HF Sinclair Corp Q4 FY2021 Earnings Call

Welcome to HollyFrontier Corporation's Fourth Quarter 2021 Conference Call and Webcast. Hosting the call today from HollyFrontier is Mike Jennings, Chief Executive Officer. He's joined by Rich Voliva, Executive Vice President and Chief Financial Officer. Tim Go, President and Chief Operating Officer; and Tom Creery, President, HollyFrontier Renewables. Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Vice President, Investor Relations. Craig, you may begin.

Thank you, Julie. Good morning, everyone and welcome to HollyFrontier Corporation's fourth quarter 2021 earnings call. This morning we issued a press release announcing results for the quarter ending December 31, 2021. 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's the statements made regarding management expectations, judgments or predictions are forward-looking statements. These statements are intended to be covered under the Safe Harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations including those noted in our SEC filings. The call also may include discussion of non-GAAP measures. Please see the earnings press release for reconciliations to GAAP financial measures. Also please note any time sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript. And with that, I'll turn the call over to Mike Jennings.

Thanks, Craig. Good morning, everyone. 2021 was a momentous year for HollyFrontier. First and foremost, I want to recognize our employees for their commitment to safety. Despite the continuing challenges of the COVID-19 pandemic, the reportable injury rate for our employee and contractor workforce was a record low for HollyFrontier. Second, we delivered solid financial results led by record earnings in our Lubricants segment, advanced our renewables projects, closed on the Puget Sound acquisition and announced our plans to acquire Sinclair. We believe the combination of these strategic initiatives will enhance our value to shareholders over the long term. These investments are significant both in terms of capital and for our people. Our team has taken the strategic initiatives head on and remained committed to execution. Turning to our fourth quarter results. We reported a net loss attributable to HollyFrontier shareholders of $40 million or $0.24 per diluted share. These results reflect special items that collectively increased net loss by $22 million. Excluding these items, adjusted net loss for the fourth quarter was $18 million, or negative $0.11 per diluted share versus adjusted net loss of $119 million or $0.74 per diluted share for the same period in 2020. Adjusted EBITDA for the period was $126 million, an increase of $148 million compared to the fourth quarter of 2020. The Refining segment reported EBITDA of $25 million, compared to $8 million for the fourth quarter of 2020, and consolidated refinery gross margin was $8.70 per produced barrel, a 116% increase compared to the same period last year. This increase was due to higher margins driven by strong product demand for transportation fuels, as we continue on the path to recovery to pre-pandemic levels. Fourth quarter crude throughput was approximately 421,000 barrels per day, below our initial guidance of 450,000 to 470,000 barrels per day due to heavy planned and unplanned refinery maintenance and weather-related downtime during the quarter. Our Lubricants and Specialty Products business reported EBITDA of $75 million, compared to $49 million, which is before the goodwill impairment charge of $82 million in the fourth quarter of 2020. For the full year 2021, our Lubricants and Specialties business achieved record financial results of $331 million in adjusted EBITDA, led by strong margins for base oils throughout most of the year. Holly Energy Partners reported adjusted EBITDA of $80 million for the fourth quarter compared to $88 million in the fourth quarter of last year. Despite the planned turnaround and unplanned maintenance at HollyFrontier's Navajo refinery, HEP delivered another quarter of strong operational performance and financial results. HEP maintained its distribution in 2021, and ended the year with a coverage ratio of 1.8x and continued its deleveraging strategy, repaying over $70 million in debt and bringing HEP's leverage to 3.9x. Looking ahead, within our Refining segment, for the first quarter of 2022, we expect to run between 490,000 and 510,000 barrels per day of crude oil. This guidance reflects the impacts of weather-related downtime at Puget Sound refinery, a scheduled turnaround at the Woods Cross refinery, as well as maintenance activities at the Navajo refinery throughout the first quarter. We believe that demand for transportation fuels will continue to strengthen as the global economy recovers from the pandemic. Within our Lubricants and Specialty products segment, for the first quarter of 2022, we expect seasonal improvement in earnings and a continued shift in mix toward rack forward from rack back. We expect base oil prices and margins to continue to decline through the first quarter, as base oil supply continues to recover. In 2022, HEP expects to hold the quarterly distribution constant at $0.35 per unit, or $1.40 on an annualized basis. HEP remains committed to its distribution strategy focused on funding all capital expenditures and distributions within operating cash flow, and maintaining distributable cash flow coverage of 1.3x or greater with the goal of reducing leverage to 3.0x to 3.5x. In our Renewable segment, we're pleased to announce that the 6,000 barrels per day Cheyenne RDU is now fully operational, and we are lining the unit out to produce on-spec product. The Artesia pretreatment unit is expected to be completed in the first quarter of 2022 and the Artesia RDU is expected to be operational in the second quarter of '22. Once completed, we will have the ability to produce approximately 15,000 barrels per day of renewable diesel with advantaged feedstock sourcing and flexibility through our own pretreatment unit. We ended 2021 with a robust financial foundation and bright prospects for continued growth and value. As we look to 2022, we're focused on one thing: execution. Execution will be critical as we ramp up to serve the recovering economy, start up our renewable diesel operations, and work toward the closing of the Sinclair business acquisition and subsequent integration after the closing.

Thank you, Mike. As previously mentioned, the fourth quarter included a few unusual items. Pre-tax earnings were negatively impacted by acquisition integration costs of $16 million, a lower of cost or market inventory valuation adjustment of $9 million and charges related to the Cheyenne Refinery conversion to renewable diesel production of $3 million. A table of these items can be found in our press release. Net cash used for operations totaled $333 million in the fourth quarter, which included $98 million of turnaround spending and $320 million of working capital headwinds. Both planned and unplanned refinery maintenance reduced throughputs, which was the single largest driver of the working capital consumption. We expect to recover $150 million to $200 million of this working capital as refinery operations normalize, and this will take us into the second quarter to fully recover. HollyFrontier's standalone capital expenditures totaled $254 million for the quarter and $725 million for the full year 2021. As of December 31, 2021, our total liquidity stood at approximately $1.6 billion comprised of a cash balance of $234 million, along with our undrawn $1.35 billion unsecured credit facility. At December 31, we have $1.75 billion of standalone debt outstanding with a debt to cap ratio of 24% and a net debt to cap ratio of 21%. We anticipate recovering $83 million in cash tax benefit in 2022 from the loss carry back potential under the CARES Act. HEP distributions received by HFC during the fourth quarter totaled $21 million. HollyFrontier owns 59.6 million HEP limited partner units, representing 57% of HEP's LP units and a market value of over $1 billion as of last night's close. With respect to capital spending of 2022, we continue to expect spending between $250 million to $270 million at HollyFrontier Refining, $225 million to $300 million in Renewables; $45 million to $60 million at HollyFrontier Lubes and Specialties, and $70 million to $100 million for turnaround and catalyst. HEP we expect to spend $15 million to $20 million on maintenance capital, $5 million to $10 million for expansion capital and $35 million to $50 million in refinery processing unit turnarounds. Beginning in the first quarter of 2022, HollyFrontier will report a new renewable segment that will contain all financial information related to renewable diesel units at the Cheyenne and Artesia facilities as well as the Artesia pretreatment unit. And with that, we are ready to take questions.

Thank you. Our first question is from Theresa Chen from Barclays. Please proceed.

Good morning. Thanks for taking my questions. I guess, first, if we can go over the progress on the Sinclair deal and where you are in terms of working with the FTC and given your comments yesterday, which on the HEP situation in the closing. Can you just talk about what's driving that?

Yes. Theresa, this is Mike. We are working with Sinclair closely and collaboratively to satisfy all the closing conditions. The principal gating factor at this time is the FTC process. We're obviously cooperating with the FTC and Sinclair is working closely with us to obtain that clearance. We expect to close the transaction as soon as we can, and at this point, we still expect closing in 2022, as we've said previously. We don't have an update beyond that.

Got it. And then maybe turning to Puget, given the volatility in the fourth quarter and still some downtime reflected in the first quarter. Can you just talk about your outlook for the asset from here? And if the delay in TMX coming online, for the postponement of that, does that change the economics of your crude outlook for the area in general?

Yes, Lisa, this is Tim Go. We were disappointed with the unplanned maintenance at the Puget Sound refinery in the first 90 days of ownership. However, this does not alter our profitability outlook for the refinery. The operations were affected by a three-week crude pipeline flooding event in the fourth quarter, followed by a record freeze lasting 7 to 10 days. These issues impacted operations and are carrying over into the first quarter, as Mike mentioned. Nonetheless, they are isolated incidents and do not change our long-term view of Puget Sound. We continue to estimate a mid-cycle EBITDA of $150 million to $200 million and believe we are still operating at or above mid-cycle conditions for the remainder of the year. When considered annually, we expect Puget Sound to achieve those figures. Regarding the delayed TMX, we have lines based on the existing TNPL that supply a significant portion of our crude runs. We also bring in additional crude over water through our dock, and we believe this delay will not affect our long-term outlook for PSR.

Thank you.

Your next question is coming from Paul Cheng from Scotiabank. Please go ahead.

Hey, guys. Good morning.

Hi, Paul.

Rich, I think in the past, you have been talking about a capital return to show they call you up to a $1 billion in the 12 months after the first quarter, I would say. Can you give an update, given the market condition and also Sinclair being delayed? And also, Puget Sound, quite frankly, that operation has not been living up to expectation, at least during the first 90 days or 100 days of your ownership. That's the first question.

Sure, Paul. So, I don't think there's any change to our capital return plans. Consistent with what we announced at the time, both the Puget Sound and then the Sinclair acquisition, we expect to reinstate the dividend in May, at that $0.35 per share level. We expected to return $1 billion of cash in total, inclusive of both dividends and repurchases into the first quarter of '23. And then in the long term, we think a 50% payout ratio and the combination of dividend and repurchase is appropriate for a business like ours.

So even though the Sinclair delay could be because I think previously, the expectation is that you may be able to close Sinclair by mid-year that doesn't look like that likely. And so, if that's further delayed beyond 2022, does that change the way how you look at the capital return?

No, Paul, I don’t think it does.

Okay. My second question is about the Puget Sound operating issue. In the fourth quarter, there were sub-zero temperatures, which I understand haven’t occurred in the last 40 years, and Trans Mountain was shut down. However, you also had the hydrocracker problem in January. Can you explain what caused the downtime in the first quarter and what your plan is to improve operations? Mike, in your prepared remarks, you mentioned execution. For the past seven years, the CEO has stressed that execution is the company’s top priority, but it appears there have been recurring issues. What gives you the confidence that things will be different this time?

That's a loaded question, Paul. Thanks. As a starting point, the issue in Puget Sound was weather-induced and the remaining issue really pertains to the hydrocracker unit and a compressor that effectively needed major maintenance following damage by the weather. So that is, Tim, to this point, if you want to take it from there.

Yes, let me jump in, Paul, on this, and then I'll turn it back over to Mike. But I can tell you that that issue has been resolved. And so, when we say that the Puget Sound issue will carry into the first quarter, it has been resolved now and we are in the process of returning to full rates of Puget Sound. But it has impacted the first quarter.

And I guess beyond that, we operate a network of inland refineries where the degrees of freedom during unit downtime are pretty limited. And so, we get the operational results matter perhaps more in that context than plants that are among the coastal network. And so, effectively, we have to be better. And we have had operational issues obviously affected our fourth quarter results. And we told you they will roll into the first, but we have people on the ground and asset strategies, I think that carry us forward toward improvement. And you know, the proof is going to be in the future results more than what I say on this call. So, I think I'll leave it at that. But we certainly put a high priority on it, and we're working the issues hard.

Thank you.

Your next question is coming from Phil Gresh from JP Morgan. Please go ahead.

Yes. Hey, good morning. Thanks for taking my questions. First one, Rich, could you just talk about how you expect the cash balances to progress in the first half of this year? You mentioned the working capital tailwinds. You mentioned the cash tax benefit at some point in '22. I'm just trying to think about getting back to those minimum cash levels of $500 million that would then allow for the dividend reinstatement.

Sure, Phil. We anticipate a challenging first quarter. Breaking it down, we expect our renewables segment to contribute positively to the income statement and cash flow in the latter half of this year. As we increase operations in the first half, cash generation will be limited. We are confident our refinery performance will improve significantly starting in the second quarter, which will generate substantial cash from earnings as well as recovery of working capital. This gives us confidence regarding the dividend in the second quarter. Regarding the tax refund, we are quite frustrated as the government is still not back in the office, and their speed of work reflects that. We are actively addressing this issue, but it is beyond our control. We expected to have this refund nine months ago. We anticipate cash accumulation to begin in the second quarter, which reassures us about the dividend.

Am I still correct in saying that the minimum target cash would be the $500 million?

Yes, I think that's a good target. As we continue our work and integrate Sinclair, I expect we will seek more liquidity, likely through an expanded revolver. However, that $500 million target cash balance will remain; we still believe it's a solid figure for a growing company.

My follow-up question is regarding your comments on renewable diesel and the startup as we are nearing two months into this first quarter. You mentioned that little contribution is expected in the first half. However, as we assess the first quarter, do you think the startup costs could result in positive EBITDA, or should we anticipate that expenses will delay that outcome?

No, I think it's going to take a little while. So, I'd expect small negative EBITDA in the first quarter, probably into the second quarter, to be honest. We're being very careful and I will ask Tom to chime in, on how we start these units up. Obviously, we've seen others have major issues. So, we're babying them a little bit, if you will. But we think that's the prudent way to approach this. So that we have the earnings power in the next several years.

Yes, Phil, this is Tom. I want to echo Rich's comments that we are taking a cautious approach intentionally. These units are relatively new to us. While we are familiar with the hydrotreating process from our refinery operations, this is still uncharted territory. Therefore, we are proceeding carefully. Our goal is to do it correctly the first time. As you can understand, as we launch this new business, we currently have minimal volumes of renewable diesel in our tanks, and we need to establish working stock before we can consider sales to customers. This process will require time and will extend the period before we can generate revenue, so it will be a gradual process.

Got it. And the Sinclair and their pretreatment, where are Sinclair in a pretreatment startup? Thank you.

To the best of our knowledge, this is just public information that they're looking sometime between the second and third quarter of this year for startup.

Your next question is coming from Roger Read from Wells Fargo. Please go ahead.

All right. I’m going to get the microphone in the right place. Good morning, guys. I just like to maybe dig a little deeper in just how the renewable diesel startup process will go. I mean, I recognize we've seen others have problems, and you all want to be careful with it. But as you look at running, I guess maybe here's the question, where are you in terms of running any kind of a feedstock through the units in getting comfort? And where are you in terms of security of the feedstock across all types?

From a high level, we need to heat the units by introducing hydrogen before we can start adding feed. Once we reach certain temperatures, we can begin to increase the feed levels, but it’s a gradual process. It takes time to walk up these units cautiously to ensure all instrumentation is functioning correctly and that levels are within the required range. This is not a quick switch; it usually requires several days to ensure everything is aligned for safe and stable operation across the reactor and isomers. Regarding feedstock, we have had no issues acquiring it for Cheyenne, Artesia, or the PTU. We’ve secured volumes through long-term contracts to cover the rest of this year and into early 2023, and we don’t anticipate any issues moving forward. We remain confident in our strategy of maintaining the PTU, which provides us with more flexibility in sourcing different feeds. As we proceed with startup, we will continue to focus on selecting feeds that maximize our returns while balancing price and carbon index.

Thanks for that. My final question is about the renewable diesel segment. Regarding the recent CapEx guidance of $800 million to $900 million, where do you anticipate landing in terms of total CapEx at this point?

Hey, Roger, it’s Rich. We will be within that range.

Your next question is coming from Neil Mehta from Goldman Sachs. Please go ahead. Neil from Goldman Sachs, your line is now open. And your next question is coming from Connor Lynn from Morgan Stanley. Please go ahead.

Yes, thank you. I would like to continue the discussion about feedstock sourcing for renewable diesel. Last quarter, you mentioned you were considering options to enhance your position in the value chain. I'm interested to know what thoughts you have on that and any options you have been looking into.

Sure. Connor, this is Tom again. We are currently tracking over 20 investment opportunities for soybean oil processing plants that have been presented to HollyFrontier. We are evaluating strategic options in two areas: long-term offtakes and equity investments. Active discussions are ongoing with potential counterparties. As I mentioned earlier, our goal is to optimize the best netback while maintaining flexibility. There has been no shortage of crush plant announcements, as you may know, and we are working to assess everything that comes our way to determine if it holds value for HollyFrontier.

What type of criteria would you say are important to you in determining that? I mean you certainly manage your feedstock independent of production on the refining side. So, I guess the question is, do you see the ultimate value creation shifting to that side? Or is it more of a hedge? Just basically, what would make you want to invest?

Probably more of a hedge. It's vertical integration, so it allows us to capture profitability throughout the chain as a part one specific point. And sort of along the same lines, as the PTU and why we entered into that market.

Just to add to that, Connor. Our focus is on returns relative to the cost of capital, whether those returns come from price reductions or investment returns. So far, we have not seen returns that meet any significant benchmark.

Which is pushing us back towards just an outright lifting or an offtake agreement.

Hey, guys. Question more on inland refining. It seems like people love the coastal a lot more now with some of the Ukraine crisis. And then you're looking at Exxon saying they want to grow Permian 25%, Chevron 10%, and all these guys are looking to accelerate Permian. Do we see a scenario where we could have a resurgence of, or a reemergence of some of these inland differentials as it looks like the rig counts are accelerating and the production is expected to go up in '22, '23?

Yes, Manav, this is Tim. I will take a first shot at that. We’ve been pleased to see the increased production in the Permian. I think they hit over 5 million barrels a day here this last month and setting new records. Takeaway capacity is still greater than that. So, we still continue to see that dynamic playing out. But certainly, as the volatility in the rest of the world plays out, the one certainty that seems to be out there is that the Permian production seems to be where most of the focus is on growth here in the U.S. And that’s going to benefit us, both in our Mid-Con refinery as well as our Southwest refinery. So, you've seen some short-term blowout in the Brent TI spread here just in the last day or so. We don’t expect that to necessarily hold at these levels, but we do think that long term, Brent TI about $3 makes a lot of sense. And if you look at the strip going out, it seems like the market feels the same way, if not even a little bit more bullish.

How much Permian can you run in your system, if you could remind us?

Well, we run our whole Southwest refinery, Navajo Refinery, runs on basically Permian. And then we can send some additional, call it, 50,000 barrels a day down into our Mid-Con refineries through the Centurion pipeline. So, we’ve got good exposure, good optionality to be exposed to the Permian crudes.

Okay. And a quick policy follow-up. I think, Rich, when you initially put out your renewable diesel projections, I remember very clearly you did not have BTC in 2023. And then we got to a situation with build back better and everything and we started assuming BTC most likely will be extended. Now, like, I just want to understand from the policy perspective, there is a lot of support for BTC, but do you see a scenario like where before year end, where BTC could be extended, so it kind of takes all that uncertainty from RDU margins?

So, Manav, from a government affairs perspective, if you will, I think our view is that there is a lot of support for the BTC. And that we will see it extended in some form or fashion consistent with a manner right it's been done historically, one of these last-minute tax extender package type events. But to your point, our original project economics were not predicated on long-term BTC.

Our long-term expectation regarding BTC was not influenced by the build back better initiative. It actually came before the political support for this extension, so we do not consider these two factors to be directly connected.

Thank you.

Your next question is coming from Doug Leggate from Bank of America. Please go ahead.

Good morning, everyone. I just want to ask a hypothetical question regarding Sinclair. I understand you may not want to discuss it too much, but I’m curious about the process. When Marathon was selling Speedway, they met all their filing requirements and still didn't receive a formal response, so they proceeded with the deal. Where do you currently stand in terms of addressing the filing requirements?

We have complied with the second request and are currently in discussions with the staff. I'm unable to share more details as this is an ongoing conversation and our tactics and strategy will not be disclosed during this call. However, we anticipate the transaction to close in 2022, and we are really excited about it. That's all I can share at this time.

Yes. I apologize for asking. I just wanted to see if there was any additional color. Well, maybe if I may take two quick ones, one is macro and one specific to you. And it's a follow-up to Paul's question about operational improvement. I’m just curious, when you think about Puget Sound and Sinclair, who has the best operating best practice? I’m thinking in terms of transfer of best practice. Does Sinclair make Holly better? Does Holly make Sinclair better and same with the Puget Sound? How do you think about the generic operational reliability of the go-forward combined company?

Doug, this is Tim. Let me take a shot at it. I think the answer is yes to both questions. Puget Sound and Sinclair make HollyFrontier better, and HollyFrontier makes Puget Sound and Sinclair better. I think there are opportunities to basically share both forward and backwards with each of these assets. Puget Sound, as we've talked about before, has a very talented workforce, advantaged assets, and a growing market that it sits in. I think they have a lot to offer HollyFrontier, but I think we have some additional things we can offer them as well in terms of an independent refiner mindset, a way to try to not have to work within a larger system, but try to optimize the asset within its individual region. I think there's a lot of opportunity there to work together. Sinclair has a very attractive market that they operate in. They obviously have a very different model in their branded marketing outlets that we will benefit tremendously from. We are looking forward to attaching that to our merchant refining portfolio to take full advantage. On the other hand, we think we’ve some systems and processes and people that we can offer to help Sinclair as well to try to get their assets to run better as well. So, I think it goes both ways.

I appreciate that answer. My final question is a broader one and I’m unsure if you want to address it. We all recall the peak period in the 2000s. My question revolves around the current natural gas supply dependency in Europe and Asia, which is quite different from what it was back then. I'm interested in understanding how the ongoing European and U.S. gas premium, potentially at varying levels, will influence your perspective on future mid-cycle margins.

Doug, we are bullish on refining this year. I think natural gas is just one component that will continue to advantage the U.S. refining system versus the European one, for example, in this case. We think low product supply, if you look at inventories, their 5-year lows right now in the U.S. We think there's going to be a heavy maintenance and turnaround year associated with a lot of the majors and a lot of the other competitors out there who already announced heavy maintenance workload this year. As we’ve talked about before, we do not have a heavy turnaround load for this year. Aside from this unplanned maintenance and then some smaller planned maintenance throughout the year, we are actually looking to be in pretty good shape to take full advantage of this environment. And so, we think this year is going to be at or above mid-cycle. We think the natural gas situation will only strengthen that and help improve that. Whether that's going to persist, I think will depend on a lot whether the geopolitical risks out there play out or not.

Yes, of course. Guys, thanks for taking my questions. I really appreciate it.

Thanks, Doug.

And your next question is coming from Neil Mehta from Goldman Sachs. Please go ahead.

Great. Can you guys hear me, okay?

Yes.

Yes, sir.

Okay. Sorry about before. So, hey, look, product inventories in PADD 2, I would be curious on your views, Mike and team. We see that happen from time to time in the winter where the inventories do get elevated relative to the rest of the country and then you work through it. But it is notable that the Mid-Con margins are a little bit softer than other PADDs? Just your observation there, and is this anything we should be concerned about, or is it just normal seasonality?

Neil, let me take the first shot. The Mid-Con inventories are definitely high right now. We do attribute that to seasonal behaviors. We see this typically every winter. We don’t think this will be any different. And we obviously, again, think that this summer is going to be strong in the Mid-Con, certainly mid-cycle or above, despite the higher inventories that we are seeing today.

All right. That’s helpful. And then just your thoughts on shape of curve with the time spreads being so strong right now up at the front, given all the geopolitical stuff. Just your thoughts on how that affects capture rates, the market structure. And is that something that we should think of as a deduct relative to the margins?

Yes, you're correct, Neil. The steep backwardation is not advantageous for capturing value. Ideally, we would have a contango market, but that’s not the situation we are in. For the next few months, it seems we will continue to experience elevated backwardation due to the existing geopolitical risks. So, you should incorporate that into your models, but we believe it will stabilize as the year progresses.

Yes. I think I will jump in, and that is to add perhaps the obvious. But the product cracks, even RVO adjusted, are seasonally strong. If you look at Mid-Con as an example, they're depressed relative to the remainder of the country, but still pretty decent for a February time frame for gasoline. If you look elsewhere in the country, other served markets, it's certainly better. And I think what we are seeing is either a snapback or a steady road back from COVID. You are seeing it in vehicle miles traveled, you certainly see it in distillate demand and inventories. And so, while backwardation hurts capture, the overall level of product margin is pretty good. And as we look forward into this year, we expect it to be a strong financial year for our sector.

Great perspective. Thank you, Mike.

Yes.

And your next question is coming from Jason Gabelman from Cowen. Please go ahead.

Good morning. Thanks for taking my questions. I had two on the renewable diesel business. First, on the financial projections. I think when you sanctioned the renewable diesel projects, there was $165 million annual free cash flow forecast. Is that still the right number? There's been a lot of moving pieces with environmental credits. So, wondering if that's the right number, excluding the BTC. And then secondly, just thinking about M&A on renewable diesel. You mentioned potentially looking to take an equity stake in upstream business. Is there a market for you to potentially sell a stake in your renewable diesel project once you get it up and running? Are those conversations you’ve had, or maybe you could just discuss potential interested parties or types of parties that could be out there? Thanks.

Hey, Jason, it's Rich. At a high level, there are some ups and downs, as you mentioned. However, I believe our free cash flow and earnings projections for renewable diesel remain consistent. We expect to see progress in the second half of '22 and continue into '23. BTC appears to be a favorable factor in the short term, while LCFS might present some challenges, but we are very optimistic about that market over the long term. Regarding mergers and acquisitions, we are focused on executing the projects we currently have. There's nothing specific to mention at this time, but we are always open to opportunities that would enhance value for our shareholders.

Yes. Jason, this is Tom. Yes, we’ve got a busy road ahead of us, not only starting up our own units, but integrating the Sinclair facilities to make it one happy family or project. We’ve got some optimization to do after the acquisition of Sinclair. So, we’ve got a full plate from a renewable standpoint. So, to Rich's comments, we really haven’t looked at any kind of potential of spinning off the renewables or spinning off an equity share in it.

Your next question is coming from Paul Cheng from Scotiabank. Please go ahead.

Hey, Mike. I have two quick follow-up questions. First, regarding the Cheyenne facility, are you currently making a profit there? Second, what is your long-term strategy for that business? Are you considering significantly increasing capacity, or is this situation a one-time opportunity due to what you see in Navajo and Cheyenne, leading you to stick with these two facilities and the pretreatment unit without expanding? What do you envision for the future of this business?

Yes. Paul, this is Tom Creery. In today's economic environment, there are still many factors at play. For instance, we do not yet have operating costs or expenses because we have not started operations, which creates a lot of uncertainties. However, we believe it would still be profitable under current circumstances. We are experiencing some challenges, particularly with lower LCFS prices, but we do not anticipate these issues to persist in the long term. It's important to note that we didn't design these units based on today's economics; we developed them with a 20-year outlook. Therefore, we are confident that over time, they will be profitable and meet our financial goals.

Yes, Paul, looking ahead in our Renewables segment, we have a lot to manage right now to get these projects completed and businesses operational as planned. However, we are also keen to explore future profitable opportunities, primarily around our existing asset facilities, which means we are focused on brownfield developments. At this moment, our critical attention is on the three assets we are currently building and preparing to operate.

Yes. Thanks. Sorry, I just had one follow-up on lubes. With your commentary around Rack Back, and some of the headwinds there with Group II that we are starting to see here in the first quarter relative to what we saw in 2021, just curious how you're thinking about Rack Forward and the potential benefits there. And sometimes in the past, you’ve been willing to give a range of guidance for what you think Rack Forward could be. And curious if you have any thoughts there. I know 2021 was a bit of a different kind of year for Rack Forward.

Yes, this is Tim. Let me address that. Last year was quite unusual with market fluctuations between Rack Forward and Rack Back, as you noticed. This trend is ongoing this year, which is why we didn't provide guidance for Rack Forward. However, we still believe our lubes business is a $250 million EBITDA business in a mid-cycle environment. For 2022, we anticipate the year will be at or above mid-cycle on a combined basis. We suggest looking at the lubes business this way for the year. We're starting to see some signs of base oil margin compression, which should help return the Rack Forward business to normal conditions. However, we are also aware of unplanned events and significant turnarounds in the base oil production market, especially in the U.S., which we believe will keep base oil prices tight. At the same time, we are seeing recovery in our Rack Forward business, and we expect it to continue strengthening. We are optimistic that in the first half of the year, we will see above mid-cycle profitability from our lubes business.

Okay, got it. That makes sense. Thanks a lot.

And there are no further questions at this time. I will turn the floor back over to Craig for closing remarks.

Thank you, operator. This is Mike, and thank you all for participating. I would like to wrap up the call this morning emphasizing a couple of points. The first is that the fourth quarter includes some significant operational challenges, many of which were brought about by extraordinary weather, but all of which we own and need to manage. On one hand, I recognize the major events made by our team to recover from these issues. And on the other, I’m going to say that my expectations are for better reliability and throughput. I will note that with respect to employee and contractor safety, our 2021 year was the best ever for our company, and our recordable injury rate was less than half of the industry average. This is a reflection of what we are achieving on the ground. We are nearing the completion of our renewable diesel investments and look forward to the transition from project management to operations management. This is a really exciting new venture for our company, and I believe it's going to be an attractive business for our owners. And the final point is that the Sinclair transaction is truly transformative for HollyFrontier. It's an incredibly exciting time for us. And while the lag from announcement to close may take some of the limelight away from this deal, internally, we are working really aggressively to plan for the closing and the integration. And we continue to view the combined company as strategic and compelling as an investment, a supplier, and an employer. So, thanks all for participating today, and we look forward to talking with you again.

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