Delek US - Earnings Call - Q3 2017
November 9, 2017
Transcript
Speaker 0
Good morning. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DelcuS Holdings Q3 twenty seventeen Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I will now turn the call over to Mr. Keith Johnson. You may begin.
Speaker 1
Thank you, Sarah. Good morning. I would like to thank everyone for joining us on today's conference and webcast to discuss Delek U. S. Holdings third quarter twenty seventeen financial results.
Joining me on today's call is Uzi Amin, our Chairman, President and CEO Kevin Kremke, EVP and CFO and Fred Green, EVP and COO as well as other members of our management team. As a reminder, this conference call may contain forward looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release.
As a result, actual operations or results may differ materially from the results discussed in the forward looking statements. We undertake no obligation to publicly update any forward looking statements, whether as a result of new information, future events or otherwise. In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, we report certain non GAAP financial results. Investors are encouraged to review the reconciliation of these non GAAP financial measures to comparable GAAP results, which can be found in the press release, which is posted on the Investor Relations section of our website. I'd like to remind everyone that we are not able to comment on the pending transaction with ALDW.
As a result, we will only be taking questions about our operation on today's call. On today's call, Kevin will begin with a review financial performance of the quarter before turning it over to Fred for an update on some key initiatives. Then Uzi will offer a few closing strategic comments. With that, I'll turn the call over to Fred. Over to Kevin.
Speaker 2
Thanks, Keith. For the 2017, Delek U. S. Reported net income of $104,400,000 or $1.29 per diluted share compared to a net loss of $161,700,000 or negative $2.61 per basic share in the third quarter of last year. On an adjusted basis for the third quarter of this year, Delek U.
S. Reported adjusted net income of $65,300,000 or zero eight one dollars per share compared to an adjusted net loss of $17,300,000 or negative $0.28 per basic share in the prior year period. Our adjusted EBITDA was $195,900,000 in the 2017 compared to $9,200,000 in the prior year period. A reconciliation of reported results to adjusted results is included in the financial tables of our press release. Improved market conditions in the refining segment and the addition of the Elan assets following the transaction close on July 1 were the primary drivers of the increase in earnings on a year over year basis, which I will discuss in more detail in a few minutes.
On a consolidated basis, line items such as operating expenses, G and A and interest increased primarily due to the addition of OHAN. I would like to note that G and A expenses did include approximately $18,400,000 of transaction costs in the 2017. This was partially offset by a gain of approximately $6,000,000 related to the freeze of certain pension plans. Our income tax rate excluding the non controlling interest income associated with Delek Logistics and Align USA Partners of $10,000,000 was 55.2% in the third quarter of this year. This tax rate included a $46,900,000 net deferred tax write off in the 2017.
Excluding this amount, the income tax rate was 35.8%. Turning now to capital spending. Our capital expenditures during the period were approximately $68,500,000 compared to $10,800,000 in the third quarter of last year. During the third quarter twenty seventeen, we spent $47,600,000 in our Refining segment, dollars 3,800,000.0 in our Logistics segment, 10,600,000.0 in our Retail segment and $6,500,000 at Corporate. Our 2017 capital expenditures are forecast to be $161,600,000 which compares to $46,300,000 in 2016.
This amount includes $114,800,000 in our Refining segment, 17,000,000 in our Logistics segment, 15,700,000 in our Retail segment and $14,100,000 at the corporate level. This is a reduction from our previous estimate of $170,000,000 for the full year. We ended the second quarter with approximately $832,000,000 of cash on a consolidated basis and $596,000,000 of net debt. Excluding net debt at Delek Logistics of $396,000,000 we had net debt of right at $200,000,000 at September 3037. Now I would like to discuss our results by segment.
In our Refining segment, we reported contribution margin of $180,100,000 compared to a contribution margin of $37,800,000 in the third quarter of last year. The year over year increase in contribution margin is primarily due to improved market conditions and higher sales volume from Tyler and El Dorado, combined with the addition of Big Spring and Cross Springs refineries from the Elan transaction. The contribution margin in the 2017 was reduced by a $30,200,000 charge for an inventory fair value adjustment at Delic U. S. Related to its acquisition of Elan on 07/01/2017, which affected the Krotz Springs and Big Spring refineries.
Also, we incurred a higher other inventory charge of $13,200,000 at El Dorado, partly due to increase in product prices in the quarter. Market conditions improved on a year over year basis as the Gulf Coast five-three-two crack spread increased to $15.92 per barrel for the third quarter of this year compared to $9.85 per barrel for the same period of last year. In addition, the refining system benefited from the Midland WTI crude differential to Brent crude that was an average discount of $4.84 per barrel compared to $2.36 per barrel in the prior year period. Our refining system operated near capacity in late August and all of September during the period affected by Hurricane Harvey. RINs expense was $29,300,000 in the refining segment compared to $7,900,000 in the year ago period.
This increase is primarily due to the addition of Big Spring and Cross Springs refineries. Our logistics segment contribution margin was $30,900,000 in the third quarter of this year compared to $24,800,000 in the prior year period. On a year over year basis, improved performance was primarily due to West Texas wholesale business and the Payline pipeline. The contribution margin in the Retail segment was $13,500,000 Merchandise sales were approximately $91,300,000 with an average margin of 31.4% and approximately 54,400,000 retail fuel gallons were sold at an average margin of $0.22 per gallon. There is no year over year comparison for this segment as it was acquired in the Elantra transaction on July 1.
Contribution margin for the CorporateOther segment was negative $24,300,000 in the third quarter of this year compared to negative $9,300,000 in the prior year period. This segment now includes the asphalt business acquired in the Elan transaction. Also effective July 1, Delek U. S. Revised the structure of our internal financial information, which resulted in a change in the composition of our reportable segments.
As a result of these changes, the result of hedging activity previously reported in refining that was not specific to a refinery location is now included in our corporate, other and elimination segment. Following this change, we reported net hedging loss in this segment of $17,800,000 for the 2017 compared to $3,300,000 in the prior year period. Approximately $7,200,000 of the hedging loss in the third quarter of this year was realized. During the latter half of the 2017, light product prices increased as Gulf Coast refineries were shut down for a period of time related to Hurricane Harvey. This price change for light products compared to our hedging strategies in place at the time was the primary factor in the change in the net hedging loss on a year over year basis.
Now I will turn the call over to Fred to discuss some of our strategic initiatives we have underway.
Speaker 3
Thanks, Kevin. First, I'd like to discuss our initiatives at the Krotz Springs refinery. After further evaluation, we are moving forward with the alkylation unit project. This should provide the refinery with additional production flexibility as it improves the ability to convert low value isobutane into higher value gasoline products such as low RBP summer grades and premium gasoline. The total capital cost is expected to be approximately $103,000,000 and the annual EBITDA from this project is expected to be 35,000,000 to $40,000,000 Through September 30, we've spent approximately $20,000,000 on the project and we currently expect to complete it in the 2019.
To give you an example of the benefit of improved conversion, we expect that we expect to create by this project, you could compare Gulf Coast £7.8 gasoline prices to the prices for isobutane. Since 2011, that spread has averaged $0.89 per gallon. Our economics are based on a mid-0.60 dollars spread, and we believe this project should enhance long term value at the refinery. We are also exploring ways to reduce crude oil transportation cost and increase crude oil sourcing flexibility. By adding flexibility, we should be able to access more Midland crude into Krotz Springs when the price point is attractive relative to LLS.
One option is to ship on the Payline pipeline to increase our WTI Midland crude over time. Regarding our California assets, we do not think that they fit our current geographic and strategic footprint and we're exploring ways to derive value from those assets. Both the Paramount, including Altair and Long Beach locations are now part of discontinued operations. At Bakersfield, we're evaluating options to reduce the cost over time and it remains part of continuing operations. From a modeling standpoint, I want to discuss a couple of items.
During the fourth quarter twenty seventeen, we're expecting to complete a reformer regeneration at Krotz Springs. We're taking advantage to also perform a mid cycle decoke on the crude heater and replace catalyst in the isomerization unit. Taking this into account, we expect our crude throughput in the fourth quarter twenty seventeen at Krotz Springs to be approximately 63,000 barrels per day. With that, I'll turn it over to Uzi for his closing comments.
Speaker 4
Thank you, Fred, and good morning. This was a great quarter from a combined operation. As we achieved adjusted EBITDA of 196,000,000 and our team made substantial progress on the integration of the companies and the teamwork used during Hurricane Harvey allowed us to operate the system near capacity. During the third quarter, our crude slate was approximately 67% Midland WTI and our refinery system is well positioned to continue to benefit from the Midland Brent discount. I am pleased that we reached an agreement to acquire the remaining 18.4% of ALDW LP units that DK does not already own in an all equity transaction.
The exchange ratio is 0.49 shares of DK for each LDW LP unit. This transaction, subject to customary closing conditions, is expected to close in the 2018 and does not require approval from the DK shareholders. This was one of our strategic initiatives following the purchase of LJ. It should simplify our corporate structure, eliminate public company costs and allow us to allocate the ALDW distribution to higher retained capital investments in the company. Also, we should be able to more efficiently capture cost of capital synergies and unlock the value of logistics assets through future potential dropdowns into DKL.
I want to thank the employees of Delek US and the complete committee of ALDW for their hard work during this process. We made significant progress on capturing the synergies we are targeting from the acquisition of ALJ. During the third quarter, we captured approximately $53,000,000 of synergies on an annualized basis and are well on our way toward the goal of 85,000,000 to $105,000,000 with a midpoint of $95,000,000 In addition, our team are focused on unlocking the value of approximately $78,000,000 logistics EBITDA through future potential dropdowns to DKL. Also, through access to DKL's logistics system, we can support this larger operation through crude oil and light product initiatives in the future. Based on September 30, our cash balance was approximately $832,000,000 This financial flexibility should enable us to support our initiatives to improve Broadspring, move forward with the integration and evaluate potential growth opportunities.
As we continue to explore opportunities created by a larger, more diverse company, we remain focused on creating long term value for our shareholders. Before I turn it over to Sarah, I would like to congratulate my dear friend, Alan More for his appointment as President of DKL. Alan joined DK with the Alon transaction and I look forward to working with him in the future. With that, Sarah, will you open the call for questions please?
Speaker 0
Certainly. Your first question comes from the line of a participant whose information was unable to be gathered. Caller, if you've queued up for a question, please state your first and last name and your company name. Your line is open.
Speaker 5
Hey guys, I think it's me. It's Blake Fernandez at Scotia Hard Wheels. So sorry about the prompt.
Speaker 4
Well, my name is hard to pronounce. Blake, I don't think yours is, but now I learned something new.
Speaker 5
Well, congrats on the results. It's nice to see you back in the black here, Uzi. So good for you guys. Happy
Speaker 4
to be here.
Speaker 5
Yes. Question for you. So with the kind of sanctioning of this project here at Krotz Springs, I think there was some discussion previously about potential asset drops from the facility and there were some, I guess, question marks as to whether you were going to continue operating it. Is it fair to say now obviously with moving forward with this project that you're now back on track on potential EBITDA drops to DKL?
Speaker 4
Well, let's back off from the drop down. I'll answer it. I'm not going to dance around the question. I want to answer it in a different way. As we all said in the past that we in oil costs, to improve itself, we need to look at three aspects of it.
The first one is the crude transportation to the refinery. The second is the facility itself. And third, the selling of the products that we didn't get the premium that we thought we should get. So let's start with the first initiative. As we all know, in the last six months and we will see it in the results we already see it in the third quarter, but we'll see it more in the fourth quarter.
The LLS Midland LLS spread in the third quarter, it was around $3 And right now, we're sitting at for December close to $6 or a little less than $6 maybe $5.5 So we said all along that we need to utilize the combined company assets to bring Midland barrels or safe transportation to Krotz. Krotz, beginning of the year, was running 20,000 Midland and 50,000 or 55,000 LLS. We are working towards and probably be there by the in December of having more than 40,000 barrels of Midland instead of LLS and capture some of that differential. We do it by having utilized the pay line pipeline, which is over nominated right now. And DKL announced this morning that we are going to increase the capacity to 42,000 on the pay line that will allow us to capture that big differential.
So we're working our way. Our goal is to get as close as we can to capacity on Midland based pricing for crude and that will eliminate big cost of the transportation. That's one component. The other one is the operation. The first one is the Alki, it's the easiest one.
The return is pretty good. We were conservative when we put 35,000,000 to $40,000,000 There are other projects that we are looking at. And the third one, we are working on a wholesale initiative. We are not ready to announce anything to the market substantially, but we're working on that along the Colonial Pipeline to capture some of the value along the Colonial Pipeline. We saw a big example of that during the hurricane.
So and we said all along that we need to work on these three before we declare victory on Crocs. We're doing that. So now going back to your original question, declaring victory and say we're going to drop down the assets to DKL is premature. So I would say, let us work a few more quarters and improve the facility and then we'll talk about that. That was a long answer to a short question, but I hope it covered everything.
Speaker 5
No, that's very comprehensive. Thanks for the answer. I guess I'll just spend both of my questions on Crodfin. Just given that you spent, I think it's roughly $20,000,000 or so, it seems like that's going to obviously put the bulk of the spending into 2018. Do you have any kind of initial thoughts or modeling suggestions on the capital spending for next Yes. Year?
I'll leave it
Speaker 4
How come I'm not surprised with this question? It's around $50,000,000 $53,000,000.53000000
Speaker 5
dollars okay. And do you have a total or is it just add that
Speaker 4
to The remaining is in 2019.
Speaker 5
Okay. Okay, I'll leave it there. Thank you.
Speaker 0
Your next question comes from the line of a participant whose information was unable to be gathered. Caller, if you've queued up for a question, please state your first and last name and your company. Your line is open. Your next question comes from the line of Paul Sankey, whose company was unable to be gathered. Caller, please state your company name.
Your line is open.
Speaker 6
Yes, I'm speechless. You've really made this call exciting for us all. I can imagine this. There's plenty analysts out there all yelling at the phone. I was just yelling hello, hello, hello on the previous one.
I don't know how you can work this out, but it's obviously going to be very tough for us. But anyway, more seriously at a high level, Lucy, where do you see Delek strategically right now? And with things obviously advancing on the MLP consolidation front, where do you now see the company strategically and going forward? Thanks.
Speaker 4
Mr. Senki, without a question for you, we would have not finished the call. So thank you for saving everybody from this. Obviously, the that's as usual very exciting, very smart question and very good one. We in the next two, three quarters, we will complete hopefully integration or the integration of Alon and with the Midland brand doing what it's doing.
By the way,
Speaker 6
Wait, how I'm going do you how do you the integration? I mean, when you say it's complete, is that
Speaker 4
both the systems, I. E, IT and accounting, HR obviously, and then capture most of the synergies. I think we are hoping to get all the synergies by the end of next year. So if this is happening the way we are expecting and so far it looks pretty good, then the next step we need to ask ourselves is to continue to look at opportunities in the marketplace. Obviously, balance sheet, we all know, is very good.
And we want to continue to grow the company. We have ideas on the midstream side. And obviously, in today's market, it doesn't make sense to pay 17 times multiple for something that actually doesn't make sense. But we still think that there are opportunities and undervalued assets in the marketplace. It's too early to declare victory on the Alon integration, but we already see that we made good progress on that.
So we feel that our ability to integrate assets just getting bear and bear over the years.
Speaker 6
Yes. Do you think I mean, when you're thinking about the undervalued and the growth that you obviously want to keep pursuing, is that more of a midstream concept or more of a refining concept or both?
Speaker 4
Probably look at both. We want to be very prudent with the capital allocation. We all remember downturns and we don't want to during the heydays, we don't want we want to maintain strong balance sheet, which has basically allowed us to buy LJ. So we want to use the same strategy in the future.
Speaker 6
Great. Okay. So that's interesting. Thanks. The next question is from an analyst.
He doesn't know if he's being pulled from a firm he doesn't know is being polled. Thanks, Susie. Great to hear you.
Speaker 4
Thank you, Paul.
Speaker 0
Your next question comes from the line of Ryan Taub from Deutsche Bank. Your line is open.
Speaker 4
Great, thanks. Ryan, this is your lucky day. Know. Identified your name in the film.
Speaker 7
Yes. If you can't pronounce my name, you're having a tough time. So maybe first a question on cash and use of cash. I think you had talked about the I mean, mentioned your cash balance. You talked about being able to use this to fund some of the capital projects you have ongoing.
But can you talk a little bit about priorities for the whether there's room for anything else in the growing cash balance, the potential as you look down the line for additional cash return to shareholders? And maybe a reminder in the past, think you've talked about wanting to maintain around a 5 to $600,000,000 cash balance. Is that still the right number?
Speaker 4
Yes. And the thought process let me be clear. Next week, next week, next year. I wish next week. Next year, we have the convertible the $150,000,000 convertible bonds that we got during the ALJ transaction that these were ALJ convert.
And we obviously want to redeem them with cash. So that will lower the debt and also prevent equity issuance for 2018. With the market doing what it's doing, obviously, there's a growing amount in pressure to look at the dividend as well as the buyback. We wanted to be prudent and to make sure that we are integrating our loan into the system with no problems. But the way we see obviously, we saw third quarter and fourth quarter is fixing to be, then it makes sense to visit this idea or these ideas.
Speaker 7
Okay. Thanks, Uzi. And then maybe one follow-up on your earlier comments about the potential opportunity set there at Krotz Springs. Is the I mean you talked about the potential to switch out maybe up to 20,000 barrels a day of LLS for Midland crude there by the end of the year. Is the benefit of running Midland crude, is it a dollar for dollar on the differential in terms of the benefit that you see of running a Midland barrel versus an LLS?
Is there a difference in transport costs? Just trying to think of how big the potential price is for swapping out 20,000 barrels a day crude?
Speaker 4
You're asking a great question that transportation cost is higher. I'm not going I will make up a number, but the transportation cost is higher in terms of getting the crude for Midland. Think it costs I don't want to start giving numbers that are coming out of my memory, we can probably provide it later on. But out of the $5 or $5.5 a big or substantial portion of this will stay in our pocket. Actually, we already saw it in the third quarter, but there was noise in the third quarter.
I just want to make clear, didn't want to allocate anything about it. But in the third quarter, because of the hurricane activity, we need to pay higher prices for barges in order to maintain the cross refinery to maintain it almost full. So there's noise in the third quarter numbers. That noise will disappear in the fourth quarter. And going forward in the first quarter, it's going to be to level down.
Now again, we do big portion of this being paid to DKL. And that's the reason we see pay lines outperforming what the expectation was. And actually, we already said that we are expanding their pipeline in the future. So big portion of it, we get it through our DKL ownership.
Speaker 7
Okay. Thanks, Susie. Appreciate the help.
Speaker 0
Your next question comes from the line of Roger Read from Wells Fargo. Your line is open.
Speaker 8
Hey, good morning. It turns out I'm not operating incognito here. Anyway, a quick
Speaker 4
question We for are confused now that we hear there is somebody with a name and a firm. So we don't know what to do with the question.
Speaker 8
You don't know. It could be somebody else altogether. Understand the investment you're making at Krotz Springs. One of the other items at that location, if I remember correctly, does not make ULSD. I know you've talked in the past about IMO 2020 maybe providing an outlet, but what is the once you get through the alkylation process, what would be the thought on how to address the other side of the barrel there?
Speaker 4
Fred, I'll let you take that one since you're the expert for DHT here.
Speaker 3
Hey, Roger. So we're looking at what it's going to take to integrate hydrotreating into that facility. But we also have some other options given that we have spare diesel hydrotreating capacity of both El Dorado and Tyler. As we've been working on shipping products to Mexico by rail. So that may be something that we can fold into that operation.
Speaker 8
All right. So I guess still optionality for a couple of years anyway?
Speaker 3
Yes. We're still running the numbers. As you can imagine, we've got our hands full.
Speaker 8
Definitely. And then Uzi, maybe at the corporate level, hedging, I don't mean to be mean about it, but it seems to be more often a drag than a positive event. As a larger company, four units instead of two, the retail assets and all, hedging still going to remain a key part of what you do? Or is there a re think on whether or not that makes sense as a strategy here?
Speaker 4
Absolutely, it makes sense. We check it obviously, we want to win all the time. In the last year, we obviously didn't win much. But at the same time, let's be clear, all this hedging came from one place one place only. The month of September with the ultra loss of diesel jumping to because of the hurricane jumping to as much higher number.
Without the hurricane, which obviously benefited us big time, the hedging would have been in black for the quarter. So I while I hate the $7,000,000 and I said to Keith, we need to highlight that. So people will see that it didn't come from the operation. Still we benefit from the hurricane big time. So we want to maintain this in our toolbox.
Speaker 8
Yes. Well, a lot of people got flooded by that hurricane, that's for sure. All right. Thanks, guys.
Speaker 4
Thank you, Roger.
Speaker 0
Your next question comes from the line of Neil Mehta from Goldman Sachs. Your line is open.
Speaker 9
Good morning guys. Congrats on a good quarter here.
Speaker 4
Hey Neil, good morning. Thanks for the support.
Speaker 9
Uzi, the first question I had was just on Midland differentials. And one of the questions we get often is what ultimately sets the product prices in your markets? Is it fair to say that it's broadly Brent at which point you should be thinking about Midland versus Brent as the key benchmark for you guys from a profitability standpoint? Or there's some of those barrels that are priced more off of local crude? And then just a follow-up there is, how do you think about that differential over time evolving Midland TI and then also Midland Brent?
Speaker 4
These are great questions, Neil. I think we spoke about that several times in the past. First, unfortunately to me, I'm being recorded every quarter. So I think we all spoke about the idea that Midland Brent will widen toward the end of the year. I honestly didn't expect to see the $6 or $6 and change that we are seeing.
I was expecting to see lower than that, but we'll take it as long as the market gives us that opportunity. One key point that we need to remember around this idea is that Mars and starting in the third quarter and that benefited our company big time, Mars is still more expensive than Midland by almost 2 thousand or 1.5 today, I think. So the benefit for the Midland Brent is mainly for the light with crude refineries. But I'll leave it to that with that comment. Do I believe that this will stay $67 Probably not.
Do we think it will go to 5 or $4 or $5 Probably yes, long term. What will dictate that is obviously one big thing, the export. While we're getting people are very focused on the offtake capacity, the barrel or the Midland barrel needs to clear itself either at The Gulf or outside The U. S. And at The Gulf, think that know Ben and I do that there's limited capacity.
Over time you can increase it, but for this moment, there's limited capacity. Also there's limited capacity for export at this point, obviously people are working on that. So for the short term, the few next few months, it will stay, we think wide and after that it may normalize toward the $4 or $5 In terms of the local market netbacks, that's a great question. It depends on the market itself, but we just need to remember that our competing market, if you will, are pipelines. And these pipelines for the most part coming from The Gulf.
So as long as the Gulf Coast refineries will see the crack spread not as great as they see today because of the Maas situation or because of the Maas situation, we are in good shape. Also, remember that in West Texas, we integrated the terminals that DKL used to have with the ALJ operation. So the margin that we've seen in West Texas are pretty good. And we hope to continue to see them in the month of October that margin was $3.2 so continue to be very strong. I hope I answered extensively enough to cover every aspect of your question, Neil.
Speaker 9
Yes, that was good. That was thorough. The follow-up is just want clarification. You talked about returning capital to shareholders both Ausy. Potentially looking at the dividend or maybe even coming back to the buyback program.
Is that return of capital story on hold until the ALKU project is done and you've made the big investments at Crops? Or is there the potential to look at that while simultaneously spending on the project?
Speaker 4
Absolutely not. The project if the market will continue to do what it does, then we are going to act rather quickly.
Speaker 9
Uzi, one last one, if I could sneak one last. The 30,000,000 to $45,000,000 assumption that underpins the EBITDA from the Alky unit, can you just walk us through the assumptions? You said they were conservative, but what are the key points that underpin that EBITDA number?
Speaker 4
I'm going to repeat the question. Well, I think the question was that what dictates the numbers behind the 35,000,000 to $40,000,000 benefit at the ALKIs that the question?
Speaker 9
Exactly.
Speaker 4
Okay. Fred, do you want
Speaker 3
to take that one? Sure. Neil, right now, the refinery configuration has us utilizing a Cat Poly unit to polymerize butylenes and selling isobutane into the market. And what the Alky does is it allows us not only to stop selling isobutane, which is at a much lower value than gasoline, but we can then convert those butylenes and purchase isobutane in order to make high octane gasoline. So the net effect is we see an uplift of in our assumptions $0.65 a gallon on the difference there between CBOB 7.8 pound gasoline and the isobutane.
So it's you can back into the amount of volume that we're talking about. But our gasoline production will go up and we'll be able to take advantage of that price differential between isobutane now as a feedstock and the CBOB 7.8 pound sales.
Speaker 9
That's great. Thanks guys.
Speaker 4
Thanks Neil.
Speaker 0
Your next question comes from the line of Phil Gresh from JPMorgan. Your line is open.
Speaker 10
Yes. Hi, good morning.
Speaker 3
Good morning Phil.
Speaker 4
First
Speaker 10
question, which I think maybe Blake was trying to get at this a little bit initially. Do you have any thoughts around the total company 2018 CapEx budget? I know you said $53,000,000 for Krotz Springs. I think you have a turnaround next year. I think you didn't have one this year.
So just any thoughts you could provide there?
Speaker 4
We'll obviously give you the numbers beginning of the year as the Board will approve it, but we do have a good sense of that. So let me walk you through some of the numbers. Obviously, this year, the number all the guidance we gave is $160,000,000 that's down from the 170,000,000 previously announced. If you look not including growth projects that we should if we identify these projects, we'll talk about them specifically. It's the net general rule of $25,000,000 per refinery on maintenance CapEx per year.
The $50,000,000 that I just mentioned on the ALKEY for next year, a little more than $50,000,000 or a little more than that, depends on the turnaround, but call it between 50,000,000 and $60,000,000 And then corporate, DKL probably $20,000,000 to $30,000,000 just the regular stuff and corporate depends on how much we need for integration. These are the numbers more or less.
Speaker 10
Got it. So somewhere in the $200,000,000 range?
Speaker 4
Well, probably a little more than that. If you take the you have the ALKEY, 100 that's together a little more than 100,000,000 then four refineries and then a little bit on a little more than 200, maybe between 200 and $2.50.
Speaker 10
Okay, got it. And then maybe just asking the dividend question in a slightly different way. I mean, you have a lot more cash flow now from four refineries and you provide some diversification benefits and things like that as well. So I mean, is there a level of dividend as a percentage of CFO or earnings or something that you over time you might hope to target? Have you given thought to that?
Speaker 4
Absolutely. We just want to absolutely, we talk about that almost on a regular basis. We just need to remember that all this is new to us. And we don't want to declare victory after three or four months. Obviously, what we see, are very happy with, very pleased with the results.
And we'll continue to talk about that as we continue to integrate the system in the next quarter or two.
Speaker 10
Okay. I guess last question. So the asphalt jobs, I apologize if I missed this. I assume you're still planning all cash to the parent based on the availability at DKL and that can help to fund some things like the converts and whatnot?
Speaker 4
Absolutely. The asphalt is all cash by definition. That's the reason we did the bond offering a few months ago, and we're working on that as well.
Speaker 10
Okay. Thanks a lot.
Speaker 4
Thank you, Phil.
Speaker 0
Your next question comes from the line of Chi Chao from TPH. Your line is open.
Speaker 11
Great, thanks. Good morning.
Speaker 4
Good morning, Chi. Good
Speaker 11
morning. I want to follow-up on Neil's question on Midland. I know we've discussed this very recently together, but a couple of questions. One, why do you think Midland is I know Midland Brent is the key spread for you, but why do you think Midland is trading above Cushing right now despite Because of
Speaker 4
the quality of the barrel. I'm sorry, I interrupted you. I thought you finished. Go ahead and finish your question.
Speaker 11
Yes, no, no. I mean that was the question. All the production is coming right there from the basin, yet we've got this premium on Midland and I guess by extension, yes, are you what's the issue with the quality? And is that going to be an ongoing trend, I guess, since the barrels seem to be getting lighter and lighter there? Any comments would be helpful.
Speaker 4
First, as you know, we can bring barrels from Midland or from Cushing to our refineries. We always prefer Midland because that's the need barrel and it's not being blended along the way. What is being done at Cushing, and again, we don't have operation at Cushing, but there are companies with Wizzes Mall that work for them very well that take different types of crude in Cushing and blend them. And for our company or our operation, and Fred can talk about for hours, we always prefer the need barrel coming from the well itself. And I assume that this is happening for other companies.
When you get the need barrel that not only improves your yield, but the duration and the time that you run the unit is growing. So the quality of the barrel is always number one versus price.
Speaker 11
Will the volume of the need barrels start to diminish though as the incremental barrel gets production wise gets lighter and lighter out of the basin there. Are you having concerns on that then?
Speaker 4
I'm not concerned about that for us and I'll tell you why, because what we see around and our main hub is becoming more and more Big Spring. What we see in the Howard County and the couple of counties around us, that the need barrel stays the way it is. It's getting lighter and lighter at the Eagle Ford side, but in the counties that we're in, actually that's the main reason why we are looking at other alternatives to bring crude to Big Spring. And we mentioned earlier that we are building or we build offloading rack at Big Spring. We're doing other stuff in Big Spring that it's not time to talk about that just yet, but to not only to save money on transportation, but to continue to enjoy the quality of the barrel.
Speaker 11
Okay. Thanks. And then secondly on retail, I know you've talked about this before, but do you have any further thoughts on whether you consider the acquired retail sites as a core asset of the company going forward here?
Speaker 4
Retail is keeper. As we said in the past, we believe in retail. I personally believe in retail. I think that there's tremendous amount of value to be created, especially with the locations that Alon has or Alon used to have that we have now in key strategic areas in the entire Permian Basin. And with the growth that we see in that basin, we see performing very, very well.
We'll start building our mega stores in the area and together with the wholesale business that we have over there that we will continue to improve, we see this as strategic to our business.
Speaker 11
Okay. Thanks. So maybe one quick final one. What's the size of the Alky unit at Kratz?
Speaker 4
Fred?
Speaker 3
It's roughly 6,000 barrels per day of alpha load production.
Speaker 11
Thanks. Appreciate it.
Speaker 0
And your next question comes from the line of Kelly Ackermine from Bank of America. Your line is open.
Speaker 12
Hey guys, Kalei Akamenei from Bank of America. First, congratulations on AOWD. My question is on consideration. Was wondering if you can offer any thoughts on the use of equity versus cash. With all the cash on the balance sheet, I'm wondering if there were any tax considerations to navigate given the MLP structure?
Speaker 4
That's a great question. I'll be very brief about it because honestly, we can't talk about ALDW much. I'll just say that we the idea was to allow the ALDW to participate in the upside with DK similar to what happened with ALJ. With ALJ, as you remember, we offered a price and then since then, the shareholders of DK enjoy a big portion of the performance of the combined company and the idea behind ALDW was the same.
Speaker 12
Got you. Anything you can offer on the tax considerations?
Speaker 4
Kevin?
Speaker 2
Yes, the taxes were actually negligible in the transaction. But by virtue of this transaction, current ALDW unitholders get to participate in passive activity losses that they've received historically that they otherwise would not have a chance to utilize. So the total tax impact was negligible.
Speaker 12
Okay. Secondly, I was wondering if you can expand on the strategic initiatives that you're pursuing at California, perhaps maybe talk broadly about interested parties, whether it includes shutting those facilities down, timing and any other expectations you may have?
Speaker 4
Obviously, putting it below the line makes a statement here. So if we weren't comfortable with the strategic move with that, we wouldn't put it below the line. I'll leave it to that, but we do we are very comfortable where it sits right now on the balance sheet.
Speaker 12
All right. Thanks guys.
Speaker 0
And your next question comes from the line of Brad Efrain from RBC. Your line is open.
Speaker 13
Hey, good morning everyone.
Speaker 4
Hey, Brad.
Speaker 13
Hey, how's it going, Uzi? I think most of my questions have been asked, but I'll just have one on the synergy number that you guys have given out, the $53,000,000 achieved to date. Can you talk a little bit about sort of the buckets that that's coming from? I would imagine most of it's corporate and the cost of capital. But have you guys harvested any of the commercial or operational synergies at this point?
Speaker 4
You're asking great question. Out of the corporate and roughly half was achieved already. Cost of capital, actually not everything or not much. One thing that we actually did is the LC that Alon used to have is now zero. We work with parties, our counterparties and the LCs went to zero.
At the same time, we are still working on other three, ALDW925 bonds, we're looking at other facilities that are higher. That will happen over the next twelve to eighteen months. Not too much on the cost of capital just yet. Well, as of the third quarter, obviously, you'll see more of that in the fourth quarter. In terms of commercial, we're working on what we mentioned earlier, the connectivity between Midland and Krotz and the Payline facility is a big portion of that.
So we started that in the third quarter and we're working on that in the fourth quarter. Obviously, the margins, the consolidation of the terminals in West Texas, both operationally and from a marketing standpoint, we did some of it already. And I'll leave it to that. I'll just say that we kept the range the way it is, but we feel really good about that range right now.
Speaker 13
Okay, got it. Thanks for that color. And I guess I'll be a liar and ask a second question actually. On Bakersfield, can you talk about just what the opportunity is that you see there that's keeping it as continued operations versus the other assets?
Speaker 4
Bakersfield, as you remember, has that rail permit. And we still need to we're not planning to operate Baker Street as a refinery, but it may have a value one way or another. We don't want to spend money just for spending money. We just we weren't comfortable to put it below the line just yet before we finishing evaluating the situation.
Speaker 13
Understood. Thanks.
Speaker 0
And your next question comes from the line of Chris Dennis from BCMI. Your line is open.
Speaker 14
Yes. Hi, nice quarter. Could you drill down a little on the $30,000,000 inventory fair value adjustment you made? I would have thought those adjusting journal entries would have been made when the deal closed with Alon.
Speaker 4
Danny, do you want to take that one?
Speaker 15
Yes, sure. So from an accounting guidance standpoint, when inventory is purchased in a business combination, that inventory is fair valued on the date of acquisition. So on July 1, the finished products that we bought from Alon were valued at market prices on the July 1. So when we sold that product in July, the beginning inventory, the cost of goods sold for that product was higher, virtually eliminating the realized margin from the sale of that product.
Speaker 14
What about the rack? I mean, we just came off the lowest WTI for the year in mid June. So I mean, most people are making FIFO adjustments that are unfavorable right now. You guys haven't done that.
Speaker 4
Well, there's no connection to the rack here. What basically we did is basically these are accounting guidance, as Denny said. Regardless of what the price at the rack is, what you do is you take the price as it exists in the marketplace, the same the day or the month of the acquisition. And then you basically put it on your books at that price. So there's no margin for these with that inventory for the month of July.
That's basically very typical for mergers like that, and that's what we did.
Speaker 14
So this is a refined product inventory write down?
Speaker 4
Not write down, but basically fair value. We took the it's refined let's just say for a second that Big Spring had 100,000 barrels of gasoline. So instead of selling it crude plus the margin, we put it on our books initially at the price of gasoline. So when we sold the gasoline, there was no margin. So the calculation was based on the crack spread just to come to this $30,000,000 But the way we did it from accounting standpoint, similar to what we did with the when we completed the stock the share purchase of a lot, we bought it to the market and we adjust these two because it didn't make sense.
Otherwise, the earnings would have been I think $1.0.3 or something like that.
Speaker 14
Okay. Thanks very much for the clarification.
Speaker 4
Thank you.
Speaker 0
And there are no further questions in the queue at this time.
Speaker 4
Thank you, Sarah. I'd like to thank the investors, view the analysts. I'd like to thank my friends around the table, Board of Directors, but mostly I'd like to thank our employees for making this company what it is. Have a great day and we'll talk to you soon.
Speaker 0
This concludes today's conference call. Thank you for your participation and you may now disconnect.