PBF Energy - Q2 2023

Transcript

Operator (participant)

Hey, everyone, welcome to the PBF Energy Second Quarter 2023 Earnings Conference Call and Webcast. At this time, all participants have been placed on a listen-only mode, and the floor will be open to your questions following management's prepared remarks. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.

Colin Murray (VP of Investor Relations)

Thank you, Debbie. Good morning, and welcome to today's call. With me today are Matt Lucey, our President and CEO, Tom Nimbley, our Executive Chairman, Karen Davis, our CFO, and several other members of our management team. Copies of today's earnings release and our 10-Q filing, including supplemental information, are available on our website. Before getting started, I'd like to direct your attention to the Safe Harbor statement contained in today's press release. Statements in our press release and those made on this call that express the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we describe in our filings with the SEC. Consistent with our prior periods, we'll discuss our results today, excluding special items.

In today's press release, we describe the special items included in our quarterly results. The cumulative impact of these special items increased second-quarter net income by an after-tax amount of approximately $729 million, or $5.59 per share. This relates primarily to the gain realized on the formation of the St. Bernard Renewables equity-method investment. Also included in today's press release is further guidance related to our 2023 operations. For any questions on these items or follow-up questions, please contact Investor Relations after today's call. For reconciliations of any non-GAAP measures mentioned on today's call, please refer to the supplemental tables provided in today's press release. I'll now turn the call over to Tom Nimbley.

Tom Nimbley (Executive Chairman)

Thanks, Colin. Good morning, everyone, and thank you for joining our call. Refiners follow the markets and respond to consumer demands. We continue to hear calls for higher refining utilization and see a market supported by low inventories and sustained customer demand. Crude differentials narrowed over the quarter. It is common to have narrow crude diffs during peak summer runs. The narrowness is amplified by the production policies of OPEC+ and, to a lesser degree, recent SPR restocking activity. We believe crude markets are near the peak of the narrowness and would expect crude diffs to relax post-summer as the industry heads into fall turnarounds that are forecasted to be higher than seasonal norms. PBF's refining system is well-positioned to manage these market dynamics. We have a complex conversion, ample reforming capacity, short naphtha, and our long octane.

We like our yield profile, that puts the company in an advantageous position. Refinery margins remain well above historical mid-cycle, and we have seen a recent rebound from the relative lows experienced during the second quarter. I say relative because those lows were still above mid-cycle. A key theme for 2023 is the recovery in the demand for jet fuel and gasoline, partially offset by a decline in distillate demand as industrial production has slowed. Diesel inventories are up, yet still remain below five year averages. However, at this time of year, we expect to see distillate inventories building into the coming agricultural season and winter. The fact that we are not seeing this normal seasonal activity provides some support for potentially stronger distillate markets ahead. The markets will continue to be volatile. Predicting the timing of and the future moves in the commodity markets is challenging.

At the same time, we are seeing stable to growing demand for our products at our refinery gates, thereby continuing the call for high utilization from our assets. With that, I will turn the call over to Matt.

Matt Lucey (President and CEO)

Thanks, Tom. Before commenting on the quarter, I thought I'd take a moment to give you my perspective of the company as I take on the role of CEO. First, I can say with absolute confidence that today, PBF is in its strongest position ever as an operating company. As I reflect on PBF's time as an operating company, which began in 2010, I break our history into three distinct periods. The first five years, from 2010-2014, we set the foundation of the company and established our refining platform. The second five, from 2015-2019, we focused on growth. We doubled our refining capacity, increased our logistics footprint, and geographic diversification. The three years from 2020-2022, we navigated the most volatile marketplace the oil market's ever experienced.

Maintaining consistent, safe, and reliable operations through the lows allowed us to fully capitalize on the robust market recovery to generate record financial performance. Which brings us to today. We have repaid over $3 billion in debt, repurchased PBF Logistics and PBF's inventory intermediation agreements, reduced our environmental credit payables by about 40% since the beginning of the year, entered the renewable fuels business with a world-class partner in ENI. We started paying a dividend and commenced in executing a share buyback program, where we bought about 8% of the shares. Moving forward, our focus is on capital allocation. Our repositioned balance sheet will buttress the company against future market disruptions, which are inevitable in this cyclical industry or any cyclical industry for that matter.

Our goal is to further strengthen our business, cash flows, and balance sheet, and to work with the rating agencies to highlight these improvements, with the intention of eventually becoming an investment-grade company. On that front, we have recently been upgraded by S&P, Moody's, and Fitch. We will continue to invest and innovate at each of our refineries to maintain and improve our reliability and competitive positioning. We will evaluate growth opportunities that leverage our expertise and large industrial footprint into high-quality business opportunities that diversify our cash flows beyond refining, similar to the renewable diesel business we developed at Chalmette. Most importantly, we will weigh potential investments in growth against returning capital to shareholders, with the goal of maximizing long-term value. By definition, any returns associated with any future potential growth opportunities must be and will be superior to buybacks and dividends.

Our process will continue to be rigorous and disciplined and will ensure competition for capital so that funds will flow to highest and best use. PBF is committed to driving long-term value for shareholders. This obviously begins with working safely and operating reliably and responsibly. On that note, in the second quarter, our refineries operated reasonably well, with system-wide throughput in line with our expectations. We completed a turnaround of the Delaware City coker and minor work on the hydrocracker in Torrance. There will be a larger FCC and alkylation unit turnaround in the fourth quarter at Torrance. As mentioned in our press release this morning, the St. Bernard Renewables joint venture transaction closed in June. We are more than pleased to have gotten to this point and look forward to operating this venture alongside ENI Sustainable Mobility. The operations of SBR are progressing as planned.

We successfully started up both the RD unit and the PTU. The facility is running well. We continue to line out operations. We sold our first commercial cargoes in July. We are more than halfway through the year. Market conditions have provided PBF with the opportunity to generate exceptional results. While the work to maintain the strength of our balance sheet is ongoing, the major efforts to improve it have largely been completed. We will continue to focus on a robust balance sheet with a simplified and transparent capital structure. We intend to demonstrate the durability of our transformation and our through-the-cycle financial strength. Our goal is to generate long-term value for our investors through solid operational performance and disciplined capital allocation. With that, I'll turn the call to Karen.

Karen Davis (CFO)

Thank you, Matt. For the second quarter, we reported adjusted net income of $2.29 per share and adjusted EBITDA of more than $560 million. As mentioned at the opening of the call, adjusted net income excludes the gain on the investment in St. Bernard Renewables. We closed on the joint venture partnership at the end of June, going forward, we will account for our 50% interest using the equity method. The fair value of the SBR business was approximately $1.72 billion at closing, excluding working capital. In the second quarter, we recorded a gain of approximately $969 million relating to the formation of the joint venture.

The gain represents the difference between the value of the consideration we received, which includes the fair value of our 50% non-controlling interest in the partnership, plus the cash contributed by our partner and the carrying value of the related assets we contributed. On June 28th, upon closing of the transaction, we received $431 million, and on August 2nd, just yesterday, we received an additional $415 million subsequent to the successful commercial startup of the PTU in July. In total, PBF has received $846 million relating to its investment in SBR. PBF is entitled to potentially receive up to an additional $30 million of contingent consideration if certain performance conditions are met.

While we exclude this one-time gain from the discussion of our second quarter results, this transaction generated real equity value for PBF and holds potential future value through additional opportunities we look forward to exploring with our new partner, ENI. With our results from operations and the cash provided by the successful closing of the SBR and the equity investment, we continued our work to improve the financial position of the company, strengthen our balance sheet, and reward shareholders. We further reduced our outstanding environmental payables by approximately $250 million, for a total of approximately $570 million year to date. Our environmental credits payables have now been reduced from over $1.3 billion at the end of last year to just under $800 million at the end of June.

Continuing with our effort to streamline our balance sheet, in July, we exited our inventory intermediation agreement at a total cost of approximately $270 million, including the cost of repurchasing the inventory and transaction fees. This arrangement had been our highest cost of capital. For the first time in our history, the company now owns and controls all of its inventory, a milestone event in the development of PBF. We continue to purchase PBF shares, and through today, we have repurchased almost $440 million worth of PBF shares, including $100 million in the second quarter. For the life of the program to date, we have repurchased over 11 million shares and reduced our total share count to just under 124 million shares.

Our G&A expenses for the second quarter came in at $104 million, which includes our base G&A expense and amounts related to the company's incentive and equity-based compensation plans. For the sake of clarity, PBF's annual base G&A expense should continue to be in the $200 million-$250 million range. Depending on financial and operational performance, on top of this, there could be approximately $100 million in incremental G&A expense related to our compensation programs. This incentive component of G&A is variable and dependent on a number of factors, the most important of which is our financial performance. If the company does well, so do our investors and our employees.

Consolidated CapEx for the second quarter was approximately $367 million, which includes $260 million for refining corporate and logistics and approximately $107 million related to SBR. Our refineries should continue to demonstrate durable earnings power, and we are adding diversified earnings streams as SBR comes online. For the second quarter, SBR was not a contributor to the earnings of our system as we did not fully start up until July. As of today, we have reached planned throughput rates and expect to continue operating in the 20,000 barrel per day range. We have previously mentioned our EBITDA per gallon expectations on a steady state basis, but we do not expect to reach that run rate until we receive all of the required regulatory approvals for our pathways and products, which could be into the first half of 2024.

We ended the quarter with over $1.5 billion in cash and approximately $1.44 billion of gross debt. We continue to focus on the strength of our balance sheet and ensuring that the needs of the business are satisfied. We believe our sector-leading balance sheet meets or exceeds many investment-grade credit metrics, and we will continue to exercise balance sheet discipline and sound financial policy. Operator, we have completed our opening remarks, and we'd be pleased to take questions.

Operator (participant)

In a moment, we will open the call to questions. The company requests that all callers limit each turn to one question and one follow-up. You may rejoin the queue with additional questions. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Roger Read with Wells Fargo. Please proceed with your question.

Roger Read (Senior Energy Analyst)

Yeah. Hello, good morning.

Matt Lucey (President and CEO)

Morning, Roger.

Roger Read (Senior Energy Analyst)

I guess let's... Well, first off, Matt, congrats on CEO and all. Can we take a hard look at the, the diesel markets and, and your comments, right? Diesel demand's been relatively weak. Diesel inventories haven't done anything very extraordinary in terms of building. As we look to the fall and winter, you know, let's say even a normalized economy next year on the industrial side, what's your view of the ability to deliver enough diesel into the market and what this may mean for margins going forward?

Matt Lucey (President and CEO)

I'll, I'll start and maybe pass it over to Tom. He made a couple comments that I think are on point. diesel was a bit softer, but we also if you bring it back to last year, it's, it's the same pattern we've seen, maybe in sort of longer, longer duration. gasoline was much stronger the, the first part of the year than diesel. As a result, we made more gasoline and, and the diesel yield declined. There's always unintended consequences. You're exactly right. Over the last couple weeks, we've seen a tremendous rebound in the diesel crack, and that's partially because of this time of year. We're still well below historical norms for diesel inventories, and so the market has to create the incentive to make the diesel going into, you know, the agricultural season and, and the weather turning.

I have no doubt that we'll be able to the marketplace will figure out a way to, to make the diesel, to provide the, the marketplace with sufficient diesel. All these questions always come back to the same answer, which is refining capacity is tight. Supply is coming on, but that supply is needed. So, you know, we view it as being very constructive, and, and the marketplace is reasonably well.to be exceed what is historical norms for mid-cycle margins. Tom, you have?

Tom Nimbley (Executive Chairman)

I mean, Matt, the only things I would add really, you know, is kind of coming, you know, we still have to get through the turnaround season, which is active, and, you know, seemingly right, just the beginning days of hurricane season. Probably a little bit of premium built into it right now in terms of getting it through there. Ultimately, the market will be, you know, and the industry will be switching yields actively over the next several, you know, weeks and months as we basically enter into winter gasoline season, and DISCO is certainly expected to maintain market leadership.

Roger Read (Senior Energy Analyst)

Okay, thanks. Then just to pivot to the comments about, you know, pursuing an IG rating and the inventory change. Is there a way you can quantify for us or, or give maybe a couple of key points of what changes for PBF with the change in the inventory control, and then if you are able to achieve an IG rating, how we should think about that as sort of a quantifiable bottom line impact, if you can?

Matt Lucey (President and CEO)

Yeah. In, in regards to the inventory intermediation agreement, and Karen mentioned this. If, if you go back in our history, when we first began, we had suppliers of crude on the East Coast and suppliers and off-takers of products. We had suppliers of crude in the Mid-Con for our 3 refineries. This is a moment for the company, which just happened last actually earlier this week, when it was finally extinguished completely, where the company is properly capitalized. I don't. There's no, the financings in which they are, they're not bad, but it's simply the fact that the company didn't have the proper capitalization to own it all. We do, which I think is a good thing. It dramatically simplifies our balance sheet. It makes it much more transparent.

We own the inventory as opposed to renting it, and it's sort of buried within the balance sheet. It lowers our costs because the intermediation agreement, you know, you are paying at, essentially, an interest rate, was our highest cost of capital. As I said, it, it, it just demonstrates that not only properly capitalized, but now that we own it and it's paid for debt-free, it deepens the keel of the company. It's more wherewithal that we can utilize in terms of liquidity going forward. I, I think it was absolutely the right thing for us to do. Those, those structures served us incredibly well over the last 12 years.

We're appreciative of the partners that we worked with to have them, but where we are in our life cycle right now, it made the most sense, to move on, and we're pleased to do it. In regards to investment grade, we're not doing that for any other reason than we think it will increase the value of our company on a number of fronts. Obviously, it lowers your cost of capital, but in this business, working capital is incredibly important, and so it increases your open credit with counterparties. You know, you're talking about 1 million barrels a day of, of crude being purchased, and when, at, you know, at $85 crude, open credit is, is critically important. So to improve our standing with counterparties, adds value, you improve your insurance, costs.

Costs across the organization go down, but also you potentially improve your shareholder base, and you attract new shareholders as you become a stronger and stronger company. I do think it's incredibly important and something that, it's a goal that we're chasing. I think we have a lot of merit to our argument, and it's slowly being recognized. We did just get upgraded. You know, for our industry and for what we do, I think it is important, and I think it will add tremendous value to our shareholders.

Roger Read (Senior Energy Analyst)

Great, thanks. Good quarter, and we'll, we'll catch you the next one.

Matt Lucey (President and CEO)

Thanks, Roger.

Operator (participant)

Thank you. Our next question comes from the line of Doug Leggate with Bank of America. Please proceed with your question.

Doug Leggate (Managing Director and Head of US Oil and Gas)

Thanks, thanks, everybody. Tom, great to hear you on the call. Matt, I, I, I think you've been pretty clear about the different life stages of PBF through its life cycle, but I, I, I wonder if I could just touch on, on how you see the portfolio today. Is, is there anything that you would shift at this point, anything you would change, anywhere you want to be that you're not? I, I guess what's behind my question is the, you know, the joint venture you have now is gonna generate some RINS, I assume, but it remains a sizable headwind for the company.

When you see the likes of Valero with its ethanol business and other, you know, ways to mitigate their RIN exposure, I'm just curious if that's on your mind as to how you address your obligations going forward.

Matt Lucey (President and CEO)

I'll, I'll go backwards, and unfortunately, way too much of my time has, has been focused on RIN mitigation. Far and away, far and away, the best way to mitigate RINs is to manufacture renewable diesel, which we're now doing, and so that it is a milestone event for the company. Not only, you know, we have half the entity, so half the RINs are ours, but we're set up to, ENI is not an obligated party, so we'll, we'll procure their share of RINs as well, which is good access simply to acquiring their RINs. You know, I would quibble with the idea that investing in ethanol is, is necessarily a good hedge against RIN volatility.

The, the long and short of it, and what makes it difficult, is the way the program is administered, the beneficiaries are entities that trade at a much higher multiple than refiners. It's a difficult task to take on that, well, I'm just gonna buy my way through the, the RIN market, because much of that benefit will flow to wholesale marketers that, and retail businesses that, you know, trade at different valuations than refining. I don't think there's any glory in going that way. You know, we, like I said, we're now manufacturing, you know, 500 million RINs a year, and that dynamically changes our position. We look forward to operating SBR safely and reliably in delivering those RINs. In regards to our portfolio, you know, and I talked a little bit of our history.

If you go back to the last cycle, 2010 to 2019, you know, I would, I would oversimplify the cycle by comparing it to residential real estate, which was location, location, location, and everything else was secondary or not important. It didn't really matter what your size was, what your, your complexity was, your ability to process sour grades. It was, are you near the crude renaissance, and do you have access to cheap crudes? For a whole host of reasons, I think our portfolio, which we put together very specifically on the back of complexity and access to, to coastal markets, our, our portfolio, I think, is much better positioned going forward. Well, why is that? I think there's been a number of closures in the industry, and that impacts everyone.

I'm not sure it impacts anyone as directly as it does PBF. As you look at where the closures have occurred, they happen to be all, our neighbors, you know, on the East Coast, PES. You could see that from Paulsboro, to a lesser extent, certainly not our neighbor, but Come By Chance, and Hovensa were direct East Coast participants. When you go to the Gulf Coast, it was really the eastern edge of the Gulf Coast where, you know, Convent and Alliance shut down, which are neighbors to Chalmette. There you have not only benefits from less refined products, being produced, but also on crude procurement because they're buying very similar crude to us.

You go out to the West Coast, and Marathon Martinez is shut, Santa Maria is down, and I believe 66 announced yesterday that Rodeo will be converting in the first quarter. All, all direct and local competitors to Martinez. I think the closures impact us directly. Stepping back more broadly than that, you know, you have obviously the disruption in Europe, which natural gas is now a major headwind for the refining sector in Europe. You obviously fire your boilers and heaters with natural gas, but you also desulfurize your products with hydrogen that comes from natural gas. If you're paying four or five times natural gas than we are in the U.S., that's a big headwind and a big competitive advantage for us.

Obviously, you have the disruption from the Russian-Ukraine ground war, and that, that creates other distortions that, you know, I think accrue to the benefit of our coastal refining network. Then, obviously, something we talked about for years and years and years was IMO, and, and, it became moot when the pandemic struck, but it is now the law of the sea. You know, I, I, you know, it's, it's impact is, its impact is embedded in everything else. As we look forward, we've got our footprint. We're very, very pleased. We're very pleased. We're just at the, the beginning stages with ENI at SBR. Then we're, we're looking to get into new businesses like hydrogen. We're working with the federal government.

I think the company is very well, well positioned to be a potential hydrogen hub going forward. We've got a refining footprint, we've got a renewable footprint that is established and potentially growing, and there are other opportunities with, you know, our industrial footprint that I think we'll be able to capitalize on.

Doug Leggate (Managing Director and Head of US Oil and Gas)

Very thorough answer. Thanks for that, Matt. I guess my follow-up is a quick one on the West Coast. You know, it seems to me last December, I think we saw $100 cracks at one point when refineries went down for maintenance. I obviously, Rodeo is still to close, and you're gonna have your FCC offline, as you pointed out. I guess my question is: how, how do you see the dynamics in the West Coast now? It seems to me we're back to sort of 2005-type volatility, incremental imports setting the incremental price. I'm just curious if you can characterize how you see the West Coast dynamic going forward, and I'll leave it there.

Matt Lucey (President and CEO)

Yeah, I think it's gonna be very tight. You went through some of the reasons. I'll ask Paul Davis to comment. He works in California every day.

Paul Davis (Head of Refining)

Actually, Doug, I would say you probably nailed it, right? The market's gonna have to price a steady flow of imports as we have experienced, refineries shutting down, and we have more impending that are gonna shut down. The gasoline markets on the West Coast, including the whole PADD, are short.

It's gonna have to price accordingly, and, you're gonna see a lot of volatility going forward. That's, that's, that's what we see.

Doug Leggate (Managing Director and Head of US Oil and Gas)

That was kind of our take as well. Thanks so much, guys. Appreciate the time.

Operator (participant)

Thank you. Our next question comes from the line of John Royall with JPMorgan. Please proceed with your question.

John Royall (Executive Director)

Hi, good morning. Thanks for taking my question. My first one's on working capital. Can you talk about any working capital builds you're seeing from the startup of SBR? We don't see it in the release, but I assume there was an overall headwind in 2Q. Will any of that reverse in the second half, or just should we be thinking about kind of more ordinary course seasonality for working capital in 2H?

Karen Davis (CFO)

Thanks, John. Thanks for the question. Yes, in the second quarter, there was a build of inventory related to SBR. In fact, it was $75 million, which was contributed to the partnership. Going forward, all of that working capital requirement will be within the SBR joint venture. I think you should see in the future, return to more normalized working capital.

John Royall (Executive Director)

Great. On, on throughput, I think, you, you cut guidance for the full year. Can you talk a little about the drivers there? Was it just turnarounds dragging a little bit beyond plan in 1 H, or anything with 2 H there?

Matt Lucey (President and CEO)

No, I don't think anything in specific. We do have a big turnaround, in, in Q4 at Torrance. The FCC will be down, be down for probably 50 days. That will certainly impact throughput there.

John Royall (Executive Director)

Okay, thank you.

Operator (participant)

Thank you. Our next question comes from the line of Manav Gupta with UBS. Please proceed with your question.

Manav Gupta (Executive Director)

I just have one question, guys. You have two complex refining assets on the West Coast. Both of them can process a lot of heavy sour crude barrels. There's a new pipe which we can debate if it opens up in 1Q next year or 2Q, but that will deliver close to 500,000 barrels of WCS on the West Coast. I just want to understand how PBF can benefit from it, and if you can help us out a little bit just by quantifying it, that would be absolutely great.

Matt Lucey (President and CEO)

Well, I, I do think it is a tremendously positive story for our West Coast operations, not only bringing new crude into the marketplace, but that crude has to be priced to get to Asia. For the U.S. and for our California system, it can be loaded on foreign flagships, and we're dramatically cheaper to deliver it to Torrance and to Martinez. You're absolutely right. Our kit out there, we can process the most heavy, the most sour grades of crude out there, and so we're incredibly well positioned to be able to take that crude. We believe it'll be at an economic advantage. You know, we're working diligently right now to figure out, you know, what's the most we can run and how we can increase that number.

We're, we're actively working in advance of whenever it is, but it is starting up next year, that we'll be able to capitalize on the best way we can.

Tom Nimbley (Executive Chairman)

Manav, this is Tom. We... well, little Tom in the room, but it's an interesting crude because, yes, it's a sour, heavy crude, but it has, it has a day one in it to ship it, and that is naphtha, by and large. We are looking at trying to figure out how to make sure we debottleneck, you know, expand our ability to handle products from that crude at the top of the tower, and we actively have the team working on that, and we again see it as a terrific opportunity for the company.

Manav Gupta (Executive Director)

Thank you so much for the detailed response.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Matthew Blair with Tudor, Pickering, and Holt. Please proceed with your question.

Matthew Blair (Managing Director)

Good morning. Thanks for taking the questions. I guess starting out on refining, could you talk a little bit about the capture rates in the East Coast in the second quarter? Seemed a little low. Was that due to the planned turnaround at, at the Del City coker? I guess what would you expect for Q3 here?

Matt Lucey (President and CEO)

Yeah, you have it right. The coker impacted, you know, two aspects. The coker turnaround, which went into the second quarter, certainly impacted capture rates on the East Coast, but also crude differentials are narrowed. Hopefully, the new year is upon us, and Tom and Paul can comment on that. We expect crude differentials to widen out, and Del City and Paulsboro have a clean run in regards to turnarounds going forward. Paul, any other comments?

Paul Davis (Head of Refining)

No, I, I think that's right. We have a clean slate on work, and we think we're, we're peaking on the light, heavy spreads on, on crude. When we take a look at September, October programs, they're, they're a little more advantageous than July and August.

Matthew Blair (Managing Director)

Sounds good. Could you, could you help us understand a little bit more on, on your expectations for RD profitability in the back half of this year? I think you mentioned that some of the pathways for, I presume, like, RINs and LCFS might not come through until the first half of 2024. It sounds like you're still selling cargoes. I, I guess one question is, you know, is there an opportunity to, to simply put that RD into storage and, and wait for the pathways, you know, to, to fully monetize it? I guess second question is, what kind of rough EBITDA range might you expect, and, and does that $1.25-$1.50 long-term target still hold?

Matt Lucey (President and CEO)

Right. I would, I would characterize in three different buckets. Absolutely, to answer your question, we believe long-term, profitability in RD will settle out between $1-$1.50. You said $1.25-$1.50, it's, it's in that range, whether it's $1-$1.50 or $1.25-$1.50. I would characterize the current market as a bit softer than that, for a whole host of reasons. The current market, and if you wanna call this the second half of 2023, that's fine. If you're fully optimized and getting the full benefit of the LCFS credits, it's probably $0.75-$1 at the moment, EBITDA margin per gallon.

But what happens when you begin operations, you get an arbitrary low carbon score, essentially, and that's sub-optimized to what our reality is as we have a full pretreatment facility, and we'll be able to run all the low carbon feeds that are available. So the sort of temporary debit, you will, we'll say, and that runs for, you know, six to nine months from the time you begin operations. That's nothing PBF specific. That's for any new entrant into the marketplace. And so for, you know, the remainder of this year, maybe early into next year, you know, you'd probably take $0.25 off what the current market is. So, you know, call that $0.50-$0.75 a gallon of EBITDA. Obviously, the markets are dynamic and things can change quickly, but that's the current outlook.

I don't think, I don't think there's any incentive to store diesel. We'll, we'll be selling actively as we go through the year.

Matthew Blair (Managing Director)

Very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Paul Sankey, with Sankey Research. Please proceed with your question.

Paul Sankey (Independent Analyst)

Morning, everyone. Matt, congrats, and I'm sure you're delighted to be free of Tom. Matt, you, you gave an interesting little historical perspective early in the call, and, you know, one thing that's always struck me about PBF is you're consistently surprised by your willingness to buy major assets. Now that you're at 1 million barrels a day capacity, and you're obviously highly pursuing the investment-grade rating, how do you think about, you know, cost of capital, future acquisitions, cash return? Are you gonna pursue a dividend policy of growth? Is there any potential for special dividends, or do you think it'll be a buyback with, with a lot less on the acquisition front now you're so big? Thanks, Matt.

Matt Lucey (President and CEO)

Okay, there's a couple things there. One, I do think there was tremendous benefits to getting to scale. I think we have scale. You know-

Paul Sankey (Independent Analyst)

Right.

Matt Lucey (President and CEO)

One small example, you know, when we, when we were three refineries, you know, we didn't have much of a refining organization. The three plant managers reported into executive management. Now we have a head of refining. We've got a whole organization under them that's self-supported. Our access to expertise and operational excellence improved as we got scale. To your point, we have scale. As I said in my remarks, the rigor that we will take at looking at all uses of capital going forward, whether it's for potential expansion in or out of refining, will all be analyzed together and compared, and everything will always be brought back to our alternative, which always exists, in buying back our shares or, or dividends. Up until this point, you know, we've been very, very focused on debt reduction.

Obviously, that's sort of extended to the inventory intermediation agreement, which we just took out. We've been paying down environmental credits. We've demonstrated a fairly aggressive buyback program, and we're coming up on the anniversary next quarter of restarting the dividend. So every day, it's my job, and I've got a team with me that works every day to figure out our best uses of capital going forward. There is no need to get bigger, and so everything will be an opportunity, and we'll weigh it against our alternative.

Paul Sankey (Independent Analyst)

Got it. That's what I kind of thought you would say, frankly. By the way, Tom, that was a joke. I didn't hear you laughing too hard.

Tom Nimbley (Executive Chairman)

Oh, I'm surprised you said-- you told a joke. That's good.

Paul Sankey (Independent Analyst)

The Valero laugh is much, much harder, regardless of how bad the joke is, but, you know, you guys.

Matt Lucey (President and CEO)

They're much more generous.

Paul Sankey (Independent Analyst)

You have a fantastic insight to global markets for oil. Could you just talk a little bit. This is my follow-up, obviously. Could you just talk about, I mean, we just had Saudi across the headlines saying that they're gonna extend cuts into September. Could you talk a bit about trade flows, first crude, you know, how it's impacting you, big moves in Canadian diffs, and then product flows, whether or not the additional mega capacity that we're seeing in Asia has perhaps West Coast impacts or a huge question, but I'd be very interested by your answer. Thanks.

Paul Davis (Head of Refining)

Paul, it's a, it's a great question. No, we'll go backwards on it. I think the capacity additions, they're real, but they're, they're not going to be imminent. It's going to take some time, to be able to get those huge refineries lined out. There will be some offset per chance in the U.S. There certainly will be with Rodeo going down, and whatever happens with LyondellBasell, if they continue to say, do as they say and, and look to exit that business, and down in the Gulf Coast. That would obviously not only have a product impact, but it would also have an impact on crude supply because they run a fair amount of WCS. I, I think, we're certainly going to watch that.

Ultimately, those refineries will get up to speed, but at the same time, they're mostly in Asia. The population growth in the world is gonna be mostly in Asia, and those refineries are being built predominantly for down the road, making sure those, those continents are self-sufficient by themselves. In terms of trade flows, I, I, I think the expert in this room on our team on watching what's been happENIng with Russia, et cetera, and even the new refineries coming on, is Tom Nimbley. Tommy, you have anything you would add?

Tom Nimbley (Executive Chairman)

Yeah, I mean, I mean, Paul, along with that, I mean, I think it's really kind of the developments that really have been related to the OPEC cuts. You know, Atlantic Basin, long crude, Pacific Basin, short crude. The OPEC cuts have had a more dramatic effect upon the, you know, refineries in Asia. We're starting to see an increased trade flow, basically, barrels leaving the Atlantic Basin, particularly on lights. I mean, you know, the Western African programs, you know, in the prior months, which were sort of softer and were moving, sloshing around the Atlantic Basin, are now starting to get pulled to the east. I think that's probably the biggest change which we've seen, which is not uncommon, but that's the change that's most apparent in front of us today.

Paul Sankey (Independent Analyst)

Yeah. Anything on Canada? Thanks. I'll leave it there.

Tom Nimbley (Executive Chairman)

I don't think anything that hasn't already been mentioned on the call.

Matt Lucey (President and CEO)

Obviously, it tightened up significantly. It looks like it's widening out a little bit, but I agree with Tom. We're gonna see, the big move there will happen when the Trans Pipeline gets on board.

Paul Sankey (Independent Analyst)

Great. Thank you, guys.

Operator (participant)

Thank you. Our final question comes from the line of Ryan Todd with Piper Sandler. Please proceed with your question.

Ryan Todd (Managing Director and Senior Research Analyst)

Good, thanks. Maybe just a follow-up on Paul's earlier request on the use of cash. I mean, you've made material progress here today, reducing your environmental liabilities, as well as staying active in the buyback market. How much further on the environmental liabilities, you know, how much lower would you like to get that before you feel like you're in a normalized place? Then with, you know, with the cash in hand, particularly from, I mean, both your organic free cash flow and the cash in hand from closing the ENI deal, I guess, you mentioned about being aggressive on the buyback. Is there room to lean in even more on the buyback, or how do you view the appropriateness of that, I guess I would say? Thanks.

Karen Davis (CFO)

Sure. Hi, Ryan. With respect to environmental liabilities, we're at $800 now, down from $1.3, we would see ourselves getting to a range of, say, $200-$400 by the middle of next year, would call that $200-$400 range normal, more normal. With respect to the ENI proceeds, you know, we've, we've long been talking that, you know, the balance sheet is our first priority, but the list of cleanup items is decreasing. We talked about taking in the Inventory Intermediation Agreement, continuing to reduce the environmental liabilities. With respect to the balance sheet, there, you know, there's the potential that we might refinance our 2025 notes.

And then beyond that, it's really weighing, as Matt said, the alternatives for excess cash, which includes stock buybacks, and everything else has to compete against that return.

Ryan Todd (Managing Director and Senior Research Analyst)

Great, thanks. Then maybe just one, one last quick one. OpEx came in, you know, really strong performance on operating expenses there, and the refining business came in lower than expectations. Can you talk about some of the drivers there and, and how sustainable some of those are as we look through the, the second half of the year?

Matt Lucey (President and CEO)

Yeah. The biggest driver, no question about it, is natural gas prices. I know there was a lot of concentration on, you know, OpEx early in the year, and that was primarily on the back of much higher natural gas prices. Natural gas, natural gas prices come down, our OpEx comes down.

Ryan Todd (Managing Director and Senior Research Analyst)

Great. Thanks.

Matt Lucey (President and CEO)

With that, that's, it concludes the call today. We appreciate everyone's participation. We look forward to speaking to you next time. Thank you.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.