Welcome to HF Sinclair Corporation and Holly Energy Partners Fourth Quarter 2022 Conference Call and Webcast. Hosting the call today is Tim Go, incoming Chief Executive Officer of HF Sinclair. He is joined by Atanas Atanasov, Chief Financial Officer; Steve Ledbetter, EVP of Commercial; Valerie Pompa, EVP of Operations; and Matt Joyce, SVP of Lubricants and Specialties; along with John Harrison, Chief Financial Officer of Holly Energy Partners. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. 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, Jack. Good morning, everyone, and welcome to HF Sinclair Corporation and Holly Energy Partners first quarter 2023 earnings call. This morning, we issued press releases announcing results for the quarter ending March 31, 2023. If you would like a copy of these press releases, you may find them on our website. 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 may also 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 Tim Go.

Good morning, everyone. Today, we reported first quarter 2023 net income attributable to HF Sinclair shareholders of $353 million or $1.79 per diluted share. These results reflect special items that collectively decreased net income by $41 million. Excluding these items, adjusted net income for the first quarter was $394 million or $2 per diluted share, compared to adjusted net income of $176 million or $0.99 per diluted share for the same period in 2022. Adjusted EBITDA for the first quarter was $705 million, an increase of approximately $328 million compared to the first quarter of 2022. In our Refining segment, first quarter 2023 EBITDA was $544 million, compared to $208 million in the same period last year. This increase was primarily driven by higher refining margins in both the West and Mid-Continent regions, steady demand, tight supply and favorable crude spreads. Crude oil charge averaged 499,000 barrels per day in the first quarter of 2023, compared to 525,000 barrels per day in the first quarter of 2022 due to heavy turnaround maintenance during the period. Of the three refinery turnarounds we conducted in the first quarter of 2023, I am pleased to report we successfully completed all three on time and on budget. While this is a significant accomplishment in itself, we also addressed many of our end-of-cycle reliability issues on the refinery equipment that was available during these downtimes. Our drive to improve our operating reliability is built around the maintenance strategies we execute during these turnaround cycles. In our renewables segment, we reported adjusted EBITDA of $3 million and total sales volume of 46 million gallons for the first quarter of 2023. We continue to work to increase utilization at our renewables facilities and expect to achieve normalized run rates in the second half of 2023, which will allow us to optimize advantaged feedstock from our pretreatment unit. Our marketing segment reported EBITDA of $6 million and total branded fuel sales volumes of 328 million gallons, representing a $0.04 per gallon margin in the first quarter of 2023. We continue to see strong value in the DINO brand, as the marketing business provides a consistent sales channel with margin uplift for our produced fuels, and we expect to grow our branded sites by 5% or more per year. Our Lubricants and Specialty Products segment reported EBITDA of $99 million for the first quarter of 2023 compared to EBITDA of $145 million for the first quarter of 2022. This decrease was largely driven by the positive FIFO impact from the consumption of lower-priced feedstock inventory in the first quarter of 2022. We continue to be pleased with the strong performance of our Lubricants and Specialty Products segment and continue to focus on sales mix optimization of our base oils and finished products. HEP reported EBITDA of $88 million in the first quarter of 2023 compared to $73 million in the same period last year. This increase was mainly driven by contributions from the Sinclair transportation assets, which were acquired in March of 2022, as well as higher revenues from our Woods Cross refinery process units, partially offset by higher interest expenses. Overall, we returned $334 million in cash to shareholders through share repurchases and dividends during the first quarter. As of March 31, 2023, we have $420 million remaining on our share repurchase authorization. We remain fully committed to our long-term cash return strategy of returning 50% or more of our net income to our shareholders, while maintaining a strong balance sheet and investment-grade credit rating. This morning, HF Sinclair made a nonbinding proposal to acquire all of the common units of Holly Energy Partners LP, not already owned by HF Sinclair, pursuant to a stock for unit merger transaction that would result in HEP becoming an indirect wholly owned subsidiary of HF Sinclair. We believe the proposed transaction simplifies our corporate structure, reduces costs and further supports the integration and optimization of our portfolio. Please refer to the separate press release for specifics related to this proposal. Looking forward, as I make the transition to CEO of HF Sinclair, I'd like to share with you my near-term priorities for the company. First, we must continue advancing our operations excellence. This means improving the safety and reliability of our plants, which we believe will result in higher utilization rates and lower operating expenses. This is our top priority, and we have recruited many reliability subject matter experts over the last few years, and we are implementing our operations excellence management system to guide us through this journey. But as I mentioned earlier, it will take time to work through our turnaround cycles to make the necessary improvements to our equipment. Second, we have completed a number of transformative acquisitions, and we continue to focus on the integration of those assets into our portfolio with the goal of capturing more operating efficiencies and margin opportunities across our asset base. We already realized annual run rate synergies of roughly $100 million from the Sinclair acquisition, and we believe there is more to capture from this acquisition, as well as in our Lubricant and Specialty Products segment. Third, I am focused on free cash flow, and I'm committed to continuing our cash return strategy that I mentioned earlier. Returning excess cash to shareholders through dividends and share repurchases, while maintaining an investment-grade balance sheet is fundamental to maximizing shareholder value over the long term and positioning the company for future success.

Thank you, Tim, and good morning, everyone. Let's begin by reviewing HF Sinclair's financial highlights. Net cash flows provided by operations for the first quarter of 2023 totaled $178 million, which included $164 million of turnaround spend in the quarter. HF Sinclair stand-alone capital expenditures totaled $92 million for the first quarter of '23. As of March 31, '23, HF Sinclair's total liquidity stood at approximately $3 billion, comprised of a stand-alone cash balance of $1.36 billion, along with our undrawn $1.65 billion in secured credit facility. As of March 31, 2023, we had $1.7 billion of stand-alone debt outstanding with a debt-to-cap ratio of 16% and a net debt-to-cap ratio of 3%. HEP distributions received by HF Sinclair during the first quarter of 2023 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 $950 million as of last night's close. Let's go through some guidance items. With respect to capital spending for the full year 2023, we still 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 corporates and $530 million to $630 million for turnarounds and catalysts. At HEP, we expect to spend between $25 million and $35 million in maintenance and back to $10 million in expansion and joint venture investments. For the second quarter of 2023, we expect to run between 550,000 to 580,000 barrels per day of crude oil in our Refining segment, and we have planned turnaround scheduled at our Navajo and Parco refineries during the period. And lastly, as Tim mentioned, please refer to our separate press release we issued this morning for specifics related to our proposal to acquire the outstanding HEP public units. As negotiations are currently ongoing, we're unable to speak to specifics around the proposal during Q&A.

Thanks, Atanas. HEP generated solid first quarter earnings, supported by safe and reliable operations and strong volumes in both our crude and refined product transportation and storage systems. HEP's first quarter 2023 net income attributable to Holly Energy Partners was $58 million compared to $50 million in the first quarter of 2022. The year-over-year increase was primarily attributable to earnings related to the Sinclair transportation assets as well as higher revenues from our Woods Cross refinery processing units, partially offset by higher interest expenses and operating costs. HEP's first quarter 2023 adjusted EBITDA was $108 million compared to $85 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 $84 million, and we announced a first quarter distribution of $0.35 per LP unit, which is payable on May 11 to unitholders of record as of May 1. Capital expenditures during the quarter were approximately $8 million, including $4 million of expansion, $3 million in maintenance, and $1 million of reimbursable CapEx. We ended the quarter with approximately $556 million in liquidity, comprised of $7 million of cash and $548 million of availability under our $1.2 billion revolving credit facility. For 2023, we are focused on safe and reliable operations while we negotiate the proposal from HF Sinclair.

Certainly. The floor is now open for questions. Our first question comes from the line of Roger Read with Wells Fargo Securities. Your line is open.

Yeah. Good morning, everybody. Tim, welcome to the lead role here.

Thanks, Roger. Appreciate it.

I have a question regarding the proposed HEP consolidation. Why is this happening now? Can you explain the discussions between the two entities about determining the right value and the decision to proceed with an all-stock deal for the units rather than a mixed approach?

Yes. Roger, as Atanas mentioned earlier, we just put the proposal out last night. We're not able to talk about it due to the public negotiation. But what I can tell you is we believe this proposed transaction simplifies our corporate structure, reduces our costs, and further supports the integration and optimization of our portfolio. It also provides an opportunity to unlock cash that is currently being held at the MLP level for LP distributions and debt reduction, and this cash will become available for DINO's long-term capital allocation strategy.

Okay, that's helpful. In addition, you mentioned that renewable diesel should reach full production capacity in the second half of this year. Clearly, Q1 presented some challenges. The previous issues discussed included the hydrogen situation and start-up difficulties. I'm interested in how these two challenges will be addressed as you move from your current position to midyear and beyond.

Thank you, Roger. This is Atanas. We are satisfied with the performance of our renewables segment in the first quarter, achieving positive adjusted EBITDA. In the past, we've discussed reliability and hydrogen availability as challenges. We've made significant progress in the first quarter, particularly in improving yields at our Cheyenne assets. We are actively working on a long-term solution for our hydrogen issues, focusing on process optimization as a priority. Regarding run rates, we've made consistent progress, but we are particularly aiming for normalized run rates in the second half of the year. For the second quarter, I want to mention that turnarounds at two of our facilities located with refineries, specifically Parco and Navajo, will affect run rates. However, this gives us the chance to address operational issues and emerge in a stronger position after these turnarounds.

Yes. And Roger, I'll just chime in for some color. We're not happy with the results of the renewable business yet, but we are happy with the progress. Showing positive adjusted EBITDA this quarter is evidence that we're moving in the right direction. As Atanas mentioned, we had several turnarounds this quarter, and we have a few more here in the second quarter that will continue to improve the hydrogen infrastructure and the other utility infrastructure surrounding these renewable diesel plants. Along with our better understanding of how to run these plants more efficiently, it will contribute to helping us deliver the expected run rate in the second half.

Yes. Fair enough. Could I just ask for one clarification? Since the hydrogen issue has a long-term solution, does that imply you do have a short- to medium-term solution in place then?

Well, I think the short- and medium-term solution is to continue to optimize the operation of the assets, and we've seen good progress there. But the longer-term solution is hydrogen supply. Another thing is, as we look at our conventional diesel cracks, sometimes we obviously have to make decisions around economics and that's part of the optimization equation.

Yes. We think our short-term solutions to achieve our normalized run rate in the second half are workable. Of course, we are working on long-term solutions to the hydrogen supply issues, which we are not ready to discuss today but are currently being addressed.

Hi, good morning, everyone. Tim, I was hoping you could elaborate more on the opportunity to improve refinery operations. You mentioned for the three planned turnarounds in Q1, you addressed some, I think it was, end-of-cycle issues. Could you talk about and then provide any examples of the problems that you're finding and what you're doing to fix them?

Yes, Matt, this is Tim. I'd be happy to. I've mentioned before that you've got resource and capability opportunities to improve. You've got systems and processes to improve. But the third leg in the triangle is we've got to improve the equipment itself. I like to say equipment doesn't know we're talking about it until we actually do something with it. During turnarounds, we have the ability to implement those maintenance strategies that affect the equipment that are usually unavailable except during turnarounds. Let me turn it over to our new EVP of Operations, Valerie Pompa. She has over 30 years of operating experience, and we're really glad to have her on our team. Val, would you like to discuss the turnaround?

Sure. In our first-quarter turnarounds, some examples regarding hydrogen, at Navajo specifically, we've spent a significant amount of our effort on hydrogen improvement projects aimed at improving reliability around our hydrogen system in Navajo. Our strategy involves reliability-focused programs and improvements during maintenance windows. Therefore, our turnarounds give us opportunities to upgrade equipment, whether it be exchangers or other specific equipment that has reached a point where they need to be changed or upgraded. We focus on boosting utilization and availability to meet our demand more efficiently.

Yes, as a summary, Matt, Val has been doing a great job at driving these improvements. We implemented over 15 risk-reduction projects during the turnarounds, as well as three large yield improvement projects. As we resume operations, we are expecting to see enhanced operational performance.

Sounds good. And then on the lubricant side, was there a material FIFO impact in Q1 2023? Can you talk about the factors that supported better lubricants profitability quarter-over-quarter, even though your index declined?

Yes, hi there. I'll take this one. This is Atanas. With respect to our FIFO impact, there was an impact of about $14 million. Even with that in mind, we're pleased with our results. When looking at the profitability of the business, notable drivers include a favorable product mix and strong margins in our Group III base oil that goes into many higher-end uses. The third driver is the strengthened market for our finished products. When combining these three factors, they account for the successful quarter we had in that business. Product mix and margins are the two main drivers.

Yes. And Matt, let me add that the FIFO impact that Atanas mentioned was a $14 million headwind this quarter. Without that, our ex-FIFO results would have been higher than what we reported and would represent a quarterly record for us on an ex-FIFO basis. Last year, we faced a sizable FIFO tailwind. As you mentioned, it was something closer to $49 million. On an ex-FIFO basis, numbers would have been lower than the current, indicating improvement over time. This gives me the opportunity to introduce another new member of our leadership team, Matt Joyce, who has nearly 30 years of experience in the base oil and lubricants industry. We're really glad to have him onboard. Matt, would you like to provide additional insights into the lubes business?

Yes, sure. Thanks, Tim. Nice to meet you, Matt. Building on what Atanas mentioned, our team has really focused on key objectives, targeting certain higher-value end-use markets where we are well situate. We've introduced some new products into that space and are seeing positive results, further supported by geographic expansion into targeted markets. The product mix, as Atanas mentioned, is intentional—we’re aiming for a robust value proposition to our end-user customers. This is reflected in the returns we are seeing, which continue to trend at a higher-than-mid-cycle range, and we're very excited about that.

Great. Thanks for all the comments there.

We're still very optimistic about the Sinclair brand, which was a key reason for our acquisition. The value proposition is strong and will effectively compete in our markets. We're on track to grow our wholesale branded business by between 5% and 10% year-over-year, particularly focused on regions where we see solid demand, such as in the Rockies and the Southwest.

Thank you. Good morning. Two questions, please. Tim, since you're saying you're going to take the opportunity during the turnaround to improve the assets, should we assume over the next two or three years that the turnaround expense will be higher than usual? If that's the case, do you have a range that you can provide on how that looks?

Okay, Paul, thanks for your questions. Let me have Val comment on the turnaround.

Our turnaround spend this year has been driven by the acquisitions. We acquired several new sites that came with refineries requiring turnaround. We are working towards an optimized turnaround schedule and I consider this a catch-up year to bring those acquisitions in check and address the reliability concerns we had, leading to a more normalized turnaround run rate ahead.

Paul, let me take this. The second question is on lubricants. We continue to see this business as very valuable to our portfolio. We're pleased with operations over the last couple of years. Some preconditions for determining if someone else might be a better owner all boil down to valuation. Currently, we feel this business is undervalued within our portfolio, and we believe there's still potential to further enhance its value with ongoing integration and operational improvements.

Yes, Paul, you have asked me in the past what evidence we can show you and shareholders that we are making progress in our execution and our improved ability to deliver results. The lubes and specialties business is a prime example of that. We've focused on it over the last three years and made significant changes to improve operations and shareholder value. We hope shareholders will continue to see our progress and that these improvements will be reflected in our stock valuation.

Yes. Good morning, Tim. Good morning, Team.

Good morning, Neil.

My first question relates to the return of capital. Could you provide your latest thoughts on the share repurchase program in a lower margin environment? What are your thoughts on repurchases bilaterally from the Sinclair family as opposed to seeing these through the open market?

Neil, thanks for your question. This is Atanas. To start, we are a capital return business focused on both the return of capital and the return on capital. Despite the ongoing negotiation with HEP that could impact the pace of our repurchase program, we remain committed to our cash return strategy.

Looking at our first quarter, Neil, we returned 14% through dividends and share buybacks, which represents 85% of net income. We feel this year will be strong, and we've done direct buybacks with the family and open market purchases. Over the long-term, we'll continue to explore similar opportunities as they arise.

That's fair. We haven't spent much time on refining macro this call, so Tim, maybe you and your team can share your perspective on some volatility we’ve seen and how you think margins might progress through the end of the year.

Yes, there has been a lot of volatility. We've expected strong demand from China and significant impacts from the Russian embargoes. We anticipated more exports from China in the first quarter, and as the country opens up throughout the year, increased local demand will absorb those higher barrels. We still believe that to be accurate. The first quarter indeed saw additional imports, but we think that trend has peaked. We're excited about the summer demand typically seen in the Rockies and West. Our gasoline demand is around 102% of last year, and diesel is about 101%. Jet demand has been particularly strong, showing an 8% increase in the first quarter compared to last year.

Hi, good morning. Thanks for taking my question. I'm curious about the forecast for utilization run rates and maintenance following the second quarter. Should we expect to run relatively full afterward?

Yes, John, thanks for the question. We've got two turnarounds in the second quarter, one at Navajo and one at Parco. The Navajo turnaround is complete, and everything went smoothly. We anticipate after the Parco startup, we can run in the low 90s for utilization through the rest of the year. Though we do have a couple more planned turnarounds in the fall, we expect to maintain high utilization levels throughout.

John, regarding the marketing segment, what you noted in our results as weakness is mainly seasonal and occurring in the first quarter. Tight supply in markets like Denver and Phoenix has led to a dislocation between unbranded and branded pricing, impacting margins, was reflected in our $0.04 margins. However, we feel positive about this business over the year.

We remain excited about the Sinclair brand, which was part of our rationale during the acquisition. Our integrated value chain positions us well, and we're on track to achieve our growth targets for the branded business.

Good morning. This is actually Kalei on for Doug. A couple of quick questions. First one on the capture rate in the West; it came in better than expected. Could you help us understand what a good estimate for the capture rate is going forward?

Kalei, this is Tim. We were pleased to see our capture rate in the West exceed expectations. Stimulation from strong crude dips in Denver has aided this. However, with turnarounds ongoing in the West, our capture rate was impacted. Moving into summer, we anticipate further improvement as we draw down intermediate inventories built during turnarounds.

This is Atanas. To clarify, we are currently consolidating both HEP and Sinclair assets. On a go-forward basis, we're looking at around one turn of leverage.

Hey guys. It’s been over a year since you acquired Puget Sound and quite some time since you acquired Sinclair. Help us understand what were the positive surprises from these particular assets that came in better than expected.

Manav, it's a good question to reflect on. We're pleased with both acquisitions. The $100 million of synergies we captured came faster than anticipated. The ability to back up supply between our refineries has significantly improved customer reliability. For instance, at our Parco refinery, we combined resources efficiently, improving our operation by backing out higher-cost components. We also enhanced heavy crude input immediately, and integrated asphalt business production benefited from the acquisition. These assets are yielding plenty of opportunities, and we aim to replicate these synergies across our entire portfolio.

We've been focused on the integration of Sinclair to improve our cash generation capabilities, which has been a priority given the investment involved.

We firmly believe now is the right time for this move with HEP. We're excited to continue to enhance value, which aligns closely with our strategy.

For clarification on capital returns, to what extent will the Sinclair family's ownership impact buybacks and governance? Additionally, any updates on your payout ratio guidance for cash going forward?

We cannot speak for the Sinclair family, but should their share count fall below 15%, their board representation changes. Regarding our payout ratio, we remain committed to our 50% target. We won't comment on metrics with ongoing negotiations but reaffirm our commitment to capital return.

I want to return to shareholder returns. What's the Sinclair family’s stance on board representation? What do you foresee regarding buybacks and the payout ratio given current trends?

As mentioned, we can't speak for the family's intentions. However, we acknowledge that deals regarding share representation are in place. Our focus remains on shareholder value, alongside our commitment to the payout ratio, which stands at 50%. We're looking forward to refining our approach in light of current events.

What insights can you offer on the possibility and implications of the LCFS pathway validation? Have you received any updates regarding opportunity costs and the impact of downtime?

We've scheduled LCFS validation visits for the second quarter across all three of our renewable diesel plants. If successful, we could transition from provisional to actual CI status, which would be beneficial starting this quarter. In terms of opportunity costs, we don’t offer exact guidance but recognize the potential for increased profitability tied to our efforts to improve asset reliability. Thank you, Jack. I just want to wrap up with a couple of points. First, I would like to recognize the impact that Mike Jennings has made on our company. Over the last three years, he has led us through a global pandemic, built a new renewable diesel business from scratch, bought the Puget Sound refinery and acquired the Sinclair Oil Company to transform this company into HF Sinclair. His leadership, dedication, and compassion for our employees has set the tone at the top and he has been a great mentor to me personally. Mike will be missed, but his legacy will never be forgotten. Second, I want to thank the Board for their confidence in me to lead this company going forward. I'm excited about the opportunity and challenges ahead. Some things won't change, like our long-term commitment to return cash to our shareholders; other things will need to change, like the need to improve our operational performance of our refineries and our renewable diesel business. I'm pleased to welcome new members of our leadership team, and we look forward to growing this business and creating additional value for our shareholders, our communities, and our employees. With that, thank you very much for your time today.

This concludes today's conference call. We thank you for your participation. You may now disconnect.