Delek US Holdings, Inc. Q2 FY2021 Earnings Call

Good morning, and welcome to Delek's US Holdings Incorporated Second Quarter 2021 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Blake Fernandez, Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' second quarter 2021 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President, and CEO; Reuven Spiegel, EVP and CFO, and Louis LaBella, EVP and President of Refining; as well as other members of our management team. The presentation materials used during today's call can be found on the Investor Relations section of the Delek US website. As a reminder, this conference call may contain forward-looking statements as that term is defined under Federal Securities Laws. Please see slide 2 for the Safe Harbor statement. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release posted on the Investor Relations section of the website. Our prepared remarks are being made assuming that the earnings release has been reviewed, and we are covering less segment and market information that is incorporated into the 2Q press release. On today's call, Reuven will review financial performance. I will cover capitalization and guidance. Louis will cover operations and CapEx. And then Uzi will offer a few closing strategic comments. With that, I'll turn the call over to Reuven.

Thank you, Blake. On an adjusted basis for the second quarter of 2021, Delek US reported a net loss of $65.2 million, or a loss of $0.88 per share, compared to a net loss of $121.7 million or loss of $1.66 per share in the prior year period. Our adjusted EBITDA was $2 million in the second quarter, compared to a loss of $100 million in the prior year period. The second paragraph of the press release highlights $25 million of after-tax tailwind, or $0.34 per share of items included in adjusted results. Page 10 of the release provides a breakdown of inventory hedging impact, and page 14 provides other inventory impacts in the quarter. Separate from these items, multiple factors impacted operations during the quarter, including residual effects of the first quarter freeze and fire as well as the Colonial Pipeline shutdown. While we cannot know what our EBITDA would have been, these events caused us to experience operational disruptions and incur incremental costs related to property damage that significantly affected our results. The incremental expenses combined with second quarter-related business interruption insurance claims prepared to date totaled roughly $40 million to $45 million. We're actively working with insurance carriers on both our property damage and business interruption claims recoveries, which will be recognized in the coming quarters. On slide 4, we provide the cash flow waterfall. In the second quarter of 2021, we had positive cash flow of approximately $169 million from continuing operations, which includes a working capital benefit of $227 million. With that, I will turn it over to Blake.

Thanks, Reuven. Slide 5 highlights our capitalization. We ended the second quarter with $833 million of cash on a consolidated basis and $1.41 billion of net debt. Excluding net debt of Delek Logistics of $927 million, we had net debt of approximately $485 million at June 30, 2021. I would note during the third quarter, we received the full tax refund of approximately $156 million. Moving to Slide 6, we provide our third quarter guidance for modeling. Third quarter operating costs are forecasted to be in the range of $145 million to $155 million. With that, I will turn the call over to Louis to discuss operations and CapEx.

Thanks, Blake. During the second quarter, our total refining system crude oil throughput was approximately 267,000 barrels per day. This was impacted by turnaround activities in Tyler and El Dorado, lingering freeze impacts at Big Springs, Krotz Springs, and El Dorado, as well as Tyler, Krotz Springs due to the Colonial Pipeline outage. In the third quarter of 2021, we expect crude oil throughput to average between 280,000 to 290,000 barrels per day, or approximately 94% utilization at the midpoint. We are currently back to normal operations at all four of our refineries and have no major planned downtime for the remainder of the year. On Slide 7, capital expenditures during the second quarter were $66 million, reflecting turnaround activities and fire-related repairs at El Dorado. The 2021 capital plan is expected to be $175 to $185 million, including turnarounds and net of estimated insurance proceeds. Next, I will turn the call over to Uzi.

Thanks, Louis, and good morning, everybody. Multiple factors impacted operations in the first half of the year and between insurance claims and tax refunds, we expect meaningful cash benefits over the coming quarters. At the same time, we're actively pursuing small refinery exemptions. Our company has a long history of being granted SREs, and this would go a long way in positively impacting the economics of our facilities. Moving to operations, we are pleased to resume growth in the retail segment with two new industry stores in the planning phase. New stores to market will complement our existing branded portfolio, which has been resilient throughout the pandemic. Finally, logistics performance recovered from depressed levels in the first quarter, and we expect the business to remain stable for the balance of the year. DKL continues its long history of distribution growth with 33 consecutive increases. With that, operator, will you please open the call for questions.

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. Our first question comes from Manav Gupta with Credit Suisse. Please go ahead.

Hey, Uzi, I had a question on small refinery exemptions. If we look at the history, you did get them for as many as three refineries; I think two of your refineries are definitely eligible. There is a Supreme Court ruling supporting the SRE, so I'm just trying to understand how confident are you, what's your opinion, how strong of a legal case you have that Krotz and El Dorado should get the SREs, and if you could help us quantify given where the current rent prices, if you do end up getting it, what's the benefit to you?

Good morning, Manav. I'll let Todd answer the quantifying part. I'm just going to give you some color around what we think and the level of confidence that we have here. Over the past years, we applied seven times for each one of the refineries; out of the seven times, Krotz got it six times, El Dorado got it five times, and Tyler got it four times, including during the Trump era and, of course, Obama. We think that we are entitled to the grant; we are actively pursuing and having discussions with the administration around this situation. Now, you probably ask yourself what the timeline is, so I'm going to give you a little color on that. The time to turn in the 2019 applications is by the end of November this year. They need to make a decision over the next couple of months unless they change the ruling, which I don't expect to happen. The time to turn in the 2020 application is January of next year, i.e., five months from now. The time to turn in the 2021 application is by the end of March 2022. So over the next six to seven months, there's time to turn in three years: 2019, 2020, and 2021. With that being said, you have some maneuvering, not the EPA, but companies when to turn and what to turn in terms of rent, which is technical and there's no need for us to get into it right now. Regarding the amount; remember, we are talking about three years here; Todd will cover that. But in general, we're discussing hundreds of millions of dollars in today's prices.

Yes. Sure, Manav. If you go and you look at some of our public filings from 2019 and 2020, and look under the production line item that we list for on-road fuels, and use that with, let's call it around a number of $1.50 per rent, you can come up with a number that's somewhere north of $300 million per year, and that's with three plants. If you do the same for 2020, you get the same thing. The only other thing I would point out: I know in your question, you mentioned the fact that you believe we've only ever been granted three waivers. In fact, there have been three years where we've actually been granted waivers for all three of the plants. So, I just wanted to point that out as well.

Okay, now that's fair. Seems like a meaningful amount, pretty big. Just the second question is during the quarter, a lot of one-time impacts from fires and such, and it looks like you're pursuing some insurance claims. Again, if you could give us some timeline on that, your level of confidence, and what's going on with these insurance claims, which could be an additional $40 million to $45 million?

Well, first, don't assume $40 million to $45 million; we actually think that it's more than that, because there was some damage in the first quarter. We didn't quantify for the first quarter, but in our mind, it should be well more than $40 million to $45 million. We are obviously in discussion with the insurance companies; I'm going to tell you that some of the processes are already getting approved as we speak in the third quarter. The claims themselves are presently being approved by the carriers. The fact that we got money, or we're getting money means that they approved these claims. We expect this to happen over the next couple of quarters, but some of the processes are already in the third quarter. So, I don't want you to think that it is $40 million to $45 million; you can probably see what happened and calculate the normality in the third quarter and come to a number as well. But it is high enough within $40 million to $45 million; that only counts for the second quarter, and we feel confident that we will start—actually, we already have been getting processes around these claims.

Uzi, thank you. A very quick last question is, it looks like you're still keen on growing the retail business; you have new stores coming in, I think in the past, you have said these could potentially double your earnings. So, I know there was an attempt for you to sell your retail business and you've always said you're open to it, but you won't do it in a hasty manner when the right time is here. So, I'm just wondering if anything has changed on that front.

Manav, you see the cash flow. We ended the quarter with $830 million. We are in active discussions with the administration around getting some of the exemptions. The insurance processes are coming in. There's no need to do that unless it fits the business model. At this point, having retail fits our business model. Obviously, if an offer comes in that makes sense for the shareholders, we will sell it. But at this point, I see a very low chance of selling it just because of how comfortable we are with the cash position.

The next question is from Roger Read with Wells Fargo. Please go ahead.

Yes, thanks. Good morning. I guess I'd like to maybe follow back up on the SRE situation because there are a lot of moving pieces here, Uzi and team. First off, we don't have an RVO for 2021. Secondly, when SREs have been granted, we've typically seen the price of rent fall right; there's a supply-demand aspect to it. So as you step back, Uzi, and look, I know the timeline you gave for when the rents are due, but the whole program has been pretty mismanaged almost from the get-go. What would be the right way to think about it? I think you've given us the high, but how would you sort of game plan this out over the next six to nine months?

Roger, we have a company to manage here. It doesn't mean that we all order in at this point. We didn't turn in the RIN just yet. We do have a liability on the books; absolutely it's in the P&L, but we can maneuver with the physical RINs, as I mentioned earlier to Manav. We have some rules that you can actually maneuver with that. So I'm not going to disclose the strategy here around how we manage the program, but you're absolutely correct on one side, that if all these waivers will be granted, prices of rents will come down. I'm just going to remind you that we did not turn the RIN just yet. So, the liability is sitting on the books at the current price right now. The P&L will be impacted at the current price as it sits right now. Now, as for cash flow, we will see how to handle it, we are not going to disclose it today; cash flow, we will see how we manage it. Now, do I think that RINs will stay at about $50? Not really. Are they going back to $0.10? I don't think that the administration will grant 30 waivers. I don't think that the majors will get them. I think only small guidelines like us have a good chance of getting them; actually a very good chance of getting them. So, I don't expect RIN prices to go back to $0.10. Do I think that they'll go down to $50? Absolutely. Now, you mentioned the RVO, RVO is unrelated to the time that you need to turn in 2019. You're talking about only 2021, and if you remember during the pandemic, they pushed the time to turn in the 2019 and 2020 applications to November and January. Unless they do it again, the deadline is coming regardless of the RVO. I was a little technical here, but I hope it was clear enough.

I appreciate the clarity. I'm just trying to understand all the implications. Let's drop that one for now. If you look operationally, obviously, the industry has had a tough last four to six quarters. When we think about Delek and a lot of your peers within the refining space, it's all about crude differentials. Just curious with some of the pipelines that you're involved in with the startup of Wink to Webster, how you're seeing the differential situation, and is there anything you've been able to do in terms of changing your crude streams to take advantage of any localized crude differential advantages?

Yes, Roger, it's Todd. Over the last couple of months, we've actually seen a bit of a deterioration in the crude differential situation. Midland was previously trading at a $0.50 to $0.60 premium relative to TI; that's come off and is now trading negative relative to TI. Also, LL has seen a relatively large move from up in the $2 range to down around the $0.50 range. So I think those things are positive. At the same time, we're always constantly looking at optimizing our crude slate. We're looking at blending opportunities in Cushing. We're looking at various other grades that might become available as balances shift around in the meantime. I think we're ideally positioned, given our footprint and our partnership with DKL to continue to do that.

Roger, I would just quickly add, we know through our gathering business in the Permian, the nominations should ramp up toward the fourth quarter, certainly into the beginning of next year. So to the extent that prevailing commodity prices remain where they are, I think there’s a chance production could start to accelerate a bit, and that may provide a little bit of a tailwind. I don't think we're going back to double digits by any means, but that may help a little bit.

I appreciate the clarification. Thanks, guys.

The next question is from Ryan Todd with Simmons Energy. Please go ahead.

Thanks. Maybe one on M&A. There's been a pretty significant amount of recent activity over the last 12 months, including on some of your peers within the refining space, and I just wanted to get your views on what the environment is in the market without spreads. You're interest in adding scale, and whether scale is likely to become an increasingly defining competitive advantage amongst the group.

Good morning, Ryan. Well, obviously, we also watched the deal that HFC just made with Sinclair; I thought that it made sense. I don't know much about the numbers, but strategically it makes sense for these small companies to come together. I do think that Delek is part of that group of small refiners that need to continue to think of how to get bigger. Of course, it needs to be the right opportunity, and we are very patient, especially in light of the fact that we expect some of the SREs to be granted, because we really think that we're entitled to several of them. So if that's the case, then the situation of both El Dorado and Krotz is dramatically different compared to what it is today, just because of the fact that all four refineries will be in a good position to continue to operate. And that, for itself, will help maybe look at other opportunities. Long-term, 10 years from now, I believe these small refineries or small companies, Delek included, should continue to think bigger. I'll leave it at that. There's nothing imminent right now; I don't want you to think that we're talking about anything imminent, but just I think that others will do the same thing.

Thanks. That's helpful. And then maybe a question on your throughput target for the third quarter, a pretty high level of throughput there, and obviously, there’s little maintenance in the second half of the year for you guys. But I think it's the highest range that we've seen since 2018 from you. Obviously, it's a different refining operating environment than we see right now. Can you talk a little bit about how you're thinking about utilization rates versus margins right now as the industry is still kind of walking that fine line on the recovery here?

Yes, Ryan. Hey, this is Louis. We’re looking at 92% to 96% utilization going into Q3. I'm happy to say that we're all back to normal after the freeze, the turnaround, and the fire event. It's really stabilizing and showing what the refiners can do and optimize. To optimize, you've got to run and run stable. So that's our outlook going into Q3.

And the margin environment, I guess, in your regional markets is supportive of those types of rates.

I'm going to repeat what I just said. The door is open for SREs, and we need to think about how to run the refineries assuming that we get SREs or don’t get SREs, and that's the sort of risk we need to manage on a daily and weekly basis. Because if you add $0.50 to cross, you need to run it wide open. These are things we need to consider as part of our program.

The next question is from Theresa Chen with Barclays. Please go ahead.

Morning. Thank you for taking my questions. Uzi, maybe if we can just revisit this SRE situation and just put a bow around it. Just boiling it all down when I think about your upward bound of the $300 million per year using the $50 per RIN price, does that mean that you have roughly 200 million RINs between Krotz, El Dorado, and Tyler between 2019 and 2020? RINs you have on hand had been sold into the market since the deadline to turn those in had not come up.

Theresa, you asked several questions. First, let's stick to the numbers, Todd, because you have the numbers in front of you; just stick to the numbers, and then I’ll give an explanation about how we go about it.

Yes, absolutely, Theresa. So, you are correct in roughly the 200 million RIN number for that calculation that we're doing.

We want to be clear; it's not $200 million, it's 200 million RINs per year, between the three of them. 200 million RINs per year for three refineries.

Got it.

Now you ask how we go about it. Obviously, we own many RINs because we didn’t want to be exposed in case the Supreme Court came up with something different. But now that we know that they did, and according to the history we had with the Saudis, and some discussions we had with the administration, we are looking at it as a whole program, how to balance between turning them in or not holding them. Obviously, the liability is sitting on the books; the P&L is already not assuming any SREs, and it reflects the $50 over $60 it is today. That's what you see in terms of the EBITDA. We need to manage the cash around that and manage the situation because there is some uncertainty about different things. With that being said, as I said, the deadline is coming. It is not three years from today that somebody can make a decision. We turned in the 2019 applications two years ago and recently turned in the 2020, and in the near future will turn in the 2021 application. The deadline for turning in the 2019 is November, January of 2022, and March of 2022 as well. So, for me, the type of decision is coming, and that's what investors are trusting us to do—balance between these applications, the waivers themselves, when to turn in RINs, how many new RINs to keep, and how to manage that risk versus the reward. I'll leave it at that because I don't want to get too technical here.

Got it. And just thinking about the rationale for why Krotz and El Dorado were able to receive the SREs even during the last democratic administration. Can you talk about the drivers of that? Is it, you know, lack of lending capability, or any puts and takes as to why you think that, you know, this is pretty for sure?

Well, actually, almost the same criteria, if you will. And again, I’ll read the applications myself several times. I’ll just go by different categories, the most important ones. First, all these refiners are in small communities, and the impact on them is significant. Second, Krotz is a pipeline refinery, and El Dorado is, for the most part, a pipeline refinery. So both of them are suffering; there are no opportunities to blend for the most part any gasoline. The third part is that we got acceptance of ethanol in these areas according to the rules, and probably some others that if you want, you can go to the EPA website and they detail all the criteria's but they score it, and we know already that some of them were scored in the past by the DOE. So, especially in light of the 2019 situation two years ago, and 2020 because of the pandemic, and 2021 because of the pandemic, we think the situation got even worse, rather than what it used to be in the past.

Thank you.

The next question is from Phil Gresh with JP Morgan. Please go ahead.

Sorry, user error. Can you hear me now?

Hey, Phil. Good morning.

I'll try that again. Renewable diesel, I know it's not your project, per se. I'm just curious how you think about what mile markers would matter for you in terms of the investment opportunity? How do you think about this? Is this a six to 12 month opportunity? Or we'll just wait and see?

Phil, it's Blake. I'll take it. Really, the reality is it's a 90-day free look once this facility's operational. Going on the global clean energy timeline, it's supposed to be in early 2022. So we're in a holding pattern, waiting and seeing at this point. Once we have the opportunity to get in there and make a decision, that's when we would do it. So, nothing has really changed on that front a lot, but that's the kind of the timeline we're on.

Okay, got it. Second question. Just around DKL. The value of your ownership in DKL appears to exceed the value of where Delek is trading at this point. So, you've talked a lot about various cash opportunities between SREs, tax refunds, business interruption proceeds, a lot of things coming in the door. If you get some of that cash in the door, is buying back in DKL a consideration? Are there too many tax ramifications? Do you think it's an area of value unlock or no?

So first, Phil, you touched—and Reuven mentioned—we touched on the situation with the tax refund. We actually got it already during the third quarter. So it's in the books as we speak. As you said, if the plan goes according to our plan, there's a tremendous amount of cash coming our way. That actually doesn't change much thought process about DKL. Because we continue to think that DKL is an engine that we want to grow. Now, we are not in the business of owning 80%, but we're also not in the business of paying a 9% return. So, at this point, we are just comfortable where we are. If the situation continues that we continue to pay 9%, then we probably need to look at it very carefully in the future to strategically determine what we want to do with it. Regardless, 80% is not the right number. We either need to bring it in or sell down some units. We'll see according to the changes in the market over the next two to three quarters what to do with it.

Got it. And in terms of the growth potential, I guess you'd be in the right environment, you're more inclined to grow and potentially do further drop downs if the valuation made sense?

That is correct.

The next question is from Paul Sankey with Sankey Resources. Please go ahead.

Hello, Uzi. Paul Sankey here with Sankey Resources. Uzi, I'm trying to make some sense of the near term as a low grade question. So, if we look at Q3, we've got the tax refund; how are things going? Obviously, there were very specific weather issues in Q2 and the rest. But with now the situation where everything is running well and margins are looking good, which seems to be the case as far as margins going up? Thanks.

So, as Louis mentioned—Paul, great to hear from you and again, good luck with your new endeavor. Second, as Louis mentioned, we're running pretty much wide open to 280,000 to 290,000 barrels. So, 92%, 93%, 94% utilization. It makes sense to run these barrels. It will make sense even more when we get some answers around SREs. But for the most part, we're running as normal.

So, essentially, this whole RIN situation is holding you back on how much you're running just to avoid the incremental cost? And if you could continue, I might be way out of date here, but I would remember Krotz was a jet fuel type refinery. But are you more or less exposed to the weakness in jet with the lack of demand that we still see, or is that improving too, if we just go through the underlying story?

Yes, Paul, it's Todd. We've really done a great job in conjunction with the folks that Louis has with the plant in optimizing the product make around the downturn in jet fuel. So, we've really minimized what we have. We have a knob that we can turn pretty much instantaneously to get back in the jet business; in fact, we are seeing demand come back in that localized market. Our contracts are not as exposed as you might believe; if you’re referring to outright Gulf Coast. If so, we're actively watching that, and we'll continue to optimize the system, and as jet demand returns, we'll continue to increase that if it makes economic sense.

Understood. And then if you could do a strategic one, and I think you've addressed the big part of this with the answers to Phil. But it's very striking that Greek government debt yields and negative debt is very cheap. You've mentioned DKL, for example, has pretty high cost of equity. The world is kind of confusing with rates falling when we thought they would be rising, et cetera, et cetera. You're the kind of guy that can actually take quite rapid advantage of the shifts that we see, perhaps against consensus on where things are heading. So, I just wanted an update on how you see this crazy world and how that affects you to the best way forward for Delek? Thank you.

Well, I'm not sure—first, thanks for the compliment. I’m not sure I'm smart enough to think how the world would behave. However, I do think that the world is a little tired of the pandemic, and people will find reasons to go back to some kind of normalcy. If this is the case, then we’ll see inflation going up, and then rates will go up with it. I think that we just took advantage of locking in note DKL until 2028, and I do think that there is a risk of inflation and a risk of rising interest rates. If, of course, the printing continues like usual everywhere, the amount of money we are chasing return is just crazy. Eventually, that will catch up with the amount of money that is being moved around. Just one person's opinion.

Basically, strategically, you've taken advantage of the rates, but essentially everything you're trying to do remains more or less—let me say for example, historically, you've run as little debt as possible; I just wanted to maybe—would it be an idea to run higher debt in this environment while you can take advantage of them.

I think, Paul, SRE is a big portion of the strategy here. I think the market underestimates the amount of cash that SREs can bring to a company like Delek. If this is the case, then our cash situation—which we have now $830 million—that's before the tax refund and the insurance, and of course, SREs—this project may change rapidly for Delek over the next one or two quarters with the potential cash coming in.

And that implies that you think there will be a resolution on it? I mean, I know it's just impossible; it's like a nightmare. But do you think there will be a resolution to this situation within any kind of reasonable timeframe, or what would you say?

I don't know much about the policy because I think this is at the highest level within the White House. But I think that the SRE situation—the fact that the Supreme Court said specifically that companies are entitled to get SREs—will make the administration grant some waivers; this is just purely my guess. I think we're very much at the front line in getting these SREs.

The next question is from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.

Hey, good morning, everyone. The $40 million to $45 million from the operational disruptions and the fire in the freeze, could you talk about exactly where that flowed through your financial statement?

Hey, Matthew, it's Blake. It's kind of spread throughout all the refineries. We haven't quantified specifically, but I will tell you of that about $10 million in operating costs related, and the rest will be business interruption, which I guess you could argue flows through margin and throughput, so $10 million in operating costs. Just as an aside, while you're on the topic, we outlined in the second paragraph a wholesale contract fee, which was about $8 million that impacted the operating costs of the corporate and other segments, in case that's helpful to you as well.

Thanks, Blake. And then Uzi, on your modeling El Dorado and Krotz, are they cash flow positive in a mid-cycle environment if they do not get SREs?

Can you repeat the question, Matt?

Sure. Do you think that El Dorado and Krotz Springs are cash flow positive if they do not get SREs? Are they dependent on SREs to be cash flow positive to you?

I understand the question. It depends on the day, obviously. If RIN is a $0.70, then it's worth $0.64 right now; they are marginally cash flow positive, but they are not rocking and rolling. If RINs were to go back to $0.20, $0.30, even when today's graphs are very good. If they go to $0.30, then you're talking about hundreds of millions of dollars in EBITDA without the SREs. These two refineries, and that is the reason they were granted these waivers in the past, because the program was initiated and designed to deal with refineries like El Dorado and Krotz. I haven't looked at it in the last two or three days, but the fact that we're running them 280,000 and 290,000 means that we are in the green.

Great, thank you.

The next question is from Neil Mehta with Goldman Sachs. Please go ahead.

Good morning, Uzi; hope you're doing well.

Hey, Neil. Good morning. How is your family, by the way?

We're doing great; thank you so much for asking, Uzi. So two quick questions from me. First, on Wink to Webster, can we just talk about where we stand from a construction standpoint? And the related question around that is just talk about how you see the pipeline situation in the Permian. We were clearly in a position of pipeline under-supply in 2018 and 2019, but we've seen a wall of these big pipes coming online that's eaten away at the differential. How do you work through that excess pipeline capacity beyond just production growth? Do you think the Permian will rationalize supply pipelines to enable better utilization?

Okay. So I’ll refresh your memory, Neil. I know you remember that better than I do, but I’ll say it just because I enjoy listening to myself. Wink to Webster is supposed to come online this quarter, then I think there's a delay of two or three weeks, but generally, we are in line for it to come online before the end of the year. Obviously, as we said, being fully subscribed means that the pipeline is about 95% full with a walk-up shipper of another 5%. That obviously will bring the situation in the Permian back to the overbuild of pipelines. I think companies that are not fully subscribed and run half-empty pipelines will start thinking about what to do especially since natural gas is in shortage around the Permian; the natural gas pipelines is in shortage. I think there will be rationalization of pipes in the market. We always think that the market doesn't have a way out; we are often surprised by how the markets react to different things. Do I think that differentials will go back to minus five anytime soon? No. But probably over the next two to three years, something will happen with several of these pipelines, and we'll get back to normalized differentials.

And then, Uzi, remind us what do you think the incremental EBITDA associated with Wink to Webster is for Delek and how good should we feel about the economics? Are they locked in or is there any variability in the way we should think about that?

Neil, it's Blake; I’ll take it. So from the last part of your question, I mean, it's take or pay, right? So there shouldn't be a tremendous amount of variability. We haven't disclosed specific EBITDA; I think I can help you do some arithmetic. If you think about our net investment being somewhere in the $360 million range, to sanction the project in the midstream, we would need a 15% rate of return, so you can apply that math. The only other piece of the equation I should mention to you, we've said publicly is we did do project financing, and the interest expense associated with that is roughly $10 million or so per year. So whatever math you come up with on the EBITDA, you may want to take $10 million off for interest expense.

The next question is from Doug Legate with Bank of America. Please go ahead.

Thank you. Good morning, everybody. Uzi, you've walked through a lot of the moving parts on what could happen. I'm just curious; we obviously have a new administration; they haven't been rushing to offer SREs despite the Supreme Court ruling. I'm just curious, have you given any consideration to the possibility that SREs are not granted, in which case, what are the major capital requirements across the system that might prompt more strategic decisions, or does that wait into the equation as it relates to their potential causing one or more of these smaller assets?

Doug, good morning, and happy to have you back. You asked a great question: What if you don't get the SREs? Obviously, the liabilities and the RINs are on our books right now. So it's not that we are sitting here not doing anything; we are taking care of that. At the end of the day, companies like us need to manage mostly cash; that's what you see on the balance sheet; we're managing our cash very carefully. We have all that cash coming in. Eventually, the market will change, and the demand will come back. I said it all along—I think you and I spoke about the idea that 2021 won't be a great year; I think 2022 is going to be an awesome year. We'll just keep working through the situation; shutting down any of these refineries at this point is not on the table. I think that SREs you mentioned have been on their desk for two years.

And Doug, if I could just chime in, I think maybe to your specific question. As you well know, turnaround activities typically are a capital event that drives a lot of these closures, and we have just finished turnarounds at both Krotz and El Dorado, so that's behind at this point.

Okay, so you guys are running it or not? That's what I was looking for. Thank you very much indeed. I didn't go anywhere else; I'm not sure where I've been. Still here. Anyway, my follow-up is your point on the return to maybe a better year in 2022. So to cut through all the moving parts of Wink to Webster, what's going on with DKL and all the other bits and pieces you've talked about? What would you frame as your view of the mid-cycle EBITDA capacity of the portfolio you have today, just so we can benchmark what we think, you know, fair value of our portfolio could look like? Under mid-cycle conditions, however you define that; what do you think the mid-cycle contribution part—the cash flow part of the portfolio is today? How do we do that? Thanks.

I'll let Blake do that because he does the modeling day in and day out, and it's above my pay grade, so Blake go ahead.

Doug, I'll try and piece it together for you. At the end of the day, you can apply some sensitivities on your end, but think about logistics—it’s a pretty ratable business. Let's just be conservative and call that $250 million a year of EBITDA. The retail business has proven very resilient even through the pandemic; we say it's about $50 million. So collectively there, you have $300 million of EBITDA from very stable businesses. That takes you to the refining piece of it, which, as you know, is very volatile and has been a drag on the overall portfolio. We've said publicly, we think $9 or $10 Gold Code 532-crack would be about a breakeven level. For every dollar per barrel, that's about $75 million of annual EBITDA. Historically, that midcycle level has been $15 or $16. Technically speaking, if we move from a net RIN environment today of about $9 or $10 up toward $15, you're looking for $400 million to $500 million from refining, so that on top of $300 million gives you some lofty numbers, but obviously, that's not the environment we’re in with the RIN environment where we are today. Hopefully, that's helpful.

It's really helpful. Neither do we expect this to continue, just for clarity of work. What are you assuming as the TI brand spread in there?

Well, that's a WTI base crack. So, at the end of the day, it's just kind of a normalized call, and we're not looking for a big expansion in the spread. So, call it $2 to $3.

The next question is from Paul Chang with Scotiabank. Please go ahead.

Hey, guys, good morning.

Mr. Chang, we couldn't wait for you to show up.

Several questions. Can you remind me in the past when you received the SRE? Did you get the full SRE or partial SRE for the plant, or did some just get 50%? I just don't remember whether you got 100% in your facility?

We do.

Okay, great. And for the $40 to $45 million, Blake is saying that that doesn't include any of the property damage, it's all BI?

Paul, there's an element in there of both. So you have…

Do you have a breakdown between the BI and the property damage?

Yes. And again, this is just the 2Q components, but $30 million is BI and $10 million is property damage.

Now, Paul, remember, we mentioned that earlier? I'm sure you've heard it, but we'll say it again. That's only Q2; there's some damage before Q1 that is not included in the $40 to $45 million.

Now I understand, I'm just trying to understand on a going-forward basis, if we use the second quarter as the base, because BI in theory once you fix it, then it should come back. Right? So with the same market conditions, what should we add back as a baseline? Just to understand your overall reliability of your operation? If not, what initiatives are you guys taking?

You know, the bad guy used to be El Dorado. El Dorado is now after the turnaround and after fixing a lot of units in El Dorado; so El Dorado, knock on wood, is running very well. Over the last couple of months, we have a new plant manager that is doing tremendous work. We’ll see; we don’t want to declare victory just yet. We're hoping to see a level of continuity to perform the way it is; obviously means that $60 are weighing on both El Dorado and Krotz. But we believe that $50 is not sustainable, regardless of how the administration goes about it. We'll see how it’s going to be addressed.

And just curious; do you guys conduct surveys? If you do, how is El Dorado and Krotz ranking on the unit profitability and reliability in that survey? Are they in the middle of the pack in the second quarter or in the fourth quarter? Any kind of numbers you can share on the insight?

Well, we usually don't share Solomon's study; we do get that for each refinery. If you remember, Solomon does it every two years, but we're actually doing it with them every year because we want to improve. I’m just going to tell you that you can look at equalization at El Dorado over the last two years before the turnaround. It wasn't great. The results weren't great, but Krotz is performing operationally pretty good.

The two final questions; one: Just curious if there's any insight you can share about the Southwest market demand, and also that you guys have a big gathering system. What do you hear from your customers about their operating plans, particularly on the pipeline operator? Do you get the impression that the activity level is going to be moving progressively higher over the years at a more gradual pace?

EMP, as you know, are still discipline; the product demand in our areas is down. Margins are very strong, but the gallons, especially of diesel in the southwestern region, are down. We gather from a lot of producers, so for the most part, it is flat. We don’t see the growth just yet. You know what you hear it from every EMP company—they will be disciplined and they want to be cash flowing. So for me, got just evidence on that. We do see other companies coming in; we signed several new producers to gather over the last couple of quarters. I thought the targeting team did an outstanding job in getting that done. In terms of the M&A, I've said in the past that we want to make sure that the energy transformation—we want to understand what energy transformation means before we move on any aspects. So that's the reason we thought we should probably sit on the sidelines and wait to see where things are going. Regardless of where energy transformation is, companies the size of Delek should be bigger. Not in the near future; there's nothing imminent right now. But going forward, I thought that what we did with both acquisitions was outstanding to get bigger. I think there’s more to come from the market; I'm not being specific about Delek. I was clear that there's nothing I’m aware of that's imminent. That's including refining, right? So when you say getting bigger, you mean including also getting bigger in refining? If refining is part of the energy future, yes.

The next question is from Jason Gabelman with Collin. Please go ahead.

Yes. Hey, guys. I wanted to ask, first on OpEx and SG&A cost, I know last year you were talking about, I think, an $80 million reduction from 2020 levels. But looking at 2020 it was about $800 million OpEx and SG&A; about where the annualized run rate is guided to for 3Q. So you just discuss what's going on there in terms of those reductions. Do you still expect those to come through?

Hey, Jason, it's Blake. I'll take it. There have been a lot of moving pieces since we gave the original guidance, part of which is operational in terms of fire, freeze, etc. Keep in mind too, when we gave the guidance for '21, the original guidance contemplated that Krotz was not running and that as the century started. So, I think the last public commentary we gave is that we thought on an underlying quarterly run rate it would be about $139 million to $140 million. What I would just tell you: you can see the 3Q guidance is a bit above that, somewhere about $150 million. There are two things to point out here: one, we have some one-time work in the third quarter—some unplanned work, but it's from some work at Krotz Springs, in boiler repair at Big Springs. So that's $5 million that'll come off into the fourth quarter. Without giving hard guidance on the fourth quarter, I think $145 million should be the range. The only other thing to point out that's in there leading to some upward pressure is natural gas prices. The sensitivity on that annual is about $20 million per dollar per MCF. We have seen an upward pressure in natural gas, and that's adding about $5 million to the 3Q guidance. A lot of that answers your question.

Yes, that's really helpful. And just two other quick ones. Firstly, you just discussed the puts and takes on working capital being a benefit in three key of that, and that's going to reverse. Lastly, just on the global clean energy fields project. I know you're limited in what you can say, but as I understand, there's some priority given to creditors in terms of cash flow before Delek would receive any material cash from that project. So, I guess the question is if you do invest in that project, when do you expect that to be a material cash contributor to Delek? Thanks.

Jason, it's Blake; I'll take the second part of the question, and then Reuven can answer your working capital question. We haven't disclosed an outlook, obviously; we're not in that project. But conceptually, I think you're describing it correctly. We’ve said all along that there are multiple layers of interest expense, mezzanine financing, and whatever arrangements Global Clean Energy has. The way I would characterize it is that we have an option to participate in 33% of the project’s free cash flow. In other words, once all of those obligations are satisfied, we would take our share of the free cash flow. So I think that answers your question.

Let me complete the part about the working capital question. So the increased crude prices caused a corresponding increase in accounts payable and inventory and supply of stake. However, we still need to settle some expenses related to the El Dorado turnaround and other expenses along with some RIN obligations, so it will unwind in the third quarter and will some of the positive working capital was in the second.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Uzi Yemin for any closing remarks.

Yes, that was a long one. I've done many of these calls; that was probably one of the longest, so I appreciate everybody's interest on the call. I appreciate the confidence that investors have in us. I'd like to thank my colleagues around the table; I'd like to thank our board of directors for their continued support and trust in us. But mainly, I'd like to thank each one of the employees of this great company. That couldn't be what it is without them. Thank you, and we'll talk to you soon. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.