Welcome to HF Sinclair Corporation and Holly Energy Partners' Fourth Quarter 2022 Conference Call and Webcast. Hosting the call today is Mike Jennings, Chief Executive Officer of HF Sinclair and Holly Energy Partners. He is joined by Tim Go, President and Chief Operating Officer of HF Sinclair; Atanas Atanasov, Chief Financial Officer of HF Sinclair; and John Harrison, Chief Financial Officer of Holly Energy Partners. Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Vice President of Investor Relations. Craig, you may begin.

Thank you, Rob. Good morning, everyone, and welcome to HF Sinclair Corporation and Holly Energy Partners fourth quarter 2022 earnings call. This morning, we issued a press release announcing results for the quarter ending December 31, 2022. If you would like a copy of the press release, you may find them on our website at hfsinclair.com and hollyenergy.com. Before we proceed with remarks, please note the safe harbor disclosure statement in today's press releases. In summary, it says statements made regarding management expectations, judgments or predictions are forward-looking statements. These statements are intended to be covered under the safe harbor provisions of federal securities laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. The call also may include discussion of non-GAAP measures. Please see the earnings press releases 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. Today, we reported fourth quarter net income attributable to HF Sinclair shareholders of $587 million or $2.92 per diluted share. These results reflect special items that collectively decreased net income by $11 million. Excluding the items, adjusted net income for the fourth quarter was $598 million or $2.97 per diluted share compared to adjusted net loss of $18 million or a negative $0.11 per diluted share for the same period in 2021. Adjusted EBITDA for the fourth quarter was $1.0 billion, an increase of approximately $878 million compared to the fourth of 2021. In our Refining segment, fourth quarter EBITDA was $864 million compared to $25 million in the same period last year. This increase was primarily driven by higher refining margins in both the West and Mid-Con regions and a 39% increase in sales of refined products year-over-year due to the acquisition of the Puget Sound Refinery and the acquired Sinclair businesses. Despite the winter storm impacts we experienced in December, crude oil charge averaged 628,000 barrels per day for the fourth quarter compared to 421,000 barrels per day in the fourth quarter of '21. For full year 2022, we achieved records for annual crude charge of 607,000 barrels per day and Refining segment EBITDA of $4.2 billion. Despite the tight supply environment in 2022, our continued focus on operational excellence allowed us to safely increase throughput to meet customer demand for our transportation fuels. In our Renewables segment, we reported adjusted EBITDA of negative $7 million for the fourth quarter and total sales volumes of 54 million gallons, driven by unplanned downtime. We continue to increase throughput at our renewables facilities and expect to achieve normalized run rates in the second half of 2023. We remain constructive on the D4 RIN market and on our ability to source advantaged feedstocks for our renewable diesel plants. Our Marketing segment reported EBITDA of $23 million for the fourth quarter, and total branded fuel sales volumes were 336 million gallons, representing a $0.07 per gallon margin. We continue to make progress expanding the DINO brand as our number of branded sites grew by 24 during the fourth quarter and by 81 since the acquisition of the branded business from Sinclair in March of '22. Lubricants and Specialty Products reported EBITDA of $67 million for the fourth quarter compared to EBITDA of $75 million for the fourth quarter of 2021. This decrease was largely driven by FIFO impact from consumption of higher-priced feedstock inventory in the fourth quarter of 2022. For full year '22, lubricants performed well above our mid-cycle guidance, reporting annual EBITDA of $382 million due to strong demand for base oils and finished products. HEP reported adjusted EBITDA of $116 million in the fourth quarter compared to $80 million in the same period of last year. This increase was primarily driven by contributions from the Sinclair transportation assets, which were acquired in March of 2022, coupled with record volumes across our integrated system. We returned $475 million in cash to shareholders through share repurchases and dividends during the fourth quarter. And since the closing of the Sinclair acquisition on March 14, 2022, we have returned over $1.6 billion, which is well ahead of our initial target of returning $1 billion to our shareholders by the end of the first quarter of '23. This represents a 2022 full year cash return of 16%. As of December 31, 2022, we have $662 million remaining on our share repurchase authorization and remain fully committed to our cash return strategy and payout ratio, while maintaining a strong balance sheet and an investment-grade credit rating. We also announced today that our Board of Directors declared a regular quarterly dividend increase to $0.45 per share payable on March 17, 2023, to our holders of record on March 7, 2023. This 12.5% increase reflects our constructive outlook on cash generation from our recently acquired assets and our Board's commitment to returning excess cash to shareholders. Looking ahead, our focus remains on operating safely and reliably, while executing on our integration strategy to fully optimize our new and more diverse asset base. We believe we've created a strong foundation as a downward integrated business with increased scale to drive growth and capital returns to shareholders. So with that, let me turn the call to Atanas.

Thank you, Mike, and good morning, everyone. Let's begin by reviewing HF Sinclair's financial highlights. Net cash provided by operations totaled $915 million, which included $47 million of turnaround spend in the quarter. HF Sinclair's stand-alone capital expenditures totaled $99 million for the fourth quarter. As of December 31, 2022, HF Sinclair's total liquidity stood at approximately $3.3 billion, comprised of a stand-alone cash balance of $1.7 billion, along with our undrawn $1.65 billion unsecured credit facility. As of December 31, we had $1.7 billion of stand-alone debt outstanding, with a debt-to-cap ratio of 16% and net debt-to-cap ratio of 1%. HEP distributions received by HF Sinclair during the fourth quarter totaled $21 million. HF Sinclair owns 59.6 million HEP Limited Partner units, which following the acquisition of Sinclair Transportation, represents 47% of HEP's outstanding LP units at a market value of approximately $1.1 billion at last night's close. Let's go through some guidance items. With respect to capital spending for full year 2023, we expect to spend between $250 million to $280 million in Refining, $25 million to $35 million in Renewables, $35 million to $50 million in Lubricants and Specialty Products, $20 million to $30 million in Marketing, $50 million to $80 million in Corporate, and $530 million to $630 million for Turnarounds and Catalysts. At HEP, we expect to spend between $25 million to $35 million in maintenance and $5 million to $10 million in expansion and joint venture investments. For the first quarter of 2023, we expect to run between 500,000 and 530,000 barrels per day of crude oil in our Refining segment, and we have planned turnaround scheduled at our Puget Sound Wood Cross and El Dorado refineries in the period.

Thanks, Atanas. I'm pleased to report HEP's strong fourth quarter and full year earnings driven by record volumes across our integrated system. HEP's fourth quarter 2022 net income attributable to Holly Energy Partners was $68.5 million compared to $45.6 million in the fourth quarter of 2021. The year-over-year increase was primarily attributable to earnings related to the Sinclair transportation assets, partially offset by higher interest expense and operating costs. HEP's fourth quarter 2022 adjusted EBITDA was $115.7 million compared to $79.7 million in the same period last year. A reconciliation table reflecting these adjustments can be found in HEP's press release. HEP generated distributable cash flow of $85.8 million, and we announced a fourth quarter distribution of $0.35 per LP unit, resulting in a distribution coverage ratio of 1.9x. Capital expenditures and joint venture investments during the quarter were approximately $18 million, including $11 million of expansion and joint venture investments, $5 million in maintenance CapEx, and $2 million for reimbursable CapEx. For 2023, we expect total CapEx of $30 million to $45 million. During 2022, we made good progress on reducing our leverage ratio and ended the year with a pro forma debt to trailing 12-month adjusted EBITDA ratio of 3.6x. We expect to reach our target leverage ratio of 3.5x in mid-2023, at which time we will evaluate incremental cash return to unitholders consistent with our previously announced capital allocation strategy. We are now ready to turn the call over to the operator for any questions.

And your first question today comes from Theresa Chen from Barclays.

Congratulations to Mike, again, for round 2 of retirement. So now that you've achieved $100 million of run rate synergies following the Sinclair acquisition and have assets under your umbrella for some time. How do you view the further stages of the integration effort? What phase are you at in terms of rolling out the Sinclair marketing brand to the legacy HFC refining markets and downstream channels and other aspects of integration and synergies that we should be anticipating?

Tim Go responded, expressing satisfaction with achieving $100 million in synergies so quickly after the Sinclair acquisition. He highlighted the potential for further opportunities within their larger refining portfolio and emphasized the importance of integrating their marketing assets. This integration was a key goal of the merger, particularly to enhance their presence in branded wholesale markets where they had previously lacked exposure. He noted the success in opening 24 additional stores in the fourth quarter and a total of 81 branded outlets for the year since acquiring Sinclair, suggesting that this is just the beginning. Tim mentioned growing interest in the Southwest and P&W for expanding branded stores, which would align with their refining output to enhance the value chain. He also pointed out potential within their operating assets to improve procurement processes and reliability, indicating that while they are not providing specific numbers yet, they see numerous opportunities and are actively pursuing them.

Congratulations on the new role. Turning to refining. Can you give us a sense of what happened on the West Coast this quarter's further details on the capture results? And do you see this improving over the long term or medium term, taking into account, of course, the near-term downtime that you have in the first half?

Yes, Theresa, this is Tim. Let me take that again. Basically, the fourth quarter impacts were about 20,000 barrels a day less heavy crude than we typically run, primarily in the West, and about 4% lower diesel yield across the portfolio, but again, primarily in the West. And that was due to both planned and unplanned maintenance as well as some higher natural gas prices that occurred that also impacted the West. So on the planned basis, we had coker maintenance planned at our Parco refinery. We had coker maintenance planned at our PSR refinery. We had distillate hydrotreater maintenance planned at our Puget Sound refinery, and then we had distillate hydrotreater maintenance planned at our El Dorado refineries. All of those contributed to the lower heavy crude runs as well as the lower distillate yields. In addition, we had some hydrogen outages, both planned and unplanned at our Navajo refinery and at our Parco refinery. So really, that's what drove the lower West Coast productivity. In addition, though, if you're looking at OpEx and if you're looking at even some of the gross margin capture associated with natural gas, we saw some very high natural gas prices on the West Coast. The basis for the P&W as well as for our Salt Lake City refinery had gotten up to about $40 to $50 in MMBtu above the Henry Hub baseline price in that December and really carrying over into the January timeframe. So those three factors, less heavy crude, less distillate yield and higher natural gas prices really explain the weaker West results that we had.

Your next question comes from the line of Paul Cheng from Scotiabank.

First, congratulations to both Mike and Tim on the retirement and promotion. Thank you, Mike, for all your support. I have two questions. Mike or Tim, it’s somewhat surprising that you mention it will take until the second half of this year to reach the normal noise runway, especially since you've noted that you are starting up all the plants, one in the first quarter and another in the second quarter. Could you provide more insight into why many expected that you would transition to a normalized operation sooner? Additionally, what have you learned so far from your operations? Also, have you already secured certification for the LCFS? My second question pertains to marketing. Last year, with only 10 months of operations, you achieved around $63 million in EBITDA, significantly exceeding the $50 million normalized cycle you referenced at the time of acquisition. Was last year just an exceptional performance, leading to the assumption that the baseline remains at 50%, or is the business actually performing better than you initially expected?

Thanks, Paul. Tim and I will divide the questions. I'll begin with the renewables topic. To be direct, our performance in renewable operations so far has not met our expectations, which is disappointing. However, we are resilient and committed to addressing this issue. There are several factors to consider. First, we need to optimize our processes and catalyst performance to improve renewable diesel yields and ensure more consistent operations. In the fourth quarter, we only achieved 14,000 barrels a day, which is 60% utilization. In this industry, that figure is too low; we should be aiming for around 90%. Therefore, we need to focus on the reliability and availability of our units and enhance catalyst performance to boost renewable diesel yields, even if it means sacrificing some naphtha yields. Additionally, these processes heavily rely on hydrogen, and we need to ensure the reliability of hydrogen production. We are working on several internal initiatives to achieve this, but with conventional petroleum margins being high, we must also optimize our hydrogen usage across the refineries, which is currently a challenge. Moving forward, we need to increase the availability of high-purity hydrogen for our plants. While they were intended to operate at full capacity, we have not reached that goal yet. We have initiatives in place aimed at improving optimization in the refinery and increasing hydrogen availability over the long term. There is a lot of work ahead in the next six months to significantly enhance throughput and yields in our plants. Although we have not reached that stage yet, it's a necessary step towards profitability.

Paul, I'll take your second question on marketing. This is Tim. Again, we're very pleased with the results that we've seen on the marketing side. This is, again, one of our core objectives that we've been focused on as far as integration and again, for the reason for the Sinclair HollyFrontier merger. You've asked if we're ready to change our $50 million a year mid-cycle, I'd say probably not at this point. But I would tell you that we are operating above mid-cycle right now. And we think that's the case because with inventories being low across the country and demand being fairly high, especially in our areas that we operate in, which in the Rockies, in particular, have low inventories and high demand, we're able to get a little bit more from our brand premium than maybe what we would during a mid-cycle type environment. More importantly, though, we saw a 5% growth rate last year in the number of stores that we have. And we think that we're going to continue to see a 5% to 10% growth rate in our branded wholesale market year-over-year. In fact, in 2023, we're hoping it will be towards the upper end of that range. So from that standpoint, we do think there'll be growth in our mid-cycle number.

Mike, can I circle back about the LCFS. Have you achieved the certification on that?

Paul, we're still operating with provisional for the Artesia facility, and we expect in the first quarter that we'll get the permanent certification.

Your next question comes from the line of Ryan Todd from Piper Sandler.

Great. First of all, congratulations to Mike and Tim on the retirement and promotion. Regarding cash return to shareholders, which continues to be impressive and significantly exceeds your earlier guidance, can you discuss your thoughts on that run rate moving forward? How aggressive do you plan to be in this area compared to building additional cash on the balance sheet? Also, should we expect this $400 million a quarter run rate to continue for a while, or how should we frame our expectations for the future?

This is Atanas, and thank you for your question. As Mike mentioned earlier, we remain fully committed to our capital return strategy. We believe that a 16% return for 2022 is very healthy. For 2023, we are seeing promising developments in terms of cracks, and we continue to be dedicated to our current approach. While we won't provide specific guidance on the pace, we are willing to exceed the previously discussed 50% target payout ratio, both regarding buybacks and dividends.

And Ryan, we're also starting from a position of privilege and that we began the year with $1.6 billion on the balance sheet, which does represent itself some excess cash.

Is there an appropriate level of cash that we should expect you to carry on the balance sheet going forward?

Yes. Previously, we talked about the range of around $500 million, but that's not a hard and fast number. We take into account our immediate capital needs. And as we've indicated in our press release and remarks, we've got to write some pretty large checks early in the year. But as we progress through the year, obviously, we'll look at our cash balance. And again, focused on very robust cash return to shareholder return, which includes looking at our cash balance.

Great. Could you provide some insights on what you've learned from nearly a year of operating the renewable diesel business, particularly regarding market placement and feedstock acquisition? What type of feed mix are you using? Have product sales and feedstock acquisition gone as expected, or have there been any challenges?

We are more experienced now and, aside from some operational challenges, we have gained valuable insights. We are optimistic about our ability to market this product profitably outside California. We are exploring many additional markets, and the current low LCFS price increases our options for placing these barrels. There is significantly more potential to sell the barrels than we had initially realized. On the feedstock front, being more conservative about volumes and supplementing with spot market purchases seems to be the right approach given recent operational issues. We've learned from past experiences that pushing excess inventory into a declining market creates significant costs affecting our profitability. Hence, we're adjusting our strategy accordingly. Regarding the strategic selection of feedstocks for our plants, the PTU is performing exceptionally well, with yields exceeding our expectations and good reliability. The downstream units, unfortunately, do not reflect the same performance, but we are committed to addressing that. The PTU's capacity to integrate new and lower CI materials will be crucial for us. We are currently working on a venture that we cannot disclose yet, which could be transformative if successful. This initiative heavily relies on the PTU's capabilities. Overall, while diesel prices have recently decreased, impacting profitability, the overall market for ag oils has also declined, and the RIN price helps balance this. We believe that our margin structure is favorable. We will enhance our optimization through improved operations, better hydrogen availability, and new or second-generation feedstocks.

Your next question comes from the line of Doug Leggate from Bank of America.

You caught me making coffee, I apologize. Mike, it seems we've only had a brief chance to connect recently, and now you're off again. Congratulations to both of you. Tim, I'm eager to see what you will bring to the table. My first question is about the future direction of the company. Should we anticipate a continuation of the current strategy or will there be changes? I have two parts to this question. Part A is for you, Mike. It seems to me you were never fully convinced about the lubricants being an integrated aspect of our portfolio. How do you see this affecting the company's position moving forward and any potential for monetization? For part B, this is a bit challenging, but the historical reliability of the stand-alone HollyFrontier business has always been a weak point compared to your competitors. It appears that similar issues might be arising since you acquired the Sinclair assets. What assurances can you provide the market that these reliability issues aren't fundamentally ingrained in our portfolio or operations, and that we can effectively address them in the future? I'll stop there.

Those are mini questions, Doug. Thank you. Tim is going to take on the bulk of it. But for clarity, I would say, while I wasn't the one who bought the lubricants businesses, there's been no lack of commitment to growing those businesses and optimizing them once in the portfolio. They've been a nice contributor to the company. And as you recall, while refining was losing money during COVID, lubricants specialties were kicking out a steady $30 million a month of EBITDA. So that business has performed well and has been improved significantly under Tim's stewardship. So Tim, I'll pitch it to you because really the future is about your vision and what you're going to do with this business.

Thank you, Mike. I'm really enthusiastic about the opportunities and challenges we face. Mike has set this company up for success, beginning with the HollyFrontier merger over a decade ago. Now, with the addition of Sinclair and Puget Sound, we have valuable assets, talented people, and strong capabilities that position us for a bright future. I want to emphasize our commitment to long-term growth and cash returns to our shareholders, which Mike has consistently shown. We definitely need to enhance our focus on safety, reliability, and operational excellence, as we've been working to catch up in these areas over the past three years since my arrival. I believe leveraging my experience in this direction aligns with the expectations of the Board. We’ve seen significant achievements, including setting annual records for crude throughput, diesel, and gasoline production, thanks to our existing plants like El Dorado, Woods Cross, and Tulsa alongside the new assets. This progress reinforces our capability to enhance safety and operational excellence, and while the journey may have ups and downs, the consistent improvement gives us confidence we're on the right path. In terms of integration and optimization, I feel like there's a lot of untapped potential with our new assets and people, specifically in the Rockies and the broader western region, creating opportunities for synergy, higher utilization, and reduced costs. Regarding our Lubes and Specialty business, we have seen fantastic performance over the past three years, achieving record earnings for the third consecutive year, which showcases our focus on operational excellence and margin improvement. With improved performance, we can explore more strategic opportunities. In the short term, we're focused on enhancing this business, but in the midterm, we may pursue further opportunities to maximize shareholder value.

Your next question comes from the line of John Royall from JPMorgan.

You called out a heavy maintenance year in refining with your full year guide, and the 1Q throughput guidance looks like pretty heavy maintenance early in the year. But as we think about how maintenance might progress throughout the year, any guidance in terms of maybe first half versus second half or just anything more granular timing-wise?

Yes, John, this is Tim. We projected a daily output of 500,000 to 530,000 barrels for the first quarter, which Atanas mentioned in the prepared remarks. This figure reflects the ongoing effects of winter storms and the turnaround impacts we expect during this period. This is lower than our usual utilization rates. However, looking ahead to the second quarter and beyond, we anticipate returning to the low 90% utilization range as we complete the first quarter turnarounds. While there will still be some additional turnaround work throughout the year, the effects on crude rates and utilization are primarily concentrated in the first quarter. Therefore, aiming for low 90s utilization would mean a return to normal production levels for the remainder of the year.

And then just wondering your view on Brent-WTI, given your exposure there. It's remained relatively wide even with the SPR release ending. Can you talk about the drivers there and how you think that can progress in 2023?

Yes. There's a lot of drivers, of course, in the Brent-WTI spread. But I think the one that seems to be taking the biggest impact right now is just the high freight rates, dirty freight rates globally. I think the Russia-Ukraine conflict has created even more pressure on shipping rates. And what you're seeing, we've always said that the Brent-WTI spread is basically determined by shipping rates of WTI into the rest of the world. And we're seeing that play out with the higher freight rates now, keeping that Brent-WTI spread wide. We're also pretty happy with the WCS/WTI spread that we continue to see. Now it jumped up in the $25 to $30 discount here in the fourth quarter, and it's come off that since then. But we still are fairly bullish that a $20 or so WCS/WTI spread for the rest of the year feels pretty good to us. And then the last thing that I'll just point out is A&S has been pricing at a discount to Brent here over the last few months. That has a big impact on our Puget Sound Refinery. We think that's associated with the higher A&S crude that we've seen production-wise coming out of the North Slope, and we think that's going to continue to advantage our P&W location.

Your next question comes from the line of Neil Mehta from Goldman Sachs & Company.

Congrats, Tim, and congrats, Mike, to both of you. I have a follow-up on the return of capital question. And I don't know if you can comment on the Sinclair family and their intentions. But one of the things that's been nice over the last year is even as they've been monetizing the position, you've been in a position to take down some stock, December notwithstanding. So just your views on whether you can continue to be over the wall and your capacity to mitigate any outflows from them?

So Neil, thanks for the question. We, as you know, are very close to the individuals. We have two of their representatives, one family member on our Board, and we speak frequently. So yes, December notwithstanding, which was an interesting trade. We expect to continue to buy shares from them as they liquidate some of their position. I don't think they have an intention to sell down to zero by any stretch, but they do want some liquidity. And it has been fairly synergistic relationship, as you will, and that we're buying in chunky quantities at a discount to market. And that, to us, benefits our shareholders. So we would expect to do more of that, assuming they're still willing.

That's helpful, Mike. We discussed the crude markets a bit, but I would appreciate your insights on the product markets. The EIA weekly data has been quite perplexing lately due to excessive noise. What is your observation regarding demand through your wholesale and retail channels? How does this shape your views on the outlook for both diesel and gasoline as we approach summer?

Yes, Neil, this is Tim. The EIA data is confusing every week, and it's interesting to see how it plays out. What I can tell you is that we're experiencing strong demand in our markets. For instance, in terms of gasoline, we're seeing demand at 98% of our 2019 peak levels in the Mid-Con, the Southwest, and the Rockies. This is an increase compared to 2021, but it's about 2% lower than 2019. On the diesel front, demand is up around 10% compared to 2019 in our operating areas. For jet fuel, which has lagged through most of the COVID period, we're currently seeing demand at about 90% of our peak levels in 2019. We believe that jet demand will continue to increase as the year goes on. We also anticipate that with China's reopening, there will be an increased global demand for these products, which bodes well for refining in the latter part of the year. While there's been considerable discussion about macro factors affecting the refining industry, I don't have anything new to add to that. However, if you examine our regional advantages, we are quite optimistic for the rest of the year. Our presence in the Rockies, our position on the West Coast and the P&W, along with our assets in the Southwest, provide us with a competitive edge over the macro factors we've been discussing. Our demographics in those regions continue to grow, driving up overall demand for transportation fuels. We also have access to favorable crude sources at each location. Additionally, we have robust local product markets, especially during the summer months when travel and activities increase in PAD4 and on the West Coast and Southwest. So, Neil, we're quite positive about this year. We believe that despite the EIA reports, our regions and markets are looking to have a strong year.

Your next question comes from the line of Matthew Blair from TPH.

Congrats, Tim, on the new role, and Mike on the retirement. I was hoping you could walk through the moving parts on lubricants in Q4. Why did your Rack Back EBITDA improve even though the base oil indicators move down? What was the FIFO impact in the quarter? And then the volume seemed a little low. Was that due to like maintenance or turnarounds on your side? Or was that more due to just like weaker demand and matching production levels to the current demand in the market?

Yes, Matt, this is Tim. I want to emphasize that we are very happy with the performance of our Lubes and Specialties business. We did experience lower volumes in the fourth quarter due to a mix of typical seasonal demand softening and customers holding off on orders as prices declined. Additionally, we've been focusing on rationalizing areas with low profit potential. We've discussed SKU rationalization for several quarters, and this effort continued in the fourth quarter. We are strategically letting go of low-margin products to concentrate on those that yield better margins. Consequently, while the volumes are down, as you noted, our gross margin per gallon has increased, which has been our intention. We expect this trend to carry on as we streamline our operations and emphasize profitability. Regarding FIFO impacts, we faced challenges in the fourth quarter amounting to about $7 million to $7.5 million. If you want to assess run rate figures, you can add that back to the $64 million. We anticipate continued headwinds in the first quarter, but we believe the core business will demonstrate strength. Typically, the first half of the year performs better for lubes. Additionally, the approximately $300 million run rate we noted for the fourth quarter is expected to persist into 2023. While base oil margins are indeed declining, particularly for Group 1 and Group 2, Group 3 margins have remained strong. Our published indexes indicate around $130 a barrel, and we are leveraging this in our Rack Bank business. We foresee this trend lasting at least through the first and possibly into the second quarter.

Sounds good. And then, Tim, I think you mentioned that WCS spreads have been a relative bright spot. What's your outlook going forward on WCS spreads, especially given this Trans Mountain pipeline expansion?

Yes. There's a lot of speculation on what will happen when Trans Mountain starts up. Of course, the published start date is still in the fourth quarter of this year. There is a possibility that it could slip further as it has in the past. But we are planning for that to happen. There will be some line fill impacts as they try to put some barrels in the line to start that thing going, which will tighten the spread, of course. We also tend to see seasonal tightening in that WCS/WTI spread in the spring when the spring maintenance activities come into full activity up there in Canada. So we're not surprised to see the WCS spread come off from the $28, $30 dip to the, call it, $18 to $20 dip that we're at right now. And we would expect that to hold in this kind of area here for the next couple of quarters.

Your next question comes from the line of Jason Gabelman from Cowen. And we'll move on to the next question from the line of Doug Irwin from Citi.

Just have one on the midstream side. Just wondering if you could just expand a bit on the capital allocation strategy at HEP. And I guess, specifically, around the potential distribution increase, kind of how you're thinking about balancing the flexibility of being almost 2x covered versus also being able to kind of achieve your leverage target and maintain that going forward?

Sure. Thanks, Doug. This is John Harrison. Our capital allocation strategy really remains the same here. So we've kept the distribution flat, while we've reduced leverage. And we're really pleased with the progress that we've made there. Happy to report we're at 3.6x on a pro forma basis. We do have that short-term target of 3.5x leverage, and we expect to hit that in mid-2023. In the longer term, we plan to maintain leverage in that 3.0 to 3.5x, with a coverage ratio of at least 1.3x. So fair to say, incremental cash return is top of mind for us. And as we approach our leverage target over the next couple of quarters, we'll communicate what we're going to do in terms of incremental cash return to shareholders.

Got it. And then I guess on the HEP outlook, I mean, you’re already kind of squarely in the low half of the pro forma range you outlined after the Sinclair acquisition. Could you maybe just talk a little bit about some of the puts and takes for ‘23 and maybe your ability to kind of push towards the higher end of that range this year?

Sure. So we are – we’re in the middle of that range already. So we’re really pleased with that. And that includes, obviously, only ¾ of the Sinclair transportation assets. So we have some room there. And also, we also have inflation adders to our contracts for HEP that really is applicable to all of our revenue at HEP. So definitely, inflation can be a tailwind for the HEP piece of the business here.

And there are no further questions at this time. I will now turn the call back over to Craig Biery for some final closing remarks.

Thanks, Rob. This is Mike Jennings. I want to wrap up with just a couple of points. 2022 was obviously a pivotal year for our company as we completed the Sinclair acquisition and established ourselves as HF Sinclair, a downstream integrated company, and further integrated the Puget Sound acquisition that had been done just in the previous year. Really dramatic changes in our business. And at the same time, operating full and well to serve the needs of our customers and generating really tremendous income and returns to our own shareholders. So we executed well. We executed on some really key points, which would have included getting these acquisitions integrated, realizing that initial $100 million, completing our start-ups within renewable diesel and importantly, returning over $1.6 billion of cash to our owners, proving up our commitment to get this done and frankly, get it done early. Moving forward, I think Tim has called out priorities well, and they include continuing to optimize this portfolio, improving our reliability and obviously, maintaining our foot on the accelerator in terms of cash returns to shareholders. We get it that that's a fundamentally important part of the investment equation within this sector and for this company. I'm going to finish up with a little note on Tim, and I want to publicly congratulate him for the announced appointment to President and CEO of HF Sinclair. This culminates a multiyear succession planning process on the part of our Board to find and develop the right leader for our company's future. I've had great pleasure of working with Tim for almost 3 years now and have come to admire his knowledge of the business, desire to improve and optimize our operations, an important ability to attract and retain strong talent for the key roles and a tremendous passion for our company and for his job. So while it will be with some regret that I stepped down simply because I love working in this industry and with the great people at this company who are committed to our success, get past the sentimentality, we're really fortunate to have Tim and the rest of this great team on board and engaged. And I believe that they will together get the job done for our owners. So thanks a lot.

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