian heavy oil. How much of them is it 100% that you have the line space commit or that you don't I mean what is the line space that you already have the firm commitment?
Speaker 1
Yes, Paul, this is Tom Creery. In terms of we typically run 80,000 barrels a day of Canadian crude. We have enough line space at the current apportionment rates of what we are forecasting to be future forecast rates to support these run rates at this time.
Speaker 4
So that is basically a one to one benefit when the Canadian heavy oil expand for you guys?
Speaker 1
At this point in time, the answer is yes.
Speaker 4
Okay. And that on the other one that the second question is, when I look at the fourth quarter across the region, your margin capture rate have declined comparing to the third quarter, which is a little bit surprising given you should have butane branding benefit. As well as in the third quarter, due to the hurricane, we get a certain rise in margin in September, which typically, as a result, people will not be able to fully capture that. So I was expecting you should see better margin capture way in so worse off. Any one off issue or special item that we should be aware of the situation?
Speaker 3
Paul, this is Rich. I think there's kind of a host of really random things that went on in the quarter. Gasoline margins kind of fell out in the back part of the quarter in particular. We had a couple of conversion rate unit issues during the quarter, which probably hit production and really sales of kind of the higher value finished products at the margin. And then to your point, we really didn't realize any of the benefit of crude differentials in the fourth quarter itself.
So we've got
Speaker 1
that lag effect that comes through there.
Speaker 4
And which on the conversion unit, can you tell us that which unit?
Speaker 3
It's number of small issues, that's why I kind of said, look at the host of little mixing cuts kind of thing. There's really not one to call out.
Speaker 4
I see. Alright, with that. Thank you.
Speaker 0
Our next question comes from the line of Blake Fernandez from Howard Weil. Your line is open.
Speaker 3
Hey, guys. Good morning. Maybe just following on to Paul's question, but more on the cost side. I guess we were a little surprised. Throughput was fairly strong, but it seemed like on a per barrel basis, the costs were a bit elevated compared to maybe what we were thinking.
So was there anything kind of driving that or thoughts on that going forward?
Speaker 2
No, I think Blake, this is George. I think Jim tried to address some of that in his prepared remarks. We had a number of accruals and or one time costs come through our books in the fourth quarter in OpEx. Jim called out roughly $18,000,000 in environmental and insurance accruals. I think Rich highlighted the IDR fees and PCI integration costs.
I think if you total all that up, it comes out to around $30,000,000 pre tax, roughly 20,000,000 after tax, roughly $0.10 or $0.11 a share. I think that's the majority of what you're looking at.
Speaker 3
Okay. And that PCLI piece, would that have been in the refining cost piece or you that wouldn't have been there though,
Speaker 1
right, George?
Speaker 2
That's in the G and A piece.
Speaker 3
And then secondly, you may have kind of tackled this George in your prepared remarks, but the one piece that kind of threw us for a little bit of a loop was on the lubes business. It looks like the Rack Forward business is trending broadly in line with your full year guidance range, but the Rack Back piece was fairly kind of negative compared to our expectations. Sounds like maybe there is a one off item in there, but could you just elaborate a little bit?
Speaker 2
No, I think we buy our gas oil for that facility from others. A major supplier to that plant had operational issues that they couldn't supply us as much as they normally do. We had to find alternative supply. That alternative supply had higher logistics costs associated with it. I think that's what you're seeing here.
Speaker 3
Okay. That seems to be alleviated though going forward here?
Speaker 2
Correct. Correct.
Speaker 3
Okay. I'll leave it there. Thank you.
Speaker 2
Thank you, Blake.
Speaker 0
Our next question comes from the line of Brad Heffern from RBC Capital Markets. Your line is open.
Speaker 5
Hey, good morning, everyone.
Speaker 2
Good morning, Brad.
Speaker 5
George, you mentioned in your prepared comments sort of the pecking order of cash uses and M and A, I think, was fourth in that. I was just wondering if you could go through your sort of outlook on the M and A front and what you're seeing in the market right now?
Speaker 2
Well, I think we're seeing a good flow of opportunities. We're working on them hard. I wouldn't say there's anything imminent, but we are pleased with the deal flow that we're seeing. And I think I'll just leave it at that. I don't think there's again anything imminent, but we continue to look.
And as we've said before, we want to emphasize our disciplined approach to this. We've seen a number of deals in 2017 that we participated in the process, but didn't end up winning obviously, otherwise we would have announced the deal. We're going to continue to look and only pull the trigger where we see value.
Speaker 5
Okay, got it. And then on the RINs front, nice to see that you guys got the waiver at Woods Cross. Can you talk through sort of what you're seeing on the political front at this point?
Speaker 2
Yes, I think we're pleased to see that there's dialogue between senators from The Corn States, senators Gradle and Ernst, as well as our Texas senators, Cruz and Cornyn are very involved in the process. I think nothing happens without dialogue. So we're pleased to see that dialogue occurring. But having said all that, there's a long way to go between dialogue and resolution. But at least we think that the dialogue in the PES bankruptcy situation is highlighting the need to get something done here and we view that all as positive momentum towards that objective.
Speaker 1
Okay. I'll leave it there. Thanks. Thanks, Brad.
Speaker 0
Our next question comes from the line of Roger Read from Wells Fargo. Your line is open.
Speaker 6
Hi, thank you. Good morning. Good Good morning, Roger. Maybe a little follow-up there on the RIN. So you get the relief at Woods Cross.
So just curious, did you ask for relief or request relief at more than that location? And if so, kind of any idea what the criteria appeared to
Speaker 1
be to the EPA? Yes.
Speaker 2
I think like you said, we announced the Woods Cross relief for 2016. As you probably recall earlier in the year, we received relief at Cheyenne and both of those are small refineries and those are the type of facilities that are applying and being considered
Speaker 6
So, that mean we're still waiting to hear on Cheyenne or do you think
Speaker 1
this is the result for the year?
Speaker 2
I think that's what we've gotten for 2016 again.
Speaker 3
So, both
Speaker 2
Cheyenne and Woods Cross received relief for the 2016 year. 2017 the books haven't closed on RINs for 2017 yet.
Speaker 6
Okay. So potentially more to come, think is the way we could look at this in terms of future release?
Speaker 2
I think that's a reasonable statement.
Speaker 6
Okay. And then back to the kind of Rack Forward, Rack Backwards discussion. And then just in a sense and this may be again affected by some one time items. If you were to look at the total sort of net income margin of the lubes business, it actually declined versus 'sixteen, which is a little surprising given the addition of PCLI. So I was just wondering as you look at the sort of total income margin, it was 16% in 'sixteen, nine percent in 'seventeen, kind of what the impacts of PCLI really were?
Is that some one time issues in OpEx? Is that a function of depreciation that got ratcheted up? I was just curious, was definitely advertised as a much more profitable business. We see it at the EBITDA line, but it didn't necessarily translate to net income.
Speaker 3
So Roger, we're not really reporting net income by this business and it would be really hard to do given tax implications. You really as we highlighted at the Analyst Day, you really cannot much like you can't model a refining business on sort of an EBITDA margin. So in as much as there's the Rack Back business that looks like a refining business and EBITDA margins on a percentage basis are going to move around a fair amount. The Rack Forward part of the business is ratable and you can think about it that way. We'd encourage you
Speaker 1
to think about it that way. But I don't think
Speaker 3
you can look at the entire business that way given it is integrated. No, I appreciate that.
Speaker 6
I guess I was just
Speaker 3
a little surprised and I said net income, I should have
Speaker 6
said just said income from operations, it's listed here, but just surprised in the end that kind of a net margin turned out to be lighter and I was just curious again is there are there some one time items in there and as we look forward we should expect a better margin or kind of this is the right baseline to go from? We don't have a lot of background with it, so it's something I think we are struggling with still to model properly.
Speaker 3
Yes, Roger, again, George highlighted on the Rack Back side in the quarter, we had some one time issues. Clearly, don't expect that portion of the business to be ratably losing money going forward. And then we gave you very specific guidance with respect to the Rack Forward part of the business going forward, which we still think is valid.
Speaker 0
Next question comes from the line of Christina Kaczarian from Credit Suisse. Your line is open. Good morning, guys.
Speaker 2
Good morning, Kristina. Good morning.
Speaker 0
When I'm thinking about capital allocation strategy, you guys mentioned a handful of things in the opening comments. Can you just remind us all of priorities between them, so whether it's M and A, which I know you answered in a previous question or share repurchases, which you talked about in the opening comments, can you just help us frame those up priority wise?
Speaker 2
Yes, I think, Christine, I tried to do that as explicitly as I could in my prepared remarks, giving specific numbers to specific capital allocations. But again, first is defending the forward type of stuff, making sure we operate our plants, our existing facilities safely and reliably. Second is keeping some cash on the balance sheet to preserve our investment grade rating in our balance sheet. Third is the dividend. And then fourth is growth.
And I think as Rich mentioned in his prepared remarks, we're targeting about $05,000,000,000 of cash on our balance sheet. I think to the extent that we have cash in excess of that and we don't have uses for that cash in any of these four categories that we just went through again, then you should be looking for potential share repurchases.
Speaker 0
Perfect. And then I'm going to follow-up with the macro one. When I'm thinking about Brent TI, could you guys talk to us a little bit about what you guys are seeing that's driving the strong inventory depletion at Cushing in the short term? And then also longer term, when you're thinking about things like IMO 2020, do you think it drives the drive of a global wider heavy light spread? But when you're kind of switching to sweeter crude, do you think you're expecting Brent WTI to kind of widen out as you see demand for Brent and other lighter crude increased or both on the short term and on the long term there?
Speaker 2
Yes, you want to try to take that?
Speaker 1
Sure. Christine, it's Tom Curry. Brent WTI differentials going forward, we sort of hang our hat on that $4 to $6 range, which is based on logistics and transportation. We've probably seen some degree of decline to that in the short term here. We've seen an awful lot of exports leave The United States back into Asia as well as India now.
So there seems to be a great degree of interest in taking crude from The United States to other markets, but we expect this to go back to historical levels about four to six. In terms of the IMO market, we think we're pretty favorably positioned here at HollyFrontier to our coking, our asphalt sales and our specialty sales through flux. What we do see with IMO 2020 is an increasing in the heavy crude spread as well as potentially increased demand in gas oil. So we think we're pretty well set up to take advantage of that as well.
Speaker 0
Perfect. Thank you, guys.
Speaker 1
Okay. Thank you.
Speaker 0
Our next question comes from the line of Phil Greff from JPMorgan. Your line is open.
Speaker 1
Yes. Hi, good morning. Rich, you had mentioned several factors that led to some usage of cash in the quarter, including the turnaround planning. Could you just elaborate a bit on how you see working capital playing out into 1Q 'eighteen or just 2018 in general? Because when I was looking at the Analyst Day slide deck, where you had done your sum of the parts, ending cash balance there for November was quite a bit different than December.
Speaker 3
Fair question, Phil. So December, we mentioned I think I mentioned timing of interest and tax payments, which hit us all in December. And to your point, additionally, we're building inventory ahead of the Tulsa turnaround and that was very year end loaded. Realistically, we would expect to release working capital in the first quarter and certainly in 2018 in general. So, you should be seeing a tailwind on that side.
Speaker 1
Okay, got it. So I guess the broader question on that would be if only want to have $500,000,000 of cash on the balance sheet, likely you have positive free cash flow in excess of the dividend and then you have the working capital piece. I mean, you want to bring cash all the way back down to the $500,000,000 level? Or do you want to still have flexibility to pursue M and A as well above and beyond that? I guess that would be for George.
Speaker 2
Well, I think you stated it accurately that we're going to try to keep $05,000,000,000 on the balance sheet. And again, to the extent that we don't have M and A deals, we'll try to get to that level. If we think we have a deal coming, we'll probably float cash above that $05,000,000,000 level.
Speaker 3
So Phil, there's a little bit of art to this because we do have to manage cash around turnarounds, around capital spending, around potential transactions and all while trying to make sure we're not building cash. Think just conceptually what we wanted to highlight is we think $500,000,000 is the right number. We certainly don't expect to be structurally building cash over that amount.
Speaker 1
I guess the essence of the question was do you feel like you can continue buybacks on an ongoing basis or is this just kind
Speaker 2
of more
Speaker 1
opportunistic until M and A comes along?
Speaker 3
So again, if you think about it, obviously, we can't forecast cracks and everything else that come with this business. So in as much as things are going well, which as we sit here now, we expect 2018 to be a good year, We'd expect to be returning cash on the form of buyback.
Speaker 1
Okay, fair enough. Thanks.
Speaker 0
Our next question comes from the line of Doug Leggate from Bank of America Merrill Lynch. Line is open.
Speaker 7
Good morning, everybody. Guys, I
Speaker 2
wonder if I could take
Speaker 7
you back to the heavy oil discussion. And I just wonder if you've got any perspective as to how long you expect these extraordinary spreads last and what else you can do to maximize exposure to that in terms of swing in your relative crude diet?
Speaker 2
Yes, Doug, this is George. I'll try to start with that. And if Tom Curry has anything to chime in, he will. But I think we see the heavy oil differentials staying wide for an extended period of time. Obviously, there's increased production in Canada.
There's no imminent additional takeaway capacity from Canada. And I think even when the next pipeline gets completed out of Canada, you've got the IMO twenty twenty right behind it that will definitely impact the crude differential for heavy Canadian crudes and other heavy Canadian crudes. So we think because of again production, takeaway capacity and the IMO impact, there'll be wide crude differentials in Canada for a protracted period of time. As Tom mentioned earlier, we feel like we're in good shape for our own pipeline capacity to get those barrels out of Canada to both El Dorado and Cheyenne. And I think we've indicated in earlier calls that we're looking at coker projects, most specifically at El Dorado.
So we're continuing to evaluate that project.
Speaker 7
I appreciate the answer, George. I've got two quick follow ups, if I may. They're both kind of follow ons from some of my colleagues' questions. On the loops right back, I'm just wondering was the rapid increase in crude price a factor in addition to what you called out? And finally, I wonder Rich, when you do your sum of the parts consideration, what is the sustaining or sustained through cycle level of working capital required given that that's obviously a factor in your cash balance?
Thanks.
Speaker 2
Okay. So I'll take the first one on the loose rack back. I think the rising crude price did impact it some because our feedstock costs react quicker to crude oil than our product prices do, but still primarily due to the supply issue that we highlighted earlier in the call. Richard, do want try to take that?
Speaker 3
Yes. So, Doug, on the working capital piece, typically, right, you're keeping about thirty to forty days of inventory on both sides, if you will, both speed and product. There's going to be that we're elevated versus that number right now, but I expect that to come down. In terms of payables versus receivables, that does move a little bit in terms of volume. Our receivable terms are shorter than our payable terms.
So depending on how crude rate is fluctuating, you can see movement there as well. But broadly speaking, we'd expect to be balanced on working capital through the cycle. There's definitely going be noise quarter to quarter, month to month.
Speaker 7
Okay. I know it's not an easy one to answer. Thanks,
Speaker 0
Our next question comes from the line of Matthew Blair from Tudor Pickering and Holt. Your line is open.
Speaker 8
Hey, good morning, George and Rich. I was hoping you could talk about the black wax situation in The Rockies. We've seen a nice improvement in Utah crude production. Looks like you ran about 18,000 barrels a day of black wax at Woods Cross. So first part, can you keep pushing these black wax volumes higher in your Rockies segment?
And then the second part, currently we're seeing differentials about $5 to $6 off In the good old days that was more like $15 or at least double digit levels. Do you have any hope of getting differentials back to the $10 to $15 range? Thanks.
Speaker 1
Yes, Matthew, this is Tom Curry. You are right, around 18,000 barrels a day of black wax, we still have probably a little bit more capability to run some more as we are bringing on Phase one and some of it is economic driven and also in the winter we get some problems with specifications. So we expect a pretty good summer coming up on black wax. You're right, we're always hoping for wider differentials going from that $5 on the spot prices to higher rates. You have to realize that we've got some long term contracts that have different pricing structures in them.
So that helps mitigate some of the tightness that we see in the prices. Like any other market that's driven by supply demand economics and as more supply comes on and further markets have to be accessed by black wax, we would expect to see the differential widen as a result just like we see in Canada today.
Speaker 2
I'll just add a few points there. I think we're pleasantly pleased with what we're hearing from the producers in the region and the technology advancements that they're making that allows them to produce more crude at even better economics. The crude production is growing even in a $50 to $60 WTI environment. So that's a good thing to see. We do have the ability to process more wax crude at Woods Cross.
We think there's healthy upside to the $18 that you're talking about. One last note is just remember when we're seeing the wider differentials, the WTI price was roughly $100 too. So that differential is a little bit of function of the flat price for WTI as well.
Speaker 8
Got it. Thank you. And then I was hoping you could share any comments on the Southwest gasoline market. It looks like Phoenix gasoline cracks have been really quite weak quarter to date, trading even below Los Angeles, which you wouldn't really expect given the LA barrels are really the marginal source of supply to that market. Any color on what's going on with Southwest gasoline?
Speaker 2
No, I think your assessment is pretty accurate. And I think it's primarily due to nobody having a turnaround this year in the Southwest region. There have been turnarounds in Southern California, but primarily the majority of that supply into Phoenix from a gasoline perspective comes from the East, not from the West. And again, it's just a function of everybody running well. We've highlighted our higher utilization rate at Navajo.
We suspect others are seeing similar performance from their plants. But the biggest single item is nobody had a turnaround so far this year in the Southwest, which is which we typically have at least one plant in that region to turn around.
Speaker 8
Got it. Thank you.
Speaker 0
Our last question comes from the line of Corey Goldman from Jefferies. Your line is open.
Speaker 7
Hey, guys. Just one from us, Rich, this probably is for you. Appreciate the color on the effective tax rate that 23% to 25% in 'eighteen. Any color is on just the cash tax rate expectation in 'eighteen and beyond, assuming it's one for one, but just
Speaker 1
can provide there would be helpful.
Speaker 3
Yes, Corey, roughly speaking, it should be one for one.
Speaker 1
Got you. And that's beyond 'eighteen, I assume? Yes. Thanks, guys.
Speaker 3
Thank you.
Speaker 0
And we have no further questions in queue. I'll turn the floor back over to Craig Bury for closing remarks.
Speaker 3
Thanks everyone. We appreciate you taking
Speaker 1
the time to join us on today's call. If you have any follow-up questions as always reach out to Investor Relations. Otherwise, we look forward to sharing our first quarter results with you in May.
Speaker 0
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.